<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, 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 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, 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>
Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations for the Three
Months and Six Months Ended June 30, 2000 and 1999 1
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
Note: Items 1, 2, 3 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
<TABLE>
<CAPTION>
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Six Months Ended June 30, 2000 and 1999
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales, net $ 183,202 $ 127,951 $ 268,102 $ 187,353
Cost of goods sold 91,579 63,676 135,661 93,019
------------ ------------ ------------ ------------
Gross profit 91,623 64,275 132,441 94,334
------------ ------------ ------------ ------------
Selling and distribution expenses 34,169 21,543 55,063 36,255
General and administrative expenses 12,789 7,251 21,123 14,917
Amortization of goodwill 1,026 304 1,711 609
------------ ------------ ------------ ------------
Total operating expenses 47,984 29,098 77,897 51,781
------------ ------------ ------------ ------------
Operating income 43,639 35,177 54,544 42,553
------------ ------------ ------------ ------------
Other expenses
Interest 9,842 3,856 16,926 8,158
Amortization of deferred financing expenses 381 188 623 375
------------ ------------ ------------ ------------
10,223 4,044 17,549 8,533
------------ ------------ ------------ ------------
Income before income taxes 33,416 31,133 36,995 34,020
Income tax provision 10,324 11,791 11,573 12,978
------------ ------------ ------------ ------------
Net income $ 23,092 $ 19,342 $ 25,422 $ 21,042
============ ============ ============ ============
Basic earnings per share:
Net income per common share $1.05 $0.88 $1.15 $0.95
============ ============ ============ ============
Diluted earnings per share:
Net income per common share $1.05 $0.88 $1.15 $0.95
============ ============ ============ ============
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
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(Dollars in thousands, except share data)
June 30, December 31,
2000 1999
-------------- --------------
ASSETS (Unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ - $ -
Accounts receivable, net of
allowance for doubtful accounts
of $1,686 and $1,444 106,602 37,196
Inventories 137,818 144,915
Prepaid expenses and other current
assets 5,183 5,204
-------------- --------------
Total current assets 249,603 187,315
-------------- --------------
FIXED ASSETS, net of accumulated
depreciation and depletion of
$44,386 and $38,455 202,042 169,317
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $2,608 and
$1,985 6,447 3,327
GOODWILL, net of accumulated amortization
of $5,583 and $3,872 137,079 58,822
-------------- --------------
$595,171 $418,781
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 15,247 $ 18,282
Accrued liabilities 10,281 8,618
Accrued payroll and benefits 11,417 7,402
Accrued interest 6,039 4,926
Long-term debt, current portion 11,721 12,730
Borrowings on revolving credit
facility 55,250 34,750
Deferred income taxes 59,423 46,565
-------------- --------------
Total current liabilities 169,378 133,273
-------------- --------------
LONG-TERM DEBT 312,630 195,677
-------------- --------------
DEFERRED INCOME TAXES 13,160 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 June 30, 2000
and December 31, 1999 221 221
Additional paid-in capital 127,938 127,938
Notes receivable from stock sales (30) (173)
Deficit (23,723) (49,145)
Accumulated other comprehensive loss (4,403) (4,091)
-------------- --------------
Total shareholders' equity 100,003 74,750
-------------- --------------
$595,171 $418,781
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
</TABLE>
2
<PAGE>
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,422 $ 21,042
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation, depletion and amortization 8,268 5,816
Amortization of deferred financing costs 623 375
Deferred income taxes 10,937 14,063
Gain on sale of fixed assets (92) (43)
---------- ----------
45,158 41,253
Change in working capital accounts, net of
effect of acquisitions:
Accounts receivable (64,316) (49,601)
Inventories 19,922 10,212
Prepaid expenses and other current assets 158 167
Accounts payable and accrued liabilities (2,105) 11,765
---------- ----------
Net cash (used in) provided by operating
activities (1,183) 13,796
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (20,016) (10,337)
Proceeds from sale of fixed assets 395 183
Acquisitions, net of cash (112,034) (985)
---------- ----------
Net cash used in investing activities (131,655) (11,139)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit 98,465 54,550
Repayments on revolving line of credit (77,965) (56,900)
Proceeds from the issuance of long-term
debt 119,416 279
Repayments of long-term debt (3,472) (5)
Deferred financing costs (3,743) -
Repayments of notes receivables from stock
sales 143 153
----------- ---------
Net cash provided by (used in) financing
activities 132,844 (1,923)
----------- ---------
Effect of exchange rate changes on cash (6) (1,249)
---------- ----------
NET DECREASE IN CASH - (515)
CASH, beginning of period 0 515
---------- ----------
CASH, end of period $ - $ -
========== ==========
Supplemental disclosure of cash flow
information:
Cash paid for interest, net of capitalized
interest of $389 and $260 $ 15,813 $ 3,054
Cash paid for income taxes $ 578 $ 79
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE>
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
JUNE 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, and (2) Color division comprise the green goods
business, Hines Nurseries, Inc. ("Hines Nurseries") and (3) its Growing
Media division operates as Sun Gro Horticulture, Inc. ("Sun Gro"). The
business of Hines is currently conducted through Hines Nurseries, Inc. a
wholly owned subsidiary of Hines, and through Sun Gro Horticulture Inc.
("Sun Gro-U.S.") a wholly owned subsidiary of Hines Nurseries, Sun Gro-
U.S.'s wholly owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-
Canada"), and Sun Gro Canada's direct and indirect Canadian subsidiaries.
Unless otherwise specified, references to "Hines" or the "Company" refer to
Hines Horticulture, Inc. and its subsidiaries.
Hines Nurseries, 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 professional 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 fair presentation,
except in regard to material contingencies or recent significant events,
may be determined in that context.
4
<PAGE>
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, common stock equivalents have
been excluded from the earnings per share calculation for the three and six
months ended June 30, 2000. 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 six
months ended June 30, 1999.
4. Inventories
-----------
Inventories consisted of the following:
<TABLE>
June 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Nursery stock $118,678 $121,330
Finished goods 6,169 10,799
Materials and supplies 12,971 12,786
-------- --------
$137,818 $144,915
======== ========
</TABLE>
5. Supplemental Cash Flow Information
----------------------------------
Supplemental disclosures of non-cash investing and financing activities
were as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------
2000 1999
-------- ----
<S> <C> <C>
Fair value of assets acquired $117,888 $985
Liabilities assumed and incurred
in connection with acquisitions 5,854 -
-------- ----
Cash paid $112,034 $985
======== ====
</TABLE>
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
stockholders. The Company's comprehensive income is composed of cumulative
foreign currency translation adjustments. The components of comprehensive
income during the three and six months ended June 30, 2000 and 1999, were as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $23,092 $19,342 $25,422 $21,042
Cumulative foreign currency
translation adjustments (387) (6,886) (312) (6,886)
------- ------- ------- -------
Comprehensive income $22,705 $12,456 $25,110 $14,156
======= ======= ======= =======
</TABLE>
7. Acquisitions
------------
During the six months ended June 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 goodwill of approximately $70.2 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.
6
<PAGE>
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. The Lovell acquisition was financed with proceeds from
the Amended Senior Credit Facility.
Pro Forma Operating Data
The following summary of condensed unaudited pro forma results of
operations for the six months ended June 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):
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Sales, net $275,264 $254,460
Net income applicable to common stock $ 25,372 $ 23,902
Basic earnings per share:
Income per common share $ 1.15 $ 1.08
Diluted earnings per share:
Income per common share $ 1.15 $ 1.08
</TABLE>
7
<PAGE>
8. Segment Information and Guarantor/Non-Guarantor Disclosures
-----------------------------------------------------------
The Senior Subordinated Notes issued by Hines Nurseries (the issuer) have
been guaranteed by Hines (the parent guarantor) and by Sun Gro-U.S. (the
subsidiary guarantor). The issuer and the subsidiary guarantor are wholly
owned subsidiaries of the parent guarantor and the parent and subsidiary
guarantees are full, unconditional and joint and several. Separate financial
statements of Hines Nurseries and Sun Gro-U.S. are not presented, and Hines
Nurseries and Sun Gro-U.S. are not filing separate reports under the Exchange
Act because management believes that they would not be material to investors.
The Senior Subordinated Notes are not guaranteed by Sun Gro-Canada or its
present or future subsidiaries.
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.
The following consolidating information shows (a) Hines on a parent company
basis only as the parent guarantor (carrying its investment in its subsidiary
under the equity method), (b) Hines Nurseries as the issuer (carrying its
investment in its subsidiary under the equity method), (c) Sun Gro-U.S. as
subsidiary guarantor (carrying its investment in Sun Gro-Canada under the
equity method), (d) Sun Gro-Canada and its direct and indirect subsidiaries,
as subsidiary non guarantors, (e) eliminations necessary to arrive at the
information for the parent guarantor and its direct and indirect subsidiaries
on a consolidated basis and (f) the parent guarantor on a consolidated basis,
as follows:
. Consolidating balance sheets as of June 30, 2000 (unaudited) and
December 31, 1999;
. Consolidating statements of operations for the three months and six
months ended June 30, 2000 and 1999 (unaudited); and
. Consolidating statements of cash flows for the six months ended June
30, 2000 and 1999 (unaudited).
8
<PAGE>
Guarantor / Non-guarantor Disclosures
Consolidating Balance Sheet
As of June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Green Goods
Segment Growing Media Segment
----------- --------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 80,429 23,516 2,657 26,173 - 106,602
Inventories - 123,574 7,367 6,877 14,244 - 137,818
Prepaid expenses and other current assets - 1,890 2,008 1,285 3,293 - 5,183
Deferred income taxes 20 122 1,019 460 1,479 (1,621) -
-------------------------------------------------------------------------------------
Total current assets 20 206,015 33,910 11,279 45,189 (1,621) 249,603
-------------------------------------------------------------------------------------
Fixed assets, net - 130,856 13,642 57,544 71,186 - 202,042
Deferred financing expenses, net - 6,447 - - - - 6,447
Goodwill, net - 115,528 20,860 691 21,551 - 137,079
Deferred income taxes - 13,606 - - - (13,606) -
Investments in subsidiaries 107,012 14,444 - - - (121,456) -
-------------------------------------------------------------------------------------
$107,032 $486,896 $68,412 $69,514 $137,926 ($136,683) $595,171
=====================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 10,384 $ 2,114 $ 2,749 $ 4,863 $ - $ 15,247
Accrued liabilities - 6,107 3,557 617 4,174 - 10,281
Accrued payroll and benefits - 10,118 369 930 1,299 - 11,417
Accrued interest - 6,010 29 - 29 - 6,039
Long-term debt, current portion - 7,175 1,510 3,036 4,546 - 11,721
Revolving line of credit - 55,250 - - - - 55,250
Deferred income taxes - 61,044 - - - (1,621) 59,423
Intercompany accounts 7,029 (49,486) 28,014 14,443 42,457 - -
-------------------------------------------------------------------------------------
Total current liabilities 7,029 106,602 35,593 21,775 57,368 (1,621) 169,378
-------------------------------------------------------------------------------------
Long-term debt - 268,241 29,139 15,250 44,389 - 312,630
Deferred income taxes - 11,300 (1,951) 17,417 15,466 (13,606) 13,160
Shareholders' equity:
Common stock 221 17,971 11,413 4,501 15,914 (33,885) 221
Additional paid in capital 127,938 21,362 5,889 - 5,889 (27,251) 127,938
Notes receivable from stock sales (30) - - - - - (30)
Retained earnings (deficit) (23,723) 61,420 3,303 - 3,303 (64,723) (23,723)
Accumulated other comprehensive loss (4,403) - (4,403) - (4,403) 4,403 (4,403)
-------------------------------------------------------------------------------------
Total shareholders' equity 100,003 100,753 16,202 4,501 20,703 (121,456) 100,003
-------------------------------------------------------------------------------------
$107,032 $486,896 $78,983 $58,943 $137,926 ($136,683) $595,171
=====================================================================================
</TABLE>
9
<PAGE>
Consolidating Balance Sheet
As of December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Green Goods
Segment Growing Media Segment
----------- ---------------------------------------
Hines Sun Gro Sun Gro Canada
Horticulture Hines U.S. (Subsidiary
(Parent Nurseries (Subsidiary Non- Sun Gro Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Sub-total Eliminations Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash $ - $ - $ - $ - $ - $ - $ -
Accounts receivable, net - 14,705 19,288 3,203 22,491 - 37,196
Inventories - 126,272 9,742 8,901 18,643 - 144,915
Prepaid expenses and other current
assets - 2,460 2,231 513 2,744 - 5,204
Deferred income taxes 24 122 1,018 465 1,483 (1,629) -
----------------------------------------------------------------------------------------------
Total current assets 24 143,559 32,279 13,082 45,361 (1,629) 187,315
----------------------------------------------------------------------------------------------
Fixed assets, net - 99,124 12,984 57,209 70,193 - 169,317
Deferred financing expenses, net - 3,327 - - - - 3,327
Goodwill, net - 36,906 21,206 710 21,916 - 58,822
Deferred income taxes - 13,606 - - - (13,606) -
Investments in subsidiaries 81,596 12,874 7,648 - 7,648 (102,118) -
----------------------------------------------------------------------------------------------
$ 81,620 $309,396 $74,117 $71,001 $145,118 ($117,353) $418,781
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 9,709 $ 4,751 $ 3,822 $ 8,573 $ - $ 18,282
Accrued liabilities - 2,567 4,617 1,434 6,051 - 8,618
Accrued payroll and benefits - 5,854 702 846 1,548 - 7,402
Accrued interest - 4,828 98 - 98 - 4,926
Long-term debt, current
portion - 8,669 1,516 2,545 4,061 - 12,730
Revolving line of credit - 34,750 - - - - 34,750
Deferred income taxes - 48,194 - - - (1,629) 46,565
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 (1,629) 133,273
----------------------------------------------------------------------------------------------
Long-term debt - 149,775 29,134 16,768 45,902 - 195,677
Deferred income taxes - 11,300 803 16,584 17,387 (13,606) 15,081
Shareholders' equity:
Common stock 221 17,971 11,414 4,500 15,914 (33,885) 221
Additional paid in capital 127,938 21,362 5,889 1,777 7,666 (29,028) 127,938
Notes receivable from stock sales (173) - - - - - (173)
Retained earnings (deficit) (49,145) 36,004 1,421 5,871 7,292 (43,296) (49,145)
Accumulated other comprehensive loss (4,091) - (4,091) - (4,091) 4,091 (4,091)
----------------------------------------------------------------------------------------------
Total shareholders' equity 74,750 75,337 14,633 12,148 26,781 (102,118) 74,750
----------------------------------------------------------------------------------------------
$ 81,620 $309,396 $74,117 $71,001 $145,118 ($117,353) $418,781
==============================================================================================
</TABLE>
10
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the six month period ended June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Green Goods
Segment Growing Media 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 $ - $199,134 $59,558 $22,179 $81,737 ($12,769) $268,102
Cost of goods sold - 100,203 36,172 12,055 48,227 (12,769) 135,661
----------------------------------------------------------------------------------------------
Gross Profit - 98,931 23,386 10,124 33,510 - 132,441
Operating expenses - 50,881 21,186 5,830 27,016 - 77,897
----------------------------------------------------------------------------------------------
Operating income - 48,050 2,200 4,294 6,494 - 54,544
----------------------------------------------------------------------------------------------
Other expenses:
Interest (10) 14,538 1,638 760 2,398 - 16,926
Interest - intercompany - (1,937) 1,248 689 1,937 - -
Amortization of deferred financing
expenses, other (25,416) (2,817) - - - 28,856 623
----------------------------------------------------------------------------------------------
(25,426) 9,784 2,886 1,449 4,335 28,856 17,549
----------------------------------------------------------------------------------------------
Income before provision for (benefit
from) income taxes 25,426 38,266 (686) 2,845 2,159 (28,856) 36,995
Income tax provision (benefit) 4 12,850 (2,645) 1,364 (1,281) - 11,573
----------------------------------------------------------------------------------------------
Net income $ 25,422 $ 25,416 $ 1,959 $ 1,481 $ 3,440 ($28,856) $ 25,422
==============================================================================================
</TABLE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Operations
For the three month period ended June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Green Goods
Segment Growing Media 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 $ - $149,841 $27,435 $9,309 $36,744 ($3,383) $183,202
Cost of goods sold - 73,970 15,931 5,061 20,992 (3,383) 91,579
----------------------------------------------------------------------------------------------
Gross Profit - 75,871 11,504 4,248 15,752 - 91,623
Operating expenses - 33,742 10,938 3,304 14,242 - 47,984
----------------------------------------------------------------------------------------------
Operating income - 42,129 566 944 1,510 - 43,639
----------------------------------------------------------------------------------------------
Other expenses:
Interest (7) 8,625 842 382 1,224 - 9,842
Interest - intercompany - (1,098) 706 392 1,098 - -
Amortization of deferred financing
expenses, other (23,088) (1,141) 1,704 - 1,704 22,906 381
----------------------------------------------------------------------------------------------
(23,095) 6,386 3,252 774 4,026 22,906 10,223
----------------------------------------------------------------------------------------------
Income before provision for (benefit
from) income taxes 23,095 35,743 (2,686) 170 (2,516) (22,906) 33,416
Income tax provision (benefit) 3 12,655 (2,750) 416 (2,334) - 10,324
----------------------------------------------------------------------------------------------
Net income (loss) $ 23,092 $ 23,088 $ 64 ($246) ($182) ($22,906) $ 23,092
==============================================================================================
</TABLE>
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>
Green Goods
Segment Growing Media 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 $ - $133,397 $44,480 $20,308 $64,788 ($10,832) $187,353
Cost of goods sold - 68,192 23,466 12,193 35,659 (10,832) 93,019
----------------------------------------------------------------------------------------------
Gross Profit - 65,205 21,014 8,115 29,129 - 94,334
Operating expenses - 30,869 15,728 5,184 20,912 - 51,781
----------------------------------------------------------------------------------------------
Operating income - 34,336 5,286 2,931 8,217 - 42,553
----------------------------------------------------------------------------------------------
Other expenses:
Interest (20) 7,261 285 632 917 - 8,158
Interest - intercompany - (776) 719 57 776 - -
Amortization of deferred financing
expenses, other (21,030) (3,621) (891) - (891) 25,917 375
----------------------------------------------------------------------------------------------
(21,050) 2,864 113 689 802 25,917 8,533
----------------------------------------------------------------------------------------------
Income before provision for
income taxes 21,050 31,472 5,173 2,242 7,415 (25,917) 34,020
Income tax provision 8 10,442 1,177 1,351 2,528 - 12,978
----------------------------------------------------------------------------------------------
Net income $ 21,042 $ 21,030 $ 3,996 $ 891 $ 4,887 ($25,917) $ 21,042
==============================================================================================
</TABLE>
Consolidating Statement of Operations
For the three month period ended June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Nursery
Segment Growing Media 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 $ - $100,224 $22,374 $10,311 $32,685 ($4,958) $127,951
Cost of goods sold - 50,379 12,048 6,207 18,255 (4,958) 63,676
----------------------------------------------------------------------------------------------
Gross Profit - 49,845 10,326 4,104 14,430 - 64,275
Operating expenses - 19,015 7,635 2,448 10,083 - 29,098
----------------------------------------------------------------------------------------------
Operating income - 30,830 2,691 1,656 4,347 - 35,177
----------------------------------------------------------------------------------------------
Other expenses:
Interest (20) 3,467 128 281 409 - 3,856
Interest - intercompany - (417) 388 29 417 - -
Amortization of deferred financing
expenses, other (19,330) (2,224) (940) - (940) 22,682 188
----------------------------------------------------------------------------------------------
(19,350) 826 (424) 310 (114) 22,682 4,044
----------------------------------------------------------------------------------------------
Income before provision for
income taxes 19,350 30,004 3,115 1,346 4,461 (22,682) 31,133
Income tax provision 8 10,486 734 563 1,297 - 11,791
----------------------------------------------------------------------------------------------
Net income $ 19,342 $ 19,518 $ 2,381 $ 783 $ 3,164 ($22,682) $ 19,342
==============================================================================================
</TABLE>
12
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the six months ended June 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
Green Goods 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
(used in) operating
activities $ 10 ($10) ($4,626) $ 3,443 ($1,183) $ - ($1,183)
--------------------------------------------------------------------------------------------------------
Cash flows from investing
activities:
Purchase of fixed
assets, net - (15,656) (1,556) (2,804) (4,360) - (20,016)
Proceeds from sales
of fixed assets - - - 395 395 - 395
Acquisitions,
net of cash - (112,034) - - - - (112,034)
--------------------------------------------------------------------------------------------------------
Net cash used in
investing activities - (127,690) (1,556) (2,409) (3,965) - (131,655)
--------------------------------------------------------------------------------------------------------
Cash flows from financing
activities:
Borrowings on
revolving line
of credit - 98,465 - - - - 98,465
Repayments of
revolving line
of credit - (77,965) - - - - (77,965)
Intercompany advances
(repayments) (153) (7,587) 7,740 - 7,740 - -
Proceeds from the
issuance of
long-term debt - 119,416 - - - - 119,416
Repayments of
long-term debt - (2,444) - (1,028) (1,028) - (3,472)
Deferred financing
costs - (3,743) - - - - (3,743)
Dividends received
(paid) - 1,558 (1,558) - (1,558) - -
Repayments of notes
receivables from
stock sales 143 - - - - - 143
--------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) financing
activities (10) 127,700 6,182 (1,028) 5,154 - 132,844
--------------------------------------------------------------------------------------------------------
Effect of exchange
rate changes
on cash and
cash equivalents - - - (6) (6) - (6)
--------------------------------------------------------------------------------------------------------
Net decrease in cash - - - - - - -
Cash, beginning of year - - - - - - -
--------------------------------------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ - $ - $ -
========================================================================================================
</TABLE>
13
<PAGE>
Guarantor / Non-guarantor Disclosures - (Continued)
Consolidating Statement of Cash Flows
For the six months ended June 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Green Goods 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 $ 8,185 $ 2,668 $ 2,923 $ 5,591 $ - $ 13,796
-------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed assets, net - (8,136) (550) (1,651) (2,201) - (10,337)
Proceeds from sales of fixed assets - - - 183 183 - 183
Acquisitions, net of cash - (500) - (485) (485) - (985)
--------------------------------------------------------------------------------------------
Net cash used in investing
activities - (8,636) (550) (1,953) (2,503) - (11,139)
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments on revolving line of credit - (2,350) - - - - (2,350)
Intercompany advances (repayments) (173) 733 (560) - (560) - -
Proceeds from the issuance of
long-term debt - - - 279 279 - 279
Repayments of long-term debt - (5) - - - - (5)
Dividends received (paid) - 1,558 (1,558) - (1,558) - -
Repayments of notes receivables
from stock sales 153 - - - - - 153
--------------------------------------------------------------------------------------------
Net cash used in financing
activities (20) (64) (2,118) 279 (1,839) - (1,923)
--------------------------------------------------------------------------------------------
Effect of exchange rate changes on
cash and cash equivalents - - - (1,249) (1,249) - (1,249)
--------------------------------------------------------------------------------------------
Net decrease in cash - (515) - - - - (515)
Cash, beginning of year - 515 - - - - 515
--------------------------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ - $ - $ - $ -
============================================================================================
</TABLE>
14
<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,
limitations of leverage and debt restrictions, government regulations and
other risks and uncertainties defined from time to time in Hines' Securities
and Exchange Commission filings.
Therefore, the Company wishes to caution each reader of this report to
consider carefully these factors as well as the specific factors discussed
with each forward-looking statement in this report and disclosed in the
Company's filings with the Securities and Exchange Commission as such factors,
in some cases, have affected, and in the future (together with other factors)
could affect, the ability of the Company to implement its business strategy
and may cause actual results to differ materially from those contemplated by
the statements expressed herein.
15
<PAGE>
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 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.
16
<PAGE>
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 goodwill
of approximately $70.2 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 intends to
pursue strategic acquisitions from time to time that increase its production
capacity, broaden or complement its existing product lines, expand its
geographic presence or offer operating synergies. The Company believes that
the highly fragmented nature of the nursery industry presents it with a number
of opportunities to make such acquisitions, though the Company does not have
current agreements to consummate any such qualifications.
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
17
<PAGE>
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.
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, the tax provision for the three and six months ended June 30,
2000 has been reduced by 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. 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. In the opinion of management, it was
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.
Results of Operations
---------------------
Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999
Net sales. Net sales of $183.2 million for the three months ended June 30,
2000 increased $55.2 million, or 43.1%, from net sales of $128.0 million for
the comparable period in 1999. This substantial sales gain was attributable to
recently completed acquisitions in the Color and Growing Media divisions, and
internal growth in the Nursery division. Sales from the Company's green goods
operations increased 49.5% during the second 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 the Southwest and on the West Coast. 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.
18
<PAGE>
Net sales of the Company's growing media segment increased by 20.6% from
the comparable period in 1999. Sales of professional peat and mix led the
growing media segment due in large part to the mounting popularity of the
Company's professional mixes.
Gross profit. Gross profit of $91.6 million for the three months ended
June 30, 2000 increased $27.9 million, or 43.8%, from gross profit of $63.7
million for the comparable period in 1999 as a result of higher sales levels
at both the green goods and growing media segments.
As a percent of net sales, gross margin decreased from 50.2% to 50.0%
from the comparable period in 1999 primarily due to recent acquisitions having
lower gross margins than the existing base business in the growing media
operations and the costs related to scaling up the Company's co-packing
initiative.
Operating expenses. Operating expenses of $48.0 million for the three
months ended June 30, 2000 increased $18.9 million, or 64.9%, from $29.1
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. Also impacting operating
expenses, was the Company's decision to reduce the carrying value on its
investment in NeoInformatics, Inc., a developer and manager of industry-
specific Internet databases, resulting in a net charge of $0.8 million.
Operating income. Operating income of $43.6 million for the three months
ended June 30, 2000 increased $8.4 million, or 23.9%, from $35.2 million for
the comparable period in 1999. As a percentage of net sales, operating income
decreased to 23.8% from 27.5% for the comparable period in 1999, due primarily
to increased operating expenses as described above.
Interest expense. Interest expense of $9.8 million for the three months
ended June 30, 2000 increased $5.9 million, or 155.2%, from $3.9 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 30.9% and
37.9% for the three months ended June 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 $23.1 million for the three months ended
June 30, 2000 increased $3.8 million, or 19.4%, from $19.3 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 interest expense.
19
<PAGE>
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Net sales. Net sales of $268.1 million for the six months ended June 30,
2000 increased $80.7 million, or 43.1%, from net sales of $187.4 million for
the comparable period in 1999. This substantial sales gain was attributable to
recently completed acquisitions in the Color and Growing Media divisions, and
internal growth in the Nursery division. Sales from the Company's green goods
operations increased 49.3% 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 28.5% from
the comparable period in 1999. The sales increases were attributable to the
growing popularity of the Company's professional peat and mix products.
Gross profit. Gross profit of $132.4 million for the six months ended
June 30, 2000 increased $38.1 million, or 40.4%, from gross profit of $94.3
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 50.4% 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
that the existing base business and the costs associated with the start up of
the Company's co-packing operations.
Operating expenses. Operating expenses of $77.9 million for the six months
ended June 30, 2000 increased $26.1 million, or 50.4%, from $51.8 million for
the comparable period in 1999. The increase was primarily attributable to
acquisitions and the significant investment in sales and management
infrastructure required to support the Company's current and future growth.
Operating expenses as a percentage of net sales increased from 27.6% to 29.1%
in the first six 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 $0.8 million.
Operating income. Operating income of $54.5 million for the six months
ended June 30, 2000 increased $11.9 million, or 28.2%, from $42.6 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 20.3% from 22.7% due primarily
to the increase in operating expenses, as described above.
20
<PAGE>
Interest expense. Interest expense of $16.9 million for the six months
ended June 30, 2000 increased $8.7 million, or 107.5%, from $8.2 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 Company's effective income tax rate was
31.3% and 38.1% for the six months ended June 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 $25.4 million for the six months ended June 30,
2000 increased $4.4 million, or 21.0%, from $21.0 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 is $5.25 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 September 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 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.
21
<PAGE>
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 acquisition was financed with proceeds from the Amended
Senior Credit Facility.
As of June 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.
Net cash (used in) provided by operating activities for the six months
ended June 30, 2000, of ($1.2) million increased $15.0 million, from $13.8
million for the comparable period in 1999. This increase is attributable to
the higher accounts receivable balance related to the increase in sales in the
six months ended June 30, 2000. The seasonal nature of the Company's
operations results in a significant increase in certain components of working
capital (primarily accounts receivable and inventory) during the growing and
selling cycles.
Net cash used in investing activities during the six months ended June 30,
2000 increased $120.6 million to $131.7 million from $11.1 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 (used in) financing activities during the six months
ended June 30, 2000 increased $134.8 million to $132.8 million from $(2.0)
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.
22
<PAGE>
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 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 July 31, 2000, the
Company had unused borrowing capacity of $1.4 million and $74.5 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 $20.0 million for the
six months ended June 30, 2000. The capital expenditures for Hines Nurseries
($15.6 million) related primarily to the purchase and development of
additional nursery acreage, 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 ($4.4 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
$35 million.
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 for the foreseeable future. However, as a result of its
plan to pursue strategic acquisitions, the Company will likely require
additional debt or equity financing in the future. There can be no assurance
that such additional financing will be on terms favorable to the Company, or
at all.
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<PAGE>
Year 2000 Compliance
--------------------
The Company has instituted a program to determine whether its computerized
information systems are able to interpret dates beyond the year 1999 and
implemented programming modifications to its main operational and financial
reporting systems to address this issue. The financial systems of companies
recently acquired by the Company were also evaluated to determine whether they
were Year 2000 compliant.
To date, the Company has not incurred any significant failures,
interruptions of supplies or services related to the Year 2000 issue.
Recent Accounting Pronouncements
--------------------------------
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.
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 June 30, 2000. Further, the Company has not experienced any other material
changes to its market risk exposures since December 31, 1999.
24
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 1, 2000 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 2000 fiscal year and approved an amendment to the Hines
Horticulture, Inc. ("Hines") Amended and Restated 1998 Long-Term Incentive
Plan.
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 17,964,711 132,277 0
Ronald A. Pierre 17,986,311 110,677 0
Thomas R. Reusche 17,964,711 132,277 0
James R. Tennant 17,964,711 132,277 0
Stephen P. Thigpen 17,986,311 110,677 0
Paul R. Wood 17,986,311 110,677 0
</TABLE>
For the ratification of PricewaterhouseCoopers LLP as the Company's
independent public accountants, 18,093,580 votes were cast in favor, 2,308
votes were cast against and there were 1,100 abstentions.
For the Amendment to the Amended and Restated 1998 Long-Term Equity Incentive
Plan, 16,485,105 votes were cast in favor, 1,608,783 votes were cast against
and there were 3,100 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
Items 1, 2, 3, and 5 are not applicable and have been omitted.
25
<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 11, 2000
26
