<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number
0-24439
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of October 31, 1998 there were 22,072,549 shares of Common Stock, par value
$0.01 per share, outstanding.
================================================================================
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
Index
Part I. Financial Information
Item 1. Financial Statements Page No.
--------
Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1998 1
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1997 and 1998 3
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1998 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and September 30, 1998
<TABLE>
<CAPTION>
ASSETS December 31, 1997 September 30, 1998
- ------ (Unaudited)
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,543 $ -
Accounts receivable, net of allowance for
doubtful accounts of $1,193 and $1,177 20,569 29,845
Inventories 106,007 107,082
Prepaid expenses and other current assets 1,958 2,879
-------- --------
Total current assets 131,077 139,806
FIXED ASSETS, net of accumulated depreciation
and depletion of $20,459 and $26,597 92,406 120,547
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $2,332 and $1,092 6,477 5,037
GOODWILL, net of accumulated amortization
of $1,474 and $2,373 38,859 38,210
-------- --------
$268,819 $303,600
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 1
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and September 30, 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) December 31, 1997 September 30, 1998
- ---------------------------------------------- (Unaudited)
----------------- ------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 8,046 $ 8,711
Accrued liabilities 5,146 7,494
Accrued payroll and benefits 6,521 8,164
Accrued interest 163 4,148
Long-term debt, current portion 5,400 1,250
Borrowings on revolving credit facility 43,102 10,800
Deferred income taxes 35,151 39,456
-------- --------
Total current liabilities 103,529 80,023
LONG-TERM DEBT 160,356 145,763
DEFERRED INCOME TAXES 6,003 11,970
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; 39,500 shares
issued at December 31, 1997 43,967 -
CUMULATIVE REDEEMABLE JUNIOR PREFERRED STOCK
12 PERCENT, par value $.01 per share;
liquidation preference of $1 per share;
22,000,000 shares authorized; 20,847,986
shares issued at December 31, 1997 26,715 -
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock
Authorized - 60,000,000 shares $.01 par value;
Issued and outstanding - 7,708,481 and 22,072,549
shares at December 31, 1997 and September 30, 1998 105 221
Additional paid in capital (accumulated accretion
of cumulative redeemable preferred stock in
excess of additional paid in capital) (857) 128,009
Notes receivable from stock sales (366) (327)
Deficit (70,633) (62,059)
-------- --------
Total shareholders' equity (deficit) (71,751) 65,844
-------- --------
$268,819 $303,600
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 2
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ----------------------------------
1997 1998 1997 1998
----------- ------------- ---------- -----------
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
Sales, net $31,104 $36,699 $172,983 $200,414
Cost of goods sold 14,301 17,478 85,784 98,171
--------- ---------- --------- ----------
Gross profit 16,803 19,221 87,199 102,243
--------- ---------- --------- ----------
Selling and distribution expenses 10,479 12,188 40,347 44,308
General and administrative expenses 4,867 5,589 15,933 19,641
Unusual expenses 271 - 78 -
--------- ---------- --------- ----------
Total operating expenses 15,617 17,777 56,358 63,949
--------- ---------- --------- ----------
Operating income 1,186 1,444 30,841 38,294
--------- ---------- --------- ----------
Other expenses
Interest 4,897 3,562 15,519 15,606
Amortization of deferred financing expenses 277 246 804 864
--------- ---------- --------- ----------
5,174 3,808 16,323 16,470
--------- ---------- --------- ----------
Income (loss) before provision for (benefit from)
income taxes (3,988) (2,364) 14,518 21,824
Income tax provision (benefit) (1,677) (947) 5,647 8,844
--------- ---------- --------- ----------
Income (loss) before extraordinary item (2,311) (1,417) 8,871 12,980
Extraordinary item, net of tax benefit - 3,027 - 4,406
--------- ---------- --------- ----------
Net income (loss) (2,311) (4,444) 8,871 8,574
Less: Preferred stock dividends and warrant
accretion (1,955) - (5,249) (5,609)
--------- ---------- --------- ----------
Net income (loss) applicable to common stock $ (4,266) $ (4,444) $ 3,622 $ 2,965
========= ========== ========= ==========
Basic earnings per share:
Income (loss) before extraordinary item $ (0.57) $ (0.06) $ 0.48 $ 0.58
Extraordinary item $ - $ (0.14) $ - $ (0.35)
--------- ---------- --------- ----------
Net income (loss) per common share $ (0.57) $ (0.20) $ 0.48 $ 0.23
========= ========== ========= ==========
Diluted earnings per share:
Income (loss) before extraordinary item $ (0.57) $ (0.06) $ 0.45 $ 0.57
Extraordinary item $ - $ (0.14) $ - $ (0.34)
--------- ---------- --------- ----------
Net income (loss) per common share $ (0.57) $ (0.20) $ 0.45 $ 0.23
========= ========== ========= ==========
Weighted average shares outstanding--Basic 7,519,090 22,072,549 7,513,219 12,759,582
========= ========== ========= ==========
Weighted average shares outstanding--Diluted 7,519,090 22,072,549 8,123,020 13,088,559
========= ========== ========= ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 3
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,871 $ 8,574
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 4,568 7,516
Amortization of deferred financing costs 804 864
Loss on early extinguishment of debt - 7,417
Deferred income taxes 5,527 4,065
(Gain) loss on sale of fixed assets (122) 234
Gain on involuntary disposal of fixed assets (1,194) -
Other 311 -
--------- ---------
18,765 28,670
Change in working capital accounts, net of effect of acquisition:
Accounts receivable (8,872) (4,967)
Inventories (505) 1,171
Prepaid expenses and other assets 489 (797)
Accounts payable and accrued liabilities 7,209 6,461
--------- ---------
Net cash provided by operating activities 17,086 30,538
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (7,379) (11,681)
Proceeds from sale of fixed assets 154 295
Proceeds from insurance claims 1,194 -
Purchase of fixed assets from insurance
claims proceeds (1,081) -
Acquisition, net of cash - (19,929)
--------- ---------
Net cash used in investing activities (7,112) (31,315)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 167,306 151,548
Repayments on revolving line of credit (174,005) (183,850)
Proceeds from the issuance of long-term debt - 83,961
Repayments of long-term debt (3,673) (103,723)
Deferred financing costs (501) (3,000)
Penalty on early payment of subordinated notes - (3,841)
Repurchase and retirement of stock (75) -
Repayments of notes receivables from stock sales - 572
Issuance of common stock - 50,157
Issuance of preferred stock 343 6,410
--------- ---------
Net cash used in financing activities (10,605) (1,766)
--------- ---------
NET DECREASE IN CASH (631) (2,543)
CASH, beginning of period 631 2,543
--------- ---------
CASH, end of period $ - $ -
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12,140 $ 11,617
Cash paid for income taxes $ 131 $ 113
Noncash investing and financing activities:
Conversion of preferred stock for common stock $ - $ 70,682
Conversion of promissory notes for common stock $ - $ 1,200
Fair value of assets acquired $ - $ 30,925
Liabilities assumed and incurred $ - $ 10,606
</TABLE>
See Accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 4
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
1. Description of Business:
------------------------
Hines Horticulture, Inc. ("Hines"), a Delaware corporation, produces and
distributes horticultural products through its two operating divisions,
Hines Nurseries and Sun Gro Horticulture ("Sun Gro"). On June 12, 1998,
Hines succeeded to the business of Hines Holdings, Inc., a Nevada
corporation, as a result of the merger of Hines Holdings, Inc. into Hines,
the purpose of which was to change the Company's name and jurisdiction of
incorporation. The business of Hines is currently conducted through Hines
Nurseries, Inc. (formerly Hines Horticulture, Inc.) ("Hines Nurseries").
The business of Sun Gro is currently conducted through Sun Gro Horticulture
Inc. ("Sun Gro-U.S.") and its wholly owned subsidiary, Sun Gro
Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun Gro-Canada's direct
and indirect Canadian subsidiaries. Hines, together with Hines Nurseries,
Sun Gro-U.S., Sun Gro-Canada, and Sun Gro-Canada's direct and indirect
Canadian subsidiaries are hereafter collectively referred to as the
"Company."
Hines Nurseries is a leading national 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 peat-based horticulture products
for both retail and professional customers. Sun Gro markets its products
in North America and various international markets with manufacturing
facilities located in Canada and the United States.
2. Unaudited Financial Information:
--------------------------------
The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments (consisting of only normal recurring
adjustments) which are necessary to state fairly the consolidated financial
position, results of operations and cash flows of the Company as of and for
the periods indicated. The Company presumes that users of the interim
financial information herein have read or have access to the Company's
audited consolidated financial statements for the preceding fiscal year and
that the adequacy of additional disclosure needed for a fair presentation,
except in regard to material contingencies or recent significant events,
may be determined in that context. Accordingly, footnote and other
disclosures which would substantially duplicate the disclosures contained
in the Form 10-K filed on March 31, 1998 by Hines Holdings, Inc. under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), have been
omitted. The financial information herein is not necessarily
representative of a full year's operations.
5
<PAGE>
3. Common Stock Offering:
----------------------
On June 26, 1998, the Company completed the issuance of 5.1 million shares
of common stock through an initial public offering (the "Offering"),
resulting in net proceeds to the Company (after deducting issuance costs)
of approximately $50.2 million. A portion of the proceeds was used to
repay in part certain borrowings secured by real property bearing interest
at 11.75% per annum and maturing on June 27, 2005. On July 29, 1998, the
remaining proceeds were used to redeem a portion of the 11.75% Senior
Subordinated Notes due 2005, Series B of Hines Nurseries (the "Senior
Subordinated Notes"), as further discussed in Note 4.
Concurrent with the closing of the Offering, the Company entered into an
amended and restated senior credit facility (the "Senior Credit Facility")
to provide for a new $50.0 million term loan and a $200.0 million revolving
credit facility. The revolving credit facility is comprised of a $100.0
million working capital revolver and a $100.0 million acquisition revolver.
Initially, working capital borrowings under the revolving credit facility
included within the Senior Credit Facility bear interest at rates
approximating the U.S. prime rate plus .25 percent or the Eurodollar rate
plus 1.25 percent. The revolving credit facility is secured by
substantially all of the assets and common stock of Hines Nurseries and Sun
Gro-U.S. as well as 65% of the common stock of Sun Gro-Canada. The senior
credit agreement contains covenants that, among other matters establish
minimum interest coverage, maximum leverage ratios, minimum net worth and
maximum capital expenditure amounts. Initially, the average daily amount
of the unused portion of the revolving credit facility is subject to a
commitment fee of .375 percent per annum. The revolving credit facility
expires on June 26, 2003.
The Senior Credit Facility replaced the Company's existing senior credit
facility and increased the aggregate size of the Company's borrowing
facilities by $100 million. The prepayment of the previous credit
facilities resulted in an extraordinary loss related to the write-off of
unamortized financing costs of $1.4 million, net of $1.0 million in related
income taxes, during the three months ended June 30, 1998.
In connection with the Offering, on June 22, 1998, Hines effected 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.
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, and all of the outstanding shares of the Company's 12%
Cumulative Redeemable Junior Preferred Stock, par value $.01 per share,
together, in each case, with all accrued and unpaid dividends thereon
through the date of the closing of the Offering, were converted into shares
of common stock at the initial public offering price less underwriting
discounts and commissions, (ii) a portion of the Company's outstanding 6%
convertible subordinated promissory notes, which were
6
<PAGE>
issued in connection with the Bryfogle's and Lakeland acquisitions in
aggregate principal amounts of $1.0 million and $0.2 million, respectively,
were converted into shares of common stock at the initial public offering
price less underwriting discounts and commissions, and (iii) all of the
outstanding warrants to purchase common stock were exercised in accordance
with their terms . These actions, as well as the above noted stock split,
are collectively referred to herein as the "Equity Recapitalization".
The following unaudited pro forma earnings per share information for the
three and nine months ended September 30, 1997 and 1998 gives effect to the
following transactions as if they occurred on January 1, 1997 and January
1, 1998, respectively: (i) the acquisitions of Bryfogle's Wholesale, Inc.,
Bryfogle's Power Plants and Power Plants II, Inc. (collectively
Bryfogles'), Pacific Color Nurseries, Inc. and Lakeland Peat Moss, Ltd. and
certain affiliated entities ("Lakeland"), (ii) the Equity Recapitalization,
(iii) the closing of the Senior Credit Facility, and (iv) the Offering.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ---------------------------
1997 1998 1997 1998
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Basic and Diluted Earnings Per Share:
Income (loss) per common share ($.13) ($.05) $.62 $.76
Weighted average shares outstanding--
Basic and Diluted 20,502,524 21,431,342 20,502,524 21,431,342
</TABLE>
4. Long-Term Debt:
---------------
On July 29, 1998, the Company redeemed $42.0 million in aggregate principal
amount of the Senior Subordinated Notes at a redemption price of 109.139%
of the aggregate principal amount thereof ($45.8 million at July 29, 1998),
plus accrued and unpaid interest thereon through the date of redemption.
Payment of the redemption premium and the recognition of a portion of the
deferred costs related to the Senior Subordinated Notes resulted in an
extraordinary loss of $3.0 million, net of related income taxes of $2.0
million, in the quarter ended September 30, 1998.
The table set forth below summarizes the Company's outstanding long-term
debt at December 31, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
December 31 September 30
1997 1998
--------------------- -----------------------
<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 as specified in the loan agreement,
with the remaining principal due on December 31, 2002, secured
by inventory $12,000 -
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
December 31 September 30
1997 1998
----------- ------------
<S> <C> <C>
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. 17,000 -
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. 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, monthly interest payments only until
June 1, 1992, blended payments of $88 per month from July 1,
1995, through June 1, 2005, with all remaining principal due on
June 27, 2005. 7,693 -
Acquisition term loan, interest at the bank's reference rate
(8.25 percent per annum at September 30, 1998) plus .25 percent
or the Eurodollar rate plus 1.25 percent per annum. Principal
payments due from September 30, 2000 through June 30, 2003
ranging from 2.50% to 37.5% of the outstanding balance as of
June 26, 2000, as specified in the loan agreement, secured by
substantially all of the assets and stock of Hines Nurseries
and Sun Gro-U.S. as well as 65% of the common stock of Sun
Gro-Canada. - 19,000
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
December 31 September 30
1997 1998
--------------------- -----------------------
<S> <C> <C>
Term debt, interest at the bank's reference (8.25 percent per
annum at September 30, 1998) plus .25 percent or the Eurodollar
rate plus 1.25 percent per annum. Principal payments due from
June 30, 1999 through June 30, 2003 ranging from $1.25 million
to $11.25 million, as specified in the loan agreement, secured
by substantially all of the assets and stock of Hines Nurseries
and Sun Gro-U.S. as well as 65% of the common stock of Sun
Gro-Canada. - 50,000
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 78,000
Capital lease obligations and equipment financing contracts due
at various dates through 1999 secured by leased equipment. 64 13
-------- --------
165,756 147,013
Less current portion 5,400 1,250
-------- --------
$160,356 $145,763
======== ========
</TABLE>
5. Recent Accounting Pronouncements:
---------------------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which is required to be adopted for the Company's year ending
December 31, 1998. SFAS 131 requires that certain financial information
regarding operating segments be publicly reported on the same basis as used
internally by management to evaluate segment performance. The adoption of
SFAS 131 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
6. Acquisition of Lakeland Peat Moss, Ltd.:
----------------------------------------
On April 6, 1998, the Company acquired all of the issued and outstanding
shares of capital stock of Lakeland, a producer of sphagnum peat moss in
western Canada, for approximately U.S. $22.4 million. The acquisition was
accounted for using the purchase method and accordingly the consolidated
unaudited financial statements reflect the operations of Lakeland since the
acquisition date.
9
<PAGE>
7. Earnings Per Share:
-------------------
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 operations for the three and
nine month periods ended September 30, 1997. For the three months ended
September 30, 1997, there are no differences between the numerators and
denominators for basic and diluted earnings per share since common stock
equivalents (in the amount of 609,801) have been excluded from the earnings
per share calculation because the effect would be anti-dilutive. There
were no dilutive common stock equivalents outstanding during the three
months ended September 30, 1998. A reconciliation of the numerators and
denominators of basic and diluted earnings per share for the nine months
ended September 30, 1997 and 1998 is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------------------
1997 1998
----------------------------------------- ------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $ 8,871 $12,980
Less: Preferred stock dividends (5,249) (5,609)
------- -------
Basic EPS
Income applicable to common stock 3,622 7,513 $.48 $ 7,371 12,760 $.58
==== ====
Effect of Dilutive Securities
Warrants 610 40 292
Convertible Notes 18 37
------- ----- ------- ------
Diluted EPS
Income applicable to common stock
plus assumed conversions $ 3,622 8,123 $.45 $ 7,429 13,089 $.57
======= ==== ====== ====
</TABLE>
10
<PAGE>
8. Guarantor/Non-Guarantor Disclosures:
------------------------------------
The Senior Subordinated Notes issued by Hines Nurseries (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 Exchange Act because management believes that they would not be
material to investors. The Senior Subordinated Notes are not guaranteed by
Sun Gro-Canada or its 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 its 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) Sun Gro-Canada and its direct and
indirect subsidiaries, 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:
. Consolidating balance sheets as of December 31, 1997 and September
30, 1998 (unaudited);
. Consolidating statements of operations for the three months and
nine months ended September 30, 1997 and 1998 (unaudited); and
. Consolidating statements of cash flows for the nine months ended
September 30, 1997 and 1998 (unaudited).
11
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Hines Sun Gro 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>
ASSETS
- ------
CURRENT ASSETS
Cash $ - $ 2,543 $ - $ - $ - $ 2,543
Accounts receivable, net - 7,945 10,188 2,436 - 20,569
Inventories - 98,391 2,162 5,454 - 106,007
Prepaid expenses and other current assets - 872 536 550 - 1,958
Deferred income taxes - 50 804 169 (1,023) -
------------------------------------------------------------------------------
Total current assets - 109,801 13,690 8,609 (1,023) 131,077
------------------------------------------------------------------------------
FIXED ASSETS, net - 44,398 4,242 43,766 - 92,406
DEFERRED FINANCING EXPENSES, net - 5,248 247 982 - 6,477
GOODWILL, net - 38,041 - 818 - 38,859
DEFERRED INCOME TAXES 16 10,163 - - (10,179) -
INVESTMENTS IN SUBSIDIARIES 55,596 8,925 7,832 - (72,353) -
------------------------------------------------------------------------------
$ 55,612 $216,576 $ 26,011 $54,175 $(83,555) $268,819
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES
Accounts payable $ - $ 5,053 $ 1,117 $ 1,876 $ - $ 8,046
Accrued liabilities 3 2,738 1,930 638 - 5,309
Accrued payroll and benefits - 5,036 887 598 - 6,521
Long-term debt, current portion - 2,400 - 3,000 - 5,400
Borrowings on revolving credit facility - 36,231 6,871 - - 43,102
Deferred income taxes - 36,174 0 0 (1,023) 35,151
Other liabilities - - (224) 224 - -
Intercompany accounts 55,678 (75,078) (1,308) 20,708 - -
------------------------------------------------------------------------------
Total current liabilities 55,681 12,554 9,273 27,044 (1,023) 103,529
------------------------------------------------------------------------------
LONG-TERM DEBT 1,000 151,856 - 7,500 - 160,356
DEFERRED INCOME TAXES - 2,829 1,555 11,798 (10,179) 6,003
CUMULATIVE REDEEMABLE SENIOR
PREFERRED STOCK 43,967 - - - - 43,967
CUMULATIVE REDEEMABLE JUNIOR
PREFERRED STOCK 26,715 - - - - 26,715
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 105 13,471 11,413 - (24,884) 105
Additional paid in capital (accumulated
accretion of cumulative redeemable
preferred stock in excess of
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) 14,502 (2,119) 6,056 (18,439) (70,633)
------------------------------------------------------------------------------
Total shareholders' equity (deficit) (71,751) 49,337 15,183 7,833 (72,353) (71,751)
------------------------------------------------------------------------------
$ 55,612 $216,576 $26,011 $54,175 $(83,555) $268,819
==============================================================================
</TABLE>
Page 12
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of September 30, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Hines Sun Gro 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>
ASSETS
- ------
CURRENT ASSETS:
Cash $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 16,914 11,247 1,684 - 29,845
Inventories - 97,434 2,386 7,262 - 107,082
Prepaid expenses and other current assets - 1,075 1,402 402 - 2,879
Deferred income taxes 36 50 804 158 (1,048) -
--------------------------------------------------------------------------
Total current assets 36 115,473 15,839 9,506 (1,048) 139,806
--------------------------------------------------------------------------
FIXED ASSETS, net - 51,294 5,999 63,254 - 120,547
DEFERRED FINANCING EXPENSES, net - 5,037 - - - 5,037
GOODWILL, net - 37,411 - 799 - 38,210
DEFERRED INCOME TAXES - 10,163 - - (10,163) -
INVESTMENTS IN SUBSIDIARIES 68,699 12,663 11,778 - (93,140) -
--------------------------------------------------------------------------
$ 68,735 $232,041 $33,616 $73,559 $(104,351) $303,600
==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ - $ 4,537 $ 902 $ 3,272 $ - $ 8,711
Accrued liabilities - 2,761 3,470 1,263 - 7,494
Accrued payroll and benefits - 6,557 820 787 - 8,164
Accrued interest - 4,148 - - - 4,148
Long-term debt, current portion - 750 - 500 - 1,250
Borrowings on revolving credit facility - 10,800 - - - 10,800
Deferred income taxes - 40,364 140 - (1,048) 39,456
Intercompany accounts 2,891 (29,411) 10,316 16,204 - -
--------------------------------------------------------------------------
Total current liabilities 2,891 40,506 15,648 22,026 (1,048) 80,023
--------------------------------------------------------------------------
LONG-TERM DEBT - 126,263 - 19,500 - 145,763
DEFERRED INCOME TAXES - 2,829 3,549 15,755 (10,163) 11,970
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock 221 17,971 11,414 4,500 (33,885) 221
Additional paid in capital (accumulated
accretion of cumulative redeemable preferred
stock in excess of additional paid in capital) 128,009 21,361 4,112 1,777 (27,250) 128,009
Notes receivable from stock sales (327) - - - - (327)
Retained earnings (deficit) (62,059) 23,111 (1,107) 10,001 (32,005) (62,059)
--------------------------------------------------------------------------
Total shareholders' equity (deficit) 65,844 62,443 14,419 16,278 (93,140) 65,844
--------------------------------------------------------------------------
$ 68,735 $232,041 $33,616 $73,559 $(104,351) $303,600
==========================================================================
</TABLE>
Page 13
<PAGE>
. Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the nine month period ended September 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 $ 0 $117,275 $48,160 $16,433 $(8,885) $172,983
Cost of goods sold - 58,795 25,566 10,308 (8,885) 85,784
------------------------------------------------------------------------------
Gross Profit - 58,480 22,594 6,125 - 87,199
Operating expenses - 27,607 23,165 5,586 - 56,358
------------------------------------------------------------------------------
Operating income - 30,873 (571) 539 - 30,841
------------------------------------------------------------------------------
Other expenses:
Interest (13) 14,171 565 796 - 15,519
Interest - intercompany - (637) 543 94 - -
Amortization of deferred financing
expenses, other (8,863) 1,758 28 234 7,647 804
------------------------------------------------------------------------------
(8,876) 15,292 1,136 1,124 7,647 16,323
------------------------------------------------------------------------------
Income (loss) before provision for (benefit
from) income taxes 8,876 15,581 (1,707) (585) (7,647) 14,518
Income tax provision (benefit) 5 6,718 (705) (371) - 5,647
------------------------------------------------------------------------------
Net income (loss) $ 8,871 $ 8,863 $(1,002) $ (214) $(7,647) $ 8,871
==============================================================================
</TABLE>
Consolidating Statement of Operations
For the three month period ended September 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 $ 0 $ 15,751 $13,355 $ 3,953 $(1,955) $ 31,104
Cost of goods sold - 7,750 6,669 $ 1,837 (1,955) 14,301
------------------------------------------------------------------------------
Gross Profit - 8,001 6,686 2,116 - 16,803
Operating expenses - 7,101 6,720 $ 1,796 - 15,617
------------------------------------------------------------------------------
Operating income - 900 (34) 320 - 1,186
------------------------------------------------------------------------------
Other expenses:
Interest 0 4,473 175 $ 249 - 4,897
Interest - intercompany - (247) 214 $ 33 - -
Amortization of deferred financing
expenses, other 2,311 389 (204) $ 81 (2,300) 277
------------------------------------------------------------------------------
2,311 4,615 185 363 (2,300) 5,174
------------------------------------------------------------------------------
Income (loss) before provision for (benefit
from) income taxes (2,311) (3,715) (219) (43) 2,300 (3,988)
Income tax provision (benefit) - (1,404) (229) $ (44) $ - (1,677)
------------------------------------------------------------------------------
Net income (loss) $ (2,311) $ (2,311) $ 10 $ 1 $ 2,300 $ (2,311)
==============================================================================
</TABLE>
Page 14
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Condensed Statement of Operations
For the nine month period ended September 30, 1998
(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 $ 0 $138,877 $52,444 $22,635 $(13,542) $200,414
Cost of goods sold - 70,960 26,888 13,865 (13,542) 98,171
------------------------------------------------------------------------------
Gross Profit - 67,917 25,556 8,770 - 102,243
Operating expenses 9 37,277 21,793 4,870 - 63,949
------------------------------------------------------------------------------
Operating income (9) 30,640 3,763 3,900 - 38,294
------------------------------------------------------------------------------
Other expenses:
Interest 46 14,301 421 838 - 15,606
Interest - intercompany - (1,189) 1,030 159 - -
Amortization of deferred financing
expenses, other (8,607) (1,649) 40 151 10,929 864
------------------------------------------------------------------------------
(8,561) 11,463 1,491 1,148 10,929 16,470
------------------------------------------------------------------------------
Income (loss) before provision
for (benefit from) income taxes 8,552 19,177 2,272 2,752 (10,929) 21,824
Income tax provision (benefit) (22) 6,743 2,396 (273) - 8,844
------------------------------------------------------------------------------
Net income (loss) before
extraordinary items 8,574 12,434 (124) 3,025 (10,929) 12,980
Extraordinary items, net of tax - 3,827 124 455 - 4,406
------------------------------------------------------------------------------
Net income (loss) $8,574 $ 8,607 $ (248) $ 2,570 $(10,929) $ 8,574
==============================================================================
</TABLE>
Consolidating Condensed Statement of Operations
For the three month period ended September 30, 1998
(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 $ 0 $18,927 $17,275 $ 6,021 $(5,524) $36,699
Cost of goods sold - 10,242 8,069 4,691 (5,524) 17,478
------------------------------------------------------------------------------
Gross Profit - 8,685 9,206 1,330 - 19,221
Operating expenses 9 9,727 7,560 481 - 17,777
------------------------------------------------------------------------------
Operating income (9) (1,042) 1,646 849 - 1,444
------------------------------------------------------------------------------
Other expenses:
Interest 17 3,006 150 389 - 3,562
Interest - intercompany - (317) 272 45 - -
Amortization of deferred
financing expenses, other 4,428 (741) 3 (3) (3,441) 246
------------------------------------------------------------------------------
4,445 1,948 425 431 (3,441) 3,808
------------------------------------------------------------------------------
Income (loss) before provision
for (benefit from) income taxes (4,454) (2,990) 1,221 418 3,441 (2,364)
Income tax provision (benefit) (10) (1,589) 1,682 (1,030) - (947)
------------------------------------------------------------------------------
Net income (loss) before
extraordinary items (4,444) (1,401) (461) 1,448 3,441 (1,417)
Extraordinary items, net
of tax benefit - - 3,027 0 0 - 3,027
------------------------------------------------------------------------------
Net income (loss) $(4,444) $(4,428) $ (461) $ 1,448 $ 3,441 $(4,444)
==============================================================================
</TABLE>
Page 15
<PAGE>
. Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the nine month period ended September 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>
Net cash provided by (used in)
operating activities $ 14 $ 16,402 $(3,389) $ 3,964 $ 95 $17,086
---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (4,858) (641) (1,880) - (7,379)
Proceeds from sale of fixed assets - 154 - - - 154
Proceeds from insurance claims - 1,194 - - - 1,194
Purchase of fixed assets from
insurance claims proceeds - (1,081) - - - (1,081)
---------------------------------------------------------------------------------------------
Net cash used in investing
activities - (4,591) (641) (1,880) - (7,112)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of
credit - 112,934 54,372 - - 167,306
Repayments on revolving line of
credit - (119,929) (54,076) - - (174,005)
Intercompany advances (repayments) (282) (6,590) 6,894 (22) - -
Repayments of long-term debt - (1,611) - (2,062) - (3,673)
Deferred financing costs - (331) (170) - - (501)
Dividends received (paid) - 3,085 (3,085) - - -
Issuance of preferred and
common stock 343 - 95 - (95) 343
Repurchase and retirement of
stock (75) - - - - (75)
---------------------------------------------------------------------------------------------
Net cash provided by (used
in) financing activities (14) (12,442) 4,030 (2,084) (95) (10,605)
---------------------------------------------------------------------------------------------
NET DECREASE IN CASH - (631) - - - (631)
CASH, beginning of period - 631 - - - 631
---------------------------------------------------------------------------------------------
CASH, end of period $ - $ - $ - $ - $ - $ -
=============================================================================================
</TABLE>
Page 16
<PAGE>
. Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the nine month period ended September 30, 1998
(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>
Net cash provided by (used in) operating activities $(4,552) $ 18,142 $ 15,402 $ (2,954) $ 4,500 $ 30,538
---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (9,674) (184) (1,823) - (11,681)
Proceeds from sales of fixed assets - - 18 277 - 295
Acquisition, net of cash 2,118 (250) - (21,797) - (19,929)
---------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,118 (9,924) (166) (23,343) - (31,315)
---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit - 123,677 27,871 - - 151,548
Repayments on revolving line of credit - (149,108) (34,742) - - (183,850)
Intercompany advances (repayments) (52,787) 36,170 (5,180) 21,797 - -
Proceeds from the issuance of long-term debt - 63,961 - 20,000 - 83,961
Repayments of long-term debt (1,918) (86,204) (101) (15,500) - (103,723)
Deferred financing costs - (3,000) - - - (3,000)
Penalty on early payment of subordinated notes - (3,841) - - - (3,841)
Dividends received (paid) - 3,084 (3,084) - - -
Repayments of notes receivables from stock sales 572 - - - - 572
Issuance of common stock 50,157 - - - - 50,157
Issuance of preferred stock 6,410 4,500 - - (4,500) 6,410
---------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,434 (10,761) (15,236) 26,297 (4,500) (1,766)
---------------------------------------------------------------------------
NET DECREASE IN CASH - (2,543) - - - (2,543)
CASH, beginning of period - 2,543 - - - 2,543
---------------------------------------------------------------------------
CASH, end of period $ - $ - $ - $ - $ - $ -
===========================================================================
</TABLE>
Page 17
<PAGE>
Item 2.
HINES HORTICULTURE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this report contains trend analysis and other forward-
looking statements. Any such statements that refer to the Company's estimated
or anticipated future results, operating performance or other non-historical
facts are forward-looking and reflect the Company's current perspective of
existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and actual results may
differ materially from those expressed or implied by such forward-looking
statements.
Overview
General. The Company is a leading operator of commercial nurseries in
North America, producing one of the broadest assortments of container-grown
plants in the industry. 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
is also the largest North American producer and marketer of sphagnum peat moss
and professional peat-based growing mixes, which it sells 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. Its business has also been favored by trends in the
retail distribution channel, including the expansion of large "big box"
retailers such as Home Depot, Lowe's and Wal-Mart which have increased their
emphasis on the lawn and garden category, thereby providing greater consumer
exposure to lawn and garden products.
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 "Results of Operations."
Acquisitions. The Company has completed a number of recent acquisitions.
Certain of these acquisitions 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 or offer operating
synergies. The Company believes that the highly fragmented nature of the nursery
industry presents it with a number of opportunities to make such acquisitions,
though the Company does not have any current definitive agreements to consummate
any such acquisitions.
Tax Matters. The Company derives significant benefits under the Internal
Revenue 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
18
<PAGE>
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. This exception 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 its ability to deduct growing costs under the farming exception 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, although there can be no
assurances that these tax benefits will not be modified or eliminated as some
future date.
Results of Operations
The Company's nursery business, like that of its competitors, is highly
seasonal. In 1997, approximately 80% of Hines Nurseries' net sales and
approximately 102% of Hines Nurseries' operating income occurred in the first
half of the year. Approximately 58% of Hines Nurseries' net sales and
approximately 84% of Hines Nurseries' operating income occurred in the second
quarter of 1997. The Company has experienced and expects to continue to
experience significant seasonality in net sales, operating income and net
income. This quarterly variability is primarily the result of the consumer
gardening cycle, which is closely aligned to seasonal weather patterns,
particularly weekend weather during the peak growing season, as well as other
factors. Sun Gro's sales, because they are more heavily weighted towards the
professional markets, typically do not experience the large seasonal variances
present in the retail market, and are only slightly weighted towards the first
half of the year.
Three Months Ended September 30, 1998 compared to Three Months Ended September
30, 1997
Net sales. Net sales of $36.7 million for the three months ended September
30, 1998 increased $5.6 million, or 18.0%, from net sales of $31.1 million for
the comparable period in 1997. The Company's sales of its nursery products
increased 19.6%, which included $1.9 million of sales from the Company's newly
acquired nursery operations, Pacific Color Nurseries, Inc. ("Pacific Color")
acquired on October 20, 1997 and Bryfogle's Wholesale, Inc. and certain
affiliated entities (collectively, "Bryfogle's") acquired on December 16, 1997.
Excluding the acquisitions, sales from the Company's nursery operations
increased 7.6% from the comparable period in 1997. The increase in net sales
was primarily due to increased sales in all regions of the country and
particularly in the western region.
Net sales of the Company's peat moss and peat-based products increased by
16.2% from the comparable period in 1997. Third quarter 1998 sales included
$3.2 million from Lakeland Peat Moss, Ltd. and certain affiliated entities
(collectively, "Lakeland") which the Company acquired on April 6, 1998.
Excluding the Lakeland acquisition, sales decreased 5.2% from the comparable
period in 1997. Sales to the Company's professional customers remained
relatively unchanged during the period, while sales to retail customers
decreased by 31.0%. This decrease in sales was attributable to the Company's
strategy to shift its sales efforts away from retail customers and to focus on
sales
19
<PAGE>
to its professional customers, which generally have a higher profit margin.
Additionally, the Company has elected to forego its past practice of providing
significant price concessions to professional growers to accelerate their
purchases prior to the actual January - March growing season. By re-establishing
its sales price baseline, the Company has, in effect, deferred revenues it would
have traditionally generated in the third quarter to future quarters.
Gross profit. Gross profit of $19.2 million (52.3% of net sales) for the
three months ended September 30, 1998 increased $2.4 million, or 14.3%, from
gross profit of $16.8 million (54.0% of net sales) for the comparable period in
1997. The increase was primarily attributable to higher sales and the improved
gross profit for the Company's peat moss operations. As a percent of sales,
gross margin decreased from 54.0% to 52.3% of net sales as the lower gross
margins of the seasonally lower volume nursery operations more than offset
improved margins in the peat moss business. The peat moss operations' increase
was primarily attributable to the increased emphasis on professional customers
and pricing improvements in all professional products. The gross margins of the
nursery operations were depressed by the newly acquired companies, which
generally bring lower margins. However, the gross profit and operating
performance of acquired companies have generally improved following the
installation of Hines' operating systems and their integration into the Company.
Operating expenses. Operating expenses of $17.8 million (48.5% of net
sales) for the three months ended September 30, 1998 increased $2.2 million, or
14.1%, from $15.6 million (50.2% of net sales) for the comparable period in
1997. The increase was primarily attributable to the acquisitions identified
above. Excluding the impact of acquisitions, the operating expenses of the
Company's nursery operations increased 23.0% while operating expenses of the
Company's peat moss operation decreased 20.8%. The increase in the operating
expenses of the nursery operations' increased due to increased selling and
general and administrative expenses, specifically related to the increased
hiring and training of selling and management personnel, and increased
investment in information systems required to support the growth of the
Company's nursery operations. The decrease in operating expense of the
Company's peat moss operations was primarily due to the reduction in promotional
and advertising programs targeted at retail customers due to the shift away from
the lower margin retail peat business.
Operating income. Operating income of $1.4 million for the three months
ended September 30, 1998 increased $0.2 million, or 16.7%, from $1.2 million for
the comparable period in 1997. Gains in operating income were limited by higher
operating expenses attributable to the nursery operations for the reasons
described above.
Interest expense. Interest expense of $3.6 million for the three months
ended September 30, 1998 decreased $1.3 million, or 26.5%, from $4.9 million for
the comparable period in 1997. The decrease was attributable to lower borrowing
levels under the Company's revolving credit facilities and the redemption of
$42.0 Million of Senior Subordinated Notes in connection with the Company's
initial public offering of common stock on June 26, 1998.
Provision for income taxes. The Company's effective income tax rate was
40.1% and 42.1% for the three months ended September 30, 1998 and 1997,
respectively.
20
<PAGE>
Net income (loss). Net loss of $4.4 million for the three months ended
September 30, 1998 increased $2.1 million, or 91.3%, from the net loss of $2.3
million for the comparable period in 1997. Excluding the $3.0 million
extraordinary charge on the early extinguishment of debt the net loss decreased
by $0.9 million, or 39.1%, from a net loss of $2.3 million for the comparable
period in 1997. The decrease in net loss was primarily attributable to
increased sales and lower interest expense described above.
Nine Months Ended September 30, 1998 compared to Nine Months Ended September 30,
1997
Net sales. Net sales of $200.4 million for the nine months ended September
30, 1998 increased $27.4 million, or 15.8%, from net sales of $173.0 million for
the comparable period in 1997. The Company's sales of nursery products
increased 18.4%, which included $14.1 million of sales from the Company's newly
acquired nursery operations, Pacific Color acquired on October 20, 1997 and
Bryfogle's acquired on December 16, 1997. Excluding these acquisitions, sales
from the Company's nursery operations increased 6.4% from the comparable period
in 1997. The higher sales were primarily due to increased sales in the eastern
and southern regions of the country, resulting from continued expansion of
existing operations. This increase was partially offset by lower sales in the
western and southwestern regions of the country, particularly in California,
where the historically strong seasonal demand was reduced due to excessive
rainfall attributable to El Nino during the period.
Net sales of the Company's peat moss and peat-based products increased by
$5.8 million, or 10.5%, from the comparable period in 1997. Nine month 1998
sales included $8.5 million from Lakeland acquired by the Company on April 6,
1998. Excluding the Lakeland acquisition, sales decreased 4.7% from the
comparable period in 1997. Sales of peat-based products in the western United
States were negatively impacted during the first nine months by unseasonably wet
weather attributable to El Nino. The Company's strategy to emphasize sales to
professional customers was reflected in a 4.0%, or $1.4 million, increase in
sales to this customer segment during the period. Likewise, the Company's
strategy to move away from unprofitable and low margin retail customers resulted
in reduced sales to retail customers of $4.0 million, or 24.0%, compared to
1997.
Gross profit. Gross profit of $102.2 million (51.0% of net sales) for the
nine months ended September 30, 1998 increased $15.0 million, or 17.2%, from
gross profit of $87.2 million (50.4% of net sales) for the comparable period in
1997. The increase was primarily attributable to the increase in sales and
improved gross profit for the Company's peat moss operations resulting from the
increased emphasis on professional customers and pricing improvements in all
professional products. As a percent of sales, gross margin improved from 50.4%
to 51.0% of net sales as lower nursery operation gross margins are more than
offset by improved margins in the peat moss operations. The peat moss
operations' improved gross margins were primarily attributable to the increased
emphasis on sales to professional customers, which generally have higher profit
margins and pricing improvements in all professional products. The gross
margins of the nursery operations were depressed by the newly acquired
companies, which generally bring lower margin than those of the core nursery
operations. However, the gross profit and operating performance of acquired
companies
21
<PAGE>
have generally improved following the installation of Hines' operating systems
and their integration into the Company.
Operating expenses. Operating expenses of $63.9 million (31.9% of net
sales) for the nine months ended September 30, 1998 increased $7.5 million, or
13.3%, from $56.4 million (32.6% of net sales) for the comparable period in
1997. The increase was primarily attributable to the acquisitions, an increase
in management hiring and training, and increased investment in information
systems required to support the Company's current and future growth. Excluding
the impact of acquisitions, the operating expenses of the Company's nursery
operations increased 21.6% while operating expenses of the Company's peat moss
operation decreased 17.7%. The increase in the operating expenses of the
nursery operations' increased due to increased selling and general and
administrative expenses, specifically related to the increased hiring and
training of selling and management personnel, and increased investment in
information systems required to support the growth of the Company's nursery
operations. The decrease in operating expense of the Company's peat moss
operations was primarily due to the reduction in promotional and advertising
programs targeted at retail customers due to the shift away from the lower
margin retail peat business.
Operating income. Operating income of $38.3 million (19.1% of net sales)
for the nine months ended September 30, 1998 increased $7.5 million, or 24.4%,
from $30.8 million (17.8% of net sales) for the comparable period in 1997.
Operating income increased primarily due to higher sales and gross profit
margins, which was partially offset by higher operating expenses, as described
above.
Interest expense. Interest expense of $15.6 million for the nine months
ended September 30, 1998 increased $0.1 million from $15.5 million for the
comparable period in 1997. The increase was attributable to higher borrowing
levels under the Company's revolving credit facilities during the first half of
the year which were used primarily to support capacity expansion capital
projects and the seasonal inventory buildup for the Company's nursery
operations. This increase in borrowings was partially offset by the redemption
of $42.0 million of Senior Subordinated Notes in connection with the Company's
initial public offering of common stock on June 26 1998.
Provision for income taxes. The Company's effective income tax rate was
40.5% and 38.9% for the nine months ended September 30, 1998 and 1997,
respectively.
Net income. Net income of $8.6 million for the nine months ended September
30, 1998 decreased $0.3 million, or 3.4%, from $8.9 million for the comparable
period in 1997. Excluding the $4.4 million extraordinary loss on the early
extinguishment of debt the net income increased by $4.1 million, or 46.1%, from
net income of $8.9 million for the comparable period in 1997. The increase in
net income was primarily attributable to an increase in sales and gross margins
partially offset by an increase in operating expenses, as described above.
Liquidity and Capital Resources
The Company has historically satisfied its working capital requirements
through operating
22
<PAGE>
cash flow and, as a result of the highly seasonal nature of the Company's
nursery operations, through borrowings under its revolving credit facilities.
On June 26, 1998, the Company completed the issuance of 5.1 million shares
of common stock through an initial public offering ("the Offering"), resulting
in net proceeds to the Company (after deducting issuance costs) of approximately
$50.2 million. The proceeds were used for the redemption on July 29, 1998, of
$42.0 million in aggregate principal amount of Senior Subordinated Notes and
repayment, in part, of certain debt secured by a mortgage.
In conjunction with the Offering, the Company entered into a new senior
credit facility (the "Senior Credit Facility") with Bankers Trust Company, Bank
of America, N.T. & S.A. and Harris Trust & Savings Bank. The Senior Credit
Facility amended and restated the Company's existing senior credit facilities to
provide for a new $50.0 million term loan and a $200.0 million revolving credit
facility. The revolving credit facility is comprised of a $100.0 million
working capital facility and a $100.0 million acquisition facility. The Senior
Credit Facility replaced the previous senior credit facilities and increased the
Company's borrowing capacity by $100.0 million. The Senior Credit Facility has a
five-year term. The revolving credit facility and all other obligations under
the Senior Credit Facility are secured by substantially all of the assets and
common stock of Hines Nurseries and Sun Gro-U.S., as well as a pledge of 65% of
the common stock of Sun Gro-Canada. The principal repayment schedule for the
term loan is $2.5 million in 1999, $6.25 million in 2000, $11.25 million in
2001, $18.75 million in 2002 and $11.25 million in 2003. Amounts borrowed under
the acquisition facility will convert into a term loan in 2000 and will begin to
amortize thereafter.
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 acquisition of the Company
by Madison Dearborn Capital Partners, L.P. and certain members of management.
These Senior Subordinated Notes were subsequently exchanged in a registered
offering for $120.0 million of its 11 3/4% Senior Subordinated Notes due 2005,
Series B. As of September 30, 1998, $78.0 million in aggregate principal amount
remains outstanding. 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 Senior Credit Facility, causing all amounts owing thereunder to become
immediately due and payable. The Senior Credit Facility imposes a number of
similar and certain additional restrictions (including financial covenants) on
Hines Nurseries and Sun Gro-U.S and its subsidiaries.
Net cash provided by operating activities for the nine months ended
September 30, 1998 of $30.5 million increased $13.4 million from $17.1 for the
comparable period in 1997. The increase was primarily due to an increase in net
income, an increase in accounts receivable and a reduction in inventory compared
with the prior year. The seasonal nature of the Company's operations results in
a significant increase in certain components of working capital (primarily
accounts receivable and
23
<PAGE>
inventory) during the growing and selling cycle. As a result, operating
activities during the first quarter of 1998, used a significant amount of cash
($27.1 million) while operating activities for the second ($40.0 million) and
third quarters ($17.6 million) generated a significant amount of cash as the
Company shipped inventory and collected accounts receivable.
Net cash used for investment activities during the nine months ended
September 30, 1998 increased $24.2 million from $7.1 million for the comparable
period in 1997. The increase was primarily due to the April 6, 1998 acquisition
of Lakeland, increased purchases of fixed assets as part of the Company's
development of additional nursery acreage and the purchase of nursery-related
structures, certain vehicles, machinery and equipment.
Net cash used by financing activities during the nine months ended
September 30, 1998 decreased to $1.8 million from $10.6 million for the
comparable period in 1997. The decrease was associated with the Offering, the
new $250 million Senior Credit Facility and a reduction in revolving credit
facility balances.
The Company typically draws under its revolving credit facilities in the
first and fourth quarters to fund its inventory buildup of nursery products and
seasonal 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 in the second and third
quarters. 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 October 31, 1998, the Company had unused
borrowing capacity of $81.0 million and $84.4 million under its acquisition
revolver and working capital revolver, respectively, included within the Senior
Credit Facility.
As a result of the Company's ability to deduct its growing costs under the
farming exception, 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. 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 carry forwards.
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 resulting from 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 $11.7 million for the
nine months ended September 30, 1998. The capital expenditures for Hines
Nurseries ($9.7 million) related primarily to the development of additional
nursery acreage and the purchase of nursery-related structures, certain
vehicles, machinery and equipment. The capital expenditures for Sun Gro ($4.0
million) related primarily to peat bog development and the purchase of peat bog
harvesting equipment.
24
<PAGE>
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 and borrowings
available under the Senior Credit Facility will be sufficient to meet the
Company's anticipated working capital, capital expenditure and debt service
requirements for the foreseeable future. However, as a result of its plan to
pursue strategic acquisitions, the Company may require additional debt or equity
financing in the future.
Year 2000 Compliance
The Company has instituted a program to determine whether its computerized
information systems are able to interpret dates beyond the year 1999 (the "Year
2000 Compliance Program") and has implemented programming modifications to its
main operational and financial reporting systems that will address these issues.
All modified programming is currently operational with testing scheduled to be
completed by the end of 1998. The financial systems of companies recently
acquired by the Company may not be entirely Year 2000 compliant. It is
expected, however, that the Company will integrate the financial data of these
acquired companies into the Company's main system by early 1999 and will have no
need to rely on any non-compliant systems.
The Company is in the early stage of evaluating non-information technology
systems, which would include telephone equipment, greenhouse automation and
watering systems. The Company expects this evaluation to be completed by the
end of 1998 or in early 1999.
The Company has contacted, or has been contacted by, its major customers
and determined that such customers are Year 2000 compliant. The Company is in
the process of contacting its major suppliers and service vendors regarding Year
2000 compliance and anticipates that this phase of the Year 2000 Compliance
Program will be completed by the end of calendar 1998 or early 1999.
The total cost of the Year 2000 Compliance Program is not expected to be
material to the Company's consolidated financial position or results of
operations. To date, the Company has spent approximately $.3 million on Year
2000 Compliance. The Company believes that the cost of ensuring Year 2000
compliance for its own operational and financial systems will be less than $.5
million.
Although management believes the Company has an adequate plan to be Year
2000 compliant there can be no assurance that this program ultimately will be
successful. The Company believes that it has sufficient resources to implement
new and modified computer systems and programming to address the Year 2000
issue, and, accordingly, has not to date identified the need for any contingency
planning. However, the Company's assessment of its financial and operations
systems, non-information technology systems and those of third parties may
reveal the need for contingency planning in the future.
25
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits 27.1 Financial Data Schedule
Exhibit 10.1 Hines Horticulture, Inc. 1998 Long-Term Equity Incentive
Plan, as amended and restated as of October 30, 1998
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HINES HORTICULTURE, INC.
(Registrant)
By: /s/ CLAUDIA M. PIEROPAN
----------------------------------
Claudia M. Pieropan
Chief Financial Officer
Date: November 12, 1998
Claudia M. Pieropan is signing in the dual capacities as (i) principal
financial officer, and (ii) a duly authorized officer of the Company.
27
<PAGE>
EXHIBIT 10.1
HINES HORTICULTURE, INC.
1998 LONG-TERM EQUITY INCENTIVE PLAN
------------------------------------
As Amended and Restated as of October 30, 1998
1. Purpose.
-------
This plan shall be known as the Hines Horticulture, Inc. 1998 Long-
Term Equity Incentive Plan (the "Plan"). The purpose of the Plan shall be to
promote the long-term growth and profitability of Hines Horticulture, Inc. (the
"Company") and its Subsidiaries by (i) providing certain directors, officers and
employees of the Company and its Subsidiaries with incentives to maximize
stockholder value and otherwise contribute to the success of the Company and
(ii) enabling the Company to attract, retain and reward the best available
persons for positions of responsibility. Grants of incentive or nonqualified
stock options, stock appreciation rights ("SARs"), either alone or in tandem
with options, restricted stock, performance awards, or any combination of the
foregoing may be made under the Plan.
2. Definitions.
-----------
(a) "Board of Directors" and "Board" mean the board of directors of
------------------ -----
Hines Horticulture, Inc.
(b) "Cause" means the occurrence of one of the following events:
-----
(i) Conviction of a felony or any crime or offense lesser than
a felony involving the property of the Company or a Subsidiary; or
(ii) Conduct that has caused demonstrable and serious injury
to the Company or a Subsidiary, monetary or otherwise; or
(iii) Willful refusal to perform or substantial disregard of
duties properly assigned, as determined by the Company; or
(iv) Breach of duty of loyalty to the Company or a Subsidiary or
other act of fraud or dishonesty with respect to the Company or a Subsidiary.
(c) "Change in Control" means the occurrence of one of the following
-----------------
events:
<PAGE>
(i) if any "person" or "group" as those terms are used in
Sections 13(d) and 14(d) of the Exchange Act, other than an Exempt Person, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding securities;
or
(ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board and any new directors whose
election by the Board or nomination for election by the Company's stockholders
was approved by at least two-thirds of the directors then still in office who
either were directors at the beginning of the period or whose election was
previously so approved, cease for any reason to constitute a majority thereof;
or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation (A) which would result in all or a portion of the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) by which the corporate
existence of the Company is not affected and following which the Company's chief
executive officer and directors retain their positions with the Company (and
constitute at least a majority of the Board); or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all the Company's assets, other than a sale to
an Exempt Person.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Compensation Committee of the Board. The
---------
membership of the Committee shall be constituted so as to comply at all times
with the applicable requirements of Rule 16b-3 under the Exchange Act.
(f) "Common Stock" means the Common Stock, par value $.01 per share,
------------
of the Company, and any other shares into which such stock may be changed by
reason of a recapitalization, reorganization, merger, consolidation or any other
change in the corporate structure or capital stock of the Company.
(g) "Competition" is deemed to occur if a person whose employment with
-----------
the Company or its Subsidiaries has terminated obtains a position as a full-time
or part-time employee of, as a member of the board of directors of, or as a
consultant or advisor with or to, or acquires an ownership interest in excess of
5% of, a corporation, partnership, firm or other entity that engages in any of
the businesses of the Company or any Subsidiary with which the person was
involved in a management role at any time during his or her last five years of
employment with or other service for the Company or any Subsidiaries.
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<PAGE>
(h) "Disability" means a disability that would entitle an eligible
----------
participant to payment of monthly disability payments under any Company
disability plan or as otherwise determined by the Committee.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Exempt Person" means (i) Madison Dearborn Capital Partners, L.P.,
-------------
(ii) any person, entity or group under the control of any party included in
clause (i), or (iii) any employee benefit plan of the Company or a trustee or
other administrator or fiduciary holding securities under an employee benefit
plan of the Company.
(k) "Fair Market Value" of a share of Common Stock of the Company
-----------------
means, as of the date in question, the officially-quoted closing selling price
of the stock on the principal securities exchange on which the Common Stock is
then listed for trading (including for this purpose the Nasdaq National Market)
(the "Market") on the immediately preceding trading day or, if the Common Stock
is not then listed or quoted in the Market, the Fair Market Value shall be the
fair value of the Common Stock determined in good faith by the Board; provided,
however, that when shares received upon exercise of an option are immediately
sold in the open market, the net sale price received may be used to determine
the Fair Market Value of any shares used to pay the exercise price or
withholding taxes and to compute the withholding taxes.
(l) "Incentive Stock Option" means an option conforming to the
----------------------
requirements of Section 422 of the Code and any successor thereto.
(m) "Non-Employee Director" has the meaning given to such term in Rule
---------------------
16b-3 under the Exchange Act.
(n) "Nonqualified Stock Option" means any stock option other than an
-------------------------
Incentive Stock Option.
(o) "Other Company Securities" mean securities of the Company other
------------------------
than Common Stock, which may include, without limitation, unbundled stock units
or components thereof, debentures, preferred stock, warrants and securities
convertible into or exchangeable for Common Stock or other property.
(p) "Retirement" means retirement as defined under any Company pension
----------
plan or retirement program or termination of one's employment on retirement with
the approval of the Committee.
(q) "Subsidiary" means a corporation or other entity of which
----------
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect the
management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.
-3-
<PAGE>
3. Administration.
--------------
The Plan shall be administered by the Committee; provided that the
Board may, in its discretion, at any time and from time to time, resolve to
administer the Plan, in which case the term "Committee" shall be deemed to mean
the Board for all purposes herein. The Committee shall consist of at least two
directors. Subject to the provisions of the Plan, the Committee shall be
authorized to (i) select persons to participate in the Plan, (ii) determine the
form and substance of grants made under the Plan to each participant, and the
conditions and restrictions, if any, subject to which such grants will be made,
(iii) modify the terms of grants made under the Plan, (iv) interpret the Plan
and grants made thereunder, (v) make any adjustments necessary or desirable in
connection with grants made under the Plan to eligible participants located
outside the United States and (vi) adopt, amend, or rescind such rules and
regulations, and make such other determinations, for carrying out the Plan as it
may deem appropriate. Decisions of the Committee on all matters relating to the
Plan shall be in the Committee's sole discretion and shall be conclusive and
binding on all parties. The validity, construction and effect of the Plan and
any rules and regulations relating to the Plan shall be determined in accordance
with applicable federal and state laws and rules and regulations promulgated
pursuant thereto. No member of the Committee and no officer of the Company
shall be liable for any action taken or omitted to be taken by such member, by
any other member of the Committee or by any officer of the Company in connection
with the performance of duties under the Plan, except for such person's own
willful misconduct or as expressly provided by statute.
The expenses of the Plan shall be borne by the Company. The Plan
shall not be required to establish any special or separate fund or make any
other segregation of assets to assume the payment of any award under the Plan,
and rights to the payment of such awards shall be no greater than the rights of
the Company's general creditors.
4. Shares Available for the Plan.
-----------------------------
Subject to adjustments as provided in Section 15, an aggregate of
2,589,210 shares of Common Stock (the "Shares") may be issued pursuant to the
Plan. Such Shares may be in whole or in part authorized and unissued, or shares
which are held by the Company as treasury shares. If any grant under the Plan
expires or terminates unexercised, becomes unexercisable or is forfeited as to
any Shares, such unpurchased or forfeited Shares shall thereafter be available
for further grants under the Plan unless, in the case of options granted under
the Plan, related SARs are exercised.
Without limiting the generality of the foregoing provisions of this
Section 4 or the generality of the provisions of Sections 3, 6 or 17 or any
other section of this Plan, the Committee may, at any time or from time to time,
and on such terms and conditions (that are consistent with and not in
contravention of the other provisions of this Plan) as the Committee may, in its
sole discretion, determine, enter into agreements (or take other actions with
respect to the options) for new options containing terms (including exercise
prices) more (or less) favorable than the outstanding options.
-4-
<PAGE>
5. Participation.
-------------
Participation in the Plan shall be limited to those directors
(including Non-Employee Directors), officers (including non-employee officers)
and employees of the Company and its Subsidiaries selected by the Committee
(including participants located outside the United States). Nothing in the Plan
or in any grant thereunder shall confer any right on a participant to continue
in the employ of or the performance of services for the Company or shall
interfere in any way with the right of the Company to terminate the employment
or performance of services of a participant at any time. By accepting any award
under the Plan, each participant and each person claiming under or through him
or her shall be conclusively deemed to have indicated his or her acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee.
Incentive Stock Options or Nonqualified Stock Options, SARs, alone or
in tandem with options, restricted stock awards, performance awards, or any
combination thereof, may be granted to such persons and for such number of
Shares as the Committee shall determine (such individuals to whom grants are
made being sometimes herein called "optionees" or "grantees," as the case may
be). Determinations made by the Committee under the Plan need not be uniform
and may be made selectively among eligible individuals under the Plan, whether
or not such individuals are similarly situated. A grant of any type made
hereunder in any one year to an eligible participant shall neither guarantee nor
preclude a further grant of that or any other type to such participant in that
year or subsequent years.
6. Incentive and Nonqualified Options.
----------------------------------
The Committee may from time to time grant to eligible participants
Incentive Stock Options, Nonqualified Stock Options, or any combination thereof;
provided that the Committee may grant Incentive Stock Options only to eligible
employees of the Company or its subsidiaries (as defined for this purpose in
Section 424(f) of the Code). In any one calendar year, the Committee shall not
grant to any one participant, options or SARs to purchase a number of shares of
Common Stock in excess of 20% of the shares authorized under the Plan. The
options granted shall take such form as the Committee shall determine, subject
to the following terms and conditions.
It is the Company's intent that Nonqualified Stock Options granted
under the Plan not be classified as Incentive Stock Options, that Incentive
Stock Options be consistent with and contain or be deemed to contain all
provisions required under Section 422 of the Code and any successor thereto, and
that any ambiguities in construction be interpreted in order to effectuate such
intent. If an Incentive Stock Option granted under the Plan does not qualify as
such for any reason, then to the extent of such nonqualification, the stock
option represented thereby shall be regarded as a Nonqualified Stock Option duly
granted under the Plan, provided that such stock option otherwise meets the
Plan's requirements for Nonqualified Stock Options.
(a) Price. The price per Share deliverable upon the exercise of each
-----
option ("exercise price") shall be established by the Committee, except that the
exercise price of any option may not be less than 100% of the Fair Market Value
of a share of Common Stock as of the date of
-5-
<PAGE>
grant of the option, and in the case of the grant of any Incentive Stock Option
to an employee who, at the time of the grant, owns more than 10% of the total
combined voting power of all classes of stock of the Company or any of its
Subsidiaries, the exercise price may not be less that 110% of the Fair Market
Value of a share of Common Stock as of the date of grant of the option, in each
case unless otherwise permitted by Section 422 of the Code.
(b) Payment. Options may be exercised, in whole or in part, upon
-------
payment of the exercise price of the Shares to be acquired. Unless otherwise
determined by the Committee, payment shall be made (i) in cash (including check,
bank draft or money order), (ii) by delivery of outstanding shares of Common
Stock with a Fair Market Value on the date of exercise equal to the aggregate
exercise price payable with respect to the options' exercise, (iii) by
simultaneous sale through a broker reasonably acceptable to the Committee of
Shares acquired on exercise, as permitted under Regulation T of the Federal
Reserve Board, (iv) by authorizing the Company to withhold from issuance a
number of Shares issuable upon exercise of the options which, when multiplied by
the Fair Market Value of a share of Common Stock on the date of exercise is
equal to the aggregate exercise price payable with respect to the options so
exercised or (v) by any combination of the foregoing. Options may also be
exercised upon payment of the exercise price of the Shares to be acquired by
delivery of the optionee's promissory note, but only to the extent specifically
approved by and in accordance with the policies of the Committee.
In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (ii) above, (A) only a whole number of
share(s) of Common Stock (and not fractional shares of Common Stock) may be
tendered in payment, (B) such grantee must present evidence acceptable to the
Company that he or she has owned any such shares of Common Stock tendered in
payment of the exercise price (and that such tendered shares of Common Stock
have not been subject to any substantial risk of forfeiture) for at least six
months prior to the date of exercise, and (C) Common Stock must be delivered to
the Company. Delivery for this purpose may, at the election of the grantee, be
made either by (A) physical delivery of the certificate(s) for all such shares
of Common Stock tendered in payment of the price, accompanied by duly executed
instruments of transfer in a form acceptable to the Company, or (B) direction to
the grantee's broker to transfer, by book entry, such shares of Common Stock
from a brokerage account of the grantee to a brokerage account specified by the
Company. When payment of the exercise price is made by delivery of Common
Stock, the difference, if any, between the aggregate exercise price payable with
respect to the option being exercised and the Fair Market Value of the share(s)
of Common Stock tendered in payment (plus any applicable taxes) shall be paid in
cash. No grantee may tender shares of Common Stock having a Fair Market Value
exceeding the aggregate exercise price payable with respect to the option being
exercised (plus any applicable taxes).
In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (iv) above, (A) only a whole number of
Share(s) (and not fractional Shares) may be withheld in payment and (B) such
grantee must present evidence acceptable to the Company that he or she has owned
a number of shares of Common Stock at least equal to the number of Shares to be
withheld in payment of the exercise price (and that such owned shares of Common
Stock have not been subject to any substantial risk of forfeiture) for at least
six months prior to the date of exercise. When payment of the exercise price is
made by withholding of Shares, the difference, if any,
-6-
<PAGE>
between the aggregate exercise price payable with respect to the option being
exercised and the Fair Market Value of the Share(s) withheld in payment (plus
any applicable taxes) shall be paid in cash. No grantee may authorize the
withholding of Shares having a Fair Market Value exceeding the aggregate
exercise price payable with respect to the option being exercised (plus any
applicable taxes). Any withheld Shares shall no longer be issuable under such
option.
(c) Terms of Options. The term during which each option may be
----------------
exercised shall be determined by the Committee, but, except as otherwise
provided herein, in no event shall an option be exercisable in whole or in part,
in the case of a Nonqualified Stock Option or an Incentive Stock Option (other
than as described below), more than ten years from the date it is granted or, in
the case of an Incentive Stock Option granted to an employee who at the time of
the grant owns more than 10% of the total combined voting power of all classes
of stock of the Company or any of its Subsidiaries, if required by the Code,
more than five years from the date it is granted. All rights to purchase Shares
pursuant to an option shall, unless sooner terminated, expire at the date
designated by the Committee. The Committee shall determine the date on which
each option shall become exercisable and may provide that an option shall become
exercisable in installments. The Shares constituting each installment may be
purchased in whole or in part at any time after such installment becomes
exercisable, subject to such minimum exercise requirements as may be designated
by the Committee. Unless otherwise provided herein or in the terms of the
related grant, an optionee may exercise an option only if he or she is, and has
continuously since the date the option was granted, been a director, officer or
employee of the Company or a Subsidiary. Prior to the exercise of an option and
delivery of the Shares represented thereby, the optionee shall have no rights as
a stockholder with respect to any Shares covered by such outstanding option
(including any dividend or voting rights).
(d) Limitations on Grants. If required by the Code, the aggregate Fair
---------------------
Market Value (determined as of the grant date) of Shares for which an Incentive
Stock Option is exercisable for the first time during any calendar year under
all equity incentive plans of the Company and its subsidiaries (as defined in
Section 422 of the Code) may not exceed $100,000.
(e) Termination; Change in Control.
------------------------------
(i) If a participant ceases to be a director, officer or employee
of the Company or any Subsidiary due to death or Disability, all of the
participant's options and SARs shall become fully vested and exercisable and
shall remain so for a period of one year from the date of such death or
Disability, but in no event after the expiration date of the options or SARs.
Notwithstanding the foregoing, if the Disability giving rise to the termination
of employment is not a disability within the meaning of Section 22(e)(3) of the
Code, Incentive Stock Options not exercised by such participant within 90 days
after the date of termination of employment will cease to qualify as Incentive
Stock Options and will be treated as Nonqualified Stock Options under the Plan
if required to be so treated under the Code.
(ii) If a participant ceases to be a director, officer or employee
of the Company or any Subsidiary upon the occurrence of his or her Retirement,
(A) all of the participant's options and SARs that were exercisable on the date
of Retirement shall remain exercisable for, and
-7-
<PAGE>
shall otherwise terminate at the end of, a period of up to three years after the
date of Retirement, but in no event after the expiration date of the options or
SARs ; provided that the participant does not engage in Competition during such
three-year period unless he or she receives written consent to do so from the
Board or the Committee, and (B) all of the participant's options and SARs that
were not exercisable on the date of Retirement shall be forfeited immediately
upon such Retirement, provided, however, that such options may become fully
vested and exercisable in the discretion of the Committee. Notwithstanding the
foregoing, Incentive Stock Options not exercised by such participant within 90
days after Retirement will cease to qualify as Incentive Stock Options and will
be treated as Nonqualified Stock Options under the Plan if required to be so
treated under the Code.
(iii) If a participant ceases to be a director, officer or
employee of the Company or a Subsidiary due to Cause, all of the participant's
options and SARs shall be forfeited immediately upon such cessation, whether or
not then exercisable.
(iv) Unless otherwise determined by the Committee, if a
participant ceases to be a director, officer or employee of the Company or a
Subsidiary for any reason other than death, Disability, Retirement or Cause, (A)
all of the participant's options and SARs that were exercisable on the date of
such cessation shall remain exercisable for, and shall otherwise terminate at
the end of, a period of 90 days after the date of such cessation, but in no
event after the expiration date of the options or SARs; provided that the
participant does not engage in Competition during such 90-day period unless he
or she receives written consent to do so from the Board or the Committee, and
(B) all of the participant's options and SARs that were not exercisable on the
date of such cessation shall be forfeited immediately upon such cessation.
(v) If there is a Change in Control of the Company and a grantee
is terminated from being a director, officer or employee of the Company or its
Subsidiaries within one year thereafter, all of the participant's options and
SARs shall become fully vested and exercisable immediately prior to such
termination and shall remain so for one year after the date of termination. In
addition, the Committee shall have the authority to grant options that become
fully vested and exercisable automatically upon a Change in Control, whether or
not the grantee is subsequently terminated thereafter.
(f) Grant of Reload Options. The Committee may provide (either at the
-----------------------
time of grant or exercise of an option), in its discretion, for the grant to a
grantee who exercises all or any portion of an option ("Exercised Options") and
who pays all or part of such exercise price with shares of Common Stock, of an
additional option (a "Reload Option") for a number of shares of Common Stock
equal to the sum (the "Reload Number") of the number of shares of Common Stock
tendered or withheld in payment of such exercise price for the Exercised Options
plus, if so provided by the Committee, the number of shares of Common Stock, if
any, tendered or withheld by the grantee or withheld by the Company in
connection with the exercise of the Exercised Options to satisfy any federal,
state or local tax withholding requirements. The terms of each Reload Option,
including the date of its expiration and the terms and conditions of its
exercisability and transferability, shall be the same as the terms of the
Exercised Option to which it relates, except that (i) the grant date for each
Reload Option shall be the date of exercise of the Exercised Option to which it
relates
-8-
<PAGE>
and (ii) the exercise price for each Reload Option shall be the Fair Market
Value of the Common Stock on the grant date of the Reload Option.
7. Stock Appreciation Rights.
-------------------------
The Committee shall have the authority to grant SARs under this Plan,
either alone or to any optionee in tandem with options (either at the time of
grant of the related option or thereafter by amendment to an outstanding
option). SARs shall be subject to such terms and conditions as the Committee
may specify.
No SAR may be exercised unless the Fair Market Value of a share of
Common Stock of the Company on the date of exercise exceeds the exercise price
of the SAR or, in the case of SARs granted in tandem with options, the exercise
price of any options to which the SARs correspond. Prior to the exercise of the
SAR and delivery of the cash and/or Shares represented thereby, the participant
shall have no rights as a stockholder with respect to Shares covered by such
outstanding SAR (including any dividend or voting rights).
SARs granted in tandem with options shall be exercisable only when, to
the extent and on the conditions that any related option is exercisable. The
exercise of an option shall result in an immediate forfeiture of any related SAR
to the extent the option is exercised, and the exercise of an SAR shall cause an
immediate forfeiture of any related option to the extent the SAR is exercised.
Upon the exercise of an SAR, the participant shall be entitled to a
distribution in an amount equal to the difference between the Fair Market Value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, the exercise price
of any option to which the SAR is related, multiplied by the number of Shares as
to which the SAR is exercised. The Committee shall decide whether such
distribution shall be in cash, in Shares having a Fair Market Value equal to
such amount, in Other Company Securities having a Fair Market Value equal to
such amount or in a combination thereof.
All SARs will be exercised automatically on the last day prior to the
expiration date of the SAR or, in the case of SARs granted in tandem with
options, the expiration date of any related option, so long as the Fair Market
Value of a share of Common Stock on that date exceeds the exercise price of the
SAR or any related option, as applicable. An SAR granted in tandem with options
shall expire at the same time as any related option expires and shall be
transferable only when, and under the same conditions as, any related option is
transferable.
8. Restricted Stock.
----------------
The Committee may at any time and from time to time grant Shares of
restricted stock under the Plan to such participants and in such amounts as it
determines. Each grant of restricted stock shall specify the applicable
restrictions on such Shares, the duration of such restrictions (which shall be
at least six months except as otherwise provided in the third paragraph of this
Section 8), and
-9-
<PAGE>
the time or times at which such restrictions shall lapse with respect to all or
a specified number of Shares that are part of the grant.
The participant will be required to pay the Company the aggregate par
value of any Shares of restricted stock (or such larger amount as the Board may
determine to constitute capital under Section 154 of the Delaware General
Corporation Law, as amended) within ten days of the date of grant, unless such
Shares of restricted stock are treasury shares. Unless otherwise determined by
the Committee, certificates representing Shares of restricted stock granted
under the Plan will be held in escrow by the Company on the participant's behalf
during any period of restriction thereon and will bear an appropriate legend
specifying the applicable restrictions thereon, and the participant will be
required to execute a blank stock power therefor. Except as otherwise provided
by the Committee, during such period of restriction the participant shall have
all of the rights of a holder of Common Stock, including but not limited to the
rights to receive dividends and to vote, and any stock or other securities
received as a distribution with respect to such participant's restricted stock
shall be subject to the same restrictions as then in effect for the restricted
stock.
Except as otherwise provided by the Committee, all restrictions on a
grantee's restricted stock will lapse at such time as the grantee ceases to be a
director, officer or employee of the Company or a Subsidiary, if such cessation
occurs due to a termination within one year after a Change in Control or due to
death, Disability or (in the discretion of the Committee) Retirement. At such
time as a participant ceases to be a director, officer or employee of the
Company or its Subsidiaries for any other reason, all Shares of restricted stock
granted to such participant on which the restrictions have not lapsed shall be
immediately forfeited to the Company.
9. Performance Awards.
------------------
Performance awards may be granted to participants at any time and from
time to time as determined by the Committee. The Committee shall have complete
discretion in determining the size and composition of performance awards so
granted to a participant and the appropriate period over which performance is to
be measured (a "performance cycle"). Performance awards may include (i)
specific dollar-value target awards (ii) performance units, the value of each
such unit being determined by the Committee at the time of issuance, and/or
(iii) performance Shares, the value of each such Share being equal to the Fair
Market Value of a share of Common Stock.
The value of each performance award may be fixed or it may be
permitted to fluctuate based on a performance factor (e.g., return on equity)
selected by the Committee.
The Committee shall establish performance goals and objectives for
each performance cycle on the basis of such criteria and objectives as the
Committee may select from time to time, including, without limitation, the
performance of the participant, the Company, one or more of its Subsidiaries or
divisions or any combination of the foregoing. During any performance cycle,
the Committee shall have the authority to adjust the performance goals and
objectives for such cycle for such reasons as it deems equitable.
-10-
<PAGE>
The Committee shall determine the portion of each performance award
that is earned by a participant on the basis of the Company's performance over
the performance cycle in relation to the performance goals for such cycle. The
earned portion of a performance award may be paid out in Shares, cash, Other
Company Securities, or any combination thereof, as the Committee may determine.
A participant must be a director, officer or employee of the Company
or its Subsidiaries at the end of the performance cycle in order to be entitled
to payment of a performance award issued in respect of such cycle; provided,
however, that, except as otherwise determined by the Committee, if a participant
ceases to be a director, officer or employee of the Company and its Subsidiaries
prior to the end of the performance cycle and if such cessation occurs due to
termination within one year after a Change in Control or due to death,
Disability or Retirement, the participant shall earn a proportionate portion of
the performance award based upon the elapsed portion of the performance cycle
and the Company's performance over that portion of such cycle.
10. Withholding Taxes.
-----------------
(a) Participant Election. Unless otherwise determined by the Committee, a
--------------------
participant may elect to deliver shares of Common Stock (or have the Company
withhold shares acquired upon exercise of an option or SAR or deliverable upon
grant or vesting of restricted stock, as the case may be) to satisfy, in whole
or in part, the amount the Company is required to withhold for taxes in
connection with the exercise of an option or SAR or the delivery of restricted
stock upon grant or vesting, as the case may be. Such election must be made on
or before the date the amount of tax to be withheld is determined. Once made,
the election shall be irrevocable. The fair market value of the shares to be
withheld or delivered will be the Fair Market Value as of the date the amount of
tax to be withheld is determined. In the event a participant elects to deliver
shares of Common Stock pursuant to this Section 10(a), such delivery must be
made subject to the conditions and pursuant to the procedures set forth in
Section 6(b) with respect to the delivery of Common Stock in payment of the
exercise price of options.
(b) Company Requirement. The Company may require, as a condition to any
-------------------
grant or exercise under the Plan or to the delivery of certificates for Shares
issued hereunder, that the grantee make provision for the payment to the
Company, either pursuant to Section 10(a) or this Section 10(b), of any foreign,
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant or any delivery of Shares. The Company, to the extent
permitted or required by law, shall have the right to deduct from any payment of
any kind (including salary or bonus) otherwise due to a grantee, an amount equal
to any foreign, federal, state or local taxes of any kind required by law to be
withheld with respect to any grant or to the delivery of Shares under the Plan,
or to retain or sell without notice a sufficient number of the Shares to be
issued to such grantee to cover any such taxes, the payment of which has not
otherwise been provided for in accordance with the terms of the Plan, provided
that the Company shall not sell any such Shares if such sale would be considered
a sale by such grantee for purposes of Section 16 of the Exchange Act that is
not exempt from matching thereunder.
11. Written Agreement; Vesting.
--------------------------
-11-
<PAGE>
Each employee to whom a grant is made under the Plan shall enter into
a written agreement with the Company that shall contain such provisions,
including, without limitation, vesting requirements, consistent with the
provisions of the Plan, as may be approved by the Committee. Unless the
Committee determines otherwise and except as otherwise provided in Sections 6,
7, 8 and 9 in connection with a Change in Control or certain occurrences of
termination, no grant under this Plan may be exercised, and no restrictions
relating thereto may lapse, within six months of the date such grant is made.
12. Transferability.
---------------
Unless the Committee determines otherwise, no option, SAR, performance
award, or restricted stock granted under the Plan shall be transferable by a
participant otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code. Unless
the Committee determines otherwise, an option, SAR or performance award may be
exercised only by the optionee or grantee thereof or his guardian or legal
representative; provided that Incentive Stock Options may be exercised by such
guardian or legal representative only if permitted by the Code and any
regulations promulgated thereunder.
13. Listing, Registration and Qualification.
---------------------------------------
If the Committee determines that the listing, registration or
qualification upon any securities exchange or under any law of Shares subject to
any option, SAR, performance award or restricted stock grant is necessary or
desirable as a condition of, or in connection with, the granting of same or the
issue or purchase of Shares thereunder, no such option or SAR may be exercised
in whole or in part, no such performance award may be paid out and no Shares may
be issued unless such listing, registration or qualification is effected free of
any conditions not acceptable to the Committee.
It is the intent of the Company that awards made hereunder comply in
all respects with Rule 16b-3 under the Exchange Act, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give effect to
such intention.
14. Transfer of Employee.
--------------------
The transfer of an employee from the Company to a Subsidiary, from a
Subsidiary to the Company, or from one Subsidiary to another shall not be
considered a termination of employment; nor shall it be considered a termination
of employment if an employee is placed on military or sick leave or such other
leave of absence which is considered by the Committee as continuing intact the
employment relationship.
15. Adjustments.
-----------
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other change in the
-12-
<PAGE>
corporate structure or shares of the Company, the Committee shall make such
adjustment as it deems appropriate in the number and kind of Shares or other
property reserved for issuance under the Plan, in the number and kind of Shares
or other property covered by grants previously made under the Plan, and in the
exercise price of outstanding options and SARs. Any such adjustment shall be
final, conclusive and binding for all purposes of the Plan. In the event of any
merger, consolidation or other reorganization in which the Company is not the
surviving or continuing corporation or in which a Change in Control is to occur,
all of the Company's obligations regarding options, SARs performance awards and
restricted stock that were granted hereunder and that are outstanding on the
date of such event shall, on such terms as may be approved by the Committee
prior to such event, be assumed by the surviving or continuing corporation or
canceled in exchange for property (including cash).
Without limitation of the foregoing, in connection with any
transaction of the type specified by clause (iii) of the definition of a Change
in Control in Section 2(c), the Committee may, in its discretion, (i) cancel any
or all outstanding options under the Plan in consideration for payment to the
holders thereof of an amount equal to the portion of the consideration that
would have been payable to such holders pursuant to such transaction if their
options had been fully exercised immediately prior to such transaction, less the
aggregate exercise price that would have been payable therefor, or (ii) if the
amount that would have been payable to the option holders pursuant to such
transaction if their options had been fully exercised immediately prior thereto
would be less than the aggregate exercise price that would have been payable
therefor, cancel any or all such options for no consideration or payment of any
kind. Payment of any amount payable pursuant to the preceding sentence may be
made in cash or, in the event that the consideration to be received in such
transaction includes securities or other property, in cash and/or securities or
other property in the Committee's discretion.
16. Termination and Modification of the Plan.
----------------------------------------
The Board of Directors or the Committee, without approval of the
stockholders, may modify or terminate the Plan, except that no modification
shall become effective without prior approval of the stockholders of the Company
if stockholder approval would be required for any listing requirement of the
principal stock exchange on which the Common Stock is then listed.
17. Amendment or Substitution of Awards under the Plan.
--------------------------------------------------
The terms of any outstanding award under the Plan may be amended from
time to time by the Committee in its discretion in any manner that it deems
appropriate (including, but not limited to, acceleration of the date of exercise
of any award and/or payments thereunder or of the date of lapse of restrictions
on Shares); provided that, except as otherwise provided in Section 15, no such
amendment shall adversely affect in a material manner any right of a participant
under the award without his or her written consent. The Committee may, in its
discretion, permit holders of awards under the Plan to surrender outstanding
awards in order to exercise or realize rights under other awards, or in exchange
for the grant of new awards, or require holders of awards to surrender
outstanding awards as a condition precedent to the grant of new awards under the
Plan.
18. Commencement Date; Termination Date.
-----------------------------------
-13-
<PAGE>
The date of commencement of the Plan shall be June 22, 1998, subject
to approval by the shareholders of the Company. Unless previously terminated
upon the adoption of a resolution of the Board terminating the Plan, the Plan
shall terminate at the close of business on June 22, 2008; provided that the
Board may, prior to such termination, extend the term of the Plan for up to five
years for the grant of awards other than Incentive Stock Options. No
termination of the Plan shall materially and adversely affect any of the rights
or obligations of any person, without his or her consent, under any grant of
options or other incentives theretofore granted under the Plan.
19. Governing Law. The Plan shall be governed by the corporate laws of the
-------------
State of Delaware without giving effect to any choice of law provisions.
-14-
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<PAGE>
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<PERIOD-END> SEP-30-1998
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0
0
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