<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 March 31, 1999
[_] 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 April 30, 1999 there were 22,072,549 shares of Common Stock, par value
$0.01 per share, outstanding.
================================================================================
<PAGE>
HINES HORTICULTURE, INC.
Index
Part I. Financial Information
Item 1. Financial Statements Page No.
--------
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1999 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1999 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1999 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
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, 1998 and March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS December 31, March 31,
- ------ 1998 1999
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash $515 $0
Accounts receivable, net of allowance for
doubtful accounts of $1,224 and $1,338 26,741 60,414
Inventories 118,126 129,957
Prepaid expenses and other current assets 2,326 2,196
----- -----
Total current assets 147,708 192,567
FIXED ASSETS, net of accumulated depreciation
and depletion of $29,221 and $31,817 125,417 130,248
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $1,235 and $1,422 4,077 3,890
GOODWILL, net of accumulated amortization
of $2,675 and $2,980 37,908 38,103
------ ------
$315,110 $364,808
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 1
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, March 31,
- ------------------------------------ 1998 1999
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $9,388 $18,321
Accrued liabilities 6,351 5,079
Accrued payroll and benefits 6,156 5,035
Accrued interest 751 3,450
Long-term debt, current portion 3,066 4,210
Borrowings on revolving credit facility 30,850 67,900
Deferred income taxes 39,389 39,330
-------- --------
Total current liabilities 95,951 143,325
LONG-TERM DEBT 145,633 144,611
DEFERRED INCOME TAXES 10,204 11,866
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares $.01 par value;
Issued and outstanding - 22,072,549 shares
at December 31, 1998 and March 31, 1999 221 221
Additional paid in capital 127,992 127,976
Notes receivable from stock sales (326) (326)
Deficit (64,565) (62,865)
-------- --------
Total shareholders' equity 63,322 65,006
-------- --------
$315,110 $364,808
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 2
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1999
(Dollars in thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
--------- ----------
<S> <C> <C>
Sales, net $48,174 $59,402
Cost of goods sold 23,515 29,343
--------- ----------
Gross profit 24,659 30,059
--------- ----------
Selling and distribution expenses 12,705 14,712
General and administrative expenses 6,207 7,971
--------- ----------
Total operating expenses 18,912 22,683
--------- ----------
Operating income 5,747 7,376
--------- ----------
Other expenses
Interest 5,706 4,302
Amortization of deferred financing expenses 323 187
--------- ----------
6,029 4,489
--------- ----------
(Loss) income before income taxes (282) 2,887
Income tax (benefit) provision (63) 1,187
--------- ----------
Net (loss) income (219) 1,700
Less: Preferred stock dividends and
warrant accretion (2,825) 0
--------- ----------
Net (loss) income applicable to common stock ($3,044) $1,700
========= ==========
Basic earnings per share:
Net (loss) income per common share ($0.39) $0.08
========= ==========
Diluted earnings per share:
Net (loss) income per common share ($0.39) $0.08
========= ==========
Weighted average shares outstanding--Basic 7,708,481 22,072,549
========= ==========
Weighted average shares outstanding--Diluted 7,708,481 22,072,549
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 3
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income ($219) 1,700
Adjustments to reconcile net (loss) income to
net cash provided by operating activities -
Depreciation, depletion and amortization 2,219 2,900
Amortization of deferred financing costs 323 187
Gain on sale of fixed assets (20) -
Deferred income taxes 24 1,603
--------- ---------
2,327 6,390
Change in working capital accounts
Accounts receivable (30,561) (33,673)
Inventories (9,667) (11,831)
Prepaid expenses and other current assets (491) 130
Accounts payable and accrued liabilities 11,253 9,239
--------- ---------
Net cash used in operating activities (27,139) (29,745)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (2,739) (6,957)
Proceeds from sale of fixed assets 194 -
Acquisitions - (985)
--------- ---------
Net cash used in investing activities (2,545) (7,942)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 47,472 38,550
Repayments on revolving line of credit (24,298) (1,500)
Proceeds from the issuance of long-term debt - 127
Repayments of long-term debt (88) (5)
Issuance of preferred and common stock 6,250 --
--------- ---------
Net cash provided by financing activities 29,336 37,172
--------- ---------
NET DECREASE IN CASH (348) (515)
CASH, beginning of period 2,543 515
--------- ---------
CASH, end of period $ 2,195 $ -
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest ($135) $ 2,211 $ 1,468
Cash paid for income taxes $ 5 $ 43
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 4
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
MARCH 31, 1998 AND 1999
(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") and
through Sun Gro Horticulture Inc. ("Sun Gro-U.S.") 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,
Pennsylvania, South Carolina and Texas. 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 production
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 26, 1999 by Hines Horticulture, 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.
Page 5
<PAGE>
3. Earnings Per Share:
-------------------
For the three months ended March 31, 1999, there are no differences between
the numerators and denominators for basic and diluted earnings per share
since common stock equivalents have been excluded from the earnings per
share calculation because the effect would be anti-dilutive. There were no
dilutive common stock equivalents outstanding during the three months ended
March 31, 1998.
4. Segment Information and 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.
In 1998, Hines adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment"
approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. The adoption of SFAS 131 had no effect on
the Company's consolidated results of operations, financial position or
cash flows. SFAS 131 did however require the disclosure of segment
information, which is incorporated as part of the following information.
The Company operates in two segments: 1) the nursery segment and
2) the peat-based segment.
Page 6
<PAGE>
The following 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, 1998 and March 31,
1999 (unaudited);
. Consolidating statements of operations for the three months ended
March 31, 1998 and 1999 (unaudited); and
. Consolidating statements of cash flows for the three months ended
March 31, 1998 and 1999 (unaudited).
Page 7
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
ASSETS
------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash $ - $ 515 $ - $ - $ - $ - $ 515
Accounts receivable, net - 9,164 14,526 3,051 17,577 - 26,741
Inventories - 108,235 2,696 7,195 9,891 - 118,126
Prepaid expenses and other - 1,124 558 644 1,202 - 2,326
current assets
Deferred income taxes 32 20 957 963 1,920 (1,972) -
------------------------------------------------------------------------------------------
Total current assets $ 32 $119,058 $18,737 $11,853 $ 30,590 ($1,972) $147,708
------------------------------------------------------------------------------------------
Fixed assets, net - 56,198 6,067 63,152 69,219 - 125,417
Deferred financing expenses, net - 4,077 - - - - 4,077
Goodwill, net - 37,116 - 792 792 - 37,908
Deferred income taxes - 14,508 - - - (14,508) -
Investments in subsidiaries 66,188 12,149 12,194 - 12,194 (90,531) -
------------------------------------------------------------------------------------------
$ 66,220 $243,106 $36,998 $75,797 $112,795 ($107,011) $315,110
LIABILITIES AND
---------------
SHAREHOLDERS' EQUITY
--------------------
Current liabilities:
Accounts payable $ - $ 3,982 $ 1,872 $ 3,534 $ 5,406 $ - $ 9,388
Accrued liabilities - 1,638 3,637 1,076 4,713 - 6,351
Accrued payroll and benefits - 4,790 718 648 1,366 - 6,156
Accrued interest - 751 - - - - 751
Long-term debt, current portion - 2,066 - 1,000 1,000 - 3,066
Revolving line of credit - 30,850 - - - - 30,850
Deferred income taxes - 41,361 - - - (1,972) 39,389
Intercompany accounts 2,898 (33,577) 13,366 17,313 30,679 - -
------------------------------------------------------------------------------------------
Total current liabilities 2,898 51,861 19,593 23,571 43,164 (1,972) 95,951
------------------------------------------------------------------------------------------
Long-term debt - 126,633 - 19,000 19,000 - 145,633
Deferred income taxes - 4,683 3,497 16,532 20,029 (14,508) 10,204
Shareholders' equity
Common stock 221 17,971 11,414 4,500 15,914 (33,885) 221
Additional paid in capital 127,992 21,362 5,889 1,777 7,666 (29,028) 127,992
Notes receivable from stock (326) - - - - - (326)
sales
Retained earnings (deficit) (64,565) 20,596 (3,395) 10,417 7,022 (27,618) (64,565)
-----------------------------------------------------------------------------------------
Total shareholders' equity 63,322 59,929 13,908 16,694 30,602 (90,531) 63,322
-----------------------------------------------------------------------------------------
$ 66,220 $243,106 $36,998 $75,797 $112,795 ($107,011) $315,110
=========================================================================================
</TABLE>
Page 8
<PAGE>
. Guarantor/Non-guarantor Disclosures - (Continued)
<TABLE>
<CAPTION>
Nursery Peat-based Segment
Segment
- -----------------------------------------------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Cash $ - $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 32,713 23,034 4,667 27,701 - 60,414
Inventories - 119,718 3,734 6,505 10,239 - 129,957
Prepaid expenses and other - 1,191 338 667 1,005 - 2,196
current assets
Deferred income taxes 32 20 956 980 1,936 (1,988) -
----------------------------------------------------------------------------------------
Total current assets $ 32 $153,642 $28,062 $12,819 $ 40,881 ($1,988) $192,567
----------------------------------------------------------------------------------------
Fixed assets, net - 61,103 5,891 63,254 69,145 - 130,248
Deferred financing expenses, net - 3,890 - - - - 3,890
Goodwill, net - 37,317 - 786 786 - 38,103
Deferred income taxes - 14,508 - - - (14,508) -
Investments in subsidiaries 67,888 13,921 12,301 - 12,301 (94,110) -
----------------------------------------------------------------------------------------
$ 67,920 $284,381 $46,254 $76,859 $123,113 ($110,606) $364,808
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 11,845 $ 2,043 $ 4,433 $ 6,476 $ - $ 18,321
Accrued liabilities - 1,813 2,483 783 3,266 - 5,079
Accrued payroll and benefits - 3,435 845 755 1,600 - 5,035
Accrued interest - 3,450 - - - - 3,450
Long-term debt, current portion - 3,194 - 1,016 1,016 - 4,210
Revolving line of credit - 67,900 - - - - 67,900
Deferred income taxes - 41,318 - - - (1,988) 39,330
Intercompany accounts 2,914 (40,386) 21,261 16,211 37,472 - -
----------------------------------------------------------------------------------------
Total current liabilities 2,914 92,569 26,632 23,198 49,830 (1,988) 143,325
----------------------------------------------------------------------------------------
Long-term debt - 125,500 - 19,111 19,111 - 144,611
Deferred income taxes - 4,683 3,942 17,749 21,691 (14,508) 11,866
Shareholders' equity
Common stock 221 17,971 11,414 4,500 15,914 (33,885) 221
Additional paid in capital 127,976 21,362 5,889 1,777 7,666 (29,028) 127,976
Notes receivable from stock sales (326) - - - - - (326)
Retained earnings (deficit) (62,865) 22,296 (1,623) 10,524 8,901 (31,197) (62,865)
----------------------------------------------------------------------------------------
Total shareholders' equity 65,006 61,629 15,680 16,801 32,481 (94,110) 65,006
----------------------------------------------------------------------------------------
$ 67,920 $284,381 $46,254 $76,859 $123,113 ($110,606) $364,808
========================================================================================
</TABLE>
Page 9
<PAGE>
Guarantor/Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the quarter ended March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery Peat-based Segment
Segment
--------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net $ - $28,453 $17,226 $6,934 $24,160 ($4,439) $48,174
Cost of goods sold - 14,432 9,088 4,434 13,522 (4,439) 23,515
--------------------------------------------------------------------------------------------
Gross Profit - 14,021 8,138 2,500 10,638 - 24,659
Operating expenses - 10,087 6,708 2,117 8,825 - 18,912
--------------------------------------------------------------------------------------------
Operating income - 3,934 1,430 383 1,813 - 5,747
--------------------------------------------------------------------------------------------
Other expenses:
Interest 15 5,317 153 221 374 - 5,706
Interest - intercompany - (440) 382 58 440 - -
Amortization of deferred
financing expenses, other 210 (263) 259 75 334 42 323
--------------------------------------------------------------------------------------------
225 4,614 794 354 1,148 42 6,029
--------------------------------------------------------------------------------------------
Income (loss) before provision for
(benefit from) income taxes (225) (680) 636 29 665 (42) (282)
Income tax provision (benefit) (6) (470) 166 247 413 - (63)
--------------------------------------------------------------------------------------------
Net income (loss) ($219) ($210) $ 470 ($218) $ 252 ($42) ($219)
============================================================================================
</TABLE>
Guarantor/Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the quarter ended March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery Peat-based Segment
Segment
--------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net $ - $33,173 $22,106 $9,997 $32,103 ($5,874) $59,402
Cost of goods sold - 17,813 11,418 5,986 17,404 (5,874) 29,343
--------------------------------------------------------------------------------------------
Gross Profit - 15,360 10,688 4,011 14,699 - 30,059
Operating expenses - 11,854 8,093 2,736 10,829 - 22,683
--------------------------------------------------------------------------------------------
Operating income - 3,506 2,595 1,275 3,870 - 7,376
--------------------------------------------------------------------------------------------
Other expenses:
Interest - 3,794 157 351 508 - 4,302
Interest - intercompany - (359) 331 28 359 - -
Amortization of deferred
financing expenses, other (1,700) (1,585) 49 0 49 3,423 187
--------------------------------------------------------------------------------------------
(1,700) 1,850 537 379 916 3,423 4,489
--------------------------------------------------------------------------------------------
Income (loss) before provision for
(benefit from) income taxes 1,700 1,656 2,058 896 2,954 (3,423) 2,887
Income tax provision (benefit) - (44) 443 788 1,231 - 1,187
--------------------------------------------------------------------------------------------
Net income $ 1,700 $ 1,700 $ 1,615 $ 108 $ 1,723 ($3,423) $ 1,700
============================================================================================
</TABLE>
Page 10
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the quarter ended March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery Peat-based Segment
Segment
--------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash used in operating activities ($4,250) ($21,358) ($1,450) ($81) ($1,531) $- ($27,139)
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (2,621) (9) (109) (118) - (2,739)
Proceeds from sale of fixed assets - - 4 190 194 - 194
--------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities - (2,621) (5) 81 76 - (2,545)
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayments on)
revolving line of credit - 24,719 (1,545) - (1,545) - 23,174
Intercompany advances (repayments) (2,000) (1,000) 3,000 - 3,000 - -
Repayments of long-term debt - (88) - - - - (88)
Issuance of preferred and common
stock 6,250 - - - - - 6,250
--------------------------------------------------------------------------------------------
Net cash provided by financing
activities 4,260 23,631 1,455 0 1,455 0 29,336
--------------------------------------------------------------------------------------------
Net decrease in cash - (348) - - - - (348)
Cash beginning of year - 2,543 - - - - 2,543
--------------------------------------------------------------------------------------------
Cash, end of year $ - $ 2,195 $ - $ - $ - $- $ 2,195
============================================================================================
</TABLE>
Page 11
<PAGE>
. Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the quarter ended March 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery Peat-based Segment
Segment
- -----------------------------------------------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by (used in) operating
activities $ - ($24,218) ($6,645) $ 1,118 ($5,527) $ - ($29,745)
-------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net (16) (6,033) (148) (760) (908) - (6,957)
Acquisitions - (500) - (485) (485) - (985)
-------------------------------------------------------------------------------------------
Net cash used in investing
activities (16) (6,533) (148) (1,245) (1,393) - (7,942)
-------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolving line of
credit - 37,050 - - - - 37,050
Intercompany advances (repayments) 16 (6,809) 6,793 - 6,793 - -
Proceeds from the issuance of
long-term debt - - - 127 127 - 127
Repayments of long-term debt - (5) - - - - (5)
Issuance of preferred and common
stock - - - - - - -
-------------------------------------------------------------------------------------------
Net cash provided by financing
activities - 30,236 6,793 127 6,920 0 37,172
Net decrease in cash - (515) - - - - (515)
Cash, beginning of year - 515 - - - - 515
-------------------------------------------------------------------------------------------
Cash, end of year $ - $ - $ - $ - $ - $ - $ -
===========================================================================================
</TABLE>
Page 12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes contained herein and in the
Annual Report on Form 10-K filed on March 26, 1999 by Hines Horticulture, Inc.
This discussion contains trend analysis and other forward-looking statements
that involve risks and uncertainties.
Overview
General. Hines is one of the largest commercial nursery operations in North
America, producing one of the broadest assortments of container-grown plants in
the industry. The Company sells its nursery products primarily to the retail
segment which includes premium independent garden centers as well as the leading
home centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart
and Target. The Company is also the largest North American producer and
marketer of sphagnum peat moss and professional peat-based growing mixes. The
Company sells its peat-based products primarily to professional customers,
including greenhouse growers, nursery growers and golf course developers. The
Company believes that sales of its nursery products have been positively
affected by societal and demographic trends, such as greater levels of
homeownership, the aging of the American population and the increasing
popularity of gardening. Recent trends in the retail distribution channel, such
as the expansion of large "big box" retailers and their growing emphasis on the
lawn and garden category, have increased consumer exposure to lawn and garden
products. Management believes these trends have favorably impacted the Company
and provide excellent opportunities for improved operating performance.
Seasonality. The Company's nursery business, like that of its competitors,
is highly seasonal. In 1998, approximately 79% of Hines Nurseries' net sales
and approximately 115% of Hines Nurseries' operating income occurred in the
first half of the year. Approximately 60% of Hines Nurseries' net sales and
approximately 100% of Hines Nurseries' operating income occurred in the second
quarter of 1998. 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.
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Acquisitions. The Company has completed a number of recent acquisitions to
expand and diversify its operations. In the three years ended December 31,
1998, the Company has completed five acquisitions. These acquisitions have and
will continue to affect the period-to-period comparability of the operating
results discussed below. The Company intends to pursue strategic acquisitions
from time to time that increase its production capacity, broaden or complement
its existing product lines, expand its geographic presence or offer operating
synergies. The Company believes that the highly fragmented nature of the nursery
industry presents it with a number of opportunities to make such acquisitions,
though the Company does not have current agreements to consummate any such
acquisitions.
Tax Matters. The Company derives significant benefits under the U.S. federal
tax code by qualifying to use the cash method of accounting for federal income
tax purposes. Under the cash method, sales are included in taxable income when
payments are received and expenses are deducted as they are paid. The primary
benefit the Company receives is the ability to deduct the cost of inventory as
it is incurred. 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 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.
Results of Operations
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998
Net sales. Net sales of $59.4 million for the three months ended March 31,
1999 increased $11.2 million, or 23.2%, from net sales of $48.2 million for the
comparable period in 1998. Sales from the Company's nursery operations
increased 16.6% during the first quarter, with both the western and southern
regions contributing significant growth. Increased volumes were largely
attributable to continued expansion of key facilities in these regions,
particularly the Houston operation. After 1998's early spring season, the East
and Midwest returned to a more typical, later-arriving spring, which resulted in
those regions recording lower sales in the first quarter of 1999 versus the
comparable period in 1998.
Net sales of the Company's peat moss and peat-based products increased by
35.0% from the comparable period in 1998. This increase in net sales was
attributable to the Company's acquisition on April 6, 1998 of Lakeland Peat
Moss, supplemented by internally generated growth from a mix line expansion at
its eastern peat business and a substantial increase in the western peat
harvest.
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Gross profit. Gross profit of $30.1 million for the three months ended
March 31, 1999 increased $5.4 million, or 21.9%, from gross profit of $24.7
million for the comparable period in 1998. The increase was primarily
attributable to higher sales at both the Company's nursery and peat moss
operations. As a percent of sales, gross margin decreased from 51.2% to 50.6%
of net sales due to increased sales growth of nursery commodity lines and a
geographical shift of seasonal activity within the nursery business to
facilities with generally lower margins. This decrease was partially offset by
improved margins in the peat moss business. The peat moss operations' increase
was primarily attributable to the greater emphasis on professional customers.
While the addition of Lakeland to the Company's peat business during the second
quarter of 1998 increased sales and gross profit for the three months ended
March 31, 1999, it did have a slightly negative impact on gross margins compared
with the comparable period in 1998.
Operating expenses. Operating expenses of $22.7 million for the three months
ended March 31, 1999 increased $3.8 million, or 20.1%, from $18.9 million for
the comparable period in 1998. The increase was primarily attributable to the
Lakeland acquisition and the significant investment in sales and management
infrastructure required to support the Company's current and future growth.
Operating expenses as a percentage of net sales were reduced from 39.3% to 38.2%
in first three months of 1999, primarily attributable to the Company's ability
to leverage operating expenses on higher sales volume.
Operating income. Operating income of $7.4 million for the three months ended
March 31, 1999 increased $1.7 million, or 29.8%, from $5.7 million for the
comparable period in 1998. As a percentage of net sales, operating income
improved 0.6% to 12.4% from 11.8% due primarily to improved operating expenses
as described above, offset by a decrease in gross margins.
Interest expense. Interest expense of $4.3 million for the three months ended
March 31, 1999 decreased $1.4 million, or 24.6%, from $5.7 million for the
comparable period in 1998. The reduction was primarily attributable the
redemption of $42.0 Million of Senior Subordinated Notes in connection with the
Company's initial public offering of common stock in June 1998.
Provision for income taxes. The Company's effective income tax rate was 41.1%
and 22.3% for the three months ended March 31, 1999 and 1998, respectively.
Net income (loss). Net income of $1.7 million for the three months ended
March 31, 1999 increased $1.9 million from a net loss of $0.2 million for the
comparable period in 1998. The improvement to net income was primarily
attributable to increased sales and lower interest expense as described above.
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Liquidity and Capital Resources
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The Company has historically satisfied its working capital requirements
through operating cash flow. Due to the highly seasonal nature of the Company's
nursery operations, the Company historically borrows under its revolving credit
facilities to fund peak needs.
On June 22, 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 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 previous senior credit facilities to
provide for a new $50.0 million term loan and a $200.0 million revolving credit
facility, increasing the Company's total borrowing capacity by $100.0 million.
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
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. The Senior Credit Facility, among other things, limits the
ability of Hines Nurseries and its subsidiaries to pay any dividends.
In October 1995, Hines Nurseries issued $120.0 million in aggregate principal
amount of 11 3/4% senior subordinated notes due 2005 (the "Senior Subordinated
Notes") to refinance certain indebtedness incurred in connection with the
acquisition of Hines by MDCP and certain members of management. The Senior
Subordinated Notes were subsequently exchanged in a registered offering for
$120.0 million of the Company's 11 3/4% Senior Subordinated Notes due 2005,
Series B. As of March 31, 1999, $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 Hines), 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
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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 its subsidiaries.
The seasonal nature of the Company's operations results in a significant
increase in certain components of working capital (primarily accounts receivable
and inventory) during the growing and selling cycles. Net cash used by operating
activities for the three months ended March 31, 1999, of $29.7 million increased
$2.6 million, from $27.1 million for the comparable period in 1998. This
increase is attributable to the increased inventory levels to support the
Company's expanded operations and an increased accounts receivable balance.
Net cash used for investing activities during the three months ended March 31,
1999 increased $5.4 million to $7.9 million from $2.5 million for the comparable
period in 1998. The increase was primarily due to the Company's development of
additional nursery acreage, the purchase of nursery-related structures, certain
vehicles, and machinery and equipment.
Net cash provided by financing activities during the three months ended March
31, 1999 increased $7.9 million to $37.2 million from $29.3 million for the
comparable period in 1998. The increase was primarily associated with increased
borrowings under the Company's revolving credit facility related to the net cash
used for investing activities described above.
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 79% 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 April 30, 1999, the Company had unused
borrowing capacity of $81.0 million and $ 31.0 million under its acquisition
revolver and working capital revolver, respectively, 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, (1) reduction in the Company's deduction for interest expense
resulting from the Company's repayment of indebtedness with the proceeds of the
Offering, (2) any slowdown in, or elimination of, future growth in the Company's
inventory of growing plants, or (3) limits on the Company's ability to use net
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operating loss carryforwards to offset all of its tax liability under the
alternative minimum tax system.
The Company's capital expenditures were approximately $6.9 million for the
three months ended March 31, 1999. The capital expenditures for Hines Nurseries
($6.0 million) related primarily to the development of additional nursery
acreage, the purchase of nursery-related structures, vehicles, and machinery and
equipment. The capital expenditures for Sun Gro ($0.9 million) related primarily
to peat bog development and the purchase of peat bog harvesting and processing
equipment. The Company's capital expenditures for 1999 are expected to be
approximately $25.0 million.
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 expenditures 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
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The Company has instituted a program to determine whether its computerized
information systems are able to interpret dates beyond the year 1999 and has
implemented programming modifications to its main operational and financial
reporting systems that will address these issues. All modified programming is
currently operational and testing has been completed. 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 during
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 include telephone equipment, greenhouse automation and watering
systems. Upgrades or replacements are being made as necessary, and are expected
to be completed by the end of 1999.
Evaluation and testing of personal computers will be performed internally. As
needed, personal computers will be made Year 2000 compliant by systematic
upgrades or replacements by the end of 1999.
The Company relies on third party suppliers for finished goods, raw materials,
water, other utilities, transportation and a variety of other key services. The
Company is evaluating the status of suppliers with whom it has a material
relationship through confirmation and follow-up procedures and expects this
phase to be completed by mid-1999.
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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 $0.3 million on Year
2000 compliance. The Company believes that the total cost of ensuring Year 2000
compliance for its own operational and financial systems will be less than $0.5
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 will continue to assess where alternative courses of
action are needed as the information technology and non-information technology
readiness plans are executed. A major effort related to formal contingency
planning will be in the third quarter of 1999, once a significant portion of the
business groups' readiness plans have been completed.
The principal business risks to the Company relating to completion of Year
2000 efforts are:
. The inability of key business partners to provide goods and services as a
result of Year 2000 issues.
. Unforeseen issues arising in connection with recent and future acquisitions or
business partnerships.
Because the Company's Year 2000 readiness is dependent upon key business
partners also being Year 2000 Compliant, there can be no guarantee that the
Company's efforts will prevent a material adverse impact on its results of
operations, financial condition and cash flows. The possible consequences to the
Company of its key business partners' inability to provide goods and services as
a result of Year 2000 issues include temporary delays in delivery of finished
products; delays in receipt of key items, containers and packaging supplies;
invoice and collection errors; and excess inventory of perishable items. The
Company believes that its readiness efforts, which include confirmation and
other testing with critical suppliers to determine if contingency planning is
needed, should reduce the likelihood of such disruptions.
The foregoing represents a Year 2000 readiness disclosure entitled to
protection as provided in the Year 2000 Information and Readiness Disclosure
Act.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has not experienced any material changes to its market
risk exposures since December 31, 1998.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits 27.1 Financial Data Schedule
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
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
(Principal financial officer
and duly authorized officer)
Date: May 12, 1999
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