<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________ to _____________________
Commission File Number
0-24439
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No( )
As of July 31, 1999 there were 22,072,549 shares of Common Stock, par value
$0.01 per share, outstanding.
===============================================================================
<PAGE>
HINES HORTICULTURE, INC.
Index
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements Page No.
--------
<S> <C> <C>
Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1999 1
Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 1998 and 1999 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1999 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
<CAPTION>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and June 30, 1999
(Dollars in thousands)
ASSETS
- ------
December 31, June 30,
1998 1999
------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 515 $ 0
Accounts receivable, net of allowance for
doubtful accounts of $1,224 and $1,338 26,741 76,342
Inventories 118,126 107,914
Prepaid expenses and other current assets 2,326 2,111
------------- ------------
Total current assets 147,708 186,367
FIXED ASSETS, net of accumulated depreciation
and depletion of $29,221 and $32,830 125,417 125,298
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $1,235 and $1,610 4,077 3,702
GOODWILL, net of accumulated amortization 37,908 37,739
------------- ------------
of $2,675 and $3,284
$315,110 $353,106
============= ============
The accompanying notes are an integral part of these consolidated financial
statements
Page 1
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and June 30, 1999
(Dollars in thousands)
December 31, June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
- ------------------------------------ ------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 9,388 $ 13,558
Accrued liabilities 6,351 5,781
Accrued payroll and benefits 6,156 10,225
Accrued interest 751 4,815
Long-term debt, current portion 3,066 4,210
Borrowings on revolving credit facility 30,850 28,500
Deferred income taxes 39,389 49,792
------------ ------------
Total current liabilities 95,951 116,881
LONG-TERM DEBT 145,633 144,763
DEFERRED INCOME TAXES 10,204 13,864
SHAREHOLDERS' EQUITY:
Common Stock
Authorized - 60,000,000 shares $.01
par value;
Issued and outstanding - 22,072,549 shares
at December 31, 1998 and June 30, 1999 221 221
Additional paid-in capital 127,992 127,960
Notes receivable from stock sales (326) (173)
Deficit (64,565) (43,524)
Accumulated other comprehensive income - (6,886)
------------ ------------
Total shareholders' equity 63,322 77,598
------------ ------------
$ 315,110 $ 353,106
============ ============
The accompanying notes are an integral part of these consolidated
financial statements
Page 2
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1998 and 1999 (Dollars in
thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1998 1999 1998 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales, net $ 115,541 $ 127,951 $ 163,715 $ 187,353
Cost of goods sold 57,178 63,676 80,693 93,019
----------- ----------- ----------- -----------
Gross profit 58,363 64,275 83,022 94,334
----------- ----------- ----------- -----------
Selling and distribution expenses 19,415 21,543 32,120 36,255
General and administrative expenses 7,845 7,555 14,052 15,526
----------- ----------- ----------- -----------
Total operating expenses 27,260 29,098 46,172 51,781
----------- ----------- ----------- -----------
Operating income 31,103 35,177 36,850 42,553
----------- ----------- ----------- -----------
Other expenses
Interest 6,338 3,856 12,044 8,158
Amortization of deferred financing expenses 295 188 618 375
----------- ----------- ----------- -----------
6,633 4,044 12,662 8,533
----------- ----------- ----------- -----------
Income before provision for income taxes 24,470 31,133 24,188 34,020
Income tax provision 9,854 11,791 9,791 12,978
----------- ----------- ----------- -----------
Income before extraordinary item 14,616 19,342 14,397 21,042
Extraordinary item, net of tax benefit 1,379 - 1,379 -
----------- ----------- ----------- -----------
Net income 13,237 19,342 13,018 21,042
Less: Preferred stock dividends and warrant accretion (2,784) - (5,609) -
----------- ----------- ----------- -----------
Net income applicable to common stock $ 10,453 $ 19,342 $ 7,409 $ 21,042
=========== =========== =========== ===========
Basic earnings per share:
Income before extraordinary item $ 1.42 $ 0.88 $ 1.09 $ 0.95
Extraordinary item ($0.17) $ 0.00 ($0.17) $ 0.00
----------- ----------- ----------- -----------
Net income per common share $ 1.25 $ 0.88 $ 0.92 $ 0.95
=========== =========== =========== ===========
Diluted earnings per share:
Income before extraordinary item $ 0.85 $ 0.88 $ 0.93 $ 0.95
Extraordinary item ($0.08) $ 0.00 ($0.11) $ 0.00
----------- ----------- ----------- -----------
Net income per common share $ 0.77 $ 0.88 $ 0.82 $ 0.95
=========== =========== =========== ===========
Weighted average shares outstanding--Basic 8,339,869 22,072,549 8,025,919 22,072,549
=========== =========== =========== ===========
Weighted average shares outstanding--Diluted 17,196,813 22,072,549 12,478,858 22,072,549
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 3
<PAGE>
HINES HORTICULTURE, INC.
(Formerly Hines Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June
30, 1998 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,018 $ 21,042
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 4,841 5,816
Amortization of deferred financing costs 618 375
Loss on early extinguishment of debt 2,373 -
Deferred income taxes 7,630 14,063
(Gain) loss on sale of fixed assets 145 (43)
-------- --------
$ 28,625 $ 41,253
Change in working capital accounts, net of effect of acquisition:
Accounts receivable (35,752) (49,601)
Inventories 12,350 10,212
Prepaid expenses and other current assets 569 167
Accounts payable and accrued liabilities 7,094 11,765
-------- --------
Net cash provided by operating activities 12,886 13,796
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (6,920) (10,337)
Proceeds from sale of fixed assets 291 183
Acquisitions, net of cash (19,679) (985)
-------- --------
Net cash used in investing activities (26,308) (11,139)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 131,347 54,550
Repayments on revolving line of credit (174,449) (56,900)
Proceeds from the issuance of long-term debt 64,961 279
Repayments of long-term debt (59,695) (5)
Deferred financing costs (3,000) -
Repayments of notes receivables from stock sales 572 153
Issuance of preferred and common stock 56,583 -
-------- --------
Net cash provided by (used in) financing activities 16,319 (1,923)
-------- --------
Effect of exchange rate changes on cash and cash equivalents - (1,249)
-------- --------
NET INCREASE (DECREASE) IN CASH 2,897 (515)
CASH, beginning of period 2,543 515
-------- --------
CASH, end of period $ 5,440 $ -
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized interest of $0 and $260 $ 11,293 $ 3,054
Cash paid for income taxes $ 53 $ 79
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 4
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
JUNE 30, 1998 AND 1999
(UNAUDITED)
1. Description of Business
-----------------------
Hines Horticulture, Inc. ("Hines"), a Delaware corporation, produces and
distributes horticultural products through its two operating divisions,
Hines Nurseries and Sun Gro Horticulture ("Sun Gro"). On June 12, 1998,
Hines succeeded to the business of Hines Holdings, Inc., a Nevada
corporation, as a result of the merger of Hines Holdings, Inc. into Hines,
the purpose of which was to change the Company's name and jurisdiction of
incorporation. The business of Hines is currently conducted through Hines
Nurseries, Inc. (formerly Hines Horticulture, Inc.) ("Hines Nurseries") and
through Sun Gro Horticulture Inc. ("Sun Gro-U.S."), 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 (collectively, "Sun Gro"), are hereafter collectively referred
to as the "Company."
Hines Nurseries is a leading national supplier of ornamental, container-
grown plants with nursery facilities located in California, Oregon,
Pennsylvania, South Carolina and Texas. Hines Nurseries markets its
products to retail customers throughout the United States.
Sun Gro produces markets and distributes peat-based horticulture products
for both retail and professional customers. Sun Gro markets its products
in North America and various international markets with production
facilities located in Canada and the United States.
2. Unaudited Financial Information
-------------------------------
The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments (consisting of only normal recurring
adjustments) which are necessary to state fairly the consolidated financial
position, results of operations and cash flows of the Company as of and for
the periods indicated. The Company presumes that users of the interim
financial information herein have read or have access to the Company's
audited consolidated financial statements for the preceding fiscal year and
that the adequacy of additional disclosure needed for a fair presentation,
except in regard to material contingencies or recent significant events,
may be determined in that context. Accordingly, footnote and other
disclosures which would substantially duplicate the disclosures contained
in the Form 10-K filed on March 26, 1999 by Hines Horticulture, Inc. under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), have
been omitted. The financial information herein is not necessarily
representative of a full year's operations.
Page 5
<PAGE>
3. Earnings Per Share
------------------
There were no differences between the numerators and denominators for basic
and diluted earnings per share for the three and six months ended June 30,
1999 since common stock equivalents have been excluded from the earnings
per share calculation because the effect would be anti-dilutive. A
reconciliation of the numerators and denominators of basic and diluted
earnings per share for the three and six months ended June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
1998 1998
---------------------------------------- ----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item $14,616 $14,397
Less: Preferred stock
dividends (2,784) (5,609)
------- -------
Basic EPS
Income available to common
stockholders $11,832 8,340 $1.42 8,788 8,026 $1.09
===== ===== ===== =====
Effect of Dilutive Securities
Warrants 40 875 40 440
Preferred Stock 2,744 7,870 2,744 3,957
Convertible Notes 18 112 18 56
------- ------ ------- ------
Diluted EPS
Income available to common
stockholders plus assumed
conversions $14,634 17,197 $0.85 $11,590 12,479 $0.93
======= ====== ===== ======= ====== =====
</TABLE>
Page 6
<PAGE>
4. Foreign Currency Translation
----------------------------
Prior to April 1, 1999, the Company considered the U.S. dollar to be the
functional currency of Sun Gro's Canadian operations. Monetary assets and
liabilities denominated in Canadian dollars were translated into U.S.
dollars at the foreign exchange rate in effect as of the balance sheet
date. Non-monetary assets and liabilities, cost of goods sold and
depreciation were re-measured into U.S. dollars at historical exchange
rates. Revenues and other expenses were remeasured at average exchange
rates. Gains or losses from these re-measurements were recognized in the
consolidated results of operations.
Effective April 1, 1999, the Company changed its functional currency of Sun
Gro's Canadian operations to the Canadian dollar. This change in
functional currency is primarily as a result of the Company's acquisition
of Lakeland Peat Moss, Ltd. and certain affiliated entities ("Lakeland") in
1998, which increased the Company's operations in Canada. Assets and
liabilities denominated in Canadian dollars are translated into U.S.
dollars at the foreign exchange rate in effect as of the balance sheet
date. Revenues and expenses are translated into U.S. dollars at the
weighted average exchange rate for the period. Translation adjustments are
recorded in accumulated other comprehensive income.
5. Reporting Comprehensive Income
------------------------------
In 1999, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income", ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income
and its components in the financial statements. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by and distributions to the Company's stockholders. The
Company's comprehensive income is composed of cumulative foreign currency
translation adjustments. The adoption of SFAS 130 had no effect on the
Company's consolidated results of operations, financial position or cash
flows. The components of comprehensive income during the three and six
months ended June 30, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------
1998 1999 1998 1999
------- ------- ------ -------
<S> <C> <C> <C> <C>
Net income $10,453 $19,342 $7,409 $21,042
Cumulative foreign
currency translation - (6,886) - (6,886)
adjustments ------- ------- ------ -------
Comprehensive income $10,453 $12,456 $7,409 $14,156
======= ======= ====== =======
</TABLE>
Page 7
<PAGE>
6. Segment Information and Guarantor/Non-Guarantor Disclosures
-----------------------------------------------------------
In 1998, Hines adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment"
approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. The adoption of SFAS 131 had no effect on
the Company's consolidated results of operations, financial position or
cash flows. SFAS 131 did, however, require the disclosure of segment
information, which is incorporated as part of the following information.
The Company operates in two segments: 1) the nursery segment and 2) the
peat-based segment.
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 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) elimination's
necessary to arrive at the information for the parent guarantor and its
direct and indirect subsidiaries on a consolidated basis and (f) the parent
guarantor on a consolidated basis, as follows:
. Consolidating balance sheets as of December 31, 1998 and June 30,
1999 (unaudited);
. Consolidating statements of operations for the three months and
six months ended June 30, 1998 and 1999 (unaudited); and
. Consolidating statements of cash flows for the six months ended
June 30, 1998 and 1999 (unaudited).
Page 8
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
------------------------------------------------------------------------------------
Sun Gro
Hines Sun Gro Canada
Horticulture Hines U.S. (Subsidiary Sun Gro Consoli-
(Parent Nurseries (Subsidiary Non- Sub- Elimina- dated
Guarantor) (Issuer) Guarantor) Guarantors) total tions 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
------------------------------------
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>
Page 9
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
------------------------------------------------------------------------------------
Sun Gro
Hines Sun Gro Canada
Horticulture Hines U.S. (Subsidiary Sun Gro Consoli-
(Parent Nurseries (Subsidiary Non- Sub- Elimina- dated
Guarantor) (Issuer) Guarantor) Guarantors) total tions Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 55,043 18,551 2,748 21,299 - 76,342
Inventories - 98,492 3,352 6,070 9,422 - 107,914
Prepaid expenses and other current assets - 768 457 886 1,343 - 2,111
Deferred income taxes 24 20 957 1,011 1,968 (2,012) -
-----------------------------------------------------------------------------------
Total current assets $ 24 $ 154,323 $ 23,317 $ 10,715 $ 34,032 ($2,012) $ 186,367
-----------------------------------------------------------------------------------
Fixed assets, net - 62,004 5,932 57,362 63,294 - 125,298
Deferred financing expenses, net - 3,702 - - - - 3,702
Goodwill, net - 37,018 - 721 721 - 37,739
Deferred income taxes - 14,508 - - - (14,508) -
Investments in subsidiaries 87,218 7,701 6,202 - 6,202 (101,121) -
------------------------------------------------------------------------------------
$ 87,242 $ 279,256 $ 35,451 $ 68,798 $104,249 ($117,641) $ 353,106
====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 7,428 $ 2,431 $ 3,699 $ 6,130 $ - $ 13,558
Accrued liabilities - 3,458 1,267 1,056 2,323 - 5,781
Accrued payroll and benefits - 8,645 513 1,067 1,580 - 10,225
Accrued interest - 4,815 - - - - 4,815
Long-term debt, current portion - 3,194 - 1,016 1,016 - 4,210
Revolving line of credit - 28,500 - - - - 28,500
Deferred income taxes - 51,804 - - - (2,012) 49,792
Intercompany accounts 9,644 (39,730) 17,102 12,984 30,086 - -
------------------------------------------------------------------------------------
Total current liabilities 9,644 68,114 21,313 19,822 41,135 (2,012) 116,881
------------------------------------------------------------------------------------
Long-term debt - 125,500 - 19,263 19,263 - 144,763
Deferred income taxes - 4,683 4,677 19,012 23,689 (14,508) 13,864
Shareholders' equity:
Common stock 221 17,971 11,414 4,500 15,914 (33,885) 221
Additional paid in capital 127,960 21,362 5,889 1,777 7,666 (29,028) 127,960
Notes receivable from stock sales (173) - - - - - (173)
Retained earnings (deficit) (43,524) 41,626 (7,842) 11,310 3,468 (45,094) (43,524)
Accumulated other comprehensive income (6,886) - - (6,886) (6,886) 6,886 (6,886)
------------------------------------------------------------------------------------
Total shareholders' equity 77,598 80,959 9,461 10,701 20,162 (101,121) 77,598
------------------------------------------------------------------------------------
$ 87,242 $ 279,256 $ 35,451 $ 68,798 $104,249 ($117,641) $ 353,106
====================================================================================
</TABLE>
Page 10
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the six month period ended June 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
---------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales, net $ - $ 119,950 $ 35,169 $ 16,614 $ 51,783
Cost of goods sold - 60,718 18,819 9,174 27,993
---------------------------------------------------------------------------
Gross Profit - 59,232 16,350 7,440 23,790
Operating expenses - 27,550 14,233 4,389 18,622
---------------------------------------------------------------------------
Operating income - 31,682 2,117 3,051 5,168
---------------------------------------------------------------------------
Other expenses:
Interest 29 11,295 271 449 720
Interest - intercompany - (872) 758 114 872
Amortization of deferred financing expenses, other (13,035) (908) 37 154 191
---------------------------------------------------------------------------
(13,006) 9,515 1,066 717 1,783
---------------------------------------------------------------------------
Income before provision for (benefit from) income taxes 13,006 22,167 1,051 2,334 3,385
Income tax provision (benefit) (12) 8,332 714 757 1,471
---------------------------------------------------------------------------
Net income before extraordinary items 13,018 13,835 337 1,577 1,914
Extraordinary items, net of tax - 800 124 455 579
---------------------------------------------------------------------------
Net income $ 13,018 $ 13,035 $ 213 $ 1,122 $ 1,335
===========================================================================
<CAPTION>
---------------------------
---------------------------
Consolidated
Eliminations Total
---------------------------
<S> <C> <C>
Sales, net
Cost of goods sold ($8,018) $ 163,715
(8,018) 80,693
---------------------------
Gross Profit - 83,022
Operating expenses - 46,172
---------------------------
Operating income - 36,850
---------------------------
Other expenses:
Interest - 12,044
Interest - intercompany - -
Amortization of deferred financing expenses, other 14,370 618
---------------------------
14,370 12,662
---------------------------
Income before provision for (benefit from) income taxes (14,370) 24,188
Income tax provision (benefit) - 9,791
---------------------------
Net income before extraordinary items (14,370) 14,397
Extraordinary items, net of tax - 1,379
---------------------------
Net income ($14,370) $ 13,018
===========================
</TABLE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the three month period ended June 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
---------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total
---------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Sales, net $ - $ 91,497 $ 17,943 $ 9,680 $ 27,623
Cost of goods sold - 46,286 9,731 4,740 14,471
--------------------------------------------------------------------------
Gross Profit - 45,211 8,212 4,940 13,152
Operating expenses - 17,463 7,525 2,272 9,797
--------------------------------------------------------------------------
Operating income - 27,748 687 2,668 3,355
--------------------------------------------------------------------------
Other expenses:
Interest 14 5,978 118 228 346
Interest - intercompany - (432) 376 56 432
Amortization of deferred financing expenses, other (13,245) (1,135) 16 79 95
--------------------------------------------------------------------------
(13,231) 4,411 510 363 873
--------------------------------------------------------------------------
Income before provision for (benefit from) income taxes 13,231 23,337 177 2,305 2,482
Income tax provision (benefit) (6) 8,802 548 510 1,058
--------------------------------------------------------------------------
Net income (loss) before extraordinary items 13,237 14,535 (371) 1,795 1,424
Extraordinary items, net of tax - 800 124 455 579
--------------------------------------------------------------------------
Net income (loss) $ 13,237 $ 13,735 ($495) $ 1,340 $ 845
==========================================================================
<CAPTION>
----------------------------
----------------------------
Consolidated
Eliminations Total
----------------------------
<S> <C> <C>
Sales, net ($3,579) $ 115,541
Cost of goods sold (3,579) 57,178
--------------------------
Gross Profit - 58,363
Operating expenses - 27,260
--------------------------
Operating income - 31,103
--------------------------
Other expenses:
Interest - 6,338
Interest - intercompany - -
Amortization of deferred financing expenses, other 14,580 295
--------------------------
14,580 6,633
--------------------------
Income before provision for (benefit from) income taxes (14,580) 24,470
Income tax provision (benefit) - 9,854
--------------------------
Net income (loss) before extraordinary items (14,580) 14,616
Extraordinary items, net of tax - 1,379
--------------------------
Net income (loss) ($14,580) $ 13,237
==========================
</TABLE>
Page 11
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the six month period ended June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
---------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales, net $ - $ 133,397 $ 44,480 $ 20,308 $ 64,788
Cost of goods sold - 68,192 23,466 12,193 35,659
--------------------------------------------------------------------------
Gross Profit - 65,205 21,014 8,115 29,129
Operating expenses - 30,869 15,728 5,184 20,912
--------------------------------------------------------------------------
Operating income - 34,336 5,286 2,931 8,217
--------------------------------------------------------------------------
Other expenses:
Interest (20) 7,261 285 632 917
Interest - intercompany - (776) 719 57 776
Amortization of deferred financing expenses, other (21,030) (3,621) (891) 0 (891)
--------------------------------------------------------------------------
(21,050) 2,864 113 689 802
--------------------------------------------------------------------------
Income before provision for income taxes 21,050 31,472 5,173 2,242 7,415
Income tax provision 8 10,442 1,177 1,351 2,528
--------------------------------------------------------------------------
Net income $ 21,042 $ 21,030 $ 3,996 $ 891 $ 4,887
==========================================================================
<CAPTION>
----------------------------
----------------------------
Consolidated
Eliminations Total
----------------------------
<S> <C> <C>
Sales, net ($10,832) $ 187,353
Cost of goods sold (10,832) 93,019
----------------------------
Gross Profit - 94,334
Operating expenses - 51,781
----------------------------
Operating income - 42,553
----------------------------
Other expenses:
Interest - 8,158
Interest - intercompany - -
Amortization of deferred financing expenses, other 25,917 375
----------------------------
25,917 8,533
----------------------------
Income before provision for income taxes (25,917) 34,020
Income tax provision - 12,978
----------------------------
Net income ($25,917) $ 21,042
============================
</TABLE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the three month period ended June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Nursery Peat-based Segment
Segment
---------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales, net $ - $ 100,224 $ 22,374 $ 10,311 $ 32,685
Cost of goods sold - 50,379 12,048 6,207 18,255
-------------------------------------------------------------------------
Gross Profit - 49,845 10,326 4,104 14,430
Operating expenses - 19,015 7,635 2,448 10,083
-------------------------------------------------------------------------
Operating income - 30,830 2,691 1,656 4,347
-------------------------------------------------------------------------
Other expenses:
Interest (20) 3,467 128 281 409
Interest - intercompany - (417) 388 29 417
Amortization of deferred financing expenses, other (19,330) (2,224) (940) 0 (940)
-------------------------------------------------------------------------
(19,350) 826 (424) 310 (114)
-------------------------------------------------------------------------
Income before provision for income taxes 19,350 30,004 3,115 1,346 4,461
Income tax provision 8 10,486 734 563 1,297
-------------------------------------------------------------------------
Net income $ 19,342 $ 19,518 $ 2,381 $ 783 $ 3,164
=========================================================================
<CAPTION>
----------------------------
----------------------------
Consolidated
Eliminations Total
----------------------------
<S> <C> <C>
Sales, net ($4,958) $ 127,951
Cost of goods sold (4,958) 63,676
----------------------------
Gross Profit - 64,275
Operating expenses - 29,098
----------------------------
Operating income - 35,177
----------------------------
Other expenses:
Interest - 3,856
Interest - intercompany - -
Amortization of deferred financing expenses, other 22,682 188
----------------------------
22,682 4,044
----------------------------
Income before provision for income taxes (22,682) 31,133
Income tax provision - 11,791
----------------------------
Net income ($22,682) $ 19,342
============================
</TABLE>
Page 12
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the six month period ended June 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------
Nursery Peat-based Segment
Segment
------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non-
Guarantor) (Issuer) Guarantor) Guarantors)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by (used in) operating activities ($7,889) ($14,318) $ 12,807 $ 17,786
------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (5,981) (84) (855)
Proceeds from sales of fixed assets - - 65 226
Acquisitions, net of cash 2,118 - - (21,797)
------------------------------------------------------------
Net cash provided by (used in) investing activities 2,118 (5,981) (19) (22,426)
------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (36,231) (6,871) -
Intercompany advances (repayments) (51,384) 53,565 (2,546) 365
Proceeds from the issuance of long-term debt - 44,961 - 20,000
Repayments of long-term debt - (44,195) - (15,500)
Deferred financing costs - (3,000) - -
Dividends received ( paid ) - 3,084 (3,084) -
Repayments of notes receivables from stock sales 572 - - -
Issuance of preferred and common stock 56,583 4,500 - -
------------------------------------------------------------
Net cash provided by (used in) financing activities 5,771 22,684 (12,501) 4,865
------------------------------------------------------------
Net increase in cash - 2,385 287 225
Cash, beginning of year - 2,543 - -
------------------------------------------------------------
Cash, end of period $ - $ 4,928 $ 287 $ 225
------------------------------------------------------------
<CAPTION> ---------------------------------------------
Sun Gro Consolidated
Sub-total Eliminations Total
---------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in) operating activities $ 30,593 $ 4,500 $ 12,886
---------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net (939) - (6,920)
Proceeds from sales of fixed assets 291 - 291
Acquisitions, net of cash (21,797) - (19,679)
---------------------------------------------
Net cash provided by (used in) investing activities (22,445) - (26,308)
---------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit (6,871) - (43,102)
Intercompany advances (repayments) (2,181) - -
Proceeds from the issuance of long-term debt 20,000 - 64,961
Repayments of long-term debt (15,500) - (59,695)
Deferred financing costs - - (3,000)
Dividends received ( paid ) (3,084) - -
Repayments of notes receivables from stock sales - - 572
Issuance of preferred and common stock - (4,500) 56,583
---------------------------------------------
Net cash provided by (used in) financing activities (7,636) (4,500) 16,319
---------------------------------------------
Net increase in cash 512 - 2,897
Cash, beginning of year - - 2,543
---------------------------------------------
Cash, end of period $ 512 $ - $ 5,440
---------------------------------------------
</TABLE>
Page 13
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the six month period ended June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------
Nursery Peat-based Segment
Segment
------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non-
Guarantor) (Issuer) Guarantor) Guarantors)
------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by operating activities $ 20 $ 8,185 $ 2,668 $ 2,923
------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (8,136) (550) (1,651)
Proceeds from sales of fixed assets - - - 183
Acquisitions, net of cash - (500) - (485)
------------------------------------------------------------
Net cash used in investing activities - (8,636) (550) (1,953)
------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (2,350) - -
Intercompany advances (repayments) (173) 733 (560) -
Proceeds from the issuance of long-term debt - - - 279
Repayments of long-term debt - (5) - -
Dividends received ( paid ) - 1,558 (1,558) -
Repayments of notes receivables from stock sales 153 - - -
Issuance of preferred and common stock - - - -
-----------------------------------------------------------
Net cash used in financing activities (20) (64) (2,118) 279
-----------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents - - - (1,249)
-----------------------------------------------------------
Net decrease in cash $ - ($515) $ - -
Cash, beginning of year - 515 - -
------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
============================================================
<CAPTION>
-----------------------------------------------
Sun Gro Consolidated
Sub-total Eliminations Total
-----------------------------------------------
<S> <C> <C> <C>
Cash provided by operating activities $ 5,591 $ - $ 13,796
----------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net (2,201) - (10,337)
Proceeds from sales of fixed assets 183 - 183
Acquisitions, net of cash (485) - (985)
-----------------------------------------------
Net cash used in investing activities (2,503) - (11,139)
-----------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - - (2,350)
Intercompany advances (repayments) (560) - -
Proceeds from the issuance of long-term debt 279 - 279
Repayments of long-term debt - - (5)
Dividends received (paid) (1,558) - -
Repayments of notes receivables from stock sales - - 153
Issuance of preferred and common stock - - -
-----------------------------------------------
Net cash used in financing activities (1,839) 0 (1,923)
-----------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,249) - (1,249)
-----------------------------------------------
Net decrease in cash $ - $ _ (515)
Cash, beginning of year $ - $ _ 515
-----------------------------------------------
Cash, end of period $ - $ _ $ (515)
===============================================
</TABLE>
Page 14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes contained herein and in the
Annual Report on Form 10-K filed on March 26, 1999 by Hines Horticulture, Inc.
This discussion contains trend analysis and other forward-looking statements
that involve risks and uncertainties.
Overview
General. Hines is one of the largest commercial nursery operations in North
America, producing one of the broadest assortments of container-grown plants in
the industry. The Company sells its nursery products primarily to the retail
segment, which includes premium independent garden centers, as well as 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 home
ownership, the aging of the American population and the increasing popularity of
gardening. Recent trends in the retail distribution channel, such as the
expansion of large "big box" retailers and their growing emphasis on the lawn
and garden category, have increased consumer exposure to lawn and garden
products. Management believes these trends have favorably impacted the Company
and provide excellent opportunities for improved operating performance.
Seasonality. The Company's nursery business, like that of its competitors,
is highly seasonal. In 1998, approximately 79% of Hines Nurseries' net sales
and approximately 115% of Hines Nurseries' operating income occurred in the
first half of the year. Approximately 60% of Hines Nurseries' net sales and
approximately 100% of Hines Nurseries' operating income occurred in the second
quarter of 1998. The Company has experienced and expects to continue to
experience significant seasonality in net sales, operating income and net
income. This quarterly variability is primarily the result of the consumer
gardening cycle, which is closely aligned to seasonal weather patterns,
particularly weekend weather during the peak growing season, as well as other
factors. Sun Gro's sales, because they are more heavily weighted towards the
professional markets, typically do not experience the large seasonal variances
present in the retail market, and are only slightly weighted towards the first
half of the year.
Page 15
<PAGE>
Acquisitions. The Company has completed a number of recent acquisitions to
expand and diversify its operations. In the three years ended December 31,
1998, the Company has completed five acquisitions. These acquisitions have and
will continue to affect the period-to-period comparability of the operating
results discussed below. The Company intends to pursue strategic acquisitions
from time to time that increase its production capacity, broaden or complement
its existing product lines, expand its geographic presence or offer operating
synergies. The Company believes that the highly fragmented nature of the nursery
and professional growing media industries presents it with a number of
opportunities to make such acquisitions.
Tax Matters. The Company derives significant benefits under the U.S. federal
tax code by qualifying to use the cash method of accounting for federal income
tax purposes. Under the cash method, sales are included in taxable income when
payments are received and expenses are deducted as they are paid. The primary
benefit the Company receives is the ability to deduct the cost of inventory as
it is incurred. As a result of the Company's ability to deduct its growing
costs under the farming exception, the Company has generally not been required
to pay cash income taxes and has generated net operating losses for federal
income tax purposes. During the same period, the Company has continued to show
a tax provision relating to the recording of deferred taxes.
Results of Operations
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998
Net sales. Net sales of $128.0 million for the three months ended June 30,
1999 increased $12.5 million, or 10.8%, from net sales of $115.5 million for the
comparable period in 1998. The Company's sales of nursery products increased
9.5% from the comparable period in 1998. Nursery sales increased in all of the
Company's regions and in the western region in particular, where demand had been
adversely affected in 1998 by unseasonably wet weather attributable to El Nino.
Net sales of the Company's peat moss and peat-based products for the three
months ended June 30, 1999 increased by 17.0% from the comparable period in
1998. As occurred with nursery products, sales of peat-based products in the
western United States recovered in 1999 after being negatively impacted during
the second quarter of 1998 by unseasonably wet weather attributable to El Nino.
New product introductions also contributed to an increase in sales during the
second quarter of 1999.
Gross profit. Gross profit of $64.3 million for the three months ended
June 30, 1999 increased $5.9 million, or 10.1%, from gross profit of $58.4
million for the comparable period in 1998 as a result of higher sales levels at
both the nursery and peat moss operations.
Page 16
<PAGE>
As a percent of sales, gross margin decreased from 50.5% to 50.2% from the
comparable period in 1998 primarily due to the effect of introductions of new
products with lower margins at the Company's peat moss operations.
Operating expenses. Operating expenses of $29.1 million for the three
months ended June 30, 1999 increased $1.8 million, or 6.6%, from $27.3 million
for the comparable period in 1998. The increase was primarily attributable to
the significant increase in selling, promotion and distribution costs related to
the Company's net sales increase for the period. Operating expenses as a
percentage of net sales were reduced from 23.6% to 22.7% from the comparable
period in 1998 primarily due to a reduction in general and administrative costs
at the Company's peat moss operations, specifically, the consolidation of
administration functions related to Lakeland Peat Moss, Ltd. ("Lakeland") which
was acquired in April 1998. The ability to leverage operating expenses on
higher sales volume also contributed to the reduction of operating expenses as a
percentage of net sales.
Operating income. Operating income of $35.2 million for the three months
ended June 30, 1999 increased $4.1 million, or 13.2%, from $31.1 million for the
comparable period in 1998 primarily as a result of sales and related gross
profit increases. As a percentage of net sales, operating income improved to
27.5% from 26.9% for the comparable period in 1998, due primarily to reduced
operating expenses as described above.
Interest expense. Interest expense of $3.9 million for the three months
ended June 30, 1999 decreased $2.4 million, or 38.1%, from $6.3 million for the
comparable period in 1998. The reduction was primarily attributable to the
redemption of $42.0 million of senior subordinated notes with a portion of the
proceeds from the Company's initial public offering of common stock in June
1998.
Provision for income taxes. The effective income tax rate was 37.9% and
40.3% for the three months ended June 30, 1999 and 1998, respectively.
Net income. Net income of $19.3 million for the three months ended June
30, 1999 increased $6.1 million, or 46.2%, from $13.2 million for the comparable
period in 1998. Excluding the extraordinary loss on early extinguishment of
debt of $1.4 million in the three months ended June 30, 1998, net income
increased by $4.7 million, or 32.2%, from $14.6 million for the comparable
period in 1998. The increase was primarily attributable to higher sales, higher
operating income and lower interest expense as described above.
Page 17
<PAGE>
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998
Net sales. Net sales of $187.4 million for the six months ended June 30,
1999 increased $23.7 million, or 14.5%, from net sales of $163.7 million for the
comparable period in 1998. Sales from the Company's nursery operations
increased 11.2% from the comparable period in 1998, with both the western and
southern regions contributing significant growth. Increased volumes were
largely attributable to continued expansion of key facilities in these regions,
particularly the Houston operation, and to a recovery from the adverse effects
of El Nino in 1998.
Net sales of the Company's peat moss and peat-based products increased by
25.2% from the comparable period in 1998. This increase in net sales was
attributable to the Company's acquisition of Lakeland, supplemented by
internally generated growth from a mix line expansion at its eastern peat
business and the introduction of new products.
Gross profit. Gross profit of $94.3 million for the six months ended June
30, 1999 increased $11.3 million, or 13.6%, from gross profit of $83.0 million
for the comparable period in 1998. The increase was primarily attributable to
higher sales at both the Company's nursery and peat moss operations. As a
percent of sales, gross margins decreased from 50.7% to 50.4% of net sales from
the comparable period in 1998, primarily due to Lakeland's greater concentration
of sales in the lower margin retail business, and the effect of introductions of
new products with lower margins in the Company's peat business.
Operating expenses. Operating expenses of $51.8 million for the six months
ended June 30, 1999 increased $5.6 million, or 12.1%, from $46.2 million for the
comparable period in 1998. The increase was primarily attributable to the
significant investment in sales and management infrastructure required to
support the Company's current and future growth. Operating expenses as a
percentage of net sales decreased from 28.2% to 27.6% in the first six months of
1999, primarily due to the Company's ability to leverage operating expenses on
higher sales volume.
Operating income. Operating income of $42.6 million for the six months
ended June 30, 1999 increased $5.7 million, or 15.4%, from $36.9 million for the
comparable period in 1998 primarily as a result of sales and related gross
profit increases, offset somewhat by increases in operating expenses. As a
percentage of net sales, operating income improved to 22.7% from 22.5% due
primarily to improved operating expense leverage more than offsetting a decrease
in gross margins, as described above.
Page 18
<PAGE>
Interest expense. Interest expense of $8.2 million for the six months
ended June 30, 1999 decreased $3.8 million, or 31.7%, from $12.0 million for the
comparable period in 1998. The reduction was primarily attributable to the
redemption of $42.0 million of senior subordinated notes with a portion of the
proceeds from the Company's initial public offering of common stock in June
1998.
Provision for income taxes. The Company's effective income tax rate was
38.1% and 40.5% for the six months ended June 30, 1999 and 1998, respectively.
Net income. Net income of $21.0 million for the six months ended June 30,
1999 increased $8.0 million, or 61.5%, from $13.0 million for the comparable
period in 1998. Excluding the extraordinary loss on early extinguishment of
debt of $1.4 million in the six months ended June 30, 1998, net income increased
by $6.6 million, or 45.8%, from $14.4 million for the comparable period in 1998.
The increase was primarily attributable to higher sales, higher operating income
and lower interest expense as described 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 its nursery
operations, the Company historically borrows under its revolving credit
facilities to fund peak needs.
In conjunction with the Company's initial public offering in June 1998, the
Company entered into a senior credit facility (the "Senior Credit Facility")
with Bankers Trust Company, Bank of America, N.T. & S.A. and Harris Trust &
Savings Bank. The Senior Credit Facility amended and restated the Company's
previous senior credit facilities to provide for a new $50.0 million term loan
and a $200.0 million revolving credit facility, increasing the Company's total
borrowing capacity by $100.0 million. The revolving credit facility is
comprised of a $100.0 million working capital facility and a $100.0 million
acquisition facility. The Senior Credit Facility has a five-year term. The
revolving credit facility and all other obligations under the Senior Credit
Facility are secured by substantially all of the assets and common stock of
Hines Nurseries and Sun Gro-U.S., as well as a pledge of 65% of the common stock
of Sun Gro-Canada. The principal repayment schedule for the term loan is $2.5
million in 1999, $6.25 million in 2000, $11.25 million in 2001, $18.75 million
in 2002 and $11.25 million in 2003. Amounts borrowed under the acquisition
facility will convert into a term loan in 2000 and will begin to amortize
thereafter. The Senior Credit Facility, among other things, limits the ability
of Hines Nurseries and its subsidiaries to pay any dividends.
In 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 Madison Dearborn Capital Partners and certain members of management.
Page 19
<PAGE>
As of June 30, 1999, $78.0 million in aggregate principal amount remains
outstanding. The indenture pursuant to which the Senior Subordinated Notes were
issued imposes a number of restrictions on Hines Nurseries and Sun Gro-U.S. The
indenture limits, among other things, their ability to incur additional
indebtedness, to make certain restricted payments (including dividends to
Hines), to make certain asset dispositions, to incur certain liens and to enter
into certain significant transactions. In addition, breach of a material term of
the indenture or any other material indebtedness that results in the
acceleration of such indebtedness would trigger an event of default under the
Senior Credit Facility, causing all amounts owing thereunder to become
immediately due and payable. The Senior Credit Facility imposes a number of
similar and certain additional restrictions (including financial covenants) on
Hines Nurseries and its subsidiaries.
The seasonal nature of the Company's operations results in a significant
increase in certain components of working capital (primarily accounts
receivable) during the growing and selling cycles. Net cash provided by
operating activities for the six months ended June 30, 1999, of $13.8 million
increased $0.9 million, from $12.9 million for the comparable period in 1998.
This increase is attributable to the increased net income (and adjustments to
reconcile net income to net cash) but was offset principally by increased
accounts receivable levels as a result of the Company's increased sales.
Net cash used in investing activities during the six months ended June 30,
1999 decreased $15.2 million to $11.1 million from $26.3 million for the
comparable period in 1998. The decrease was primarily due to the Company's
purchase of Lakeland during the six months ended June 30, 1998 with no
significant acquisitions during the comparable period for 1999.
Net cash provided by (used in) financing activities during the six months
ended June 30, 1999 decreased $18.3 million to $(2.0) million from $16.3 million
for the comparable period in 1998. The decrease was primarily associated with
proceeds of the Offering, which occurred during the six months ended June 30,
1998 less redemption or repayment of certain notes and secured debt at that
time.
The Company typically draws under its revolving credit facilities in the first
and fourth quarters to fund its inventory buildup of nursery products and
seasonal operating expenses. Approximately 80% of the sales of Hines Nurseries
occur in the first half of the year, generally allowing the Company to reduce
borrowings under its revolving credit facilities in the second and third
quarters. Working capital requirements for the Company's peat moss operations
are less seasonal in nature, with slight inventory buildups generally occurring
in the third and fourth quarters. On July 31, 1999, the Company had unused
borrowing capacity of $81.0 million and $ 86.75 million under its acquisition
revolver and working capital revolver, respectively, within the Senior Credit
Facility.
Page 20
<PAGE>
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 $10.3 million for the
six months ended June 30, 1999. The capital expenditures for Hines Nurseries
($8.1 million) related primarily to the development of additional nursery
acreage, and the purchase of nursery-related structures, vehicles, machinery and
equipment. The capital expenditures for Sun Gro ($2.2 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 $29.0 million.
Management believes that cash generated by operations and borrowings available
under the Senior Credit Facility will be sufficient to meet the Company's
anticipated working capital, capital expenditures and debt service requirements
for the foreseeable future. However, as a result of its plan to pursue
strategic acquisitions, the Company may require additional debt or equity
financing in the future.
Year 2000 Compliance
- --------------------
The Company has instituted a program ("Year 2000 Compliance Program") to
determine whether its computerized information systems are able to interpret
dates beyond the year 1999 and has implemented programming modifications to its
main operational and financial reporting systems that will address these issues.
All modified programming is currently operational and testing has been
completed. The financial systems of companies recently acquired by the Company
may not be entirely Year 2000 compliant.
It is expected, however, that the Company will integrate the financial data of
these acquired companies into the Company's main system during 1999 and will
have no need to rely on any non-compliant systems.
The Company is in the early stage of evaluating non-information technology
systems, which include telephone equipment, greenhouse automation and watering
systems.
Page 21
<PAGE>
Upgrades or replacements are being made as necessary, and are expected to be
completed by the end of 1999.
Evaluation and testing of personal computers will be performed internally. As
needed, personal computers will be made Year 2000 compliant by systematic
upgrades or replacements by the end of 1999.
The Company relies on third party suppliers for finished goods, raw materials,
water, other utilities, transportation and a variety of other key services. The
Company is evaluating the status of suppliers with whom it has a material
relationship through confirmation and follow-up procedures and expects this
phase to be completed by October 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 $0.3 million on Year
2000 compliance. The Company believes that the total cost of ensuring Year 2000
compliance for its own operational and financial systems will be less than $0.5
million.
Although management believes the Company has an adequate plan to be Year 2000
compliant, there can be no assurance that this program ultimately will be
successful. The Company will continue to assess where alternative courses of
action are needed as the information technology and non-information technology
readiness plans are executed. A major effort related to formal contingency
planning will be in the third quarter of 1999, once a significant portion of the
business groups' readiness plans have been completed.
The principal business risks to the Company relating to completion of Year
2000 efforts are:
. The inability of key business partners to provide goods and services as a
result of Year 2000 issues.
. Unforeseen issues arising in connection with recent and future acquisitions
or business partnerships.
Page 22
<PAGE>
Because the Company's Year 2000 readiness is dependent upon key business
partners also being Year 2000 Compliant, there can be no guarantee that the
Company's efforts will prevent a material adverse impact on its results of
operations, financial condition and cash flows. The possible consequences to the
Company of its key business partners' inability to provide goods and services as
a result of Year 2000 issues include temporary delays in delivery of finished
products; delays in receipt of key items, containers and packaging supplies;
invoice and collection errors; and excess inventory of perishable items. The
Company believes that its readiness efforts, which include confirmation and
other testing with critical suppliers to determine if contingency planning is
needed, should reduce the likelihood of such disruptions.
The foregoing represents a Year 2000 readiness disclosure entitled to
protection as provided in the Year 2000 Information and Readiness Disclosure
Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has not experienced any material changes to its market risk
exposures since December 31, 1998.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 27, 1999 at which
the stockholders of the Company elected six directors and ratified the
appointment of PricewaterhouseCoopers LLP as the Company's independent public
accountants for the 1999 fiscal year.
The following individuals were elected as directors and received the number of
votes indicated below:
<TABLE>
<CAPTION>
Name of Nominee Votes For Against Abstentions
- -------------------- ---------- ------- -----------
<S> <C> <C> <C>
Douglas D. Allen 16,396,651 6,700 0
Ronald A. Pierre 16,396,651 6,700 0
Thomas R. Reusche 16,396,651 6,700 0
James R. Tennant 16,396,651 6,700 0
Stephen P. Thigpen 16,396,651 6,700 0
Paul R. Wood 16,396,651 6,700 0
</TABLE>
For the ratification of PricewaterhouseCoopers LLP as the Company's
independent public accountants, 16,398,851 votes were cast in favor, 600 votes
were cast against and there were 3,900 abstentions.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule
Items 1, 2, 3 and 5 are not applicable and have been omitted.
Page 23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HINES HORTICULTURE, INC.
(Registrant)
By: /s/ Claudia M. Pieropan
-------------------------------
Claudia M. Pieropan
Chief Financial Officer
(Principal financial officer
and duly authorized officer)
Date: August 8, 1999
Page 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 77,680
<ALLOWANCES> 1,338
<INVENTORY> 107,914
<CURRENT-ASSETS> 186,367
<PP&E> 158,128
<DEPRECIATION> 32,830
<TOTAL-ASSETS> 353,106
<CURRENT-LIABILITIES> 116,881
<BONDS> 144,763
221
0
<COMMON> 0
<OTHER-SE> 77,377
<TOTAL-LIABILITY-AND-EQUITY> 353,106
<SALES> 187,353
<TOTAL-REVENUES> 187,353
<CGS> 93,019
<TOTAL-COSTS> 51,781
<OTHER-EXPENSES> 8,533
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,158
<INCOME-PRETAX> 34,020
<INCOME-TAX> 12,978
<INCOME-CONTINUING> 21,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,042
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.95
</TABLE>
