<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ______________
Commission File Number
0-24439
HINES HORTICULTURE, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0803204
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No( )
As of October 31, 2000 there were 22,072,549 shares of Common Stock, par value
$0.01 per share, outstanding.
================================================================================
<PAGE>
HINES HORTICULTURE, INC.
Index
Part I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page No.
--------
<S> <C>
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 2000 and 1999 1
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 3
Notes to the Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
</TABLE>
Note: Items 1, 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 2000 and 1999
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales, net $ 63,398 $ 45,509 $ 331,500 $ 232,862
Cost of goods sold 31,985 23,347 167,646 116,366
----------- ----------- ----------- -----------
Gross profit 31,413 22,162 163,854 116,496
----------- ----------- ----------- -----------
Selling and distribution expenses 19,994 14,168 75,057 50,423
General and administrative expenses 8,955 6,874 30,078 21,791
Amortization of goodwill 1,053 435 2,764 1,044
----------- ----------- ----------- -----------
Total operating expenses 30,002 21,477 107,899 73,258
----------- ----------- ----------- -----------
Operating income 1,411 685 55,955 43,238
----------- ----------- ----------- -----------
Other expenses
Interest 9,178 4,424 26,104 12,582
Amortization of deferred financing expenses 376 187 999 562
----------- ----------- ----------- -----------
9,554 4,611 27,103 13,144
----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes (8,143) (3,926) 28,852 30,094
Income tax provision (benefit) (3,049) (1,493) 8,524 11,485
----------- ----------- ----------- -----------
Net income (loss) ($5,094) ($2,433) $ 20,328 $ 18,609
=========== =========== =========== ===========
Basic earnings per share:
Net income (loss) per common share ($0.23) ($0.11) $0.92 $0.84
Diluted earnings per share:
Net income (loss) per common share ($0.23) ($0.11) $0.92 $0.84
Weighted average shares outstanding--Basic 22,072,549 22,072,549 22,072,549 22,072,549
=========== =========== =========== ===========
Weighted average shares outstanding--Diluted 22,072,549 22,072,549 22,072,549 22,072,549
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 1
<PAGE>
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------ ------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ - $ -
Accounts receivable, net of allowance for
doubtful accounts of $1,648 and $1,444 57,430 37,196
Inventories 151,385 144,915
Prepaid expenses and other current assets 5,739 5,204
-------- --------
Total current assets 214,554 187,315
FIXED ASSETS, net of accumulated depreciation
and depletion of $47,341 and $38,455 210,331 169,317
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $2,984 and $1,985 6,071 3,327
GOODWILL, net of accumulated amortization of $6,647 and $3,872 137,903 58,822
-------- --------
$568,859 $418,781
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 16,264 $ 18,282
Accrued liabilities 10,681 8,618
Accrued payroll and benefits 10,077 7,402
Accrued interest 7,130 4,926
Long-term debt, current portion 27,438 12,730
Borrowings on revolving credit facility 35,850 34,750
Deferred income taxes 57,243 46,565
-------- --------
Total current liabilities 164,683 133,273
LONG-TERM DEBT 297,135 195,677
DEFERRED INCOME TAXES 12,265 15,081
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock
Authorized - 60,000,000 shares $.01 par value;
Issued and outstanding - 22,072,549 shares
at September 30, 2000 and December 31, 1999 221 221
Additional paid-in capital 127,938 127,938
Notes receivable from stock sales (30) (173)
Deficit (28,817) (49,145)
Accumulated other comprehensive loss (4,536) (4,091)
-------- --------
Total shareholders' equity 94,776 74,750
-------- --------
$568,859 $418,781
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 2
<PAGE>
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(Dollars in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------
2000 1999
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,328 $ 18,609
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 12,206 8,952
Amortization of deferred financing costs 999 562
Deferred income taxes 7,861 12,481
Gain on sale of fixed assets (92) (104)
--------- --------
$ 41,302 $ 40,500
Change in working capital accounts, net of effect of acquisitions:
Accounts receivable (15,144) (10,073)
Inventories 4,579 (3,016)
Prepaid expenses and other current assets (347) (115)
Accounts payable and accrued liabilities (1,090) 9,689
--------- --------
Net cash provided by operating activities 29,300 36,985
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (31,582) (15,325)
Proceeds from sale of fixed assets 436 250
Acquisitions, net of cash (112,034) (61,431)
--------- --------
Net cash used in investing activities (143,180) (76,506)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 128,130 70,283
Repayments on revolving line of credit (127,030) (91,233)
Proceeds from the issuance of long-term debt 121,216 60,961
Repayments of long-term debt (5,050) (5)
Deferred financing costs (3,743) -
Repayments of notes receivable from stock sales 143 104
--------- --------
Net cash provided by financing activities 113,666 40,110
--------- --------
Effect of exchange rate changes on cash 214 (1,104)
--------- --------
NET DECREASE IN CASH - (515)
CASH, beginning of period - 515
--------- --------
CASH, end of period $ - $ -
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest, net of capitalized $ 23,900 $ 9,747
interest of $875 and $343
Cash paid for income taxes $ 747 $ 142
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Page 3
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
1. Description of Business
-----------------------
Hines Horticulture, Inc. a Delaware corporation ("Hines"), produces and
distributes horticultural products through three operating divisions: (1)
its Nursery division (2) its Color division and (3) its Growing Media
division. The Nursery division and Color division make up the green goods
business. The green goods business is conducted through Hines Nurseries,
Inc. ("Hines Nurseries") a wholly owned subsidiary of Hines, and the
business of the Growing Media division is conducted 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, the green goods business, is a leading national supplier
of ornamental shrubs, color plants and container-grown plants with
commercial nursery facilities located in Arizona, California, Florida,
Oregon, New York, Pennsylvania, South Carolina and Texas. Hines Nurseries
markets its products to retail and commercial customers throughout the
United States.
Sun Gro, the growing media business, produces and markets sphagnum peat
moss and peat and bark-based growing media horticulture products for both
professional and retail customers. Sun Gro markets its products in North
America and various international markets with 17 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
Page 4
<PAGE>
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 27,
2000 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.
3. Earnings Per Share
------------------
Because the effect would be anti-dilutive, potential dilutive securities
have been excluded from the earnings per share calculation for the three
and nine months ended September 30, 2000 and 1999. Hence, there are no
differences between the numerators and denominators for basic and diluted
earnings per share. The only potentially dilutive shares relate to stock
options. There were no dilutive common stock equivalents outstanding during
the three and nine months ended September 30, 2000 and 1999.
4. Inventories
-----------
Inventories consisted of the following:
September 30, December 31,
------------ -----------
2000 1999
---- ----
Nursery stock $131,239 $121,330
Finished goods 6,897 10,799
Material and supplies 13,249 12,786
-------- --------
$151,385 $144,915
======== ========
5. Supplemental Cash Flow Information
----------------------------------
Supplemental disclosures of non-cash investing and financing activities
were as follows:
Nine Months Ended
-----------------
September 30,
------------
2000 1999
---- ----
Fair value of assets acquired $118,041 $74,660
Liabilities assumed and incurred
In connection with acquisitions 6,007 13,229
----- ------
Cash paid $112,034 $61,431
======== =======
Page 5
<PAGE>
6. Comprehensive Income
--------------------
Comprehensive income includes all changes in equity during a period except
those resulting from investments by and distributions to the Company's
stockholder. The Company's comprehensive income is composed of cumulative
foreign currency translation adjustments. The components of comprehensive
income during the three and nine months ended September 30, 2000 and 1999,
were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income ($5,094) ($2,433) $20,328 $18,609
Cumulative foreign currency
translation adjustments (133) (103) (4,536) (6,989)
---------- -------- ---------- --------
($5,227) ($2,536) $15,792 $11,620
Comprehensive (loss) income ========== ======== ========== ========
</TABLE>
7. Acquisitions
------------
During the nine months ended September 30, 2000, the Company made two
acquisitions, both of which have been accounted for under the purchase
method for accounting purposes. Accordingly, the purchase price was
allocated to certain assets and liabilities based on their respective fair
market values. The excess of the purchase price over the estimated fair
market value of the net assets acquired in each transaction was accounted
for as goodwill. Amounts allocated to goodwill are being amortized on a
straight-line basis over an estimated life of thirty-five years. The
purchase agreements include provisions to adjust the purchase price subject
to the occurrence of certain future conditions. The Company's existing
acquisition facility and a new term loan provided the funds used for the
acquisitions. The consolidated financial statements include the operating
results of each acquisition from the date of acquisition.
On March 3, 2000, the Company entered into an agreement to acquire (i)
substantially all of the assets and assume certain liabilities of Lovell
Farms, Inc. and Botanical Farms, Inc.; (ii) the capital stock of Enviro-
Safe Laboratories, Inc.; and (iii) the partnership interest of Lovell
Properties (collectively referred to as "Lovell"). Lovell is a supplier of
bedding and holiday plants to independent garden centers, home centers,
mass merchandisers and other professional customers in the southeastern
United States. The total acquisition price was approximately $92.0 million,
which resulted in the goodwill of approximately $72.2 million.
In addition, under the terms of the purchase agreement, the Company may be
Page 6
<PAGE>
required to make additional payments of up to $12.5 million, contingent
upon Lovell's achieving certain operating results during 2000 and 2001.
On January 14, 2000, the Company entered into an agreement to acquire
certain assets (primarily land and buildings) and all of the outstanding
capital stock of Willow Creek Greenhouses, Inc. ("Willow Creek"), a
producer of quality annual bedding plants and holiday plants. The total
acquisition price was approximately $18.8 million, which resulted in
goodwill of approximately $9.7 million. In addition, under the terms of the
purchase agreement, the Company may be required to make additional payments
of up to $1.1 million, contingent upon Willow Creek's achieving certain
operating results during 2000 and 2001.
In connection with the Lovell acquisition on March 3, 2000, the Company
entered into an amendment to its existing senior credit facility (the
"Amended Senior Credit Facility") to provide for a new $100 million term
loan and a $15 million increase in the Company's existing working capital
revolving credit facility. The term loan requires annual principal payments
of $1 million through December 31, 2003, $47 million in fiscal year 2004
and the remaining balance in fiscal year 2005. The term loan and revolving
credit facility interest rate is a percentage spread over the U.S. prime
rate and the Eurodollar rate, depending upon the Company's quarterly
leverage and interest rate coverage ratios as defined in the Amended Senior
Credit Facility. The term loan and revolving credit facility are secured by
substantially all of the assets and common stock of the Company's domestic
subsidiaries and 65% of the common stock of its foreign subsidiary. Refer
to Note 8 for a discussion of the Amended Senior Credit Facility. The
Lovell acquisition was financed with proceeds from the Amended Senior
Credit Facility.
Pro Forma Operating Data
The following selected unaudited pro forma condensed combined financial
information for the nine months ended September 30, 2000 and 1999 gives
effect to the acquisitions of Strong Lite Inc. ("Strong Lite"), Pro-Gro
Products, Inc. and related companies ("Pro Gro"), Atlantic Greenhouses,
Inc. ("Atlantic"), Willow Creek and Lovell as if they had occurred on
January 1, 1999. The above acquisitions were completed on August 2, 1999,
August 23, 1999, September 9, 1999, January 14, 2000 and March 3, 2000,
respectively.
(In thousands, except per share data):
Nine Months Ended September 30
------------------------------
2000 1999
---- ----
Sales, net $338,662 $313,151
Net income $ 20,278 $ 19,649
Page 7
<PAGE>
Basic earnings per share $ 0.92 $ 0.89
Diluted earnings per share $ 0.92 $ 0.89
8. Amendments to Amended Senior Credit Facility and Senior Subordinated Notes
--------------------------------------------------------------------------
As a result of higher working capital requirements, higher borrowing levels
due to the Company's recent acquisitions and this year's escalation in
interest rates, the Company was unable to comply with two covenants under
its Amended Senior Credit Facility. The Company requested and received two
temporary waivers from its senior lenders through and including November
30, 2000. The first waiver related to the Company's leverage ratio, which
for the twelve-month period ended September 30, 2000 was 4.83, in violation
of the requirement that it not exceed 4.75. The second waiver related to a
clean down requirement, which requires that borrowings under the working
capital revolver not exceed $20 million for a period of 60 consecutive
days, annually. Earlier this year, the Company's borrowings reached a low
point of $32.75 million.
The Company and its senior lenders have reached an agreement in principle
to amend the Company's Amended Senior Credit Facility. Under the terms of
the proposed amendment, the Company would receive permanent waivers of the
covenant noncompliance addressed by the temporary waivers. The amendment
also would (i) provide the Company with additional revolving loan
commitments in the amount of $30 million guaranteed by its majority
shareholder, Madison Dearborn Capital Partners, L.P. ("MDCP"), which could
only be borrowed and could only be outstanding between March 15 and June 15
of 2001 and 2002, (ii) increase the interest rate on all loans by 1/4% to
1/2%, (iii) reset the financial covenants that establish minimum interest
coverage ratios and net worth levels, and maximum leverage ratios and
capital expenditure amounts, (iv) add a minimum EBITDA covenant, (v)
amend the clean down requirement for working capital revolving loans and
(vi) provide for additional restrictions on the Company's ability to make
acquisitions and reinvest proceeds from asset sales. In consideration for
its guarantee on the additional revolving loan commitments, MDCP would
receive a fee of $600,000 and warrants to initially purchase 440,000 shares
of the common stock of Hines. These warrants would be exercisable at any
time prior to December 31, 2005 at an exercise price equal to the opening
price of Hines common stock on the effective date of the amendment. All
other significant terms and conditions of the Amended Senior Credit
Facility would remain unchanged.
In addition, Hines Nurseries is soliciting the approval of its noteholders
to amend the Indenture governing its Series B 11 3/4% Senior Subordinated
Notes due 2005 and the Notes for the purpose of amending the definition of
"Permitted Indebtedness" within the Indenture to include (i) all
indebtedness that may be incurred under the Amended Senior Credit Facility
in an
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<PAGE>
aggregate principal amount to not exceed $365 million (less the amount of
all mandatory principal repayments and required permanent reductions made
thereunder) plus (ii) up to an additional $35 million in indebtedness under
the additional revolving loan commitments, provided that such borrowings
may only be borrowed and may only be outstanding between March 15 and June
15 of 2001 and 2002. In consideration for the amendment, Hines Nurseries
would agree to (i) pay a fee of $35 per $1,000 of the principal amount of
Notes, (ii) increase the interest rate thereon from 11 3/4% to 12 3/4% per
annum, (iii) increase the optional redemption price to 106.00% of the
principal amount thereof, (iv) increase the purchase price upon a change of
control from 101.00% to 105.00% of the principal amount thereof and add to
the events that constitute a change of control, and (v) pay a premium at
maturity equal to 5.00% of the principal amount to be repaid.
The Company expects to enter into the amendment to the Amended Senior
Credit Facility and the amendments to the Indenture and the Notes in the
very near future on substantially the terms described above, although there
can be no assurances that it will be able to do so.
9. Subsequent Event
----------------
On November 4, 2000, the Company's Seba Beach growing media production
facility located in Alberta, Canada, was substantially destroyed by fire.
The facility and its operations are covered by replacement and business
interruption insurance. The Company expects to replace the destroyed assets
and resume production within 6 months. In the meantime, the estimated net
book value of the property destroyed, approximately $4.2 million, will be
written off during the quarter ending December 31, 2000. The Seba Beach
facility accounts for approximately 14% of the Company's annual growing
media production volume.
10. Segment Information and Guarantor/Non-Guarantor Disclosures
-----------------------------------------------------------
The Senior Subordinated Notes issued by Hines Nurseries (the issuer) have
been guaranteed by Hines (the parent guarantor) and by Sun Gro-U.S and
Enviro-Safe Laboratories, Inc. (the subsidiary guarantors). The issuer and
the subsidiary guarantor are wholly owned subsidiaries of the parent
guarantor; 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 information provides the required disclosures with respect to
the Company's segments pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The Company operates in two segments: 1) the
green goods segment and 2) the growing media segment.
Page 9
<PAGE>
The following consolidating information shows (a) Hines on a parent company
basis only as the parent guarantor (carrying its investment in its
subsidiary under the equity method), (b) Hines Nurseries as the issuer
(carrying its investment in its subsidiary under the equity method), (c)
Sun Gro-U.S. as subsidiary guarantor (carrying its investment in Sun Gro-
Canada under the equity method and Enviro-Safe as subsidiary guarantor),
(d) Sun Gro-Canada and its direct and indirect subsidiaries, as subsidiary
non guarantors, (e) eliminations necessary to arrive at the information for
the parent guarantor and its direct and indirect subsidiaries on a
consolidated basis and (f) the parent guarantor on a consolidated basis, as
follows:
. Consolidating balance sheets as of September 30, 2000 (unaudited)
and December 31, 1999;
. Consolidating statements of operations for the three months and
nine months ended September 30, 2000 and 1999 (unaudited); and
. Consolidating statements of cash flows for the nine months ended
September 30, 2000 and 1999 (unaudited).
Page 10
<PAGE>
Guarantor / Non-guarantor Disclosures
Consolidating Balance Sheet
As of September 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Nursery Growing Media 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
--------------------------------------------------------------------------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ - $ - $ - $ - $ -
Accounts receivable, net - 36,305 18,811 2,314 21,125
Inventories - 135,734 7,117 8,534 15,651
Prepaid expenses and other current assets - 1,719 2,547 1,473 4,020
Deferred income taxes 20 122 1,019 458 1,477
-------------------------------------------------------------------------
Total current assets 20 173,880 29,494 12,779 42,273
-------------------------------------------------------------------------
Fixed assets, net - 138,509 13,245 58,577 71,822
Deferred financing expenses, net - 6,071 - - -
Goodwill, net - 116,514 20,707 682 21,389
Deferred income taxes - 13,606 - - -
Investments in subsidiaries 101,918 12,849 9,376 - 9,376
-------------------------------------------------------------------------
$101,938 $461,429 $72,822 $72,038 $144,860
=========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 11,560 $ 2,008 $ 2,696 $ 4,704
Accrued liabilities - 6,063 3,978 640 4,618
Accrued payroll and benefits - 8,487 663 927 1,590
Accrued interest - 7,101 29 - 29
Long-term debt, current portion - 18,720 4,170 4,548 8,718
Revolving line of credit - 35,850 - - -
Deferred income taxes - 58,862 - - -
Intercompany accounts 7,162 (49,104) 23,546 18,396 41,942
-------------------------------------------------------------------------
Total current liabilities 7,162 97,539 34,394 27,207 61,601
-------------------------------------------------------------------------
Long-term debt - 256,931 26,481 13,723 40,204
Deferred income taxes - 11,300 (2,661) 17,232 14,571
Shareholders' equity:
Common stock 221 17,971 11,414 4,500 15,914
Additional paid in capital 127,938 21,362 5,889 1,777 7,666
Notes receivable from stock sales (30) - - - -
Retained earnings (deficit) (28,817) 56,326 1,841 7,599 9,440
Accumulated other comprehensive loss (4,536) - (4,536) - (4,536)
-------------------------------------------------------------------------
Total shareholders' equity 94,776 95,659 14,608 13,876 28,484
-------------------------------------------------------------------------
$101,938 $461,429 $72,822 $72,038 $144,860
=========================================================================
<CAPTION>
------------------------------
------------------------------
Consolidated
Eliminations Total
------------------------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ - $ -
Accounts receivable, net - 57,430
Inventories - 151,385
Prepaid expenses and other current assets - 5,739
Deferred income taxes (1,619) -
-----------------------------
Total current assets (1,619) 214,554
-----------------------------
Fixed assets, net - 210,331
Deferred financing expenses, net - 6,071
Goodwill, net - 137,903
Deferred income taxes (13,606) -
Investments in subsidiaries (124,143) -
-----------------------------
($139,368) $ 568,859
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 16,264
Accrued liabilities - 10,681
Accrued payroll and benefits - 10,077
Accrued interest - 7,130
Long-term debt, current portion - 27,438
Revolving line of credit - 35,850
Deferred income taxes (1,619) 57,243
Intercompany accounts - -
-----------------------------
Total current liabilities (1,619) 164,683
-----------------------------
Long-term debt - 297,135
Deferred income taxes (13,606) 12,265
Shareholders' equity:
Common stock (33,885) 221
Additional paid in capital (29,028) 127,938
Notes receivable from stock sales - (30)
Retained earnings (deficit) (65,766) (28,817)
Accumulated other comprehensive loss 4,536 (4,536)
-----------------------------
Total shareholders' equity (124,143) 94,776
-----------------------------
($139,368) $ 568,859
=============================
</TABLE>
Page 11
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Balance Sheet
As of December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Nursery Growing Media 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
--------------------------------------------------------------------------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash $ - $ - $ - $ - $ -
Accounts receivable, net - 14,705 19,288 3,203 22,491
Inventories - 126,272 9,742 8,901 18,643
Prepaid expenses and other current assets - 2,460 2,231 513 2,744
Deferred income taxes 24 122 1,018 465 1,483
----------------------------------------------------------------------------
Total current assets 24 143,559 32,279 13,082 45,361
----------------------------------------------------------------------------
Fixed assets, net - 99,124 12,984 57,209 70,193
Deferred financing expenses, net - 3,327 - - -
Goodwill, net - 36,906 21,206 710 21,916
Deferred income taxes - 13,606 - - -
Investments in subsidiaries 81,596 12,874 7,648 - 7,648
----------------------------------------------------------------------------
$ 81,620 $309,396 $74,117 $71,001 $145,118
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 9,709 $ 4,751 $ 3,822 $ 8,573
Accrued liabilities - 2,567 4,617 1,434 6,051
Accrued payroll and benefits - 5,854 702 846 1,548
Accrued interest - 4,828 98 - 98
Long-term debt, current portion - 8,669 1,516 2,545 4,061
Revolving line of credit - 34,750 - - -
Deferred income taxes - 48,194 - - -
Intercompany accounts 6,870 (41,587) 17,863 16,854 34,717
----------------------------------------------------------------------------
Total current liabilities 6,870 72,984 29,547 25,501 55,048
----------------------------------------------------------------------------
Long-term debt - 149,775 29,134 16,768 45,902
Deferred income taxes - 11,300 803 16,584 17,387
Shareholders' equity:
Common stock 221 17,971 11,414 4,500 15,914
Additional paid in capital 127,938 21,362 5,889 1,777 7,666
Notes receivable from stock sales (173) - - - -
Retained earnings (deficit) (49,145) 36,004 1,421 5,871 7,292
Accumulated other comprehensive loss (4,091) - (4,091) - (4,091)
----------------------------------------------------------------------------
Total shareholders' equity 74,750 75,337 14,633 12,148 26,781
----------------------------------------------------------------------------
$ 81,620 $309,396 $74,117 $71,001 $145,118
============================================================================
<CAPTION>
-------------------------------
-------------------------------
Consolidated
Eliminations Total
-------------------------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ - $ -
Accounts receivable, net - 37,196
Inventories - 144,915
Prepaid expenses and other current assets - 5,204
Deferred income taxes (1,629) -
----------------------------
Total current assets (1,629) 187,315
----------------------------
Fixed assets, net - 169,317
Deferred financing expenses, net - 3,327
Goodwill, net - 58,822
Deferred income taxes (13,606) -
Investments in subsidiaries (102,118) -
----------------------------
($117,353) $418,781
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 18,282
Accrued liabilities - 8,618
Accrued payroll and benefits - 7,402
Accrued interest - 4,926
Long-term debt, current portion - 12,730
Revolving line of credit - 34,750
Deferred income taxes (1,629) 46,565
Intercompany accounts - -
----------------------------
Total current liabilities (1,629) 133,273
----------------------------
Long-term debt - 195,677
Deferred income taxes (13,606) 15,081
Shareholders' equity:
Common stock (33,885) 221
Additional paid in capital (29,028) 127,938
Notes receivable from stock sales - (173)
Retained earnings (deficit) (43,296) (49,145)
Accumulated other comprehensive loss 4,091 (4,091)
----------------------------
Total shareholders' equity (102,118) 74,750
----------------------------
($117,353) $418,781
============================
</TABLE>
Page 12
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the nine month period ended September 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Nursery Growing Media Segment
Segment
----------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net $ - $238,992 $79,275 $30,164 $109,439 ($16,931) $331,500
Cost of goods sold - 121,152 47,048 16,377 63,425 (16,931) 167,646
---------------------------------------------------------------------------------------
Gross Profit - 117,840 32,227 13,787 46,014 - 163,854
Operating expenses - 69,893 29,957 8,049 38,006 - 107,899
---------------------------------------------------------------------------------------
Operating income - 47,947 2,270 5,738 8,008 - 55,955
---------------------------------------------------------------------------------------
Other expenses:
Interest (10) 22,445 2,434 1,235 3,669 - 26,104
Interest - intercompany - (2,951) 1,937 1,014 2,951 - -
Amortization of deferred financing
expenses, other (20,322) (2,537) - - - 23,858 999
---------------------------------------------------------------------------------------
(20,332) 16,957 4,371 2,249 6,620 23,858 27,103
---------------------------------------------------------------------------------------
Income before provision (benefit) for
income taxes 20,332 30,990 72 3,489 1,388 (23,858) 28,852
Income tax provision (benefit) 4 10,668 (3,464) 1,316 (2,148) - 8,524
---------------------------------------------------------------------------------------
Net income $ 20,328 $ 20,322 $ 3,536 $ 2,173 $ 3,536 ($23,858) $ 20,328
=======================================================================================
</TABLE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the three month period ended September 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Nursery Growing Media Segment
Segment
-----------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net $ - $ 39,858 $19,717 $ 7,985 $ 27,702 ($4,162) $ 63,398
Cost of goods sold - 20,949 10,876 4,322 15,198 (4,162) 31,985
---------------------------------------------------------------------------------------
Gross Profit - 18,909 8,841 3,663 12,504 - 31,413
Operating expenses - 19,012 8,771 2,219 10,990 - 30,002
---------------------------------------------------------------------------------------
Operating income - (103) 70 1,444 1,514 - 1,411
---------------------------------------------------------------------------------------
Other expenses:
Interest - 7,907 796 475 1,271 - 9,178
Interest - intercompany - (1,014) 689 325 1,014 - -
Amortization of deferred financing
expenses, other 5,094 280 - - - (4,998) 376
---------------------------------------------------------------------------------------
5,094 7,173 1,485 800 2,285 (4,998) 9,554
---------------------------------------------------------------------------------------
Income (loss) before provision (5,094) (7,276) (1,415) 644 (771) 4,998 (8,143)
(benefit) for income taxes
Income tax benefit - (2,182) (819) (48) (867) - (3,049)
---------------------------------------------------------------------------------------
Net income (loss) (5,094) (5,094) (596) 692 96 4,998 (5,094)
=======================================================================================
</TABLE>
Page 13
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the nine month period ended September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Nursery Growing Media Segment
Segment
---------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
---------------------------------------------------------------------------------------
<S> <C>
Sales, net $ - $157,743 $61,730 $27,806 $89,536 ($14,417) $232,862
Cost of goods sold - 82,025 32,483 16,275 48,758 (14,417) 116,366
----------------------------------------------------------------------------------------
Gross Profit - 75,718 29,247 11,531 40,778 - 116,496
Operating expenses - 42,245 23,219 7,794 31,013 - 73,258
----------------------------------------------------------------------------------------
Operating income - 33,473 6,028 3,737 9,765 - 43,238
----------------------------------------------------------------------------------------
Other expenses:
Interest (20) 10,968 678 956 1,634 - 12,582
Interest - intercompany - (1,088) 928 160 1,088 - -
Amortization of deferred financing
expenses, other (18,597) (3,755) (1,119) - (1,119) 24,033 562
----------------------------------------------------------------------------------------
(18,617) 6,125 487 1,116 1,603 24,033 13,144
----------------------------------------------------------------------------------------
Income before provision
for income taxes 18,617 27,348 5,541 2,621 8,162 (24,033) 30,094
Income tax provision 8 8,751 1,224 1,502 2,726 - 11,485
----------------------------------------------------------------------------------------
Net income (loss) $18,609 $ 18,597 $ 4,317 $ 1,119 $ 5,436 ($24,033) $ 18,609
========================================================================================
</TABLE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the three month period ended September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Nursery Growing Media Segment
Segment Segment
----------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net - $ 24,346 $17,250 $ 7,498 $24,748 ($3,585) $ 45,509
Cost of goods sold - 13,833 9,017 4,082 13,099 (3,585) 23,347
----------------------------------------------------------------------------------------
Gross Profit - 10,513 8,233 3,416 11,649 - 22,162
Operating expenses - 11,376 7,491 2,610 10,101 - 21,477
----------------------------------------------------------------------------------------
Operating income - (863) 742 806 1,548 - 685
----------------------------------------------------------------------------------------
Other expenses:
Interest - 3,707 393 324 717 - 4,424
Interest - intercompany - (312) 209 103 312 - -
----------------------------------------------------------------------------------------
Amortization of deferred financing
expenses, other 2,433 (134) (228) - (228) (1,884) 187
----------------------------------------------------------------------------------------
2,433 3,261 374 427 801 (1,884) 4,611
----------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes (2,433) (4,124) 368 379 747 1,884 (3,926)
Income tax provision benefit - (1,691) 47 151 198 - (1,493)
----------------------------------------------------------------------------------------
Net income (loss) ($2,433) ($2,433) $ 321 $ 228 $ 549 $ 1,884 ($2,433)
======================================================================================
</TABLE>
Page 14
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the nine month period ended September 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Nursery Growing Media Segment
Segment
-------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
-------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
<S>
Cash provided by (used in) operating
activities $ 10 $ 26,250 $($2,407) $ 5,447 $ 3,040 $ _ $ 29,300
-------------------------------------------------------------------------------------------
Cash flows from investing
activities:
Purchase of fixed assets, net - (24,824) (1,702) (5,056) (6,758) - (31,582)
Proceeds from sales of fixed assets - - - 436 436 - 436
Acquisitions, net of cash - (112,034) - - - - (112,034)
-------------------------------------------------------------------------------------------
Net cash used in investing activities - (136,858) (1,702) (4,620) (6,322) - (143,180)
-------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on revolving line of credit - 1,100 - - - - 1,100
Intercompany advances (repayments) (153) (7,072) 7,225 - 7,225 - -
Proceeds from the issuance of
long-term debt - 121,216 - - - - 121,216
Repayments of long-term debt - (4,009) - (1,041) (1,041) - (5,050)
Deferred financing costs - (3,743) - - - - (3,743)
Penalty on early payment of
subordinated notes - - - - - - -
Dividends received ( paid ) - 3,116 (3,116) - (3,116) - -
Repayments of notes receivables from
stock sales 143 - - - - - 143
-------------------------------------------------------------------------------------------
Net cash provided by (used in) (10) 110,608 4,109 (1,041) 3,068 - 113,666
financing activities
-------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash - - - 214 214 - 214
Net increase in cash - - - - - - -
Cash, beginning of year - - - - - - -
-------------------------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ - $ - $ -
===========================================================================================
</TABLE>
Page 15
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the nine month period ended September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Nursery Growing Media Segment
Segment
------------------------------------------------------------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided by operating activities $ 20 $ 24,588 $ 8,906 $ 3,471 $ 12,377 $ - $ 36,985
-------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (11,962) (927) (2,436) (3,363) - (15,325)
Proceeds from sales of fixed assets - - - 250 250 - 250
Acquisitions, net of cash - (30,796) (30,150) (485) (30,635) - (61,431)
-------------------------------------------------------------------------------------------
Net cash used in investing
activities - (42,758) (31,077) (2,671) (33,748) - (76,506)
-------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of
credit - (20,950) - - - - (20,950)
Intercompany advances (repayments) (124) 6,552 (6,428) - (6,428) - -
Proceeds from the issuance of
long-term debt - 30,500 30,157 304 30,461 - 60,961
Repayments of long-term debt - (5) - - - - (5)
Dividends received ( paid ) - 1,558 (1,558) - (1,558) - -
Repayments of notes receivables
from stock sales 104 - - - - - 104
-------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (20) 55 22,171 304 22,475 - 40,110
-------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash - - - (1,104) (1,104) - (1,104)
-------------------------------------------------------------------------------------------
Net decrease in cash $ - ($515) $ - $ - $ - $ - (515)
Cash, beginning of year - 515 - - - - 515
-------------------------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ - $ - $ -
-------------------------------------------------------------------------------------------
</TABLE>
Page 16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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 or to satisfy payment obligations under existing financing,
limitations of Hines' substantial leverage and debt restrictions,
government regulations and other risks and uncertainties described 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.
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 green goods products
primarily to the retail
Page 17
<PAGE>
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 and bark-
based growing mixes. The Company sells its growing media products primarily
to professional customers, including greenhouse growers, nursery growers
and golf course developers. The Company believes that sales of its green
goods and growing media 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 green goods business, like that of its
competitors, is highly seasonal. In 1999, approximately 75% of Hines
Nurseries' net sales and approximately 117% of Hines Nurseries' operating
income occurred in the first half of the year. Approximately 57% of Hines
Nurseries' net sales and approximately 105% of Hines Nurseries' operating
income occurred in the second quarter of 1999. 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.
Acquisitions. The Company has completed a number of recent
acquisitions to expand and diversify its operations. Since January 1, 1997,
the Company has completed eight acquisitions, all of which have been
accounted for under the purchase method. Accordingly, the purchase prices
were allocated to certain assets and liabilities based on their respective
fair market values. The excess of the purchase price over the estimated
fair market value of the net assets acquired in each transaction was
accounted for as goodwill. The Company's existing acquisition facility and
a new term loan provided the funds used for the acquisitions. The
consolidated financial statements include the operating results of each
acquisition from the date of acquisition.
On March 3, 2000, the Company entered into an agreement to acquire (i)
substantially all of the assets and assume certain liabilities of Lovell
Farms, Inc., and Botanical Farms, Inc.; (ii) the capital stock of Enviro-
Safe Laboratories, Inc.; and (iii) the partnership interest of Lovell
Properties (collectively referred to as
Page 18
<PAGE>
"Lovell"). Lovell is a supplier of bedding and holiday plants to
independent garden centers, home centers, mass merchandisers and other
professional customers in the southeastern United States. The total
acquisition price was approximately $92.0 million, which resulted in
goodwill of approximately $72.2 million. In addition, under the terms of
the purchase agreement, the Company may be required to make additional
payments of up to $12.5 million, contingent upon Lovell's achieving certain
operating results during 2000 and 2001.
On January 14, 2000, the Company entered into an agreement to acquire
certain assets (primarily land and buildings) and all of the outstanding
capital stock of Willow Creek Greenhouses, Inc. ("Willow Creek"), a
producer of quality annual bedding plants and holiday plants. The total
acquisition price was approximately $18.8 million, which resulted in
goodwill of approximately $9.7 million. In addition, under the terms of the
purchase agreement, the Company may be required to make additional payments
of up to $1.1 million, contingent upon Willow Creek's achieving certain
operating results during 2000 and 2001.
These acquisitions have and will continue to affect the period-to-
period comparability of the operating results discussed below. The Company
has historically pursued 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.
While the Company continues to believe that the highly fragmented nature of
the nursery industry presents it with a number of opportunities to make
such acquisitions, management's current priority is to increase its
operating cash flows and financial flexibility. Accordingly, the Company
does not have current agreements to consummate further 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.
In 1999, the Company generated taxable income for federal income tax
purposes. To the extent taxable income is offset with net operating loss
carry forwards, no cash federal income tax will be paid apart from a small
amount due to the alternative minimum tax. During the same period, the
Company has continued to show a tax provision relating to the recording of
deferred taxes. At December 31, 1999, the Company had approximately $36.5
million in net operating loss carryforwards for federal income tax
reporting purposes.
Page 19
<PAGE>
In recent years, the Company's Canadian operations have become more
self-sufficient and less dependent upon its U.S.-based parent. This trend
has continued into 2000 to the extent that management considers its
investment in Sun Gro-Canada to be essentially permanent in duration.
Through March 31, 2000, a total of $3.0 million in deferred taxes had been
provided against pretax income on translation gains and losses arising from
the remeasurement of the financial statements of Sun Gro-Canada into U.S.
dollars. To the extent that the Company's investment in Sun Gro-Canada is
permanent in duration, deferred taxes need not be provided on translation
gains and losses. Accordingly, a deferred tax benefit of $3.0 million
reflecting deferred taxes which had previously been provided against pretax
income on translation gains and losses arising from the remeasurement of
the financial statements of Sun Gro-Canada into U.S. dollars was recorded
during the quarter ended June 30, 2000. In addition, at December 31, 1999,
Sun Gro-Canada had capital loss carryforwards of approximately Cdn.
$2,121,000 (U.S. $1,447,000). A full valuation allowance of approximately
$571,000 had been recorded against the deferred tax asset associated with
these capital loss carryforwards. An analysis conducted during the year
determined that the valuation allowance should be released, as the loss
carryforwards are more likely than not to be realized in the future. The
combined impact of these two tax-related items was a reduction of $3.6
million in the Company's deferred tax liability, which was recorded during
the quarter ended June 30, 2000.
Results of Operations
Three Months Ended September 30, 2000 compared to Three Months Ended
September 30, 1999
Net sales. Net sales of $63.4 million for the three months ended
September 30, 2000 increased $17.9 million, or 39.3%, from net sales of
$45.5 million for the comparable period in 1999. Sales from the Company's
green goods operations increased 63.7% during the third quarter, due to the
performance of the Company's recently acquired color businesses, and
significant internal growth from its nursery businesses.
Both the Color and Nursery divisions continued to successfully
leverage the expansion of the Company's store service programs,
particularly in its Southern regions. In particular, sales to "big box"
retailers continue to be driven in large part by the growth and enhancement
of the Company's store service programs nationwide.
Net sales of the Company's growing media segment increased by 11.2%
from the comparable period in 1999. Sales of professional peat and mix led
the growing media segment due in large part to recently completed
acquisitions and the growing
Page 20
<PAGE>
popularity of the Company's professional mixes.
Gross profit. Gross profit of $31.4 million for the three months ended
September 30, 2000 increased $9.2 million, or 41.7%, from gross profit of
$22.2 million for the comparable period in 1999 as a result of higher sales
levels in both the green goods and growing media segments.
As a percent of net sales, gross margin increased from 48.7% to 49.5%
from the comparable period in 1999 primarily due to increased production
efficiencies in the Company's green goods segment.
Operating expenses. Operating expenses of $30.0 million for the three
months ended September 30, 2000 increased $8.5 million, or 39.7%, from
$21.5 million for the comparable period in 1999. The increase was primarily
attributable to a dramatic increase in distribution costs caused by
significant increases in fuel and freight costs.
Operating income. Operating income of $1.4 million for the three
months ended September 30, 2000 increased $0.7 million, or 106.0%, from
$0.7 million for the comparable period in 1999. As a percentage of net
sales, operating income increased to 2.2% from 1.5% for the comparable
period in 1999, due primarily to increased gross profit as described above.
Interest expense. Interest expense of $9.2 million for the three
months ended September 30, 2000 increased $4.8 million, or 107.5%, from
$4.4 million for the comparable period in 1999. This higher interest
expense is attributable to a significant increase in debt relating to the
Company's five acquisitions during the past year, and an escalation in
current interest rate levels.
Provision for income taxes. The effective income tax rate was 37.4%
and 38.0% for the three months ended September 30, 2000 and 1999,
respectively.
Net loss. Net loss of $5.1 million for the three months ended
September 30, 2000 increased $2.7 million, or 109.4%, from the net loss of
$2.4 million for the comparable period in 1999. The increase was primarily
attributable to increased interest expense as described above.
Nine Months Ended September 30, 2000 compared to Nine Months Ended
September 30, 1999
Net sales. Net sales of $331.5 million for the nine months ended
September 30, 2000 increased $98.6 million, or 42.4%, from net sales of
$232.9 million for the comparable period in 1999.
Page 21
<PAGE>
Sales from the Company's green goods operations increased 51.5% from
the comparable period in 1999, due to the performance of the Company's
recently acquired color businesses, and significant internal growth from
its nursery businesses.
Net sales of the Company's growing media segment increased by 23.2%
from the comparable period in 1999. This increase in net sales was
attributable to recently completed acquisitions and the growing popularity
of the Company's professional peat and mix products.
Gross profit. Gross profit of $163.9 million for the nine months ended
September 30, 2000 increased $47.4 million, or 40.7%, from gross profit of
$116.5 million for the comparable period in 1999. The increase was
primarily attributable to higher sales at both the Company's green goods
and growing media segments. As a percent of sales, gross margins decreased
from 50.0% to 49.4% of net sales from the comparable period in 1999,
primarily due to the impact of the recent growing media acquisitions having
lower gross margins than the existing base business and the costs
associated with the start up of the Company's co-packing operations.
Operating expenses. Operating expenses of $107.9 million for the nine
months ended September 30, 2000 increased $34.6 million, or 47.3%, from
$73.3 million for the comparable period in 1999. The increase was primarily
attributable to the acquisitions and the significant investment in sales
and management infrastructure required to support the Company's current and
future growth. Operating expenses as a percentage of net sales increased
from 31.5% to 32.6% in the first nine months of 2000, primarily due to a
dramatic increase in distribution costs caused by significant increases in
fuel and freight expenses. Also impacting operating expenses was the
Company's decision to reduce the carrying value on the Company's investment
in NeoInformatics, Inc., a developer and manager of industry-specific
Internet databases, resulting in a net charge of $1.0 million in the
quarter ended June 30, 2000.
Operating income. Operating income of $56.0 million for the nine
months ended September 30, 2000 increased $12.8 million, or 29.4%, from
$43.2 million for the comparable period in 1999 primarily as a result of
sales and related gross profit increases, offset by increases in operating
expenses. As a percentage of net sales, operating income was reduced to
16.9% from 18.6% due primarily to an increase in operating expenses, as
described above.
Interest expense. Interest expense of $26.1 million for the nine
months ended September 30, 2000 increased $13.5 million, or 107.5%, from
$12.6 million for the comparable period in 1999. This higher interest
expense is attributable to a significant increase in debt relating to the
Company's five acquisitions during the
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past year, and an escalation in current interest rate levels.
Provision for income taxes. The Company's effective income tax rate was
29.5% and 38.2% for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in the effective income tax rate reflects the
deferred tax benefit described above.
Net income. Net income of $20.3 million for the nine months ended
September 30, 2000 increased $1.7 million, or 9.2%, from $18.6 million for
the comparable period in 1999. The increase was primarily attributable to
increased sales and the reduction of a previously recorded deferred tax
liability, offset by higher operating and interest expenses.
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 1998, the Company entered into a senior credit facility (the "Senior
Credit Facility") which provided for a $50.0 million term loan and a $200.0
million revolving credit facility, 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 and acquisition facility
is $11.9 million in 2000, $23.6 million in 2001, $63.1 million in 2002 and
$48.2 million in 2003.
In connection with the Lovell acquisition on March 3, 2000, the Company
entered into an amendment to its existing senior credit facility (the
"Amended Senior Credit Facility") to provide for a new $100.0 million term
loan and a $15.0 million increase in the Company's existing working capital
revolving credit facility. The term loan requires annual principal payments
of $1.0 million through December 31, 2003, $47.0 million in fiscal year
2004 and the remaining balance in fiscal year 2005.
The term loan and revolving credit facility interest rate is a
percentage spread over the U.S. prime rate and the Eurodollar rate,
depending upon the Company's quarterly leverage and interest rate coverage
ratios as defined in the Amended Senior Credit Facility. The term loan and
revolving credit facility are secured by substantially all of the assets
and common stock of the Company's domestic subsidiaries and 65% of the
common stock of its foreign subsidiary. The Lovell
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acquisition was financed with proceeds from the Amended Senior Credit
Facility.
As of September 30, 2000, $78.0 million in aggregate principal amount
remains outstanding of the Company's 11 3/4% Senior Subordinated Notes due
2005, Series B. 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.
As a result of higher working capital requirements, higher borrowing
levels due to the Company's recent acquisitions and this year's escalation
in interest rates, the Company was unable to comply with two covenants
under its Amended Senior Credit Facility. The Company requested and
received two temporary waivers from its senior lenders through and
including November 30, 2000. The first waiver related to the Company's
leverage ratio, which for the twelve-month period ended September 30, 2000
was 4.83, in violation of the requirement that it not exceed 4.75. The
second waiver related to a clean down requirement, which requires that
borrowings under the working capital revolver not exceed $20 million for a
period of 60 consecutive days, annually. Earlier this year, the Company's
borrowings reached a low point of $32.75 million.
The Company and its senior lenders have reached an agreement in
principle to amend the Company's Amended Senior Credit Facility. Under the
terms of the proposed amendment, the Company would receive permanent
waivers of the covenant noncompliance addressed by the temporary waivers.
The amendment also would (i) provide the Company with additional revolving
loan commitments in the amount of $30 million guaranteed by its majority
shareholder, Madison Dearborn Capital Partners, L.P ("MDCP"), which could
only be borrowed and could only be outstanding between March 15 and June 15
of 2001 and 2002, (ii) increase the interest rate on all loans by 1/4% to
1/2%, (iii) reset the financial covenants that establish minimum interest
coverage ratios and net worth levels, and maximum leverage ratios and
capital expenditure amounts, (iv) add a minimum EBITDA covenant, (v) amend
the clean down requirement for working capital revolving loans and (vi)
provide for additional restrictions on the Company's ability to make
acquisitions and reinvest proceeds from asset sales. In consideration for
its guarantee on the additional revolving loan commitments, MDCP would
receive a fee of $600,000 and warrants to initially purchase 440,000 shares
of the common stock of Hines. These warrants will be exercisable at any
time prior to December 31, 2005
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at an exercise price equal to the opening price of Hines' common stock on
the effective date of the amendment. All other significant terms and
conditions of the Amended Senior Credit Facility would remain unchanged.
In addition, Hines Nurseries is soliciting the approval of its
noteholders to amend the Indenture governing its Series B 11 3/4% Senior
Subordinated Notes due 2005 and the Notes for the purpose of amending the
definition of "Permitted Indebtedness" within the Indenture to include (i)
all indebtedness that may be incurred under the Amended Senior Credit
Facility in an aggregate principal amount to not exceed $365 million (less
the amount of all mandatory principal repayments and required permanent
reductions made thereunder) plus (ii) up to an additional $35 million in
indebtedness under the additional revolving loan commitments, provided that
such borrowings may only be borrowed and may only be outstanding between
March 15 and June 15 of 2001 and 2002. In consideration for the amendment,
Hines Nurseries would agree to (i) pay a fee of $35 per $1,000 of the
principal amount of Notes, (ii) increase the interest rate thereon from 11
3/4% to 12 3/4% per annum, (iii) increase the optional redemption price to
106.00% of the principal amount thereof, (iv) increase the purchase price
upon a change of control from 101.00% to 105.00% of the principal amount
thereof and add to the events that constitute a change of control, and (v)
pay a premium at maturity equal to 5.00% of the principal amount to be
repaid.
The Company expects to enter into the amendment to the Amended Senior
Credit Facility and the amendments to the Indenture and the Notes in the
very near future on substantially the terms described above, although there
can be no assurances that it will be able to do so.
Net cash provided by operating activities for the nine months ended
September 30, 2000, of $29.3 million decreased $7.7 million, from $37.0
million for the comparable period in 1999. This decrease is attributable to
the higher accounts receivable balance related to the increase in sales in
the nine months ended September 30, 2000. The seasonal nature of the
Company's operations results in significant increases in certain components
of working capital (primarily accounts receivable and inventory) during the
growing and selling cycles.
Net cash used in investing activities during the nine months ended
September 30, 2000 increased $66.7 million to $143.2 million from $76.5
million for the comparable period in 1999. The increase was primarily due
to the Company's acquisitions of Willow Creek and Lovell, the development
of additional nursery acreage and the purchase of nursery-related
structures, certain vehicles and machinery and equipment.
Net cash provided by financing activities during the nine months ended
September 30, 2000 increased $73.6 million to $113.7 million from $40.1
million for the comparable period in 1999. The increase was primarily
associated with increased borrowings under the Amended Senior Credit
Facility related to the acquisitions described above.
The Company typically draws under its revolving credit facilities in the
first and fourth quarters to fund its seasonal inventory buildup of green
goods products and
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seasonal operating expenses. Approximately 75% 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
growing media operations are less seasonal in nature, with slight inventory
buildups generally occurring in the third and fourth quarters. On November
9, 2000, the Company had unused borrowing capacity of $1.4 million and
$60.5 million under its acquisition facility and working capital revolver,
respectively, within the Amended 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) any slowdown in, or
elimination of, future growth in the Company's inventory of growing plants,
or (2) 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 $31.6 million for
the nine months ended September 30, 2000. The capital expenditures for
Hines Nurseries ($24.8 million) related primarily to the development of
additional nursery acreage, and the purchase of nursery-related structures,
vehicles, machinery and equipment and the implementation of an ERP, which
will standardize systems and processes throughout the Company. The capital
expenditures for Sun Gro ($6.8 million) related primarily to peat bog
development and the purchase of peat bog harvesting and processing
equipment. The Company's capital expenditures for 2000 are expected to be
approximately $38.0 million.
Principal repayments due under the Company's various borrowings
agreements total $26.4 million in 2001, $64.2 million in 2002, $49.3
million in 2003 and $175.1 million thereafter. Management believes that
cash generated by operations and borrowings available under the Amended
Senior Credit Facility will be sufficient to meet the Company's anticipated
working capital, capital expenditures and debt service requirements through
2002. Management is currently considering various alternatives to
facilitate the refinancing or repayments of amounts due under the Amended
Senior Credit Facility in 2002. Management believes at this time that the
Company will be able to successfully refinance or repay amounts due under
the Amended Senior Credit Facility in accordance with its terms; however,
there is no assurance that the Company will be able to do so.
Recent Accounting Pronouncements
--------------------------------
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In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," which deferred
the effective date until the first fiscal quarter of the first fiscal year
beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected
to have a material impact on the financial position or results of
operations of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In May 2000, the Company entered into an interest rate swap agreement to
hedge $75 million of its loan facility. The Company does not hold or issue
interest rate swap agreements for trading purposes. This interest rate swap
agreement effectively changes the Company's exposure on its variable rate
interest payments to fixed rate interest payments (7.13%) based on the 3-
month LIBOR rate in effect at the beginning of each quarterly period, with
a maximum rate of 8%.
The interest rate swap agreement matures in February 2005. The market
risk of this interest rate swap agreement is not considered to be material
as of September 30, 2000. Further, the Company has not experienced any
other material changes to its market risk exposures since December 31,
1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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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: November 20, 2000
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