<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
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HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Delaware 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
12621 Jeffrey Road, Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
http://www.HinesHorticulture.com
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
----------------
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $94.5 million.
As of March 15, 1999 there were 22,072,549 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Hines Horticulture, Inc.'s Proxy Statement to be mailed
to stockholders on or about April 28, 1999 for the Annual Meeting of
Stockholders to be held on May 27, 1999 are incorporated in Part III hereof by
reference.
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<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
----
PART I
<C> <S> <C>
ITEM 1. BUSINESS...................................................... 1
ITEM 2. PROPERTIES.................................................... 9
ITEM 3. LEGAL PROCEEDINGS............................................. 10
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 11
MATTERS......................................................
ITEM 6. SELECTED FINANCIAL DATA....................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 21
ITEM 11. EXECUTIVE COMPENSATION........................................ 21
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................... 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- 21
K............................................................
</TABLE>
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
Item 1. BUSINESS
Introduction
Hines Horticulture, Inc., a Delaware corporation ("Hines"), produces and
distributes horticultural products through its two operating divisions: (1)
its nursery division, Hines Nurseries and (2) its plant-growing media
division, Sun Gro Horticulture ("Sun Gro"). On June 12, 1998, Hines
Horticulture became the successor to the business of Hines Holdings, Inc., a
Nevada corporation ("Holdings"), as a result of the merger of Hines Holdings,
Inc. into Hines, the purpose of which was to change Hines Horticulture's name
and jurisdiction of incorporation. The business of Hines Nurseries is
currently conducted through Hines Nurseries, Inc. ("Hines Nurseries") a wholly
owned subsidiary of Hines, and through Sun Gro Horticulture Inc. ("Sun Gro-
U.S.") a wholly owned subsidiary of Hines Nurseries, Sun Gro-U.S.'s wholly
owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun
Gro-Canada's direct and indirect Canadian subsidiaries. Unless otherwise
specified, references to "Hines" or the "Company" refer to Hines Horticulture,
Inc. and its subsidiaries.
Hines Nurseries produces approximately 4,100 varieties of ornamental shrubs
and color plants through its eight nursery facilities located in California,
Oregon, Pennsylvania, South Carolina and Texas. Hines Nurseries sells to more
than 1,900 retail and commercial customers, representing more than 7,300
outlets throughout the United States and Canada. Sun Gro produces high
quality, sphagnum peat moss and peat-based potting and growing mixes. Sphagnum
peat moss is a natural, organic material that is generally considered the
highest quality growing medium available due to its excellent water and
nutrient retention and aeration characteristics. Sun Gro controls
approximately 49,000 acres of peat bogs throughout Canada and produces its
peat moss and peat-based mixes in ten facilities strategically located across
Canada and the United States.
History
Ownership
Hines was founded in 1920 by James W. Hines Sr. in San Gabriel, California.
Hines was a family owned business until its acquisition by the Weyerhauser
Company in 1976. Hines was sold in 1990 to a private investment group and
certain members of management. In August 1995, Hines was acquired by Madison
Dearborn Capital Partners, L.P. ("MDCP"), a private equity investment firm and
certain members of management. On June 22, 1998, Hines completed an initial
public offering of 5.1 million shares of its common stock (the "Offering").
Recent Acquisitions
Hines has completed a number of recent acquisitions to expand and diversify
its operations. Often they have complemented the Company's existing operations
and enhanced the Company's product offerings.
1
<PAGE>
The following table sets forth information with respect to these
acquisitions:
<TABLE>
<CAPTION>
Acquired Purchase
Date Company Price Location Principal Products
---- ------------- ------------- -------------------------------------- -----------------------
<C> <C> <C> <C> <S>
April 1998 Lakeland $22.4 million Canada, Oregon and Utah Sphagnum peat moss and
peat-based mixes
December 1997 Bryfogle's $19.0 million Pennsylvania Color bedding plants
October 1997 Pacific Color $ 1.7 million California Color bedding plants
November 1996 Flynn $11.7 million California Ornamental plants and
flowering color plants
August 1996 Iverson $10.3 million South Carolina Perennial flowers and
plants
January 1995 OGP $17.6 million Oregon Ornamental, cold-
tolerant plants and
flowering color plants
June 1993 Sun Gro $48.9 million Canada, Michigan, Texas and Washington Sphagnum peat moss and
peat-based mixes
</TABLE>
On April 6, 1998, the Company acquired Lakeland Peat Moss, Ltd. and certain
affiliated entities ("Lakeland"), a leading producer of sphagnum peat moss and
peat-based potting and growing mixes in western Canada, with facilities in
Utah and Oregon. Lakeland's products are sold primarily to retail customers
and, to a lesser extent, professional customers such as greenhouse growers,
vegetable farmers and golf course developers located primarily in the western
United States.
On December 16, 1997, the Company acquired Bryfogle's Wholesale, Inc. and
certain affiliated entities ("Bryfogle's"), a producer of color bedding plants
sold primarily to home centers and mass merchandisers in Pennsylvania and
surrounding states. This acquisition significantly enhanced the Company's
offerings of annual bedding and holiday plants.
On October 20, 1997, the Company acquired the assets of Pacific Color
Nurseries, Inc. ("Pacific Color"), a producer of color bedding plants sold
primarily to home centers and mass merchandisers in California. The
acquisition of Pacific Color increased the Company's offerings of annual
bedding and holiday plants.
On November 27, 1996, the Company acquired Flynn Nurseries, Inc. ("Flynn"),
a producer of ornamental plants, flowering color plants and perennials sold to
various retail customers throughout the United States. Hines acquired Flynn,
in part, because of its location in Southern California where there are ideal
growing conditions and its close proximity to the Company's Irvine, California
nursery.
On August 30, 1996, the Company acquired Iverson Perennial Gardens
("Iverson"), a producer of perennial flowers and plants sold primarily to home
centers, mass merchandisers and other retail customers located in the
southeastern, eastern and midwestern regions of the United States. The Iverson
acquisition has enhanced the Company's market presence in the eastern and
southeastern United States, increased penetration into the perennial plant
market and provided expansion capacity at the South Carolina nursery location.
On January 27, 1995, the Company acquired Oregon Garden Products ("OGP"), a
producer of ornamental, cold-tolerant, container-grown plants sold primarily
to home centers, mass merchandisers and other retail customers located in the
eastern and midwestern regions of the United States and flowering color plants
sold primarily to retail customers located in the northwestern United States.
The OGP acquisition broadened Hines Nurseries' product mix and added
undeveloped acreage which provides Hines Nurseries with significant
opportunities for future expansion.
In June 1993, Hines acquired Sun Gro-U.S. and its subsidiaries in order to
enter the peat-products market, thereby diversifying the Company's operations
and expanding its share of the market for horticultural products.
2
<PAGE>
Business Overview
Hines Nurseries is one of the largest commercial nursery operations in North
America, producing one of the broadest assortments of container-grown plants
in the industry. Hines Nurseries sells its nursery products primarily to the
retail segment which includes the 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. Sun Gro is also the largest North American
producer and marketer of sphagnum peat moss and professional peat-based
growing mixes, which it primarily sells to professional customers, including
greenhouse growers, nursery growers and golf course developers. As a result of
both internal expansion and acquisitions, the Company has grown sales from
approximately $50 million in 1992 to almost $235 million in 1998, representing
a compound annual growth rate of 29%. Unaudited pro forma net sales for 1998,
after giving effect to the acquisition of Lakeland as if it had occurred on
January 1, 1998, would have been approximately $241 million.
Key Growth Strategies
Expand Production. The Company is experiencing unfulfilled demand from a
number of key nursery customers. Accordingly, the Company plans to continue
expanding its nursery acreage and greenhouse facilities in 1999 in order to
increase production of key product lines (including the color plant category),
and to commercially introduce new plant varieties. By expanding production at
existing facilities, the Company seeks not only to increase sales volume, but
also to leverage its established operating processes and management, thereby
reducing unit costs.
Increase Customer Penetration and Expand Customer Base. With its
strategically-located nurseries and its emphasis on customer service, the
Company has established a national customer base and distribution system for a
wide variety of ornamental plants. The Company is pursuing opportunities to
increase its volume with existing customers by (1) increasing sales to
successful "big box" retailers and premium independent garden centers as they
open additional outlets, and (2) increasing same-store sales by capitalizing
on its customers' continued expansion of lawn and garden floor space with a
broader variety of merchandise, particularly in the color plant category. The
Company also intends to pursue new relationships with other high volume
retailers and premium garden centers. Management believes that the demand for
value-added peat-based mixes by professional growers is increasing and that
there is a trend among professional growers to outsource the mixing of these
products. Sun Gro intends to further penetrate the professional market by
expanding its offerings of customized value-added mixes and technical
expertise in order to capitalize on this trend.
Pursue Strategic Acquisitions. The Company believes that strategic
acquisitions will continue to play an important role in expanding its
geographic presence and product offerings. For example, since optimizing
production and distribution of color plants such as holiday crops, annual
bedding plants and perennials requires regional growing capacity, the Company
will continue to seek acquisitions of additional regional color plant growers
as it continues to expand its nursery network. The Company will continue to
apply its proprietary operating processes to recently acquired businesses to
facilitate integration and to improve operating performance. In the peat
division, the Company will continue to seek acquisitions of businesses that
offer operating synergies and complementary products.
3
<PAGE>
Hines' Nursery Business
Hines Nurseries produces and markets approximately 4,100 varieties of
ornamental, container-grown plants grown primarily for outdoor use, most of
that are sold under its Hines Nurseries(TM) and Iverson(TM) trade names. Most
of Hines Nurseries' varieties fall into the following categories:
<TABLE>
<CAPTION>
Approximate Approximate
% of Hines % of Hines
Nurseries' Nurseries' Typical
1997 1998 Growing
Product Category Representative Products Revenue Revenue Times
---------------- ----------------------- ----------- ----------- ------------
<C> <S> <C> <C> <C>
Evergreens
Broadleafs Azalea, boxwood, camellia, 26.7% 25.7% 12-18 months
euonymous, holly
Conifers Pines, spruce, junipers 13.4 12.4 18-24 months
Deciduous Plants Barberry, dogwood, forsythia, spirea 13.3 8.7 12-18 months
Flowering Color Plants
Perennials Daylillies, clematis, ornamental 17.6 21.9 4-10 months
grasses
Annual bedding plants Marigolds, petunias 11.5 15.8 2-4 months
Tropical flowering plants Bougainvillea, hibiscus 6.4 4.1 6-12 months
Holiday plants Easter lilly, poinsettia 0.8 0.8 3-6 months
Speciality / topiary plants Trellises, bonsais 7.6 9.0 24-36 months
Other Ferns, trees 2.7 1.6 6-18 months
----- -----
100.0% 100.0%
===== =====
</TABLE>
Since 1993, Hines Nurseries has added numerous plant varieties to its
product line. Recently, Hines Nurseries has aggressively expanded its offering
of flowering color plants. Hines Nurseries has also successfully developed
patio-ready type products, which it markets under the names of Patio
Tropics(TM) and Festival Pots(TM). These products generally command premium
prices and improved profit margins than other plants offered by the Company.
The Company sells its nursery products primarily to the retail segment which
includes the 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 following table sets forth the estimated percentage of Hines
Nurseries' net sales by customer type for the period indicated:
<TABLE>
<CAPTION>
Customer Type 1996 1997 1998
------------- ---- ---- ----
<S> <C> <C> <C>
Home centers.............................................. 29% 32% 37%
Mass merchandisers........................................ 23 27 26
Independent garden centers................................ 21 18 16
Garden center chains...................................... 11 11 11
Rewholesalers............................................. 13 9 8
Landscapers and others.................................... 3 3 2
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
</TABLE>
The Company believes sales to home centers and mass merchandisers have
increased significantly during the past several years as a result of the rapid
growth of this channel of distribution. Management believes the Company enjoys
competitive advantages in selling into this channel due to its ability to
provide a broad assortment of consistently high quality products in large
volumes, its nationwide distribution and its value-added
4
<PAGE>
services such as custom labeling, bar-coding, full electronic data interchange
and technical support. Management expects to participate in the overall growth
of this channel to a greater extent than its competitors that do not offer
such services. Hines Nurseries' top ten customers accounted for approximately
48%, 58% and 62% of Hines Nurseries' net sales in 1996, 1997 and 1998,
respectively. Hines Nurseries' largest customer, Home Depot, accounted for
approximately 15%, 18% and 20% of its net sales in 1996, 1997 and 1998,
respectively, and approximately 10%, 12% and 14% of the Company's consolidated
net sales in 1996, 1997 and 1998, respectively.
Research and Development. Hines Nurseries' product sourcing and development
yield unique plant varieties, which are marketed under a trade name and
patented whenever possible. The Company applies for patents on plant varieties
that are significantly different from existing varieties. Differences among
plant varieties may include coloration, size at maturity or hardiness in
drought or cold conditions. These varieties command higher prices, provide
higher unit margins and enhance the Company's reputation as a product
innovator.
Sales and Marketing. Most of Hines Nurseries' facilities have separate sales
forces, which include a sales manager, in-house customer service
representatives, direct sales consultants and various support personnel. As of
December 31, 1998, Hines Nurseries employed approximately 122 direct sales
consultants, key account managers and merchandisers. National accounts are
serviced through "National Account Task Teams" comprised of a senior
management member and direct sales personnel from each nursery supplying the
account. Hines Nurseries also markets its products through trade shows, print
advertising in trade journals, direct mail promotion and catalogues.
Competition. Competition in the nursery products segment of the lawn and
garden industry is based principally on breadth of product offering,
consistent product quality and product availability, customer service and
price. The nursery products segment is highly fragmented, comprised of
approximately 30,000 primarily small and regionally based growers, with the
top 100 growers accounting for approximately 22% of the industry volume in
1997. Management believes Hines Nurseries is one of only two growers able to
serve every major regional market in North America; the Company's only
national competitor being Monrovia Nursery Company. In each of its markets,
Hines competes with regional growers such as Color Spot in the West, Clinton
Nurseries in the Northeast, Zelenka Nurseries in the Midwest, Wight Nurseries
in the South and many other smaller regional and local growers. Hines
Nurseries' key competitive advantage is its ability to provide consistent,
high quality products in large volumes, its nationwide distribution and its
value-added services.
Sun Gro Peat and Peat-Based Products Business
Sun Gro harvests and produces high quality, sphagnum peat moss and peat-
based potting and growing mixes. Sphagnum peat moss is partially decomposed
sphagnum moss, a plant whose unique cellular structure consists of large
cavities with sponge-like absorption characteristics for air and water.
Because the optimal balance of air and water is essential for root development
and plant growth, organic sphagnum peat moss is generally considered the
highest quality growing medium available. While there are less expensive
products on the market that are used for similar purposes, such as top soil,
manure, bark, mulch and composts made from yard or sewage wastes, these
products do not contain the superior soil aeration and water and nutrient
retention characteristics of peat moss.
Sun Gro markets peat moss under its Sunshine(TM), Parkland(TM), Fairway(TM),
Black Gold(TM), Lakeland Grower(TM), Alberta Rose(TM), Nature's(TM) and
Gardener's Gold(TM) trade names in both the professional and retail markets in
four different grades: fine, medium, coarse and super coarse. Fine grade is
typically sold in the retail market, while the other grades, particularly
coarse grade, are sold to professional growers. Capitalizing on its strong
market position in the professional peat moss market, Sun Gro has become one
of the leading North American suppliers of value-added, peat-based growing
mixes used for specific professional applications such as seed germination,
cutting propagation and greenhouse crop production. As a result of Sun Gro's
success with this product line, higher margin professional growing mixes now
constitute a greater percentage of Sun Gro's professional market sales than
pure peat moss. Sun Gro's retail potting mixes use a similar blend of
ingredients
5
<PAGE>
as its professional growing mixes, but are specifically targeted to home
gardeners. By highlighting formulations for specific plant varieties, Sun Gro
has expanded its product offerings to the retail customer.
Sun Gro's peat moss and peat-related products are sold directly and by
distributors throughout the United States and Canada. Sun Gro also markets its
product internationally through distributors who sell to Mexico and Japan and,
to a lesser extent, other countries in Asia and South America. Peat moss is
sold to both the professional and retail markets, while growing mixes are sold
exclusively to the professional market as potting mixes are to the retail
market. Sun Gro's professional customers consist of greenhouse growers,
nursery growers and golf course developers. Sun Gro's retail customers are
similar to those of Hines Nurseries.
The following table sets forth the estimated percentage of Sun Gro's net
sales by customer type for the period indicated:
<TABLE>
<CAPTION>
Customer Type 1996 1997 1998
------------- ---- ---- ----
<S> <C> <C> <C>
Professional:
Greenhouse growers and vegetable farmers.................. 61% 57% 61%
International/others...................................... 10 11 7
Golf course developers.................................... 5 6 5
--- --- ---
Total Professional..................................... 76% 74% 73%
--- --- ---
Retail:
Home centers and mass merchandisers....................... 16% 18% 17%
Independent garden centers................................ 5 5 3
Garden center chains...................................... 3 3 7
--- --- ---
Total Retail........................................... 24% 26% 27%
--- --- ---
Total Professional and Retail......................... 100% 100% 100%
=== === ===
</TABLE>
Sun Gro's top ten customers accounted for approximately 30%, 28% and 26% of
Sun Gro's net sales in 1996, 1997 and 1998, respectively. No single Sun Gro
customer accounted for more than 10% of consolidated net sales in 1996, 1997
and 1998.
Research and Development. Sun Gro's research and development efforts focus
on the creation and development of new value-added peat-based growing mixes
for retail and professional customers. Such mixes often command higher prices
and provide higher profit margins than peat alone. Differences in growing
mixes may relate to differences in coarseness of peat and amounts of nutrient
additives, including limestone, and other mix constituents, such as perlite,
vermiculite and bark. Sun Gro's research and development efforts have resulted
in the commercial introduction of approximately 35 new growing mixes and
related products since 1992.
Sales and Marketing. Sun Gro sells its products on a direct basis and
through a network of approximately 205 distributors located throughout North
America. As of December 31, 1998, Sun Gro's direct sales force was comprised
of approximately 36 employees who are highly trained in the technical
applications of its products. Approximately 56% of Sun Gro's sales are
conducted through the distributor network. Sun Gro's distributor network
provides broad market coverage, reduces credit exposure and distributes
products to smaller growers cost effectively.
Competition. Competition in the peat moss and professional growing and
potting mix segment of the lawn and garden industry is based principally upon
product quality, distribution, service and price. Management believes Sun Gro
is one of the largest producers and marketers of plant-growing media in North
America. Sun Gro's principal competition comes from Premier Canadian
Enterprises, Ltd., a Canadian producer of peat moss, and The Scotts Company,
which competes mostly in the retail growing mix and potting mix markets. Sun
Gro's key competitive advantages are its control over high quality peat moss
reserves, its strong relationships throughout its distributor network and its
ability to provide significant technical support.
6
<PAGE>
Financial Information on the Company's Foreign Operations and Operating
Segments
See Notes 13 and 18 to the Company's consolidated financial statements,
which are included as a separate section of this Report beginning on page F-1.
Seasonality
The Company's nursery business is highly seasonal in nature, with most of
its sales typically occurring in the first half of the year. Sun Gro's
business is more heavily weighted towards the professional markets, which do
not typically experience the large seasonal variances present in the retail
peat market. The table below sets forth the Company's quarterly net sales, as
a percentage of total year net sales, during the year ended December 31, 1998:
<TABLE>
<CAPTION>
Percentage of Total
Quarter 1998 Net Sales
------- -------------------
<S> <C>
First Quarter...................................... 21%
Second Quarter..................................... 49
Third Quarter...................................... 15
Fourth Quarter..................................... 15
---
100%
===
</TABLE>
Patents and Trademarks
The Company has registered numerous trademarks, service marks and logos used
in its businesses in the United States and Canada. In addition, the Company
has developed and continues to develop specialty plants for which it holds
patents registered with the U.S. Patent and Trademark Office. The Company
currently holds 24 patents with 1 patent application pending.
Government Regulation
The Company is subject to certain United States and Canadian federal, state,
local and provincial health, safety and environmental laws and regulations
regarding the production, storage and transportation of certain products and
the disposal of its wastes. The EPA and similar state and local agencies
regulate the Company's operations and activities, including but not limited to
water runoff and the use of certain pesticides in its nursery operations. With
respect to its peat moss operations, the Company has various operating,
monitoring and site maintenance obligations, which are prescribed by various
Canadian and U.S. agencies. The Company does not anticipate that future
expenditures for compliance with such environmental laws and regulations will
have a material adverse effect on the Company's financial position or results
of operations. The Company cannot give any assurance, however, that compliance
with such laws and regulations, or compliance with other environmental laws
and regulations that may be enacted in the future, will not have an adverse
effect.
Hines Nurseries obtains certain irrigation water supplied to local water
districts from facilities owned and operated by the United States acting
through the Department of Interior Bureau of Reclamation ("reclamation
water"). The use and price of reclamation water, including availability of
subsidized water rates, is governed by federal reclamation laws and
regulations. Hines Nurseries utilizes reclamation water as one of the water
supplies for its Northern California and Oregon facilities. While the Company
believes that the nursery operations are in compliance with applicable
regulations and it maintains a continuous compliance program, there can be no
assurance that changes in law will not reduce availability of or increase the
price of, reclamation water to the Company.
7
<PAGE>
Employees
As of December 31, 1998, the Company employed approximately 2,945 persons,
including approximately 775 seasonal employees. Of this total, approximately
2,255 were employed by Hines Nurseries, including approximately 495 seasonal
employees (seasonal employment peaked at 1,456 in April), and approximately
690 were employed by Sun Gro, including approximately 280 seasonal employees
(its peak seasonal employment). As of December 31, 1998, approximately 500 of
Sun Gro's employees were employed in Canada. All of Hines Nurseries' employees
are non-union. The non-management employees at Sun Gro's Canadian peat
processing facilities, which vary seasonally in number from approximately 200
to 300, are represented by various labor unions, with collective bargaining
agreements in effect for all such facilities. Sun Gro's agreement with the
United Food and Commercial Workers Union, which covers 135 employees at its
Manitoba facility, expires in May 1999 and the Company expects negotiations to
begin in April 1999. Sun Gro's agreements with the Brotherhood of Carpenters
and Joiners of America, which cover 71 employees at Sun Gro's Lameque, New
Brunswick facility and 49 employees at its Maisonnette, New Brunswick
facility, expire in December 2000 and August 2001, respectively. The Company's
management believes labor relations are good.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements. Hines desires to take
advantage of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Several important factors, in addition to the
specific factors discussed in connection with such forward-looking statements
individually, could affect the future results of the Company and could cause
those results to differ materially from those expressed in the forward-looking
statements contained herein.
The Company's estimated or anticipated future results, products and service
performance or other non-historical facts are forward-looking and reflect
Hines' current perspective of existing trends and information. These
statements involve risks and uncertainties that cannot be predicted or
quantified and, consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, among others, the continued ability of Hines' to access
water, the impact of growing conditions, risks associated with customer
concentration, future acquisitions and the ability to integrate such
acquisitions in a timely and cost effective manner, the ability to manage
growth, the impact of competition, the ability to obtain future financing,
limitations of leverage and debt restrictions, government regulations, the
successful and timely implementation of the Company's Year 2000 Compliance
Program and other risks and uncertainties defined from time to time in Hines'
Securities and Exchange Commission filings.
Therefore, the Company wishes to caution each reader of this report to
consider carefully these factors as well as the specific factors discussed
with each forward-looking statement in this report and disclosed in the
Company's filings with the Securities and Exchange Commission as such factors,
in some cases, have affected, and in the future (together with other factors)
could affect, the ability of the Company to implement its business strategy
and may cause actual results to differ materially from those contemplated by
the statements expressed herein.
8
<PAGE>
Item 2. PROPERTIES
The Company owns approximately 3,190 acres related to its nursery facilities
and approximately 1,792 acres of harvestable peat bogs in Canada. In addition,
the Company leases approximately 1,377 acres related to its nursery facilities
(including leases from Blooming Farm, Inc., an affiliated entity) and
approximately 49,000 acres of harvestable peat bogs in Canada from provincial
governments and various private parties. Sun Gro has historically been able to
renew its leases upon expiration. However, no assurance can be given that Sun
Gro will be able to do so in the future. The Company's management believes
that its owned and leased facilities are sufficient to meet its operating
requirements for the foreseeable future.
The Company's facilities are identified in the table below:
<TABLE>
<CAPTION>
Location Description Status
-------- ----------- ------
<C> <S> <C>
Hines Nurseries
Danville, Pennsylvania............. 141 acre nursery Leased
Fallbrook, California.............. 266 acre nursery Leased(a)
Forest Grove, Oregon............... 1,106 acre nursery Owned/leased(b)
Fulshear, Texas.................... 450 acre nursery Owned
Irvine, California................. 454 acre nursery and Leased
headquarters
Lake Elsinore, California.......... 85 acres of undeveloped Leased(a)
land
Northern California(c)............. 1,445 acre nursery Owned
San Joaquin Valley, California(d).. 48 acre nursery Owned/leased(e)
Trenton, South Carolina............ 572 acre nursery Owned/leased(f)
Sun Gro
Seba Beach, Alberta................ 53,000 square foot Owned/leased(g)
processing and mixing
facility and 11,666
acres of peat bogs
Vilna, Alberta..................... 61,540 square foot Owned/leased(g)
processing and mixing
facility located on 295
acres and 1,676 acres
of peat bogs
Wandering River, Alberta........... 2,723 acres of peat bogs Owned/leased(g)
Corrigall Lake, Mallaig, Lobstick,
Alberta............................ 1,602 acres of peat Owned/leased(g)
bogs and 30 acres of
vacant land
Elma, Manitoba..................... 73,700 square foot Owned/leased(g)
processing and mixing
facility and 20,352
acres of peat bogs
Julius, Manitoba................... 39,000 square foot Owned/leased(g)
processing facility and
3,818 acres of peat bogs
Lameque, New Brunswick............. 50,400 square foot Owned/leased(g)
processing and mixing
facility and 4,454 acres
of peat bogs
Maisonnette, New Brunswick......... 47,900 square foot Owned/leased(g)
processing facility and
1,029 acres of peat bogs
Quincy, Michigan................... 83,700 square foot Owned
mixing facility
Terrell, Texas..................... 55,800 square foot Owned
mixing facility
Surrey, British Columbia........... 30,000 square foot Leased
depot/storage yard
Iroquois Falls, Ontario............ 29 acres of vacant land Owned
Matheson, Bingle Lake, Ontario..... 1,794 acres of peat bogs Owned/leased(g)
Niagara Falls, Ontario............. 8,000 square foot Owned
depot/storage yard
Montreal, Quebec................... 33,000 square foot Owned
depot/storage yard
Bellevue, Washington............... 10,000 square foot Leased
office (headquarters)
Hubbard, Oregon.................... 24,840 square foot Owned
mixing facility on 7
acres
Fillmore, Utah..................... 48,400 square foot Owned
mixing facility on 21
acres
</TABLE>
9
<PAGE>
- --------
(a) The lease contains a purchase option that the Company has exercised. The
Company is in negotiations regarding the purchase price, and expects to
consummate the purchase of this property in 1999.
(b) The Company owns 745 acres and leases 361 acres at this nursery.
(c) The Northern California nursery consists of sites in Vacaville and
Allendale, California.
(d) The San Joaquin Valley nursery consists of sites in Chowchilla and Madera,
California.
(e) The Company owns 38 acres and leases 10 acres at this nursery.
(f) The Company owns 512 acres and leases 60 acres at this nursery.
(g) The Company leases all but 1,792 acres in the aggregate of these peat bogs
from Canadian provincial governments and various private parties. The
Company's peat processing facilities are owned by the Company but, with
the exception of the Vilna peat-processing facility, these facilities are
situated on land leased to the Company by Canadian provincial governments
and various private parties.
Item 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of these disputes and lawsuits may adversely affect the Company's
financial position. Management believes, however, that the ultimate resolution
of such matters will not have a material adverse impact on the Company's
consolidated financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
10
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a result of the Company's initial public offering on June 22, 1998, the
common stock of Hines trades on The Nasdaq National Market under the symbol
"HORT". As of March 15, 1999, there were 70 registered holders of record of
the Company's common stock. The following table sets forth the quarterly high
and low share price for the year ended December 31, 1998:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
2nd quarter, (from June 22) ............................ $11 3/8 $10 1/2
3rd quarter ............................................ 11 1/4 6 7/8
4th quarter ............................................ 8 7/8 5
</TABLE>
Hines has not paid dividends on the common stock in the past and does not
presently plan to pay dividends on the common stock. The payment of dividends
is restricted under the terms of the Company's senior credit agreement and
senior subordinated note indenture. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Recent Sales of Unregistered Securities
On February 5, 1998, in a transaction exempt from Registration under Section
4(2) of the Securities Act, Hines issued to MDCP, for $2,000,000 in cash,
2,000 shares of Hines' 12% Cumulative Redeemable Senior Preferred Stock
("Senior Preferred Stock"), having an aggregate liquidation value of
$2,000,000. All of Hines' Senior Preferred Stock was converted into common
stock in connection with the Offering.
On March 18, 1998, in a transaction exempt from Registration under Section
4(2) of the Securities Act, Hines issued and sold to Abbott Capital 1330
Investors I, L.P. ("Abbott") (1) 4,250 shares of Senior Preferred, at a price
per share of $970.21 per share, and (2) presently exercisable warrants to
purchase 93,034 shares of common stock, with an exercise price of $.01 per
share. Each warrant entitled the holder to purchase one share of common stock
at a price of $1.36. The purchase price was paid in cash. Abbott exercised all
of its warrants immediately prior to the Offering.
On April 2, 1998, in a transaction exempt from Registration under Section
4(2) of the Securities Act Hines issued and sold to Abbott (1) 250 shares of
Senior Preferred Stock, at a price per share of $970.21 per share, and (2)
presently exercisable warrants to purchase 5,473 shares of common stock, with
an exercise price of $.01 per share. Each warrant entitled the holder to
purchase one share of common stock at a price of $1.36. The purchase price was
paid in cash. Abbott exercised all of its warrants immediately prior to the
Offering.
11
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for the years
ended December 31, 1994 and December 31, 1995 have been derived from Hines'
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent accountants. The selected historical consolidated financial
data for the years ended December 31, 1996 through December 31, 1998 have been
derived from Hines' consolidated financial statements, which have been audited
by PricewaterhouseCoopers LLP, independent accountants, as indicated in their
report included elsewhere herein. The following selected historical
consolidated financial data should be read in conjunction with the
Consolidated Financial Statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
For the Years Ended December 31, (a)
------------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ---------- ---------- -----------
(In thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $134,781 $ 156,909 $ 164,323 $ 201,256 $ 234,962
Cost of goods sold...... 60,827 72,245 80,812 99,407 115,013
Gross profit............ 73,954 84,664 83,511 101,849 119,949
Operating expenses...... 50,274 58,392 60,757 70,408 82,170
Unusual operating
expenses (b)........... -- -- 830 343 --
Operating income........ 23,680 26,272 21,924 31,098 37,779
Interest expense........ 9,422 17,831 21,080 21,805 20,460
Provision for income
taxes.................. 3,635 2,850 636 3,516 6,845
Income from continuing
operations............. 10,623 5,591 208 5,777 10,474
Income (loss) from
continuing operations
per common share: (c)
Basic................. 29,860 (d) 0.06 (0.48) (0.12) 0.32
Diluted............... 29,860 0.06 (0.48) (0.12) 0.32
Weighted average shares
outstanding (f):
Basic................. 264 3,061,984 7,439,190 7,550,174 15,106,960
Diluted............... 264 3,061,984 7,439,190 7,550,174 15,353,016
Other Data:
Capital expenditures.... $ 7,389 $ 7,684 $ 8,752 $ 10,130 $ 19,189
Cash paid for income
taxes (e).............. 131 3 4 161 168
Balance Sheet Data (at
end of period):
Working capital......... $ 26,132 $ 42,825 $ 29,597 $ 27,548 $ 51,757
Short-term debt......... 18,025 16,751 34,254 48,502 33,916
Total assets............ 140,906 188,544 227,515 268,819 315,110
Long-term debt.......... 63,107 157,742 152,769 160,356 145,633
Redeemable preferred
stock.................. -- 31,460 54,525 70,682 --
Shareholders' equity
(deficit).............. 9,930 (67,798) (70,900) (71,751) 63,322
</TABLE>
12
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(dollars in thousands)
(a) From January 1, 1994 through December 31, 1998, the Company acquired the
following six companies: OGP (January 27, 1995), Iverson (August 30,
1996), Flynn (November 27, 1996), Pacific Color (October 20, 1997),
Bryfogle's (December 16, 1997) and Lakeland (April 6, 1998). The financial
results include the operations of each acquisition since its respective
acquisition date.
(b) Unusual operating expenses consist of certain severance and other
restructuring costs of $830 and $1,537 in 1996 and 1997, respectively, net
of a $1,194 gain from receipt of insurance proceeds on an involuntary
disposal of fixed assets in 1997.
(c) After deduction of the minority interest in earnings of subsidiaries of
$2,740 and $3,958 for the years ended December 31, 1994 and 1995 and
accrued preferred stock dividends of $1,460, $3,775, $6,666 and $5,609 for
the years ended December 31, 1995, 1996, 1997 and 1998, respectively.
(d) The financial statements for the year ended December 31, 1995 reflect
purchase accounting for the exchange by certain members of management and
other investors of their minority interests for stock of Hines in
connection with the recapitalization of Hines on August 4, 1995. The
repurchase by Hines of its own stock from shareholders (other than the
continuing management shareholders) was recorded as a repurchase and
retirement of treasury stock, which resulted in negative shareholders'
equity. As a result of this transaction, the earnings per share amount for
the year ended December 31, 1994 is not considered to be comparable to
those for the years ended December 31, 1995, 1996, 1997 and 1998.
(e) Hines derives significant benefits under the U.S. federal tax code by
qualifying to use the cash method of accounting and by qualifying under
the "farming exception" to the uniform cost capitalization rules. As a
result, the Company has generally not been required to pay significant
cash income taxes and has generated net operating losses for federal
income tax purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview--Tax Matters."
(f) All shares and per share amounts reflect a 1.3611-for-one reverse stock
split effected on June 22, 1998.
13
<PAGE>
Item 7. 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 included in Item 8 of this
Annual Report on Form 10-K. This discussion contains trend analysis and other
forward-looking statements that involve risks and uncertainties. Such risks
and uncertainties are discussed at "Cautionary Statement for Purposes of the
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995"
on page 8 of the Annual report of Form 10-K.
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 the 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. The Company has, and expects to continue to experience
significant variability in net sales, operating income and net income on a
quarterly basis.
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 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. At December 31,
1998, the Company had approximately $36 million in net operating loss
carryforwards for federal income tax reporting purposes.
Results of Operations
Fiscal Year Ended December 31, 1998 compared to Fiscal Year Ended December
31, 1997.
Net sales. Net sales of $235.0 million for the fiscal year ended December
31, 1998 increased $33.7 million, or 16.7%, from net sales of $201.3 million
for the comparable period in 1997. The Company's sales of nursery products
increased 19.1%, which included $16.2 million of sales from Pacific Color
(acquired on October 20, 1997) and Bryfogle's (acquired on December 16, 1997).
Excluding these acquisitions, sales from
14
<PAGE>
the Company's nursery operations increased 7.4% 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
$9.4 million, or 12.7%, from the comparable period in 1997. Fiscal year 1998
sales included $11.7 million from Lakeland, acquired on April 6, 1998.
Excluding the Lakeland acquisition, sales decreased 3.1% from the comparable
period in 1997. Sales of peat-based products in the western United States were
negatively impacted during the first half of the year by unseasonably wet
weather attributable to El Nino. The Company's strategy of emphasizing sales
to professional customers was reflected in a 3.3%, or $1.8 million, increase
in sales to this customer segment during the period. Likewise, the Company's
strategy to move away from unprofitable and low margin customers resulted in
reduced sales to retail customers of $4.1 million, or 22.0%, compared to 1997.
Gross profit. Gross profit of $119.9 million (51.1% of net sales) for the
year ended December 31, 1998 increased $18.1 million, or 17.8%, from gross
profit of $101.8 million (50.6% of net sales) for the comparable period in
1997. The increase was primarily attributable to higher sales and improved
gross profit from the Company's peat moss operations resulting from the
heightened emphasis on professional customers and pricing improvements in all
professional products. As a percent of sales, gross margin improved by .5% to
51.1% of net sales as lower nursery operation gross margins were more than
offset by improved margins in the peat moss operations. The gross margins of
the nursery operations were depressed by the newly-acquired companies, which
initially have lower margins than those of the core nursery business. However,
the gross profit and operating performance of recently acquired companies have
generally improved following the installation of Hines' operating systems and
their integration into the Company.
Operating expenses. Operating expenses of $82.2 million (35.0% of net sales)
for the fiscal year ended December 31, 1998 increased $11.4 million, or 16.1%,
from $70.8 million (35.2% of net sales) for the comparable period in 1997. The
increase was primarily attributable to acquisitions and the significant
investment in sales and management infrastructure 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 21.7% while
operating expenses of the Company's peat moss operation decreased 13.6%. The
increase in operating expenses of the nursery operations was due to higher
selling and general and administrative expenses, related to significant
investments in sales and management infrastructure required to support the
Company's current and future growth. The decrease in operating expenses of the
Company's peat moss operations was primarily due to the reduction in
promotional and advertising programs targeted at retail customers resulting
from the shift away from the lower margin retail peat business. Total
operating expenses as a percentage of net sales decreased .2% to 35.0% due
primarily to improved operating leverage at the Company's peat moss operation.
Operating income. Operating income of $37.8 million (16.1% of net sales) for
the fiscal year ended December 31, 1998 increased $6.7 million, or 21.5%, from
$31.1 million (15.5% of net sales) for the comparable period in 1997.
Operating income increased primarily due to higher sales and gross profit
margins, which were partially offset by higher operating expenses, as
described above. The higher operating margin resulted from improved gross
margin and a reduction in operating expenses as a percentage of net sales.
Interest expense. Interest expense of $19.5 million for the year ended
December 31, 1998 decreased $1.2 million from $20.7 million for the comparable
period in 1997. The decrease was attributable to lower borrowing levels and
financing costs under the Company's revolving credit facilities during the
third and fourth quarter of the year. Another contributing factor was 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
39.5% and 37.8% for the years ended December 31, 1998 and 1997, respectively.
The higher effective tax rate in 1998 was due to the non-deductibility of the
goodwill amortization related to recent acquisitions.
15
<PAGE>
Net income. Net income of $6.1 million for the year ended December 31, 1998
increased $0.3 million, or 5.2%, from $5.8 million for the comparable period
in 1997. Excluding the $4.4 million extraordinary loss on the early
extinguishment of debt, net income increased by $4.7 million, or 81.4%, from
net income of $5.8 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.
Fiscal Year Ended December 31, 1997 compared to Fiscal Year Ended December
31, 1996.
Net sales. The Company had consolidated net sales of $201.3 million in 1997,
representing an increase of $37.0 million, or 22.5%, from net sales of $164.3
million in 1996. The Company's sales of nursery products increased 38.2% to
$127.5 million from net sales of $92.2 million in 1996. This 1997 performance
reflects increased sales volume and prices from its existing nursery
operations as well as $26.3 million of sales from the acquisitions of Iverson
on August 30, 1996, Flynn on November 27, 1996, Pacific Color on October 20,
1997 and Bryfogle's on December 16, 1997. Excluding these acquisitions, sales
from the nursery operations increased 9.6% in 1997. This sales growth resulted
primarily from higher sales to home centers and mass merchandisers as well as
increased sales volume of flowering color plants. Net sales of peat moss and
peat-based products increased 2.3% to $73.8 million from $72.1 million in 1996
primarily due to volume growth in the professional market. Sales of peat to
the retail market also increased in 1997 as a result of higher unit sales
volume, partially offset by lower retail peat prices. Peat prices in the first
half of 1997 continued to be adversely affected by the unusually long peat
moss harvesting season in eastern Canada in 1995, which created an excess
supply of peat moss in the Company's eastern markets.
Gross profit. Gross profit of $101.8 million (50.6% of net sales) for the
fiscal year ended December 31, 1997 represents an increase of $18.3 million,
or 21.9%, from gross profit of $83.5 million (50.8% of net sales) in 1996.
This increase was primarily attributable to the Company's 1996 and 1997
nursery acquisitions and higher sales from the Company's existing nursery
operations. The slight decrease in gross margin percentage was primarily due
to lower margins from these acquisitions, which are in varying stages of being
integrated into the Company's existing nursery operations.
Operating expenses. Operating expenses of $70.8 million (35.2% of net sales)
for the fiscal year ended December 31, 1997 represented an increase of $9.2
million, or 14.9%, from $61.6 million of operating expenses (37.5% of net
sales) in 1996. Operating expenses in 1997 included $0.3 million of unusual
expenses, which consisted of $1.5 million of severance and other restructuring
costs (compared to $0.8 million in 1996), net of a $1.2 million gain on the
involuntary disposal of fixed assets in connection with property damage
covered by insurance. While the absolute increase was largely related to the
Company's nursery acquisitions, the reduction as a percentage of net sales was
primarily attributable to leveraging fixed costs over a larger sales base.
Operating income. Operating income of $31.1 million (15.4% of net sales) for
the fiscal year ended December 31, 1997 represents an increase of $9.2
million, or 42.0%, from $21.9 million (13.3% of net sales) in 1996. The
increase was primarily due to the Company's nursery acquisitions and higher
sales from the Company's existing nursery operations. The improved operating
margin resulted from a reduction in operating expenses as a percentage of
sales more than offsetting the slight decrease in gross margins.
Interest expense. Interest expense of $20.7 million for the fiscal year
ended December 31, 1997 increased $0.6 million from $20.1 million in 1996. The
increase was attributable to higher borrowing levels as a result of increased
capital expenditures and working capital requirements relating to the
acquisitions. This increase was partially offset by lower interest rates.
Provision for income taxes. The effective income tax rate was 37.8% and
75.4% for the years ended December 31, 1997 and 1996, respectively. The
decrease in the Company's effective income tax rate was due primarily to the
$0.3 million increase in the valuation allowance in 1996 against certain net
operating loss carryforwards and investment tax credits related to Sun Gro-
Canada.
16
<PAGE>
Net income. Net income of $5.8 million for 1997 represented an increase of
$5.6 million from net income of $0.2 million for the comparable period in
1996. The increase was primarily due to the Company's higher sales and
operating margins as discussed above.
Liquidity and Capital Resources
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, borrowings under its revolving credit facilities
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 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 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 and
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. 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 December 31, 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 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
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 year ended December 31,
1998 of $16.0 million increased $13.8 million, from $2.2 million for the
comparable period in 1997. The higher cash level generated was primarily due
to increases in net income and accounts receivable collections 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 inventory) during the growing and selling cycles. As a
result, operating activities during the first and fourth quarters of 1998 used
significant amounts of cash, totaling $27.1 million and $14.5 million,
respectively. In contrast, the operating activities for the second and third
quarters generated substantial cash, totaling $40.0 million and $17.6 million,
respectively, as the Company shipped inventory and collected accounts
receivable.
17
<PAGE>
Net cash used for investment activities during the year ended December 31,
1998 increased $9.1 million to $38.8 million from $29.7 million for the
comparable period in 1997. The increase was primarily due to the Company's
increased purchases of fixed assets to develop additional nursery acreage, and
the purchase of nursery-related structures, certain vehicles, machinery and
equipment.
Net cash provided by financing activities during the year ended December 31,
1998 decreased $8.7 million to $20.8 million from $29.5 million for the
comparable period in 1997. The decrease was primarily associated with the
redemption of a portion of the Senior Subordinated Notes and the repayment of
other debt obligations.
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 March 15, 1999, the
Company had unused borrowing capacity of $81.0 million and $35.5 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 operating loss carryforwards to offset all of
its tax liability under the alternative minimum tax system.
The Company's capital expenditures were approximately $19.2 million for the
year ended December 31, 1998. The capital expenditures for Hines Nurseries
($15.8 million) related primarily to the purchase and development of
additional nursery acreage and the purchase of nursery-related structures,
certain vehicles, machinery and equipment. The capital expenditures for Sun
Gro ($3.4 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 $25.1 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
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 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 would include telephone equipment, greenhouse automation and
watering systems. Upgrades or replacements are being made as necessary, and is
expected to be completed by the end of 1999.
18
<PAGE>
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 a material
relationship with the Company through confirmation and follow-up procedures
and expects this phase to be completed by mid-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 total 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 will continue to assess where alternative courses of
action are needed as the information technology and non-information technology
readiness plans are executed. The drive for formal contingency planning will
be in the third quarter of 1999, once a significant amount 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/business partnerships.
Because the Company's Year 2000 readiness is dependent upon key business
partners also being Year 2000 ready, 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 ingredients, 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.
New Accounting Pronouncements
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 (refer to Note 13 to the Company's
consolidated financial statements).
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
on accounting for certain costs in connection with obtaining or developing
computer software for internal use and requires that entities capitalize such
costs once certain criteria are met. The Company is required to adopt SOP 98-1
as of January 1, 1999.
Effects of Inflation
Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.
19
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its ongoing business, the Company is exposed to certain market
risks, including fluctuations in interest rates, foreign currency exchange
rates, commodity prices and its common stock price. The Company does not enter
into transactions designed to mitigate its market risks for trading or
speculative purposes. As of December 31, 1998, the Company had no foreign
exchange contracts and options outstanding.
The Company manages its interest rate risk by balancing the amount of its
fixed and variable long-term debt. For fixed rate debt, interest rate changes
affect the fair market value of such debt but do not impact earnings or cash
flows. Conversely, for variable rate debt, interest rate changes generally do
not affect the fair market value of such debt but do impact future earnings
and cash flows, assuming other factors are held constant. At December 31,
1998, Hines had fixed rate long-term debt of $78.0 million and variable rate
long-term debt of $69.0 million. Holding other variables constant (such as
foreign exchange rates and debt levels), a one percentage point increase in
interest rates would have decreased the unrealized fair market value of the
fixed rate debt at December 31, 1998 by approximately $3.9 million and would
be expected to have an estimated impact on pre-tax earnings and cash flows for
next year of approximately $.7 million for the variable debt.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is submitted as a separate section
of this Report on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
20
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's 1998 Proxy Statement to be filed
with the Securities and Exchange Commission.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's 1998 Proxy Statement to be filed
with the Securities and Exchange Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's 1998 Proxy Statement to be filed
with the Securities and Exchange Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's 1998 Proxy Statement to be filed
with the Securities and Exchange Commission.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The financial statements listed in "Index to Financial Statements."
2. The exhibits listed in "Index to Exhibits."
(b) Reports on Form 8-K:
The Registrant filed no current reports on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1998.
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Acquisition Agreement dated as of July 20, 1995 by and among the
Company, MDCP and Macluan Capital (Nevada) Inc. as amended by
Amendment No. 1 to Acquisition Agreement dated as of August 4,
1995.(1)
3.1 Restated Certificate of Incorporation of the Company.(4)
3.2 Amended and Restated By-laws of the Company.+
4.1 Form of certificate representing Common Stock.(4)
4.2 Amended and Restated Credit Agreement dated June 26, 1998 among Hines
Nurseries, Inc., Sun Gro Horticulture Canada, Ltd., and Lakeland
Canada, Ltd., as borrowers, the lenders listed therein, Bank of
America N.T. & S.A., as syndication agent, Harris Trust & Savings
Bank, as documentation agent, BT Bank of Canada, as Canadian agent,
and Bankers Trust Company, as administrative agent.(5)
4.3 Registration Agreement dated as of June 11, 1998 by and between Hines
Holdings, Inc. and MDCP(4)
10.1 Stockholders Agreement dated as of August 4, 1995 by and among the
Company and the other parties signatory thereto.(1)
10.2 Amendment No. 1 to Stockholders Agreement dated as of November 27,
1996.(2)
10.3 Amendment No. 2 to Stockholders Agreement dated as of December 15,
1997.(5)
10.4 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Douglas D. Allen.(1)*
10.5 Employment Agreement dated as of August 3, 1995 between Hines
Horticulture and Stephen P. Thigpen.(1)*
10.6 Sun Gro Horticulture Inc. U.S. Executive Supplemental Retirement
Plan.(1)*
10.7 Employment Agreement dated as of August 4, 1995 between Hines
Horticulture and Claudia M. Pieropan.(1)*
10.8 Hines Horticulture Nursery Division Vision 2000 Management Variable
Compensation Plan.(3)*
10.9 Sun Gro Division Management Variable Compensation Plan.(3)*
10.10 Management Stock Agreement dated as of September 29, 1997 by and
between the Company and Stephen P. Thigpen.(2)
10.11 Management Stock Pledge Agreement dated as of September 29, 1997 by
and between the Company and Stephen P. Thigpen.(2)
10.12 Promissory Note dated as of September 29, 1997 from Stephen P.
Thigpen, as maker, to the Company.(2)
10.13 Purchase and Sale Agreement dated as of August 4, 1995 by and between
Oregon Garden Products, Inc., as seller, and Blooming Farm, Inc., as
buyer.(1)
10.14 Promissory Note dated August 4, 1995, from Blooming Farm, Inc., as
maker, to Oregon Garden Products, Inc., as seller, and Blooming Farm,
Inc., as buyer.(1)
10.15 Trust Deed, Security Agreement, Assignment of Leases and Rents and
Fixture Financing Statement dated August 4, 1995 from Blooming Farm,
Inc., as trustor, to Ticor Title Insurance Company, as trustee, and
Oregon Garden Products, Inc., as beneficiary.(1)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.16 Agricultural Lease dated as of June 26, 1998 between Blooming Farm,
Inc., as lessor, and Oregon Garden Products, Inc., as lessee.+
10.17 Demand Note dated October 17, 1997 in the principal amount of
$2,500,000 from the Company, as maker, to MDCP.(2)
10.18 Purchase Agreement dated as of December 16, 1997 by and among the
Company, Abbott Capital 1330 Investors I, LP and MDCP.(2)
10.19 Stock Purchase Warrants of the Company dated as of December 16, 1997
in favor of MDCP.(2)
10.20 Amendment No. 1 to Purchase Agreement, dated as of June 11, 1998, by
and among Hines Holdings, Inc., MDCP and Abbott Capital 1330
Investors I, LP.(4)
10.21 Securities Purchase Agreement dated as of February 5, 1998 by and
between the Company and MDCP.(2)
10.22 1998 Long-Term Equity Incentive Plan.(6)
10.23 Form of Incentive Stock Option Agreement.(4)
21.1 Subsidiaries of the Company.(4)
23.1 Consent of PricewaterhouseCoopers LLP+
27.1 Financial Data Schedule.+
</TABLE>
- --------
+Filed herewith.
*Management contract or compensatory arrangement.
(1) Incorporated by reference to Hines Holdings, Inc.'s Registration Statement
on Form S-4, File No. 33-99452, filed on November 15, 1995 and amended on
December 22, 1995 and January 8, 1996.
(2) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997.
(3) Incorporated by reference to Hines Holdings, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(4) Incorporated by reference to Hines Horticulture, Inc.'s Registration
Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and
amended on May 26 1998 and June 16, 1998.
(5) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 24, 1999.
HINES HORTICULTURE, INC.
/s/ Claudia M. Pieropan
By: _________________________________
Claudia M. Pieropan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
registrant in the capacities indicated on March 24, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Stephen P. Thigpen President, Chief Executive
____________________________________ Officer and Director
Stephen P. Thigpen (principal executive
officer)
/s/ Douglas D. Allen Chairman of the Board
____________________________________
Douglas D. Allen
/s/ Claudia M. Pieropan Chief Financial Officer,
____________________________________ Secretary and Treasurer
Claudia M. Pieropan (principal financial and
accounting officer)
/s/ James R. Tennant Director
____________________________________
James R. Tennant
/s/ Ronald A. Pierre Director
____________________________________
Ronald A. Pierre
/s/ Thomas R. Reusche Director
____________________________________
Thomas R. Reusche
/s/ Paul R. Wood Director
____________________________________
Paul R. Wood
</TABLE>
24
<PAGE>
HINES HORTICULTURE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-1
</TABLE>
<TABLE>
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and 1998............... F-2
</TABLE>
<TABLE>
<S> <C>
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998....................................................... F-3
</TABLE>
<TABLE>
<S> <C>
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended
December 31, 1996, 1997 and 1998.......................................... F-4
</TABLE>
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998....................................................... F-5
</TABLE>
<TABLE>
<S> <C>
Notes to Consolidated Financial Statements................................. F-6
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Hines Horticulture, Inc. (formerly Hines Holdings, Inc.)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Hines Horticulture, Inc. (formerly Hines Holdings, Inc.) and its
subsidiaries at December 31, 1998 and 1997 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Newport Beach, California
February 22, 1999
F-1
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................... $ 2,543 $ 515
Accounts receivable, net of allowance for doubtful
accounts of $1,193 and $1,224........................... 20,569 26,741
Inventories.............................................. 106,007 118,126
Prepaid expenses and other current assets................ 1,958 2,326
-------- --------
Total current assets................................... 131,077 147,708
-------- --------
FIXED ASSETS, net of accumulated depreciation and
depletion of $20,459 and $29,221......................... 92,406 125,417
DEFERRED FINANCING EXPENSES, net of accumulated
amortization of $2,332 and $1,235........................ 6,477 4,077
GOODWILL, net of accumulated amortization of $1,474 and
$2,675................................................... 38,859 37,908
-------- --------
$268,819 $315,110
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable......................................... $ 8,046 $ 9,388
Accrued liabilities...................................... 5,090 6,351
Accrued payroll and benefits............................. 6,521 6,156
Accrued interest......................................... 219 751
Long-term debt, current portion.......................... 5,400 3,066
Borrowings on revolving credit facility.................. 43,102 30,850
Deferred income taxes.................................... 35,151 39,389
-------- --------
Total current liabilities.............................. 103,529 95,951
-------- --------
LONG-TERM DEBT............................................ 160,356 145,633
-------- --------
DEFERRED INCOME TAXES..................................... 6,003 10,204
-------- --------
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 1998............................ 77 221
Additional paid in capital (accumulated accretion of
cumulative redeemable preferred stock in excess of
additional paid in capital)............................. (829) 127,992
Notes receivable from stock sales........................ (366) (326)
Deficit.................................................. (70,633) (64,565)
-------- --------
Total shareholders' equity (deficit)................... (71,751) 63,322
-------- --------
$268,819 $315,110
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1997 and 1998
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Sales, net.................................. $ 164,323 $ 201,256 $ 234,962
Cost of goods sold.......................... 80,812 99,407 115,013
--------- --------- ----------
Gross profit.............................. 83,511 101,849 119,949
--------- --------- ----------
Selling and distribution expenses........... 43,308 50,233 56,001
General and administrative expenses......... 18,239 20,403 25,779
Other operating (income) expenses........... (790) (228) 390
Unusual expenses............................ 830 343 --
--------- --------- ----------
Total operating expenses.................. 61,587 70,751 82,170
--------- --------- ----------
Operating income.......................... 21,924 31,098 37,779
--------- --------- ----------
Other expenses
Interest.................................. 20,140 20,708 19,453
Amortization of deferred financing
expenses................................. 940 1,097 1,007
--------- --------- ----------
21,080 21,805 20,460
--------- --------- ----------
Income before provision for income taxes.... 844 9,293 17,319
Income tax provision........................ 636 3,516 6,845
--------- --------- ----------
Income before extraordinary item............ 208 5,777 10,474
Extraordinary item, net of tax benefit...... -- -- 4,406
--------- --------- ----------
Net income.................................. 208 5,777 6,068
Less: Preferred stock dividends and warrant
accretion.................................. (3,775) (6,666) (5,609)
--------- --------- ----------
Net income (loss) applicable to common
stock...................................... $ (3,567) $ (889) $ 459
========= ========= ==========
Basic earnings per share:
Income (loss) before extraordinary item... $ (0.48) $ (0.12) $ 0.32
Extraordinary item........................ $ -- $ -- $ (0.29)
--------- --------- ----------
Net income (loss) per common share........ $ (0.48) $ (0.12) $ 0.03
========= ========= ==========
Diluted earnings per share:
Income (loss) before extraordinary item... $ (0.48) $ (0.12) $ 0.32
Extraordinary item........................ $ -- $ -- $ (0.29)
--------- --------- ----------
Net income (loss) per common share........ $ (0.48) $ (0.12) $ 0.03
========= ========= ==========
Weighted average shares outstanding--Basic.. 7,439,190 7,550,174 15,106,960
========= ========= ==========
Weighted average shares outstanding--
Diluted.................................... 7,439,190 7,550,174 15,353,016
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1996, 1997 and 1998
(Dollars in thousands except for share data)
<TABLE>
<CAPTION>
Common Stock
------------------ Notes Rec. Retained Shareholders'
Number of Stock Earnings Equity
Shares Amount (i) Sales (Deficit) (Deficit)
---------- ------ -------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1995................... 7,346,999 $ 73 $ 8,467 $ -- $(76,338) $(67,798)
Net proceeds from
issuance of stock, net
of expenses............ 208,184 2 169 -- -- 171
Redemption of stock..... (42,007) -- (58) -- -- (58)
Repurchase and
retirement of stock.... -- -- -- -- (280) (280)
Cumulative undeclared
dividends.............. -- -- (3,775) -- -- (3,775)
Issuance of warrants,
net of discount........ -- -- 824 -- -- 824
Notes receivable from
stock sales............ -- -- -- (192) -- (192)
Net income.............. -- -- -- -- 208 208
---------- ---- -------- ----- -------- --------
BALANCE, December 31,
1996................... 7,513,176 75 5,627 (192) (76,410) (70,900)
---------- ---- -------- ----- -------- --------
Net proceeds from
issuance of stock, net
of expenses............ 213,048 2 24 -- -- 26
Redemption of stock..... (17,743) -- (24) -- -- (24)
Cumulative undeclared
dividends.............. -- -- (6,666) -- -- (6,666)
Issuance of warrants,
net of discount........ -- -- 210 -- -- 210
Notes receivable from
stock sales............ -- -- -- (174) -- (174)
Net income.............. -- -- -- -- 5,777 5,777
---------- ---- -------- ----- -------- --------
BALANCE, December 31,
1997................... 7,708,481 77 (829) (366) (70,633) (71,751)
---------- ---- -------- ----- -------- --------
Net proceeds from
issuance of stock, net
of expenses............ 5,100,000 51 50,122 -- -- 50,173
Preferred stock
conversion............. 8,231,635 82 84,127 -- -- 84,209
Promissory note
conversion............. 117,302 2 1,198 -- -- 1,200
Warrant conversion...... 915,131 9 (1,101) -- -- (1,092)
Cumulative undeclared
dividends.............. -- -- (5,609) -- -- (5,609)
Issuance of warrants,
net of discount........ -- -- 84 -- -- 84
Payments received on
notes receivable from
stock sales............ -- -- -- 40 -- 40
Net income.............. -- -- -- -- 6,068 6,068
---------- ---- -------- ----- -------- --------
BALANCE, December 31,
1998................... 22,072,549 $221 $127,992 $(326) $(64,565) $ 63,322
========== ==== ======== ===== ======== ========
</TABLE>
- --------
(i) Accumulated accretion of cumulative redeemable preferred stock (in excess)
less than additional paid-in capital
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1997 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 208 $ 5,777 $ 6,068
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation, depletion and amortization... 4,962 6,407 10,454
Amortization of deferred financing costs... 940 1,097 1,007
Loss on early extinguishment of debt....... -- -- 7,417
Deferred income taxes...................... 508 3,647 2,232
Loss on sale of fixed assets............... -- -- 230
Gain on involuntary disposal of fixed
assets.................................... -- (1,194) --
Other...................................... 525 (81) --
--------- --------- ---------
7,143 15,653 27,408
Change in working capital accounts, net of
effect of acquisitions:
Accounts receivable........................ 824 (4,373) (1,863)
Inventories................................ (4,270) (9,495) (9,873)
Prepaid expenses and other current assets.. (815) 1,008 (244)
Other assets............................... (577) (322) --
Accounts payable and accrued liabilities... (3,500) 297 590
Other liabilities.......................... (361) (581) --
--------- --------- ---------
Net cash (used in) provided by operating
activities.............................. (1,556) 2,187 16,018
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets.................... (8,752) (10,130) (19,189)
Proceeds from sale of fixed assets.......... 175 154 301
Proceeds from insurance claims.............. -- 1,194 --
Purchase of fixed assets from insurance
claims proceeds............................ -- (1,324) --
Acquisitions, net of cash................... (21,915) (19,632) (19,929)
--------- --------- ---------
Net cash used in investing activities.... (30,492) (29,738) (38,817)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit...... 202,785 220,188 174,748
Repayments on revolving line of credit...... (186,121) (206,443) (187,000)
Proceeds from the issuance of long-term
debt....................................... -- 12,000 85,655
Repayments of long-term debt................ (4,209) (4,910) (103,731)
Deferred financing costs.................... (253) (1,223) (2,183)
Premium paid on redemption of Senior
Subordinated Notes......................... -- -- (3,841)
Repurchase and retirement of stock.......... (280) (75) --
Repayments of notes receivables from stock
sales...................................... -- -- 40
Issuance of preferred and common stock...... 20,612 9,926 57,083
Other....................................... (36) -- --
--------- --------- ---------
Net cash provided by financing
activities.............................. 32,498 29,463 20,771
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH............... 450 1,912 (2,028)
CASH, beginning of period..................... 181 631 2,543
--------- --------- ---------
CASH, end of period........................... $ 631 $ 2,543 $ 515
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of capitalized
interest................................... $ 23,702 $ 20,729 $ 18,921
Cash paid for income taxes.................. $ 4 $ 161 $ 168
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
1. Summary of Significant Accounting Policies
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 manufacturing facilities
located in Canada and the United States.
Consolidation
The consolidated financial statements include the accounts of Hines and its
wholly owned subsidiaries Hines Nurseries and Sun Gro, including Sun Gro's
wholly owned subsidiary, Sun Gro-Canada. All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenue, net of sales discounts and allowances, upon
product shipment to the customer. The Company is subject to credit risk
primarily through accounts receivables. Credit risk on accounts receivables is
minimized as a result of the large and diverse nature of the Company's
customer base throughout North America. The Company does not require
collateral for its accounts receivable. Certain customers are granted deferred
payment terms (dating). At December 31, 1997 and 1998, significant amounts of
accounts receivable are subject to dating terms. The Company's largest
customer accounted for approximately 10%, 12% and 14% of the Company's
consolidated net sales in 1996, 1997 and 1998, respectively.
Amortization of Deferred Financing Expenses
Deferred financing expenses are being amortized using a method, which
approximates the effective interest method over the term of the associated
financing agreements.
Depreciation and Depletion
Fixed assets are stated at cost less accumulated depreciation. Interest is
capitalized for qualifying assets during the assets' acquisition period. In
1998, $709 of interest was capitalized. No interest was capitalized in 1996 or
1997. Capitalized interest is recorded as part of the asset to which it
relates and is amortized over the
F-6
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respective asset's estimated useful life. Depreciation has been provided for
on a straight-line basis over the following estimated economic useful lives:
<TABLE>
<S> <C>
Buildings............................... 20 to 60 years
Machinery and equipment................. 2 to 25 years
Vehicles and trailers................... 2 to 15 years
Furniture and fixtures.................. 3 to 5 years
</TABLE>
Bog depletion is based on the volume of peat produced during the year at
rates which will amortize the bog acquisition costs, as well as the initial
bog clearing and development costs, over the period of production of peat from
the bog.
Goodwill and Negative Goodwill
In connection with the sale of the Company in 1990, the Company recorded
$6,100 of negative goodwill. Negative goodwill equals the excess of the fair
market value of the acquired net assets over the acquisition purchase price
after reducing the amount allocated to the fixed assets acquired to zero. The
Company has amortized negative goodwill on a straight-line basis as a
component of other operating expenses over the period from June 29, 1990 to
December 31, 1997.
In connection with the acquisition of the interests of minority shareholders
for stock in the Company, approximately $14,700 of goodwill was recorded and
is being amortized over a 35-year period as a component of other operating
expenses.
Goodwill recorded in connection with the Company's recent acquisitions, as
discussed in Note 3, is being amortized over an estimated life of 35 years.
At each balance sheet date, the Company reviews the recoverability of
goodwill by comparing projected operating income on an undiscounted basis to
the net book value of the related assets. If the carrying value of goodwill
exceeds projected operating income, the carrying value of goodwill is written
down to undiscounted projected operating income.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including identifiable
intangible assets, for potential impairment. When circumstances indicate that
the carrying amount of the asset may not be recoverable, as demonstrated by
the projected undiscounted cash flows, an impairment loss would be recognized
based on fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Hines' nursery stock has an average growing period of approximately eighteen
months. The nursery stock is classified as a current asset based on Hines
Nurseries' normal operating cycle.
Foreign Currency Translation
The Company considers the U.S. dollar to be the functional currency of Sun
Gro's Canadian operations. Monetary assets and liabilities are translated at
the foreign exchange rate in effect as of the balance sheet date.
F-7
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Non-monetary assets and liabilities are translated at historical rates and
revenues and expenses at average exchange rates for the period. Gains or
losses from changes in exchange rates are recognized in the consolidated
results of operations in the year of occurence.
Income Taxes
Hines' operations are agricultural in nature. Hines reports its results for
income tax purposes on the cash basis.
The Company accounts for income taxes using an asset and liability approach
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities at the applicable
enacted tax rates. A valuation allowance is provided when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
Advertising
The Company expenses advertising costs at the time the advertising first
takes place. Advertising expense was $1,658, $1,898 and $1,124 for the years
ended December 31, 1996, 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings (Loss) Per Share ("EPS")
Basic earnings per share is computed by dividing net income, after deduction
of preferred dividends, by the weighted average number of common shares
outstanding in each year. Diluted earnings per share is computed by dividing
net income, after deduction of preferred dividends, by the weighted average
number of common shares outstanding plus any potential dilution that could
occur if options and warrants were converted into common stock in each year.
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). In accordance with the implementation
provisions of SFAS 128, the Company has restated earnings per share in the
Consolidated Statements of Operations for the year ended December 31, 1996.
F-8
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
There is no difference between the numerators and denominators for basic and
diluted earnings per share since common stock equivalents have been excluded
from the earnings per share calculation for fiscal years 1996 and 1997 (in the
amounts of $52 and $618, respectively) because the effect would be anti-
dilutive. A reconciliation of the numerators and denominators of basic and
diluted earnings per share for the year ended December 31, 1998 is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(Dollar in Thousands)
<S> <C> <C> <C>
Income before extraordinary item....... $10,474
Less: Preferred stock dividends........ (5,609)
-------
Basic EPS
Income (loss) applicable to common
stock................................. 4,865 15,107 $0.32
=====
Effect of Dilutive Securities
Warrants............................... 40 218
Convertible notes...................... 18 28
------- ------
Diluted EPS
Income applicable to common stock plus
assumed conversions................... $ 4,923 15,353 $0.32
======= ====== =====
</TABLE>
Recent Accounting Pronouncements
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 consolidated results of
operations, financial position or cash flows. SFAS 131 did however require the
disclosure of segment information (refer to Note 13).
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance
on accounting for certain costs in connection with obtaining or developing
computer software for internal use and requires that entities capitalize such
costs once certain criteria are met. The Company is required to adopt SOP 98-1
as of January 1, 1999.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentations.
2. Initial Public Offering
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 $50,200. 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. The remaining proceeds were
F-9
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
used for the redemption on July 29, 1998, of $42,000 in aggregate principal
amount of the 11.75% Senior Subordinated Notes due 2005, Series B (the "Senior
Subordinated Notes"). The Senior Subordinated Notes were redeemed at a price
of 109.139% of the aggregate principal amount thereof ($45,800 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 $3,000, net of related income taxes of $2,000, in the
quarter ended September 30, 1998.
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 $50,000 term loan and $200,000 revolving credit facility, as
further discussed in Note 7. The revolving credit facility is comprised of a
$100,000 working capital revolver and a $100,000 acquisition revolver. The
Senior Credit Facility replaced the Company's existing senior credit facility
and increased the aggregate size of the Company's borrowing facilities by
$100,000. The prepayment of the previous credit facilities resulted in an
extraordinary loss related to the write-off of unamortized financing costs of
$1,400, net of $1,000 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 issued in connection with certain acquisitions in
the aggregate principal amount of $1,200, was 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".
3. Acquisitions
Lakeland Peat Moss
On April 6, 1998, the Company acquired all of the issued and outstanding
shares of capital stock of Lakeland Peat Moss, Ltd. and certain affiliated
entities (collectively "Lakeland"), a producer of sphagnum peat moss in
western Canada, for approximately U.S. $22,437. The acquisition was accounted
for using the purchase method. The purchase price allocation is summarized as
follows:
<TABLE>
<S> <C>
Cash................................................................ $ 640
Accounts receivable................................................. 4,309
Inventories......................................................... 2,246
Prepaid expenses.................................................... 124
Fixed assets........................................................ 23,606
Accounts payable and accrued liabilities............................ (2,431)
Long-term debt...................................................... (101)
Deferred income taxes............................................... (5,956)
-------
Total purchase price.............................................. $22,437
=======
</TABLE>
F-10
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bryfogle's
On December 16, 1997, the Company acquired all of the issued and outstanding
shares of Bryfogle's Wholesale, Inc., Bryfogle's Power Plants, and Power
Plants II, Inc. (collectively "Bryfogle's") for approximately $18,981. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:
<TABLE>
<S> <C>
Cash................................................................ $ 54
Accounts receivable................................................. 452
Inventories......................................................... 1,088
Fixed assets........................................................ 4,163
Other assets........................................................ 639
Goodwill............................................................ 13,752
Accounts payable and accrued liabilities............................ (756)
Deferred tax liability--non-current................................. (411)
-------
Total purchase price.............................................. $18,981
=======
</TABLE>
Pacific Color Nurseries
On October 20, 1997, the Company acquired certain assets and assumed certain
liabilities of Pacific Color Nurseries, Inc. ("PCN") for $1,705. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable.................................................. $ 100
Inventories.......................................................... 200
Prepaid expenses..................................................... 5
Fixed assets......................................................... 1,385
Goodwill............................................................. 285
Accounts payable and accrued liabilities............................. (270)
------
Total purchase price............................................... $1,705
======
</TABLE>
Flynn Nurseries
On November 27, 1996, the Company acquired all of the issued and outstanding
shares of Flynn Nurseries, Inc. ("Flynn") for $11,653. The acquisition was
accounted for using the purchase method. The purchase price allocation is
summarized as follows:
<TABLE>
<S> <C>
Cash................................................................ $ 39
Accounts receivable................................................. 642
Inventories......................................................... 11,644
Prepaid expenses.................................................... 48
Fixed assets........................................................ 3,162
Goodwill............................................................ 5,279
Accounts payable and accrued liabilities............................ (3,981)
Long-term debt...................................................... (16)
Deferred tax liability non-current.................................. (5,164)
-------
Total purchase price.............................................. $11,653
=======
</TABLE>
F-11
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Iverson Perennial Gardens
On August 30, 1996, the Company acquired certain assets and assumed certain
liabilities of Iverson Perennial Gardens, Inc. ("Iverson") for $10,301. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable............................................... $ 1,181
Inventories....................................................... 2,416
Prepaid expenses.................................................. 40
Fixed assets...................................................... 1,296
Goodwill.......................................................... 6,114
Accounts payable and accrued liabilities.......................... (691)
Long-term debt.................................................... (55)
-------
Total purchase price............................................ $10,301
=======
</TABLE>
The consolidated financial statements reflect the operations of Iverson,
Flynn, PCN, Bryfogle's, and Lakeland since the dates of their respective
acquisition. The following summary of condensed unaudited pro forma results of
operations for the year ended December 31, 1997 reflects the acquisitions of
Bryfogle's, PCN and Lakeland as if they had occurred on January 1, 1997. The
following summary of condensed unaudited pro forma results of operations for
the year ended December 31, 1998 gives effect to the following transactions as
if they had occurred as of January 1, 1998: (i) the acquisition of Lakeland;
(ii) the Equity Recapitalization; (iii) the closing of the new Senior Credit
Facility; and (iv) the Offering (in thousands, except per share data):
<TABLE>
<CAPTION>
For the Year
Ended December
31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Sales, net............................................. $234,046 $241,154
Net Income (loss) applicable to common stock(a)........ (477) 13,716
Basic earnings per share:
Income (loss) per common share......................... $ (.06) $ .64
Diluted earnings per share:
Income (loss) per common share......................... $ (.06) $ .64
</TABLE>
- --------
(a) After deduction of preferred stock dividends of $6,666 for the year ended
December 31, 1997.
The pro forma results do not necessarily represent results, that would have
occurred if the acquisitions had taken place as of the dates assumed, nor are
they indicative of the results of future combined operations.
4. Unusual Expenses
During 1997, the Company received $1,194 of insurance proceeds from claims
to replace assets that had been damaged and recorded a gain of $1,194,
representing the difference between the proceeds received and the carrying
amount of the damaged assets. As of December 31, 1998, the Company had
acquired $1,324 of fixed assets utilizing the insurance proceeds.
In December 1996, the Company approved a restructuring plan for Sun Gro
which, for the year ended December 31, 1996, resulted in an unusual charge of
$830, representing severance-related payments. An additional liability of
$1,537 was recognized during the year ended December 31, 1997, representing
$1,100 of severance-related payments and $437 of other related restructuring
charges. As of December 31, 1998, there was no remaining reserve balance.
F-12
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Nursery stock............................................. $ 95,195 $104,085
Finished goods............................................ 4,003 4,818
Materials and supplies.................................... 6,809 9,223
-------- --------
$106,007 $118,126
======== ========
</TABLE>
6. Fixed Assets
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Land...................................................... $ 7,103 $ 11,238
Peat reserves and bog costs............................... 49,146 62,873
Buildings and improvements................................ 21,915 33,955
Machinery and equipment................................... 27,691 40,454
Construction in progress.................................. 7,010 6,118
-------- --------
112,865 154,638
Less-Accumulated depreciation and depletion............... 20,459 29,221
-------- --------
$ 92,406 $125,417
======== ========
</TABLE>
7. Revolving Lines of Credit
On August 4, 1995, the Company entered into a revolving credit agreement
that, as amended on December 16, 1997, provided for a line of credit equal to
the lesser of $75,000 or a specified percentage of accounts receivable and
inventory. Borrowings under this line were at interest rates approximating the
U.S. prime rate plus 1.5 percent or the Eurodollar rate plus 2.5 percent. The
line of credit was secured by substantially all of the assets and common stock
of Hines Nurseries and Sun Gro-U.S., as well as a pledge of 66% of the common
stock of Sun Gro-Canada. The agreement contained covenants that, among other
matters, established minimum interest coverage and maximum leverage ratios and
minimum earnings and maximum capital expenditure amounts. The average daily
amount of the unused portion of the line of credit was subject to a commitment
fee of 0.5 percent per annum.
On December 16, 1997 the Company entered into another revolving loan
agreement that provided for a line of credit equal to the lesser of $10,000 or
a percentage of accounts receivable and inventory balances, as stipulated in
the agreement. Borrowings under this line were at interest rates approximating
the U.S. prime rate plus 0.75 percent or the Eurodollar rate plus 2.25
percent. The line of credit was secured by substantially all of the assets of
Hines Nurseries. The agreement contained covenants, which, among other
matters, established minimum interest coverage and maximum leverage ratios and
minimum earnings and maximum capital expenditure amounts. The average daily
amount of the unused portion of the line of credit was subject to a commitment
fee of 0.5 percent per annum.
Concurrent with the Offering, the Company entered into an amended and
restated Senior Credit Facility to provide for a new $50,000 term loan and a
$200,000 revolving credit facility, which replaced the Company's
F-13
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
existing senior credit facility and increased the aggregate size of the
Company's borrowing facilities by $100,000. The revolving credit facility is
comprised of a $100,000 working capital revolver and a $100,000 acquisition
revolver.
After an initial period, the interest rate spread over the U.S. prime rate
and Eurodollar rate varies depending upon the Company's quarterly leverage and
interest coverage ratios as defined in the Senior Credit Facility agreement.
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 Senior Credit Facility contains covenants
that, among other matters, establish minimum interest coverage and net worth
and maximum leverage ratios and capital expenditure amounts. After an initial
period, the average daily amount of the unused portion of the revolving credit
facility is subject to a commitment fee which varies depending upon the
Company's quarterly leverage ratio as defined in the Senior Credit Facility
agreement. The revolving credit facility expires on June 30, 2003. Amounts
borrowed under the acquisition facility will convert into a term loan on June
30, 2000 and will begin to amortize thereafter. The weighted average interest
rate on borrowings outstanding under the Company's revolving lines of credit
as of December 31, 1997 and 1998 was approximately 8.4% and 7.7%,
respectively.
F-14
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8.Long-term Debt
<TABLE>
<CAPTION>
December 31, December 31,
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 and fixed assets .......... $ 12,000 --
Convertible subordinated promissory note,
interest at 6 percent per annum. Principal due
December 16, 2005............................... 1,000 --
Senior term debt, interest at the bank's
reference rate (8.5 percent per annum at
December 31, 1997) plus 1.5 percent or the
Eurodollar rate plus 2.5 percent per annum.
Principal payments due on June 30, September 30
and December 31 through 2000 ranging from $500
to $3,250, secured by inventories and fixed
assets.......................................... 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 (7.75 percent per annum at
December 31, 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........ -- 19,000
Term debt, interest at the bank's reference rate
(7.75 percent per annum at December 31, 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 $1,250 to $11,250, as specified in the loan
agreement....................................... -- 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, equipment financing
contracts and other obligations due at various
dates through 2000.............................. 64 1,699
-------- --------
165,756 148,699
Less current portion............................. 5,400 3,066
-------- --------
$160,356 $145,633
======== ========
</TABLE>
F-15
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Estimated principal maturities of long-term debt outstanding at December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999................................................................ $ 3,066
2000................................................................ 8,333
2001................................................................ 13,625
2002................................................................ 27,300
2003................................................................ 18,375
Thereafter.......................................................... 78,000
--------
$148,699
========
</TABLE>
The Senior Subordinated Notes were issued by Hines Nurseries and are
redeemable, in whole or in part, at the option of the Company, on or after
October 15, 2000 at prices specified by the indenture agreement (105.875% as a
percentage of the principal amount thereof in 2000 to 100.000% in 2004). Upon
a change of control, each holder will have the right to require Hines
Nurseries to repurchase such holder's notes at a price equal to 101 percent of
the principal amount thereof plus accrued interest, if any, to the date of
repurchase. The Senior Subordinated Notes are unsecured and subordinated to
all existing and future senior debt and unconditionally guaranteed on a senior
subordinated basis by Hines and Sun Gro-U.S.
The indenture governing the Senior Subordinated Notes imposes certain
limitations on the ability of Hines and Sun Gro-U.S. to, among other things,
incur additional indebtedness, pay dividends or make certain other restricted
payments and consummate certain asset sales.
9. Commitments and Contingencies
Operating Leases
The Company leases certain land, office and warehouse facilities under
various renewable long-term operating leases, which expire through 2010.
Certain of these leases include escalation clauses based upon changes in the
consumer price index and/or the fair rental value of leased land. One of the
operating land leases requires the Company to pay rent equal to the greater of
2.25 percent, increasing to 3 percent by the year 2010, of the sales derived
from the related land or a minimum per acre amount, as defined in the
agreement. Total rent expense under these operating lease agreements for the
years ended December 31, 1996, 1997 and 1998 was $1,302, $1,684 and $1,592
respectively.
As of December 31, 1998, the Company's future minimum annual payments under
its non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1999................................................................. $ 3,778
2000................................................................. 3,424
2001................................................................. 2,694
2002................................................................. 1,696
2003................................................................. 1,012
Thereafter........................................................... 6,570
-------
$19,174
=======
</TABLE>
Legal Matters
From time to time, the Company is involved in various disputes and
litigation matters, which arise in the ordinary course of business. The
litigation process is inherently uncertain and it is possible that the
resolution of
F-16
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
these disputes and lawsuits may adversely affect the Company. Management
believes, however, that the ultimate resolution of such matters will not have
a material adverse impact on the Company's consolidated financial position or
results of operations.
10. Shareholders' Equity
Stock Option Plan: On June 22, 1998, the Board adopted the 1998 Long-Term
Equity Incentive Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides
for grants of stock options, stock appreciation rights ("SARs"), restricted
stock, performance awards and any combination of the foregoing to certain
directors, officers and employees of the Company and its subsidiaries. The
purpose of the 1998 Stock Plan is to provide such individuals with incentives
to maximize shareholder value and otherwise contribute to the success of the
Company and to enable the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. The options are
granted at the fair market value of the shares underlying the options at the
date of grant, generally become exercisable over a four-year period and expire
in ten years.
Approximately 2.6 million shares of common stock will be available for
issuance pursuant to the 1998 Stock Plan, subject to adjustment in the event
of a reorganization, stock split, merger or similar change in the corporate
structure of the Company or the outstanding shares of common stock.
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") in 1998. As permitted by SFAS 123, the Company measures compensation
cost in accordance with Accounting Principles Board Opinon No. 25, "Accounting
for Stock Issued to Employees", and related interpretations, but provides pro
forma disclosures of net income and earnings per share as if the fair value
method (as defined in SFAS 123) had been applied. Had compensation cost been
determined using the fair value method prescribed by SFAS 123, the Company's
net loss and earnings (loss) per share would have been as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Pro forma net loss:........................................ $(352)
Pro forma basic earnings (loss) per share.................. $(.02)
Pro forma diluted earnings (loss) per share................ $(.02)
</TABLE>
The Company estimates the weighted average fair value of each stock option
on the grant date using the Black-Scholes option pricing model with the
following weighted-average assumptions: no dividend yield; expected volatility
of approximately 50%; risk-free interest rate of 5.56% and expected life of
approximately four years.
A summary of the status of the Company's stock option plan as of December
31, 1998 is presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding as of January 1, 1998................ -- $ --
Granted.......................................... 2,081,600 $10.99
Exercised........................................ -- $ --
Cancelled........................................ (37,649) $11.00
--------- ------
Total outstanding as of December 31,1998....... 2,043,951 $10.99
========= ======
</TABLE>
F-17
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For options outstanding as of December 31, 1998, the weighted average
remaining contractual life was 9.5 years with expiration dates ranging from
June 22, 2008 to October 20, 2008. The range of exercise prices was $6.875 to
$11.00 for options outstanding as of December 31, 1998. The weighted average
fair value of options granted during the year ended December 31, 1998 was
$4.93.
11. Income Taxes
The components of income (loss) from continuing operations before provision
for income taxes and the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S..................................... $ 1,902 $ 8,321 $ 17,890
Foreign................................. (1,058) 972 (571)
---------- ---------- -----------
$ 844 $ 9,293 $ 17,319
========== ========== ===========
Current:
Federal................................. 264 -- --
State................................... 34 10 41
Foreign................................. -- -- 143
---------- ---------- -----------
298 10 184
========== ========== ===========
Deferred:
Federal................................. 456 3,345 5,974
State................................... 74 698 867
Foreign................................. (192) (537) (180)
---------- ---------- -----------
338 3,506 6,661
---------- ---------- -----------
$ 636 $ 3,516 $ 6,845
========== ========== ===========
</TABLE>
The reported provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate of 34 percent to income before
provision for income taxes as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Provision computed at
statutory rate......... $ 287 $ 3,161 $ 5,888
Increase (decrease)
resulting from:
State tax, net of
federal benefit........ 71 433 605
Foreign taxes........... (95) (63) (13)
Goodwill................ (127) (93) 349
Meals and
entertainment.......... 100 113 199
Change in valuation
allowance.............. 328 -- --
Other................... 72 (35) (183)
--------- ----------- -----------
$ 636 $ 3,516 $ 6,845
========= =========== ===========
</TABLE>
F-18
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred expenses....................................... $ 1,210 $ 690
Capital loss carryforwards.............................. 660 851
Deferred currency loss.................................. 304 1,300
Net operating loss carryforwards........................ 14,417 14,357
Investment tax credit carryforwards..................... 384 298
Other................................................... 650 241
Valuation allowance..................................... (3,166) (2,141)
-------- --------
Gross deferred tax assets............................... 14,459 15,596
-------- --------
Deferred tax liabilities:
Accrual to cash adjustment.............................. (36,280) (41,361)
Deferred currency gain.................................. (235) --
Fixed asset basis differences........................... (15,255) (19,042)
Investment in foreign subsidiary........................ (1,749) (3,250)
Other................................................... (2,094) (1,536)
-------- --------
Gross deferred tax liabilities.......................... (55,613) (65,189)
-------- --------
Net deferred tax liability.............................. (41,154) (49,593)
-------- --------
Deferred income tax liability, current.................. (35,151) (39,389)
Deferred income tax liability, non-current.............. (6,003) (10,204)
-------- --------
$(41,154) $(49,593)
======== ========
</TABLE>
The Company derives significant benefits 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. The net benefit
realized by the Company thus far is represented by the "Accrual to Cash
Adjustment" item above. Because the items to which this "Accrual to Cash
Adjustment" relate to are comprised of current assets and current liabilities
in the balance sheet (such as inventory, accounts receivable, accounts
payable, etc.), this deferred tax item is also characterized as current.
At December 31, 1998, the Company had approximately $36,000 in net operating
loss carryforwards for federal income tax reporting purposes. The Company's
federal net operating losses begin to expire in 2005.
Included in the valuation allowance is $1,000 that relates to the deferred
tax assets recorded from acquisitions. Any tax benefits subsequently
recognized for these deferred tax assets will be allocated to goodwill.
At December 31, 1998, Sun Gro-Canada had capital loss carryforwards and
investment tax credits of approximately Cdn. $2,908 (U.S. $1,890) and Cdn.
$459 (U.S. $298), respectively. Their use is limited to future taxable
earnings of Sun Gro-Canada. A full valuation allowance has been recorded
against the deferred tax assets
F-19
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
associated with the capital loss carryforwards and the investment tax credits.
The capital loss may be carried forward indefinitely and the investment tax
credits expire as follows (Canadian dollars):
<TABLE>
<CAPTION>
Investment
Tax
Year of Expiration Credits
------------------ ----------
<S> <C>
1999............................................................ $165
2000............................................................ 150
2001............................................................ 123
2002............................................................ 21
2003............................................................ --
----
$459
====
</TABLE>
During 1998, the Canadian net operating loss carryforward of approximately
Cdn. $7,000 was fully utilized and the valuation allowance related to it was
released.
12. Employee Benefit Plans
Sun Gro sponsors defined contribution plans for certain salaried U.S.
employees, certain salaried Canadian employees and certain hourly Canadian
employees. Participants of the salaried U.S. investment plan may make
voluntary contributions to the plan up to 15 percent of their compensation (as
defined). Sun Gro contributes five percent of each participant's compensation
(as defined) up to a maximum of $3,500 per participant depending upon Sun
Gro's performance.
Participants of the salaried and hourly Canadian investment plan must
contribute 3 percent of their compensation (as defined) and may make voluntary
contributions to the plan up to 18 percent of their compensation (as defined).
Sun Gro contributes up to 5 percent and 3 percent of each participant's
compensation (as defined) with no maximum for the salaried and hourly plans,
respectively.
The total expense related to these plans was $395, $284 and $0 for the years
ended December 31, 1996, 1997 and 1998, respectively.
13. Segment Information
The Company operates in two business segments in the horticultural industry:
nursery products and peat-based products. The Company evaluates the
performance of its segments based primarily on operating income. Refer to Note
19 "Guarantor/ Non-guarantor Disclosures" for the required disclosures about
the Company's segments for the three years ended December 31, 1998.
14. Supplemental Cash Flow Information
Supplemental disclosure of non-cash investing and financing activities were
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Fair value of assets acquired...................... $31,822 $22,069 $30,535
Liabilities assumed and incurred in connection with
acquisitions...................................... 9,907 2,437 10,606
------- ------- -------
Cash paid.......................................... $21,915 $19,632 $19,929
======= ======= =======
</TABLE>
F-20
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Fair Values of Financial Instruments
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments:
Cash
The carrying amount reported in the balance sheet for cash approximates its
fair value.
Short-term and Long-term Debt
The fair value of the Senior Subordinated Notes is based on the closing
price of the debt securities at December 31, 1997 and 1998. The carrying
amount of the Company's other long-term debt approximates its fair value based
upon borrowing rates currently available to the Company. The carrying amount
of the short-term debt approximates the fair value based on the short-term
maturity of the instrument.
Redeemable Preferred Stock
The fair value of the Senior Preferred Stock and Junior Preferred Stock
approximates its carrying value as of December 31, 1997, as the stock was
recently issued.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Ended December 31,
---------------------------------------
1997 1998
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash............................... $ 2,543 $ 2,543 $ 515 $ 515
Short-term debt.................... 43,102 43,102 30,850 30,850
Long-term debt (including current
portion).......................... 165,756 177,756 148,699 155,719
Redeemable preferred stock......... 70,682 70,682 -- --
</TABLE>
17. Valuation and Qualifying Accounts
Activity with respect to the Company's allowance for doubtful accounts
receivable is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance........................ $ 1,165 $ 1,019 $ 1,193
Charges to expense....................... 225 474 131
Amounts written off...................... (371) (300) (100)
---------- ---------- ----------
Ending balance........................... $ 1,019 $ 1,193 $ 1,224
========== ========== ==========
</TABLE>
F-21
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Geographic Information
Geographic information is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
United States
Sales to unaffiliated customers............ $155,136 $191,150 $221,655
Canada
Sales to unaffiliated customers............ 9,187 10,106 13,307
Transfers to other geographic areas........ 14,531 13,852 19,758
Eliminations................................. (14,531) (13,852) (19,758)
-------- -------- --------
$164,323 $201,256 $234,962
======== ======== ========
Operating income:
United States................................ $ 21,379 $ 28,637 $ 32,988
Canada....................................... 545 2,461 4,791
Eliminations................................. -- -- --
-------- -------- --------
$ 21,924 $ 31,098 $ 37,779
======== ======== ========
Total assets:
United States................................ $196,579 $241,679 $241,090
Canada....................................... 54,689 54,174 75,797
Eliminations................................. (23,753) (27,034) (1,777)
-------- -------- --------
$227,515 $268,819 $315,110
======== ======== ========
</TABLE>
Export sales from the United States totaled $6,780, $7,872 and $9,952 for
the years ended December 31, 1996, 1997 and 1998, respectively.
19. 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
F-22
<PAGE>
HINES HORTICULTURE, INC.
(FORMERLY HINES HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31,
1998
.Consolidating statements of operations for the year ended December 31,
1996, 1997 and 1998; and
.Consolidating statements of cash flows for the year ended December 31,
1996, 1997 and 1998
F-23
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES
CONSOLIDATING BALANCE SHEET
As of December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ---------------------------------
Sun Gro-
Hines Sun Gro- Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantor) Sub-total Eliminations Total
------------ --------- ----------- ----------- --------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash................... $ -- $ 2,543 $ -- $ -- $ -- $ -- $ 2,543
Accounts receivable,
net................... -- 7,945 10,188 2,436 12,624 -- 20,569
Inventories............ -- 98,391 2,162 5,454 7,616 -- 106,007
Prepaid expenses and
other current
assets................ -- 872 536 550 1,086 -- 1,958
Deferred income
taxes................. -- 50 804 169 973 (1,023) --
-------- -------- ------- ------- ------- -------- --------
Total current
assets.............. -- 109,801 13,690 8,609 22,299 (1,023) 131,077
-------- -------- ------- ------- ------- -------- --------
Fixed assets, net....... -- 44,398 4,242 43,766 48,008 -- 92,406
Deferred financing
expenses, net.......... -- 5,248 247 982 1,229 -- 6,477
Goodwill, net........... -- 38,041 -- 818 818 -- 38,859
Deferred income taxes... 16 10,163 -- -- -- (10,179) --
Investments in
subsidiaries........... 55,596 8,925 7,832 -- 7,832 (72,353) --
-------- -------- ------- ------- ------- -------- --------
$ 55,612 $216,576 $26,011 $54,175 $80,186 $(83,555) $268,819
======== ======== ======= ======= ======= ======== ========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
(DEFICIT)
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable....... $ -- $ 5,053 $ 1,117 $ 1,876 $ 2,993 $ -- $ 8,046
Accrued liabilities.... 3 2,738 1,930 638 2,568 -- 5,309
Accrued payroll and
benefits.............. -- 5,036 887 598 1,485 -- 6,521
Long-term debt,
current portion....... -- 2,400 -- 3,000 3,000 -- 5,400
Revolving line of
credit................ -- 36,231 6,871 -- 6,871 -- 43,102
Deferred income
taxes................. -- 36,174 -- -- -- (1,023) 35,151
Other liabilities...... -- -- (224) 224 -- -- --
Intercompany
accounts.............. 55,678 (75,078) (1,308) 20,708 19,400 -- --
-------- -------- ------- ------- ------- -------- --------
Total current
liabilities......... 55,681 12,554 9,273 27,044 36,317 (1,023) 103,529
-------- -------- ------- ------- ------- -------- --------
Long-term debt.......... 1,000 151,856 -- 7,500 7,500 -- 160,356
Deferred income taxes... -- 2,829 1,555 11,798 13,353 (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........... 77 13,471 11,413 -- 11,413 (24,884) 77
Additional paid in
capital (accumulated
accretion of
cumulative redeemable
preferred stock in
excess of additional
paid in capital)...... (829) 21,364 5,889 1,777 7,666 (29,030) (829)
Notes receivable from
stock sales........... (366) -- -- -- -- -- (366)
Retained earnings
(deficit)............. (70,633) 14,502 (2,119) 6,056 3,937 (18,439) (70,633)
-------- -------- ------- ------- ------- -------- --------
Total shareholders'
equity (deficit).... (71,751) 49,337 15,183 7,833 23,016 (72,353) (71,751)
-------- -------- ------- ------- ------- -------- --------
$ 55,612 $216,576 $26,011 $54,175 $80,186 $(83,555) $268,819
======== ======== ======= ======= ======= ======== ========
</TABLE>
F-24
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES--(CONTINUED)
CONSOLIDATING BALANCE SHEET
As of December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ------------------------------------
Hines Sun Gro-
Horticulture Hines U.S. Sun Gro-Canada
(Parent Nurseries (Subsidiary (Subsidiary Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) Sub-total Eliminations Total
------------ --------- ----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
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 current
assets................ -- 1,124 558 644 1,202 -- 2,326
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
(DEFICIT)
---------------------
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 sales........... (326) -- -- -- -- -- (326)
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>
F-25
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES--(CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ------------------------------------
Hines Sun Gro-
Horticulture Hines U.S. Sun Gro-Canada
(Parent Nurseries (Subsidiary (Subsidiary Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) Sub-total Eliminations Total
------------ --------- ----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ -- $ 92,214 $62,922 $23,718 $86,640 ($14,531) $164,323
Cost of goods sold...... -- 45,650 33,544 16,149 49,693 (14,531) 80,812
------- -------- ------- ------- ------- -------- --------
Gross profit........... -- 46,564 29,378 7,569 36,947 -- 83,511
Operating expenses...... -- 26,393 28,170 7,024 35,194 -- 61,587
Operating income....... -- 20,171 1,208 545 1,753 -- 21,924
Other expenses:
Interest............... -- 18,420 536 1,184 1,720 -- 20,140
Interest--
intercompany.......... -- (672) 552 120 672 -- --
Amortization of deferred
financing expenses,
other.................. (208) 1,485 867 299 1,166 (1,503) 940
------- -------- ------- ------- ------- -------- --------
(208) 19,233 1,955 1,603 3,558 (1,503) 21,080
Income (loss) before
provision for (benefit
from) income taxes..... 208 938 (747) (1,058) (1,805) 1,503 844
Income tax provision
(benefit).............. -- 730 98 (192) (94) -- 636
------- -------- ------- ------- ------- -------- --------
Net income (loss)....... $ 208 $ 208 $( 845) $( 866) $(1,711) $ 1,503 $ 208
======= ======== ======= ======= ======= ======== ========
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1997
(Dollars in thousands)
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ------------------------------------
Hines Sun Gro-
Horticulture Hines U.S. Sun Gro-Canada
(Parent Nurseries (Subsidiary (Subsidiary Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) Sub-total Eliminations Total
------------ --------- ----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ -- $127,465 $63,685 $23,958 $87,643 $(13,852) $201,256
Cost of goods sold...... -- 64,175 33,980 15,104 49,084 (13,852) 99,407
------- -------- ------- ------- ------- -------- --------
Gross Profit........... -- 63,290 29,705 8,854 38,559 -- 101,849
Operating expenses...... -- 33,977 30,380 6,394 36,774 -- 70,751
Operating income....... -- 29,313 (675) 2,460 1,785 -- 31,098
Other expenses:
Interest............... 39 18,928 708 1,033 1,741 -- 20,708
Interest--
intercompany.......... -- (1,036) 889 147 1,036 -- --
Amortization of deferred
financing expenses,
other.................. (5,800) 1,347 48 310 358 5,192 1,097
------- -------- ------- ------- ------- -------- --------
(5,761) 19,239 1,645 1,490 3,135 5,192 21,805
------- -------- ------- ------- ------- -------- --------
Income (loss) before
provision for (benefit
from) income taxes..... 5,761 10,074 (2,320) 970 (1,350) (5,192) 9,293
Income tax provision
(benefit).............. (16) 4,274 (239) (503) (742) -- 3,516
------- -------- ------- ------- ------- -------- --------
Net income (loss)....... $ 5,777 $ 5,800 $(2,081) $ 1,473 $( 608) $ (5,192) $ 5,777
======= ======== ======= ======= ======= ======== ========
</TABLE>
F-26
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES--(CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- -----------------------------------
Hines Sun Gro-
Horticulture Hines U.S. Sun Gro-Canada Sun Gro
(Parent Nurseries (Subsidiary (Subsidiary Sub- Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) total Eliminations Total
------------ --------- ----------- -------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ -- $151,806 $69,849 $33,065 $102,914 $(19,758) $234,962
Cost of goods sold...... -- 78,198 36,182 20,391 56,573 (19,758) 115,013
------- -------- ------- ------- -------- -------- --------
Gross Profit........... -- 73,608 33,667 12,674 46,341 -- 119,949
Operating expenses...... -- 45,983 28,304 7,883 36,187 -- 82,170
------- -------- ------- ------- -------- -------- --------
Operating income....... -- 27,625 5,363 4,791 10,154 -- 37,779
------- -------- ------- ------- -------- -------- --------
Other expenses:
Interest............... 44 17,625 592 1,192 1,784 -- 19,453
Interest--
intercompany.......... -- (1,475) 1,424 51 1,475 -- --
Amortization of
deferred financing
expenses, other....... (6,094) (2,550) (2,945) 151 (2,794) 12,445 1,007
------- -------- ------- ------- -------- -------- --------
(6,050) 13,600 (929) 1,394 465 12,445 20,460
------- -------- ------- ------- -------- -------- --------
Income before provision
for income taxes....... 6,050 14,025 6,292 3,397 9,689 (12,445) 17,319
Income tax provision
(benefit).............. (18) 4,104 2,802 (43) 2,759 -- 6,845
------- -------- ------- ------- -------- -------- --------
Net income before
extraordinary items.... 6,068 9,921 3,490 3,440 6,930 (12,445) 10,474
Extraordinary items, net
of tax................. -- 3,827 124 455 579 4,406
------- -------- ------- ------- -------- -------- --------
Net income.............. $ 6,068 $ 6,094 $ 3,366 $ 2,985 $ 6,351 $(12,445) $ 6,068
======= ======== ======= ======= ======== ======== ========
</TABLE>
F-27
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ------------------------------------
Hines Sun Gro- Sun Gro-
Horticulture Hines U.S. Canada
(Parent Nurseries (Subsidiary (Subsidiary Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) Sub-total Eliminations Total
------------ --------- ----------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............ ($ 577) ($8,963) $ 884 $3,084 $3,968 $4,016 ($1,556)
------- ------- ------ ------ ------ ------ -------
Cash flows from
investing activities:
Purchase of fixed
assets, net.......... -- (5,761) (1,446) (1,370) (2,816) -- (8,577)
Acquisitions, net of
cash................. -- (21,915) -- -- -- -- (21,915)
------- ------- ------ ------ ------ ------ -------
Net cash used in
investing
activities......... -- (27,676) (1,446) (1,370) (2,816) -- (30,492)
------- ------- ------ ------ ------ ------ -------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- 12,388 4,276 -- 4,276 -- 16,664
Intercompany advances
(repayments)......... (19,755) 19,820 (132) 67 (65) -- --
Repayments of long-
term debt............ -- (2,459) -- (1,750) (1,750) -- (4,209)
Deferred financing
costs................ -- (87) (44) (122) (166) -- (253)
Dividends received (
paid )............... -- 7,427 (7,427) -- (7,427) -- --
Issuance of preferred
and common stock..... 20,612 -- 4,016 -- 4,016 (4,016) 20,612
Repurchase and
retirement of
stock................ (280) -- -- -- -- -- (280)
Other................. -- -- (36) -- (36) -- (36)
------- ------- ------ ------ ------ ------ -------
Net cash provided by
(used in) financing
activities......... 577 37,089 653 (1,805) (1,152) (4,016) 32,498
------- ------- ------ ------ ------ ------ -------
Net increase (decrease)
in cash............... -- 450 91 (91) -- -- 450
Cash and cash
equivalents, beginning
of year............... -- 181 -- -- -- -- 181
------- ------- ------ ------ ------ ------ -------
Cash, end of year...... $ -- $ 631 $ 91 ($ 91) $ -- $ -- $ 631
======= ======= ====== ====== ====== ====== =======
</TABLE>
F-28
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ------------------------------------
Hines Sun Gro- Sun Gro-
Horticulture Hines U.S. Canada
(Parent Nurseries (Subsidiary (Subsidiary Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) Sub-total Eliminations Total
------------ --------- ----------- ------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............ $(9,858) $ 3,149 $(6,998) $6,299 $ (699) $9,595 $ 2,187
------- ------- ------- ------ ------ ------ -------
Cash flows from
investing activities:
Purchase of fixed
assets, net.......... -- (7,169) (741) (2,066) (2,807) -- (9,976)
Proceeds from
insurance claims..... -- 1,194 -- -- -- -- 1,194
Purchase of fixed
assets from
insurance claims
proceeds............. -- (1,324) -- -- -- -- (1,324)
Acquisitions, net of
cash................. -- (19,632) -- -- -- -- (19,632)
------- ------- ------- ------ ------ ------ -------
Net cash used in
investing
activities......... -- (26,931) (741) (2,066) (2,807) -- (29,738)
------- ------- ------- ------ ------ ------ -------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- 12,030 1,715 -- 1,715 -- 13,745
Intercompany advances
(repayments)......... 7 (10,879) 10,893 (21) 10,872 -- --
Proceeds from the
issuance of long-
term debt............ -- 12,000 -- -- -- -- 12,000
Repayments of long-
term debt............ -- (2,160) -- (2,750) (2,750) -- (4,910)
Deferred financing
costs................ -- (966) (257) -- (257) -- (1,223)
Dividends received (
paid )............... -- 6,169 (6,169) -- (6,169) -- --
Repurchase and
retirement of
stock................ (75) -- -- -- -- -- (75)
Issuance of preferred
and common stock..... 9,926 9,500 95 -- 95 (9,595) 9,926
------- ------- ------- ------ ------ ------ -------
Net cash provided by
(used in) financing
activities............ 9,858 25,694 6,277 (2,771) 3,506 (9,595) 29,463
------- ------- ------- ------ ------ ------ -------
Net increase (decrease)
in cash............... -- 1,912 (1,462) 1,462 -- -- 1,912
Cash, beginning of
year.................. -- 631 -- -- -- -- 631
------- ------- ------- ------ ------ ------ -------
Cash, end of year...... $ -- $ 2,543 $(1,462) $1,462 $ -- $ -- $ 2,543
======= ======= ======= ====== ====== ====== =======
</TABLE>
F-29
<PAGE>
GUARANTOR / NON-GUARANTOR DISCLOSURES--(CONTINUED)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Peat-based Segment
--------- ------------------------------------
Hines Sun Gro-
Horticulture Hines U.S. Sun Gro-Canada
(Parent Nurseries (Subsidiary (Subsidiary Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Non-Guarantor) Sub-total Eliminations Total
------------ --------- ----------- -------------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by (used
in) operating
activities............ ($4,543) $ 3,680 $14,486 ($2,105) $12,381 $4,500 $ 16,018
------- ------- ------- ------- ------- ------ --------
Cash flows from
investing activities:
Purchase of fixed
assets, net.......... -- (15,814) (679) (2,395) (3,074) -- (18,888)
Acquisitions, net of
cash................. 2,118 (250) -- (21,797) (21,797) -- (19,929)
------- ------- ------- ------- ------- ------ --------
Net cash used in
investing
activities......... 2,118 (16,064) (679) (24,192) (24,871) -- (38,817)
------- ------- ------- ------- ------- ------ --------
Cash flows from
financing activities:
Proceeds from
(repayments on)
revolving line of
credit............... -- (5,381) (6,871) -- (6,871) -- (12,252)
Intercompany advances
(repayments)......... (52,780) 33,176 (2,193) 21,797 19,604 -- --
Proceeds from the
issuance of long-
term debt............ -- 65,655 -- 20,000 20,000 -- 85,655
Repayments of long-
term debt............ (1,918) (86,212) (101) (15,500) (15,601) -- (103,731)
Deferred financing
costs................ -- (2,183) -- -- -- -- (2,183)
Premium paid on
redemption of Senior
Subordinated Notes... -- (3,841) -- -- -- -- (3,841)
Dividends received (
paid )............... -- 4,642 (4,642) -- (4,642) -- --
Repayments of notes
receivables from
stock sales.......... 40 -- -- -- -- -- 40
Issuance of preferred
and common stock..... 57,083 4,500 -- -- -- (4,500) 57,083
------- ------- ------- ------- ------- ------ --------
Net cash provided by
(used in) financing
activities......... 2,425 10,356 (13,807) 26,297 12,490 (4,500) 20,771
------- ------- ------- ------- ------- ------ --------
Net decrease in cash... -- (2,028) -- -- -- -- (2,028)
Cash, beginning of
year.................. -- 2,543 -- -- -- -- 2,543
------- ------- ------- ------- ------- ------ --------
Cash, end of year...... $ -- $ 515 $ -- $ -- $ -- $ -- $ 515
======= ======= ======= ======= ======= ====== ========
</TABLE>
F-30
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
HINES HORTICULTURE, INC.
A Delaware Corporation
(Effective as of March 25, 1999)
ARTICLE I
---------
OFFICES
-------
Section 1. Registered Office. The registered office of Hines
---------- -----------------
Horticulture, Inc. (the "Corporation") in the State of Delaware shall be located
at 9 East Loockerman Street, in the City of Dover, County of Kent, 19901. The
name of the Corporation's registered agent at such address shall be National
Registered Agents, Inc. The registered office and/or registered agent of the
Corporation may be changed from time to time by action of the Board of
Directors.
Section 2. Other Offices. The Corporation may also have offices at such
---------- -------------
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
----------
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Annual Meeting. An annual meeting of the stockholders shall be
---------- --------------
held each year within 150 days after the close of the immediately preceding
fiscal year of the Corporation or at such other time specified by the Board of
Directors for the purpose of electing Directors and conducting such other proper
business as may come before the annual meeting. At the annual meeting,
stockholders shall elect Directors and transact such other business as properly
may be brought before the annual meeting pursuant to Article II, Section 11
hereof.
Section 2. Special Meetings. Special meetings of the stockholders may
---------- ----------------
only be called in the manner provided in the Restated Certificate of
Incorporation.
Section 3. Place of Meetings. The Board of Directors may designate any
---------- -----------------
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting. If no designation is made,
or if a special meeting be otherwise called, the place of meeting shall be the
principal executive office of the Corporation. If for any reason any annual
meeting shall not be held during any year, the business thereof may be
transacted at any special meeting of the stockholders.
<PAGE>
Section 4. Notice. Whenever stockholders are required or permitted to
---------- ------
take action at a meeting, written or printed notice stating the place, date,
time and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than 10 nor more than 60 days before the date of the meeting. All such
notices shall be delivered, either personally or by mail, by or at the direction
of the Board of Directors, the chairman of the board, the president or the
secretary, and if mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his, her or its address as the same appears on the records of the
Corporation. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock
---------- -----------------
ledger of the Corporation shall make, at least 10 days before every meeting of
the stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares of
---------- ------
capital stock entitled to vote, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders, except as otherwise
provided by the General Corporation Law of the State of Delaware or by the
Restated Certificate of Incorporation. If a quorum is not present, the holders
of a majority of the shares present in person or represented by proxy at the
meeting, and entitled to vote at the meeting, may adjourn the meeting to another
time and/or place. When a specified item of business requires a vote by a class
or series (if the Corporation shall then have outstanding shares of more than
one class or series) voting as a class, the holders of a majority of the shares
of such class or series shall constitute a quorum (as to such class or series)
for the transaction of such item of business.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
---------- ------------------
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
-2-
<PAGE>
Section 8. Vote Required. When a quorum is present, the affirmative vote
---------- -------------
of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless (i) by express provisions of an applicable law or of the
Restated Certificate of Incorporation a different vote is required, in which
case such express provision shall govern and control the decision of such
question, or (ii) the subject matter is the election of Directors, in which case
Section 2 of Article III hereof shall govern and control the approval of such
subject matter.
Section 9. Voting Rights. Except as otherwise provided by the General
---------- -------------
Corporation Law of the State of Delaware, the Restated Certificate of
Incorporation of the Corporation or any amendments thereto or these By-laws,
every stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of common stock held by such
stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
----------- -------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy. At each meeting of the
stockholders, and before any voting commences, all proxies filed at or before
the meeting shall be submitted to and examined by the secretary or a person
designated by the secretary, and no shares may be represented or voted under a
proxy that has been found to be invalid or irregular.
Section 11. Business Brought Before an Annual Meeting. At an annual
----------- -----------------------------------------
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
brought before the meeting by or at the direction of the Board of Directors or
(iii) otherwise properly brought before the meeting by a stockholder who was a
stockholder of record at the time of giving notice provided for in this By-law.
For business to be properly brought before an annual meeting by a stockholder,
the stockholder must have given timely notice thereof in writing to the
secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than 60 days nor more than 90 days prior to the first
anniversary of the prior year's annual meeting; provided, however, that in the
-------- -------
event that the annual meeting is changed by more than 30 days from such
anniversary date, notice by the stockholder to be timely must be not later than
the close of business on the 10th day following the date on which such notice of
the date of the annual meeting was mailed or such public
-3-
<PAGE>
announcement was made. A stockholder's notice to the secretary shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in these By-laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this section. The
presiding officer of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this section; if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted. For purposes of this
section, "public announcement" shall mean disclosure in a press release reported
by Dow Jones News Service, Associated Press or a comparable national news
service. Nothing in this section shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
ARTICLE III
-----------
DIRECTORS
---------
Section 1. General Powers. The business and affairs of the Corporation
---------- --------------
shall be managed by or under the direction of the Board of Directors. In
addition to such powers as are herein and in the Restated Certificate of
Incorporation expressly conferred upon it, the Board of Directors shall have
and may exercise all the powers of the Corporation, subject to the provisions of
the laws of Delaware, the Restated Certificate of Incorporation and these
By-laws.
Section 2. Number, Election and Term of Office. The number of Directors
---------- -----------------------------------
which shall constitute the first Board of Directors shall be six. Thereafter,
subject to any rights of the holders of any series of Preferred Stock to elect
additional Directors under specified circumstances, the number of Directors
which shall constitute the Board of Directors shall be fixed from time to time
by resolution adopted by the affirmative vote of a majority of the total number
of Directors then in office. The Directors shall be elected by a plurality of
the votes of the shares present in person or represented by proxy at the annual
meeting of the stockholders and entitled to vote in the election of Directors;
provided that, whenever the holders of any class or series of capital stock of
the Corporation are entitled to elect one or more Directors pursuant to the
provisions of the Restated Certificate of Incorporation of the Corporation
(including, but not limited to, for purposes of these By-laws, pursuant to any
duly authorized certificate of designation), such Directors shall be elected by
a plurality of the votes of such class or series present in person or
represented by proxy at the meeting and entitled to vote in the election of such
Directors. The Directors shall be elected in this manner at the annual meeting
of stockholders, except as provided in Section 4 of this Article III, and each
Director shall hold office until a successor is duly elected and qualified or
until his or her earlier death, resignation or removal as hereinafter provided.
-4-
<PAGE>
Section 3. Removal and Resignation. Any director or the entire Board of
---------- -----------------------
Directors may be removed at any time, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of Directors.
Whenever the holders of any class or series are entitled to elect one or more
Directors by the provisions of the Corporation's Restated Certificate of
Incorporation, the provisions of this section shall apply, in respect to the
removal without cause of a Director or Directors so elected, to the vote of the
holders of the outstanding shares of that class or series and not to the vote of
the outstanding shares as a whole. Any Director may resign at any time upon
written notice to the corporation.
Section 4. Vacancies. Vacancies and newly created directorships resulting
---------- ---------
from any increase in the total number of Directors may be filled only in the
manner provided in the Restated Certificate of Incorporation.
Section 5. Nominations.
---------- -----------
(a) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible to serve as Directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of stockholders (i) by or at the direction of the Board of
Directors or (ii) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in this By-law, who is
entitled to vote generally in the election of Directors at the meeting and who
shall have complied with the notice procedures set forth below in Section 5(b).
(b) In order for a stockholder to nominate a person for election to
the Board of Directors of the Corporation at a meeting of stockholders, such
stockholder shall have delivered timely notice of such stockholder's intent to
make such nomination in writing to the secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation (i) in the case of an annual
meeting, not less than 60 nor more than 90 days prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the event
-------- -------
that the date of the annual meeting is changed by more than 30 days from such
anniversary date, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the earlier of the
day on which notice of the date of the meeting was mailed or public disclosure
of the meeting was made, and (ii) in the case of a special meeting at which
Directors are to be elected, not later than the close of business on the 10th
day following the earlier of the day on which notice of the date of the meeting
was mailed or public announcement of the meeting was made. Such stockholder's
notice shall set forth (i) as to each person whom the stockholder proposes to
nominate for election as a Director at such meeting all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a Director
if elected); (ii) as to the stockholder giving the notice (A) the name and
address, as they appear on the Corporation's books, of such stockholder and (B)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder and also which are owned of record by such stockholder; and
(iii) as to the beneficial owner, if any, on whose behalf the nomination is
made, (A) the name and address of such person and (B) the class
-5-
<PAGE>
and number of shares of the Corporation which are beneficially owned by such
person. At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a Director shall furnish to the secretary of
the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
(c) No person shall be eligible to serve as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
section. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this section, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded. A
stockholder seeking to nominate a person to serve as a Director must also comply
with all applicable requirements of the Exchange Act, and the rules and
regulations thereunder with respect to the matters set forth in this section.
Section 6. Annual Meetings. The annual meeting of the Board of Directors
---------- ---------------
shall be held without other notice than this By-law immediately after, and at
the same place as, the annual meeting of stockholders, unless otherwise provided
by resolution of the Board.
Section 7. Other Meetings and Notice. Regular meetings, other than the
---------- -------------------------
annual meeting, of the Board of Directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the Board of Directors may be called by the
chairman of the board, the president (if the president is a Director) or, upon
the written request of at least a majority of the Directors then in office, the
secretary of the Corporation on at least 24 hours notice to each Director,
either personally, by telephone, by mail or by telecopy.
Section 8. Chairman of the Board, Quorum, Required Vote and Adjournment.
---------- ------------------------------------------------------------
The Board of Directors shall elect, by the affirmative vote of a majority of the
total number of Directors then in office, a chairman of the board, who shall
preside at all meetings of the stockholders and Board of Directors at which he
or she is present and shall have such powers and perform such duties as the
Board of Directors may from time to time prescribe. If the chairman of the
board is not present at a meeting of the stockholders or the Board of Directors,
the president (if the president is a Director and is not also the chairman of
the board) shall preside at such meeting, and, if the president is not present
at such meeting, a majority of the Directors present at such meeting shall elect
one of their members to so preside. A majority of the total number of Directors
then in office shall constitute a quorum for the transaction of business.
Unless by express provision of an applicable law, the Restated Certificate of
Incorporation or these By-laws a different vote is required, the vote of a
majority of Directors present at a meeting at which a quorum is present shall be
the act of the Board of Directors. If a quorum shall not be present at any
meeting of the Board of Directors, the Directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
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<PAGE>
Section 9. Committees. The Board of Directors may, by resolution passed
---------- ----------
by a majority of the total number of Directors then in office, designate one or
more committees, each committee to consist of one or more of the Directors of
the Corporation, which to the extent provided in such resolution or these By-
laws shall have, and may exercise, the powers of the Board of Directors in the
management and affairs of the Corporation, except as otherwise limited by law.
The Board of Directors may designate one or more Directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the Board
of Directors. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
Section 10. Committee Rules. Each committee of the Board of Directors may
----------- ---------------
fix its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the Board of
Directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. Unless otherwise provided in such a
resolution, in the event that a member and that member's alternate, if
alternates are designated by the Board of Directors, of such committee is or are
absent or disqualified, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member.
Section 11. Communications Equipment. Members of the Board of Directors
----------- ------------------------
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
and speak with each other, and participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.
Section 12. Waiver of Notice and Presumption of Assent. Any member of the
----------- ------------------------------------------
Board of Directors or any committee thereof who is present at a meeting shall be
conclusively presumed to have waived notice of such meeting except when such
member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 13. Action by Written Consent. Unless otherwise restricted by the
----------- -------------------------
Restated Certificate of Incorporation, any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board or committee.
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<PAGE>
ARTICLE IV
----------
OFFICERS
--------
Section 1. Number. The officers of the Corporation shall be elected by
---------- ------
the Board of Directors and shall consist of a chairman of the board, a chief
executive officer, a president, one or more vice-presidents, a secretary, a
chief financial officer and such other officers and assistant officers as may be
deemed necessary or desirable by the Board of Directors. Any number of offices
may be held by the same person. In its discretion, the Board of Directors may
choose not to fill any office for any period as it may deem advisable, except
that the offices of president and secretary shall be filled as expeditiously as
possible.
Section 2. Election and Term of Office. The officers of the Corporation
---------- ---------------------------
shall be elected annually by the Board of Directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as convenient.
Vacancies may be filled or new offices created and filled at any meeting of the
Board of Directors. Each officer shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the Board of
---------- -------
Directors may be removed by the Board of Directors at its discretion, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
---------- ---------
death, resignation, removal, disqualification or otherwise may be filled by the
Board of Directors.
Section 5. Compensation. Compensation of all executive officers shall be
---------- ------------
approved by the Board of Directors, and no officer shall be prevented from
receiving such compensation by virtue of his or her also being a Director of the
Corporation.
Section 6. Chairman of the Board. The chairman of the board shall preside
---------- ---------------------
at all meetings of the stockholders and of the Board of Directors and shall have
such other powers and perform such other duties as may be prescribed to him or
her by the Board of Directors or provided in these By-laws.
Section 7. Chief Executive Officer. The chief executive officer shall
---------- -----------------------
have the powers and perform the duties incident to that position. Subject to
the powers of the Board of Directors and the chairman of the board, the chief
executive officer shall be in the general and active charge of the entire
business and affairs of the Corporation, and shall be its chief policy making
officer. The chief executive officer shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or provided in
these By-laws. The chief executive officer is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where
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<PAGE>
the signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. Whenever the
president is unable to serve, by reason of sickness, absence or otherwise, the
chief executive officer shall perform all the duties and responsibilities and
exercise all the powers of the president.
Section 8. The President. The president of the Corporation shall, subject
---------- -------------
to the powers of the Board of Directors, the chairman of the board and the chief
executive officer, have general charge of the business, affairs and property of
the Corporation, and control over its officers, agents and employees. The
president shall see that all orders and resolutions of the Board of Directors
are carried into effect. The president is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. The president shall have such other powers and perform such
other duties as may be prescribed by the chairman of the board, the chief
executive officer, the Board of Directors or as may be provided in these
By-laws.
Section 9. Vice-Presidents. The vice-president, or if there shall be more
---------- ---------------
than one, the vice-presidents in the order determined by the Board of Directors
or the chairman of the board, shall, in the absence or disability of the
president, act with all of the powers and be subject to all the restrictions of
the president. The vice-presidents shall also perform such other duties and
have such other powers as the Board of Directors, the chairman of the board, the
chief executive officer, the president or these By-laws may, from time to time,
prescribe. The vice-presidents may also be designated as executive vice-
presidents or senior vice-presidents, as the Board of Directors may from time to
time prescribe.
Section 10. The Secretary and Assistant Secretaries. The secretary shall
----------- ---------------------------------------
attend all meetings of the Board of Directors, all meetings of the committees
thereof and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose or shall ensure that
his or her designee attends each such meeting to act in such capacity. Under
the chairman of the board's supervision, the secretary shall give, or cause to
be given, all notices required to be given by these By-laws or by law; shall
have such powers and perform such duties as the Board of Directors, the chairman
of the board, the chief executive officer, the president or these By-laws may,
from time to time, prescribe; and shall have custody of the corporate seal of
the Corporation. The secretary, or an assistant secretary, shall have authority
to affix the corporate seal to any instrument requiring it and when so affixed,
it may be attested by his or her signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
or her signature. The assistant secretary, or if there be more than one, any of
the assistant secretaries, shall in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the Board of Directors, the
chairman of the board, the chief executive officer, the president, or secretary
may, from time to time, prescribe.
Section 11. The Chief Financial Officer. The chief financial officer
----------- ---------------------------
shall have the custody of the corporate funds and securities; shall keep full
and accurate all books and accounts of the
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<PAGE>
Corporation as shall be necessary or desirable in accordance with applicable law
or generally accepted accounting principles; shall deposit all monies and other
valuable effects in the name and to the credit of the Corporation as may be
ordered by the chairman of the board or the Board of Directors; shall cause the
funds of the Corporation to be disbursed when such disbursements have been duly
authorized, taking proper vouchers for such disbursements; and shall render to
the Board of Directors, at its regular meeting or when the Board of Directors so
requires, an account of the Corporation; shall have such powers and perform such
duties as the Board of Directors, the chairman of the board, the chief executive
officer, the president or these By-laws may, from time to time, prescribe. If
required by the Board of Directors, the chief financial officer shall give the
Corporation a bond (which shall be rendered every six years) in such sums and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of the office of chief financial
officer and for the restoration to the Corporation, in case of death,
resignation, retirement or removal from office of all books, papers, vouchers,
money and other property of whatever kind in the possession or under the control
of the chief financial officer belonging to the Corporation.
Section 12. Other Officers, Assistant Officers and Agents. Officers,
----------- ---------------------------------------------
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
Section 13. Absence or Disability of Officers. In the case of the absence
----------- ---------------------------------
or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any Director, or to any other
person selected by it.
ARTICLE V
---------
CERTIFICATES OF STOCK
---------------------
Section 1. Form. Every holder of stock in the Corporation shall be
---------- ----
entitled to have a certificate, signed by, or in the name of the Corporation by
the chairman of the board, the chief executive officer or the president and the
secretary or an assistant secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation. If such a certificate is
countersigned (i) by a transfer agent or an assistant transfer agent other than
the Corporation or its employee or (ii) by a registrar, other than the
Corporation or its employee, the signature of any such chairman of the board,
chief executive officer, president, secretary or assistant secretary may be
facsimiles. In case any officer or officers who have signed, or whose facsimile
signature or signatures have been used on, any such certificate or certificates
shall cease to be such officer or officers
-10-
<PAGE>
of the Corporation whether because of death, resignation or otherwise before
such certificate or certificates have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the Corporation. All certificates for shares shall
be consecutively numbered or otherwise identified. The name of the person to
whom the shares represented thereby are issued, with the number of shares and
date of issue, shall be entered on the books of the Corporation. Shares of stock
of the Corporation shall only be transferred on the books of the Corporation by
the holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the Corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization and
other matters as the Corporation may reasonably require, and accompanied by all
necessary stock transfer stamps. In that event, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate or certificates and record the transaction on its books. The
Board of Directors may appoint a bank or trust company organized under the laws
of the United States or any state thereof to act as its transfer agent or
registrar, or both in connection with the transfer of any class or series of
securities of the Corporation.
Section 2. Lost Certificates. The Board of Directors may direct a new
---------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or his or her legal representative, to give the Corporation a bond sufficient to
indemnify the Corporation against any claim that may be made against the
Corporation on account of the loss, theft or destruction of any such certificate
or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
---------- ---------------------------------------------
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the next
day preceding the day on which notice is first given. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 4. Fixing a Record Date for Other Purposes. In order that the
---------- ---------------------------------------
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining stockholders for any
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<PAGE>
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
Section 5. Registered Stockholders. Prior to the surrender to the
---------- -----------------------
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the Corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications and otherwise to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
Section 6. Subscriptions for Stock. Unless otherwise provided for in the
---------- -----------------------
subscription agreement, subscriptions for shares shall be paid in full at such
time, or in such installments and at such times, as shall be determined by the
Board of Directors. Any call made by the Board of Directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the Corporation may proceed to collect the
amount due in the same manner as any debt due the Corporation.
ARTICLE VI
----------
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
---------- ---------
Corporation, subject to the provisions of the Restated Certificate of
Incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting, in accordance with applicable law. Dividends may be paid in
cash, in property or in shares of the capital stock, subject to the provisions
of the Restated Certificate of Incorporation. Before payment of any dividend,
there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or any other purpose and the Directors may modify or abolish any
such reserve in the manner in which it was created.
Section 2. Issuance of Stock. The shares of all classes of stock of the
---------- -----------------
Corporation may be issued by the Corporation from time to time for such
consideration as from time to time may be fixed by the Board of Directors of the
Corporation, provided that shares of stock having a par value shall not be
issued for a consideration less than such par value, as determined by the Board.
At any time, or from time to time, the Corporation may grant rights or options
to purchase from the Corporation any shares of its stock of any class or classes
to run for such period of time, for such consideration, upon such terms and
conditions, and in such form as the Board of Directors may determine. The Board
of Directors shall have authority, as provided by law, to determine that only a
part of the consideration which shall be received by the Corporation for the
shares of its stock which it shall issue from time to time, shall be capital;
provided, however, that, if all the shares issued shall be shares
- -------- -------
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<PAGE>
having a par value, the amount of the part of such consideration so determined
to be capital shall be equal to the aggregate par value of such shares. The
excess, if any, at any time, of the total net assets of the Corporation over the
amount so determined to be capital, as aforesaid, shall be surplus. All classes
of stock of the Corporation shall be and remain at all times nonassessable.
Section 3. Checks, Drafts or Orders. All checks, drafts or other orders
---------- ------------------------
for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the Board of Directors or a duly
authorized committee thereof.
Section 4. Contracts. In addition to the powers otherwise granted to
---------- ---------
officers pursuant to Article IV hereof, the Board of Directors may authorize any
officer or officers, or any agent or agents, of the Corporation to enter into
any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
Section 5. Loans. The Corporation may lend money to, or guarantee any
---------- -----
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiaries, including any officer or employee who is a
Director of the Corporation or its subsidiaries, whenever, in the judgment of
the Directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the Corporation at
common law or under any statute.
Section 6. Fiscal Year. The fiscal year of the Corporation shall be fixed
---------- -----------
by resolution of the Board of Directors.
Section 7. Corporate Seal. The Board of Directors may provide a corporate
---------- --------------
seal which shall be in the form of a circle and shall have inscribed thereon the
name of the Corporation and the words "Corporate Seal, Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
Section 8. Voting Securities Owned By Corporation. Voting securities in
---------- --------------------------------------
any other corporation held by the Corporation shall be voted by the chief
executive officer, the president or a vice-president, unless the Board of
Directors specifically confers authority to vote with respect thereto, which
authority may be general or confined to specific instances, upon some other
person or officer. Any person authorized to vote securities shall have the
power to appoint proxies, with general power of substitution.
Section 9. Inspection of Books and Records. The Board of Directors shall
---------- -------------------------------
have power from time to time to determine to what extent and at what times and
places and under what conditions and
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<PAGE>
regulations the accounts and books of the Corporation, or any of them, shall be
open to the inspection of the stockholders; and no stockholder shall have any
right to inspect any account or book or document of the Corporation, except as
conferred by the laws of the State of Delaware, unless and until authorized so
to do by resolution of the Board of Directors or of the stockholders of the
Corporation.
Section 10. Section Headings. Section headings in these By-laws are for
----------- ----------------
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 11. Inconsistent Provisions. In the event that any provision of
----------- -----------------------
these By-laws is or becomes inconsistent with any provision of the Restated
Certificate of Incorporation, the General Corporation Law of the State of
Delaware or any other applicable law, the provision of these By-laws shall not
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VII
-----------
AMENDMENTS
----------
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
alter, amend, change, add to or repeal these By-laws by the affirmative vote of
a majority of the total number of Directors then in office. Any alteration or
repeal of these By-laws by the stockholders of the Corporation shall require the
affirmative vote of a majority of the outstanding shares of the Corporation
entitled to vote on such alteration or repeal; provided, however, that Section
-------- -------
11 of Article II and Sections 2, 3, 4 and 5 of Article III and this Article VII
shall not be altered, amended or repealed and no provision inconsistent
therewith shall be adopted without the affirmative vote of the holders of at
least 66% of the outstanding shares of the Corporation entitled to vote in the
election of directors, voting together as a class.
-14-
<PAGE>
EXHIBIT 10.16
AMENDED AND RESTATED AGRICULTURAL LEASE
THIS AMENDED AND RESTATED AGRICULTURAL LEASE ("Lease") is made and
entered into as of June 26, 1998 (the "Effective Date") by and between BLOOMING
FARM, INC., a Delaware corporation ("Lessor"), and HINES NURSERIES, a Delaware
corporation ("Lessee").
R E C I T A L S
- - - - - - - -
A. Lessor is the owner of that certain real property located in
Washington County, Oregon, consisting of approximately 343 acres, more or less,
as more particularly described on Exhibit "A" attached hereto and incorporated
herein by this reference (the "Property").
B. Lessor has leased the Property to Lessee pursuant to two (2)
separate lease agreements dated August 4, 1995 and June 21, 1996, respectively
(collectively the "Prior Leases") which Prior Leases the Lessee and Lessor
desire to amend and restate and combine into a single agreement on the terms and
conditions contained in this Lease.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which is hereby acknowledged, the parties agree as follows:
1. Leased Premises. Lessor hereby leases to Lessee, and Lessee
---------------
hereby leases from Lessor, upon the terms and conditions set forth in this
Lease, the approximately 343 acres of real property described in Exhibit "A",
together with all improvements and structures thereon and all appurtenant rights
thereto, including, without limitation, wells, pumps, motors, electrical panels,
electrical hookups, water discharge facilities, pipelines, irrigation systems,
easements, rights-of-way for ingress and egress, licenses and water rights and
privileges, which water rights and privileges include, without limitation, any
and all rights such real property may have, or that Lessor may have with respect
to such real property, including any above-ground and below-ground pipeline,
rights, easements, licenses or privileges with respect to any canal or
distribution integration program, to receive irrigation water from Tualatin
Valley Irrigation District ("TVID") (collectively, the "Premises").
2. Term. The term of this Lease shall commence on the Effective
----
Date, and end on May 31, 2008 (the "Lease Term").
3. Rent. As and for rental of the Property, Lessee shall pay to
----
Lessor annually the sum of Two Hundred and No/100 Dollars ($200.00) per acre,
for a total annual rent of Sixty-Eight Thousand Six Hundred and No/100 Dollars
($68,600.00). The rent
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<PAGE>
shall be paid in equal monthly installments of Five Thousand Seven Hundred
Sixteen and 66/100 Dollars ($5,716.66) due in arrears on the last day of each
month. Lessee shall pay the rent to Lessor at Lessor's address for notices
hereunder or at such other place as Lessor shall from time to time designate in
writing.
4. Real Property and Water District Taxes and Assessments; Water
-------------------------------------------------------------
Costs. All real estate taxes, assessments or similar levies of any kind and all
- -----
water district taxes, assessments or similar levies of any kind levied against
the Property at the inception date of this Lease and assessed or falling due
during the Lease Term shall be paid by Lessee. All such taxes, assessments or
similar levies shall be pro-rated for Lessee's period of occupancy. All taxes
and assessments assessed against or attributable to improvements placed upon the
Property by the Lessee and Lessee's personal property on the Property, shall be
paid by Lessee. The cost of water, together with any water standby or other
charges, necessary for the adequate and proper irrigation of crops grown on the
Property shall be borne by Lessee.
5. Utilities. Lessee shall pay for all charges for light, power, and
---------
all other services and utilities supplied to the Property during the Lease Term.
6. Water Supply. Any and all of Lessor's rights to extract any
------------
groundwater beneath the Property, use of any TVID facilities serving the
Property, and any future allocations of irrigation water from TVID to which the
Property might be entitled during the Term of this Lease are hereby transferred
to Lessee for the Term of this Lease.
7. Compliance with Laws; Waste.
---------------------------
(a) Compliance with Laws. Lessee shall not do or suffer to be
--------------------
done on or about the Property, anything that would or does violate or
conflict with any law, ordinance, rule or regulation now in force or
effect, or that may hereinafter be enacted, promulgated or adopted by
Federal, State or local authority.
(b) Waste. Lessee shall not commit or suffer to be committed any
-----
waste on the Property (provided that, the use or application of pesticides,
herbicides, sprays or other materials on the Property or on any crops, in
accordance with federal, state or county laws and regulations, shall not
constitute waste). Lessee shall not maintain any nuisance on the Property,
and shall not use the Property for any unlawful purposes. Lessor and
Lessee acknowledge and agree that any and all deterioration of the Property
due to salinity, drainage and related problems or the use of the Property
by Lessee in accordance with normal and customary agricultural
-2-
<PAGE>
practices does not constitute waste or a nuisance or a breach of any of
the terms of this Lease.
8. Agricultural Conservation Programs. If applicable, Lessor and
----------------------------------
Lessee acknowledge that certain acreage allotments, bases, and yields, have been
and in the future will be established by the United States Department of
Agriculture. Lessee agrees to work with Lessor and the Washington County or
other applicable Agricultural Stabilization and Conservation Service
("A.S.C.S.") Office to do all things reasonably necessary to maintain all such
required allotments, bases, and yields. Lessee further agrees, at its expense,
to comply with all rules and regulations dealing with conservation use acres and
set-aside acreage. Any payments made in connection with or affecting operations
conducted on or in conjunction with the Property during the Lease Term
(including without limitation any payments for participation in an agricultural
program under or in compliance with any federal, state, county or municipal law
or regulation that involve crop controls, compliance payments on the acreage of
crops actually produced, conservation practices, the diversion of crop land
acreage from cash crop production, price supports, parity payments or other
agricultural payments) shall belong to Lessee, and Lessor shall have no interest
therein. To the extent and so long as the same is permitted under applicable
A.S.C.S. regulations, the Property may be combined with other property of Lessee
for purposes of any A.S.C.S. or other payment or subsidy program.
9. Environmental Indemnity and Covenants.
-------------------------------------
(a) Lessor's Representations and Warranties. Lessor represents
---------------------------------------
and warrants that any handling, transportation, storage, treatment or usage
of Hazardous Substances (as defined in subparagraph (f) below) that has
occurred on the Property during the period of its ownership has been in
compliance with all Environmental Requirements (as defined in subparagraph
(e) below). Lessor further represents and warrants that, to the best of
its knowledge and belief and except as otherwise disclosed to Lessee in
writing, any currently known Hazardous Substances which might be present
above, on, or beneath the Property do not exceed those concentrations which
would violate current applicable laws and regulations.
(b) Lessor's Indemnity of Lessee. Lessor hereby agrees to
----------------------------
indemnify and hold harmless Lessee from and against, any and all losses,
costs, claims, or damages to the Property or suffered by Lessee resulting
from use, generation, manufacture, production, storage, release, discharge,
or disposal of Hazardous Substances (as defined in subparagraph (f) below)
on, under, or about the Property which are caused by Lessor or occurred
prior to the commencement of this Lease.
-3-
<PAGE>
Further, Lessor assumes all liabilities for any clean-up, remediation,
and/or restoration costs which result from such use, generation,
manufacture, production, storage,release, discharge, or disposal of
Hazardous Substances.
(c) Lessee's Indemnity of Lessor. Lessee hereby agrees to
----------------------------
indemnify and hold harmless Lessor from and against, any and all losses,
costs, claims, or damages to the Property or suffered by Lessor resulting
from use, generation, manufacture, production, storage, release, discharge,
or disposal of Hazardous Substances (as defined in subparagraph (f) below)
on, under, or about the Property which are caused by Lessee or occurred
during the term of this Lease, other than caused by Lessor. Further,
Lessee assumes all liabilities for any clean-up, remediation, and/or
restoration costs which result from such use, generation, manufacture,
production, storage, release, discharge, or disposal of Hazardous
Substances.
(d) Covenants Regarding Use. Lessee covenants that during the
-----------------------
Lease Term it will not use, generate, manufacture, produce, store, release,
discharge, or dispose of on, under or about the Property or transport to or
from the Property any Hazardous Substances except: (i) petroleum, gasoline
or diesel fuel, propane or natural gas used to operate motor vehicles or
farm machinery or equipment; and (ii) Hazardous Substances used in the
production of agricultural crops on the Property or activities related
thereto, which are commonly used for such purposes in the vicinity of the
Property, and which are used in compliance with applicable laws.
(e) "Environmental Requirements" Defined. "Environmental
------------------------------------
Requirements" means all applicable present statutes, regulations, rules,
ordinances, codes, licenses, permits, orders, approvals, plans,
authorizations, concessions, franchises, and similar items, of all
governmental agencies, departments, commissions, boards, bureaus, or
instrumentalities of the United States, states or political subdivisions
thereof and all applicable judicial, administrative, and regulatory
decrees, judgments, and orders relating to the protection of human health
or the environment, including, without limitation, all requirements,
including, but not limited to, those pertaining to reporting, licensing,
permitting, investigation, and remediation of emissions, discharges,
releases, or threatened releases of "Hazardous Substances", chemical
substances, pollutants, contaminants or hazardous or toxic substances,
materials or wastes whether solid, liquid, or gaseous in nature, into the
air, surface water, groundwater, or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
-4-
<PAGE>
transport, or handling of chemical substances, materials, or wastes,
whether solid, liquid, or gaseous in nature.
(f) "Hazardous Substances" Defined. The term "Hazardous
------------------------------
Substances" shall include without limitation: (i) those substances
included within the definitions of "Hazardous Substances," "Hazardous
Materials," "Toxic Substances" or "Solid Waste" in CERCLA (42 U.S.C. 9601
et seq.), RCRA (42 U.S.C. 6901 et seq.) and the Hazardous Materials
Transportation Act (49 U.S.C. Sections 1801 et seq.), TSCA (15 U.S.C. (S)
2601 et seq.) and in the regulations promulgated pursuant to said laws;
(ii) those substances defined as hazardous wastes in any applicable law of
the state of Oregon and in the regulations promulgated pursuant to said
laws; (iii) those substances listed in the United States Department of
Transportation Table of Hazardous Materials (49 CFR 172.101 and amendments
thereto) or by the Environmental Protection Agency (or any successor
agency) as hazardous substances (40 CFR Part 302 and amendments thereto);
(iv) such other substances, materials and wastes which are or become
regulated under applicable local, state or federal law, or which are
classified as hazardous or toxic under federal, state, or local laws or
regulations; and (v) any material, waste or substance which is petroleum,
asbestos, polychlorinated biphenyls, flammable explosives, or radioactive
materials. Any reference herein to statutory or regulatory sections shall
be deemed to include any amendments thereto and any successor sections.
"Hazardous Substances" shall also include any substance the presence of
which requires investigation or remediation under any federal, state or
local statute, regulation, ordinance, order, action or policy; and
includes, in addition, any substance the presence of which causes or
threatens to cause a nuisance upon the Property or adjacent property or
threatens the health and safety of persons on or about the Property.
10. Concerning the Property. Lessor represents and warrants to
-----------------------
Lessee that it is the sole and lawful record and beneficial owner of the
Property and that it has the full authority to enter into this Lease and perform
as herein contemplated.
11. Indemnity and Insurance.
-----------------------
(a) Indemnity of Lessor. Except as otherwise provided in this
-------------------
Lease, Lessee shall indemnify, defend, and hold Lessor, Lessor's employees
and agents, and Lessor's property harmless from and against all claims,
losses, damages, liabilities and expenses (including attorneys' fees)
arising from personal injury or physical damage to any person or property
occurring on the Property and caused by Lessee, Lessee's employees, agents
or representatives, or due to
-5-
<PAGE>
Lessee's operations on the Property during the Lease Term. The obligation
of Lessee to indemnify, defend, and hold harmless Lessor, however, shall
not apply to, and Lessee shall not be liable for, claims, losses, damages,
liabilities and expenses as and to the extent the same arise from or relate
to (i) the negligence or willful misconduct of Lessor or Lessor's
employees, agents or representatives, or (ii) any condition on, of or
affecting the Property on or prior to the date of execution and delivery of
this Lease.
(b) Indemnity of Lessee. Lessor shall indemnify, defend and hold
-------------------
Lessee harmless from all claims, losses, damages, liabilities and expenses
(including attorneys' fees) arising from or relating to (i) the negligence
or willful misconduct of Lessor or Lessor's employees, agents or
representatives, or (ii) any condition on, of or affecting the Property on
or prior to the date of execution and delivery of this Lease.
(c) Insurance. Lessee shall, at Lessee's sole expense, keep and
---------
maintain in full force during the term hereof, (a) worker's compensation
insurance, unless Lessee has no employees, (b) a general liability
insurance policy (covering both bodily injury and property damage) in an
amount not less than Five Hundred Thousand Dollars ($500,000.00) for injury
or death of one person, in an amount not less than One Million and No/100
Dollars ($1,000,000.00) for injury or death of more than one person in any
one accident or occurrence, and property damage insurance in an amount not
less than Three Hundred Thousand and No/100 Dollars ($300,000.00).
12. Right of First Refusal.
----------------------
(a) If at any time during the Term, Lessor shall reach
substantial agreement on the basic business terms of a sale of all or any
portion of the Property (the "Sale Parcel") to a prospective purchaser or
the basic business terms for the sale of a Sale Parcel for which Lessee
previously elected not to exercise its rights under this Section shall have
materially changed, then Lessor shall notify Lessee in writing (the
"Lessor's Notice") setting forth (i) the size and location of the Sale
Parcel, (ii) the proposed closing date, (iii) the purchase Price, and (iv)
all other economic terms upon which Lessor is prepared to sell the Sale
Parcel to the prospective purchaser.
(b) Provided Lessee is not in default of the terms hereunder,
Lessee shall have the right of first refusal to purchase the Sale Parcel on
the terms and conditions outlined in Lessor's Notice, which right is
exercisable by written notice from Lessee to Lessor given not less than ten
(10)
-6-
<PAGE>
business days after the giving of Lessor's Notice, time being of the
essence. If Lessee fails to notify Lessor in writing that it will purchase
the Sale Parcel within the prescribed ten (10) business day period,
Lessee's rights under this Section shall terminate, and Lessor shall have
no further obligation under this Section with respect to the Sale Parcel,
except that if Lessor, within six (6) months after the date of Lessor's
Notice, has not closed on the sale of the Sale Parcel under terms and
conditions which are substantially similar to those set forth in the
applicable Lessor's Notice, then Lessee's rights under this Section to
lease such portion of the Sale Parcel shall be reinstated and Lessor shall
be required to reissue Lessor's Notice upon expiration of such six (6)
month period. If Lessee shall exercise its right to purchase the Sale
Parcel, pursuant to this Section, such sale shall be consummated on the
terms and conditions of Section 13(c) hereof, except to the extent such
terms and conditions conflict with those set forth in the Lessor's Notice
in which case the terms in Lessor's Notice shall control.
13. Option to Purchase.
------------------
(a) For the period from the Effective Date until three (3) months
prior to the end of the Term (the "Option Period"), and so long as Lessee
is not in default hereunder, Lessor hereby grants to Lessee an option to
purchase all or a portion of the Property at a purchase price (the
"Purchase Price") equal to the current fair market value at the time Lessee
exercises such option. Said option shall be exercised by written notice to
Lessor (the "Option Notice") at any time during the Option Period which
notice shall identify the portion of the Property Lessee desires to
purchase (the "Option Parcel") and Tenant's estimate of the current fair
market value of the Option Parcel ("Proposed Purchase Price"). If the
Lessor objects to the Proposed Purchase Price, Lessor shall send written
notice ("Objection Notice") to Lessee, which notice must be received by
Lessee not later than seven (7) business days after Lessor's receipt of the
Option Notice (the "Objection Period"), time being of the essence. If
Lessee fails to receive the Objection Notice within the Objection Period,
the Lessor shall be deemed to have accepted the Proposed Purchase Price.
(b) If Lessee receives the Objection Notice within the Objection
Period, the current fair market value of the Option Parcel shall be
determined in the following manner:
(i) Within twenty (20) days following Lessee's receipt of
the Objection Notice, Lessor and Lessee shall each select an appraiser
of their choice and
-7-
<PAGE>
give the other party written notice of such appraiser's name, address
and telephone number.
(ii) Within thirty (30) days following Lessee's receipt of
the Objection Notice, the two (2) appraisers so selected by Lessor and
Lessee shall then select a third (3rd) appraiser and furnish Lessor
and Lessee written notice of such appraiser's name, address and
telephone number.
(iii) All appraisers selected pursuant to this section
shall be M.A.I. appraisers, unless Lessor and Tenant shall otherwise
agree in writing, each having at least ten (10) years experience with
agricultural property in Washington County, Oregon. Within forty (40)
days following Lessee's receipt of the Objection Notice, each of the
three (3) selected appraisers shall independently determine and
separately submit to both Lessor and Lessee their respective estimates
of the current fair market value of the Option Parcel. For the
purposes of this lease, the fair market value shall be the average of
the two (2) closest estimates (or identical estimates if applicable),
provided that if there are no two (2) closest estimates, the current
fair market value shall be an average of the three (3) estimates.
(iv) All fees, costs and expenses incurred in connection
with obtaining the appraisals and set forth in this section shall be
shared equally by Lessor and Lessee; however, Lessor and Lessee shall
each bear their own attorneys' fees incurred with respect to this
procedure.
(c) If Lessee's option hereunder is exercised, the following
closing procedure shall apply:
(i) The closing date (the "Closing Date") for the sale of
the Property to Lessee shall be on a date mutually agreeable to the
parties, but in no event later than ninety (90) days after Lessor's
receipt of the Option Notice (or the Lessee's receipt of the Lessor's
Notice, in the event the purchase is pursuant to Section 12 hereof).
Payment of the purchase price and the delivery of the deed (the
"Closing") shall be made at the office of Kirkland & Ellis in Chicago,
Illinois, or at such other place as the parties may agree. At the
request of either party, the Closing shall be effected through a deed
and money escrow, the cost of which escrow shall be borne equally by
Lessor and Lessee. The Purchase Price shall be payable to Lessor on
the Closing
-8-
<PAGE>
Date in cash or by certified or cashier's check, together with
delivery of evidence of part purchase money indebtedness, if
applicable, upon delivery of the deed to Lessee and performance of
Lessor's other obligations as set forth herein.
(ii) The conveyance of the Property shall be made by
recordable limited or special warranty deed to Lessee (or its
designee) and other documentation necessary to transfer good and
marketable fee simple title to the Property to Lessee, subject only to
(A) the lien of current general real estate taxes and special
assessments not then due and payable; (B) any acts or doings caused or
suffered by Lessee; (C) private, public and utility easements and
roads and highways, if any; (D) covenants, conditions and restrictions
of record; and (E) existing leases and tenancies ("Permitted Title
Exceptions").
(iii) Lessor shall deliver or cause to be delivered to
Lessee, not later than thirty (30) days prior to the Closing, as
evidence of Lessor's title to the Property, a commitment for an ALTA
Form B owner's title insurance policy (with extended coverage over all
general exceptions) in the aggregate amount of the Purchase Price as
provided hereunder and an ALTA/ACSM-Class A survey showing no
encroachments by or from the Land onto any adjacent property, no
encroachments onto the Land by any adjacent property and no violation
of any recorded building lines, restrictions or easements affecting
the Property. Such survey shall be dated no more than thirty (30)
days prior to the date of Closing and shall be certified to Lessee's
lender, Lessee and Lessee's lender, or designee, if any. Such title
commitment shall be issued by Chicago Title Insurance Company, shall
name Lessee or its designee as the proposed insured and show title to
the Property in Lessor, subject only to (a) the Permitted Title
Exceptions, and (b) other title exceptions pertaining to liens or
encumbrances of a definite or ascertainable amount which may be
removed at Closing by the payment of money, but not to exceed the cash
portion of the Purchase Price otherwise payable to Lessor at Closing,
and which Lessor shall so remove or cause to be removed, concurrently
with the Closing, any mortgage and any other related security
instrument.
(iv) The payment of all prorations, transfer taxes, title
insurance charges, escrow fees, recording fees and other expenses,
fees and charges shall be made by the party from whom such payment is
due in accordance
-9-
<PAGE>
with statutory requirements or in accordance with the custom at the
time of the Closing for sales of other properties similar to the
Property.
(v) If Lessor refuses to enter into the contract within the
time required therefor, and provided Lessee has validly executed its
option to purchase in full compliance with the terms hereof, Lessee
shall be entitled to all remedies available at law or in equity with
respect to Lessor's refusal to enter into the contract, including,
without limitation, damages and specific performance.
(vi) In the event the Closing shall not occur prior to the
expiration of the Term ("Termination Date"), Lessee shall abide by all
the terms and conditions of this Lease, including the obligation to
pay rent from the Termination Date through the Closing Date, provided
that Lessee shall not be required to pay rent if the Closing Date is
delayed due to the fault of Lessor, or its employees, agents or
contractors.
(d) Notwithstanding anything to the contrary herein, Lessee shall
not have the option granted pursuant to this Section 13 with respect to any
Sale Parcel provided Lessee receives Lessor's Notice with respect to such
Sale Parcel prior to or at the same time Lessor receives an Option Notice.
14. Surrender of Property. Immediately upon the expiration or
---------------------
earlier termination of this Lease, Lessee shall surrender possession of the
Property to the then current owner of the Property, excepting that Lessee shall
be permitted to care for, harvest and remove any crops then-growing on the
Property.
15. Default. The failure by Lessee to observe or perform any
-------
covenant, condition or provision of this Lease to be observed or performed by
Lessee, where such failure continues for a period of thirty (30) days after
written notice from Lessor to Lessee shall constitute a default under this Lease
by Lessee. If a default occurs, Lessor shall have the right to take possession
Premises or relet the Premises.
16. Waiver and Modification. This Lease may be amended
-----------------------
or supplemented only by a written instrument signed by the parties hereto.
17. Severability. In the event any provision of this Lease shall be
------------
held by any court of competent jurisdiction to be illegal, invalid or
unenforceable for any reason, the remaining provisions of this Lease shall
nonetheless remain in full force and effect.
-10-
<PAGE>
18. Construction of Lease. The paragraph headings in this Lease have
---------------------
been inserted for convenience only, and shall not be considered or referred to
in resolving questions of interpretation or construction. In determining the
meaning of, or resolving any ambiguity with respect to, any provision of this
Lease, such provision shall be interpreted without construing such provision in
favor of or against the party responsible for drafting this document.
19. Further Assurances. Lessee and Lessor shall, at their own
------------------
expense, execute, acknowledge and deliver all instruments and documents and take
all actions as may reasonably be required in order to carry out the intent of,
and the transactions contemplated by, this Lease.
20. Attorneys' Fees. In any action or proceeding by either party to
---------------
enforce this Lease or any provisions thereof, the prevailing party shall be
entitled to all costs and reasonable attorneys', paralegals' and other
professionals' fees. Any and all attorneys' fees to which Lessee is entitled
under this Lease shall include attorneys' fees for in-house counsel.
21. Notices. Any notice to be given to either party by the other
-------
shall be in writing and deemed served on the date of delivery if hand delivered
to the person to whom notice is to be given, and on the third (3rd) day after
mailing if sent by certified mail, with postage prepaid and return receipt
requested, and addressed as follows:
"Lessor" Blooming Farm, Inc.
3150 SE Minter Bridge Rd.
Hillsboro, Oregon 97123
Attn: Chief Financial Officer
"Lessee" Hines Nurseries
12621 Jeffrey Road
Irvine, California 92620
Attn: Chief Financial Officer
With a copy to: Kirkland & Ellis
200 E. Randolph Drive
Chicago, Illinois 60601
Attn: Michael H. Kerr
22. Binding Effect. The provisions of this Lease shall benefit and
--------------
bind the heirs, successors, executors, administrators and assigns of all parties
to this lease.
23. Time. Time is of the essence of this Lease.
----
-11-
<PAGE>
24. Entire Agreement. This Lease constitutes the entire agreement
----------------
between the parties pertaining to the lease of the Premises, and supersedes all
prior and contemporaneous agreements, representations, and understandings of the
parties with regard thereto. No supplement, modification or amendment of this
Lease shall be binding unless executed in writing by all of the parties hereto.
25. Relationship Limited. It is expressly understood and agreed that
--------------------
the relationship of Lessor and Lessee is one of Lessor and Lessee and not one of
partnership or joint venture, and that Lessor shall not become responsible for
any debt or obligation contracted or incurred by Lessee nor shall Lessee become
responsible for any debt or obligation contracted or incurred by Lessor.
26. Authority. Each party represents and warrants to the other that
---------
(i) such party has the requisite legal capacity and authority to enter into and
fully perform each and all of their obligations under this Lease and (ii) this
Lease does not in any way violate any covenant, contract, agreement, instrument
or understanding by which such party is bound.
27. Recordation. The parties agree that Lessee may, during the term
-----------
of this Lease, record a memorandum of this Lease.
IN WITNESS WHEREOF, the parties hereto have executed this lease as of
the year and day first written above.
"Lessee" "Lessor"
HINES NURSERIES BLOOMING FARM, INC.
By /s/ Paul R. Wood By /s/ Thomas R. Reusche
------------------------------ ------------------------------
Paul R. Wood Thomas R. Reusche
Secretary Secretary
-12-
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-58561) of Hines Horticulture, Inc. of our report
dated February 22, 1999 appearing on page F-1 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Newport Beach, California
March 25, 1999
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 515
<SECURITIES> 0
<RECEIVABLES> 27,965
<ALLOWANCES> 1,224
<INVENTORY> 118,126
<CURRENT-ASSETS> 147,708
<PP&E> 154,638
<DEPRECIATION> 29,221
<TOTAL-ASSETS> 315,110
<CURRENT-LIABILITIES> 95,951
<BONDS> 145,633
221
0
<COMMON> 0
<OTHER-SE> 63,322
<TOTAL-LIABILITY-AND-EQUITY> 315,110
<SALES> 234,962
<TOTAL-REVENUES> 234,962
<CGS> 115,013
<TOTAL-COSTS> 82,170
<OTHER-EXPENSES> 20,460
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<INTEREST-EXPENSE> 19,453
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