<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended March 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________________ to _____________________
Commission File Number
33-99452
HINES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Nevada 52-1720681
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
12621 Jeffrey Road
Irvine, California 92620
(Address of principal executive offices) (Zip Code)
(949) 559-4444
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
As of April 30, 1998 there were 10,492,014 shares of Common Stock, par
value $0.01 per share, outstanding.
================================================================================
<PAGE>
HINES HOLDINGS, INC.
Index
Part I. Financial Information
Item 1. Financial Statements Page No.
--------
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998 1
Condensed Consolidated Statements of Operations and
Deficit for the Three Months Ended March 31, 1997
and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1998 4
Notes to the Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
Part II. Other Information
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
Note: Items 1, 3, 4 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
HINES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1998
<TABLE>
<CAPTION>
ASSETS December 31, 1997 March 31, 1998
------ (unaudited)
----------------- --------------
<S> <C> <C>
(Dollars in thousands)
CURRENT ASSETS:
Cash $ 2,543 $ 2,195
Accounts receivable, net of allowance for
doubtful accounts of $1,193 and $1,263 20,569 51,130
Inventories 106,007 115,674
Prepaid expenses and other current assets 1,958 1,741
----------------- --------------
Total current assets 131,077 170,740
----------------- --------------
FIXED ASSETS, net of accumulated depreciation
and depletion of $20,459 and $22,312 92,406 93,046
DEFERRED FINANCING EXPENSES, net of
accumulated amortization of $2,332 and $2,655 6,477 6,154
ESCROW DEPOSIT - Lakeland Acquisition - 708
GOODWILL, net of accumulated amortization
of $1,474 and $1,768 38,859 38,565
----------------- --------------
$268,819 $309,213
================= ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
<PAGE>
HINES HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
------------------------------------- December 31, 1997 March 31, 1998
(unaudited)
----------------- --------------
<S> <C> <C>
(Dollars in thousands except share data)
CURRENT LIABILITIES:
Accounts payable $8,046 $17,072
Accrued liabilities 5,309 9,251
Accrued payroll and benefits 6,521 4,806
Long-term debt, current portion 5,400 5,400
Revolving line of credit 43,102 66,276
Deferred income taxes 35,151 34,904
----------------- --------------
Total current liabilities 103,529 137,709
----------------- --------------
LONG-TERM DEBT 160,356 160,268
DEFERRED INCOME TAXES 6,003 6,274
COMMITMENTS AND CONTINGENCIES
CUMULATIVE REDEEMABLE SENIOR PREFERRED
STOCK 12 PERCENT, par value $.01 per share;
liquidation preference of $1,000 per share; 50,000
shares authorized; 39,500 and 45,750, shares issued
at December 31, 1997 and March 31, 1998 43,967 51,847
CUMULATIVE REDEEMABLE JUNIOR PREFERRED
STOCK 12 PERCENT, par value $.01 per share;
liquidation preference of $1 per share; 22,000,000
shares authorized; 20,847,986 shares issued
at December 31, 1997 and March 31, 1998 26,715 27,703
SHAREHOLDERS' DEFICIT
Common Stock
Authorized - 30,000,000 shares $.01 par value;
Issued and outstanding - 10,492,014 at
December 31, 1997 and March 31, 1998 105 105
Accumulated accretion of cumulative redeemable preferred
stock (in excess) less than additional paid in capital (857) (3,475)
Notes receivable from stock sales (366) (366)
Deficit (70,633) (70,852)
----------------- --------------
Total shareholders' deficit (71,751) (74,588)
----------------- --------------
$268,819 $309,213
================= ==============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
<PAGE>
HINES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Three Months Ended March 31, 1997 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------
1997 1998
---------- ------------
<S> <C> <C>
(Dollars in thousands except per share data)
SALES, NET $47,767 $48,174
COST OF GOODS SOLD 24,931 23,515
---------- ----------
Gross Profit 22,836 24,659
---------- ----------
SELLING AND DISTRIBUTION EXPENSES 12,486 12,705
GENERAL AND ADMINISTRATIVE EXPENSES 4,701 6,207
---------- ----------
Total operating expenses 17,187 18,912
---------- ----------
Operating income 5,649 5,747
---------- ----------
OTHER EXPENSES:
Interest 5,238 5,706
Amortization of deferred financing expenses 250 323
---------- ----------
5,488 6,029
---------- ----------
Income (loss) before income tax benefit 161 (282)
INCOME TAX BENEFIT (119) (63)
---------- ----------
NET INCOME (LOSS) 280 (219)
Less: Preferred stock dividends (1,647) (2,825)
---------- ----------
NET LOSS applicable to common stock ($1,367) ($3,044)
========== ==========
Net loss per common share - basic ($0.13) ($0.29)
========== ==========
Weighted average shares outstanding 10,226,184 10,492,014
========== ==========
DEFICIT, beginning of period ($76,410) ($70,633)
NET INCOME (LOSS) during the period 280 (219)
---------- ----------
DEFICIT, end of period ($76,130) ($70,852)
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
<PAGE>
HINES HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1998
(Unaudited)
Three Months Ended March 31
---------------------------
1997 1998
---------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 280 $ (219)
Adjustments to reconcile net income to
net cash used in operating activities -
Depreciation, depletion and amortization 1,747 2,542
Deferred income taxes (58) 24
(Gain) on sale of fixed assets - (20)
Other 46 -
------- -------
2,015 2,327
CHANGE IN WORKING CAPITAL ACCOUNTS:
Accounts receivable (30,840) (30,561)
Inventories (6,576) (9,667)
Prepaid expenses and other assets 561 (491)
Accounts payable and accrued liabilities 10,070 11,253
Other liabilities (184) -
------- -------
Net cash used in operating activities (24,954) (27,139)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,352) (2,739)
Proceeds from sale of fixed assets - 194
------- -------
Net cash used in investing activities (2,352) (2,545)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit 46,740 47,472
Repayments on revolving line of credit (19,570) (24,298)
Repayments of long-term debt (116) (88)
Deferred financing costs (379) -
Issuance of preferred stock - 6,250
------- -------
Net cash provided by financing activities 26,675 29,336
------- -------
NET DECREASE IN CASH (631) (348)
CASH beginning of period 631 2,543
------- -------
CASH end of period $ - $ 2,195
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
4
<PAGE>
HINES HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1998
(UNAUDITED)
1. Description of Business:
------------------------
Hines Holdings, Inc. ("Holdings") produces and distributes horticultural
products through its two operating divisions, Hines Nurseries ("Hines") and
Sun Gro Horticulture ("Sun Gro"). The business of Hines is conducted
through Hines Horticulture, Inc. ("Hines Horticulture") and Hines II, Inc.
("Hines II"), and the business of Sun Gro is conducted through Sun Gro
Horticulture Inc., a wholly owned subsidiary of Hines Horticulture, ("Sun
Gro-U.S."), and its wholly owned subsidiary, Sun Gro Horticulture Canada
Ltd. ("Sun Gro-Canada"). Holdings, together with Hines Horticulture, Hines
II, Sun Gro-U.S. and Sun Gro-Canada, are hereafter collectively referred to
as the "Company."
Hines is a leading supplier of ornamental, container-grown plants with
nursery facilities located in California, Oregon, Texas, South Carolina and
Pennsylvania. Hines markets its products to retail customers throughout
North America.
Sun Gro produces, markets and distributes a range of peat-based
horticulture products for both retail and professional customers. Sun Gro
markets its products in North America and various international markets.
Manufacturing is conducted in 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 which are necessary to state fairly
the consolidated financial position, results of operations and cash flows
of the Company as of and for the periods indicated. The Company presumes
that users of the interim financial information herein have read or have
access to the Company's audited consolidated financial statements for the
preceding fiscal year and that the adequacy of additional disclosure needed
for a fair presentation, except in regard to material contingencies or
recent significant events, may be determined in that context. Accordingly,
footnote and other disclosures which would substantially duplicate the
disclosures contained in the Form 10-K filed on March 31, 1998 by Hines
Holdings, 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.
5
<PAGE>
3. Inventories:
------------
As of December 31, 1997 and March 31, 1998, inventories consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
<S> <C> <C>
Nursery stock $ 95,195 $106,280
Finished goods 4,003 2,818
Materials and supplies 6,809 6,576
-------- --------
$106,007 $115,674
======== ========
</TABLE>
4. Acquisitions:
------------
On April 6, 1998, the Company purchased Lakeland Peat Moss, Ltd. and
certain affiliated entities ("Lakeland"), a leading producer of sphagnum
peat moss in western Canada, for approximately Cdn. $31.8 million, or
approximately $22.4 million U.S. For the fiscal year ended December 31,
1997, Lakeland had net sales of $18.3 million.
5. New Senior Credit Facility:
--------------------------
The Company has entered into negotiations with BT Alex. Brown, as arranger
for Bankers Trust Company, to amend and restate its existing senior credit
facilities (the "Existing Senior Credit Facilities") to provide for a new
$100.0 million revolving credit facility for working capital purposes, a
new $50.0 million term loan and a new $100.0 million revolving credit/term
facility to fund acquisitions (collectively, the "New Senior Credit
Facility"). The New Senior Credit Facility will replace the Existing
Senior Credit Facilities and increase the Company's borrowing capacity by
up to $100.0 million to accommodate the Company's growth plans. The New
Senior Credit Facility is expected to close concurrently with the closing
of a common stock offering by the Company in June 1998.
6. Guarantor/Non-Guarantor Disclosures:
------------------------------------
The 11.75% Senior Subordinated Notes issued by Hines Horticulture (the
issuer) have been guaranteed by Holdings (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 Horticulture and Sun Gro-
U.S. are not presented and Hines Horticulture and Sun Gro-U.S. are not
filing separate reports
6
<PAGE>
under the Exchange Act because management believes that they would not be
material to investors. The Senior Subordinated Notes are not guaranteed by
Hines II, Sun Gro-Canada or their respective present or future
subsidiaries.
The following condensed consolidating information shows (a) Holdings on a
parent company basis only as the parent guarantor (carrying its investment
in subsidiary under the equity method), (b) Hines Horticulture 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) Hines II and Sun Gro-Canada 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:
. Condensed consolidating balance sheets as of December 31, 1997 and
March 31, 1998 (unaudited);
. Condensed unaudited consolidating statements of operations and
retained earnings (deficit) and condensed unaudited consolidating
statements of cash flows for the three-month periods ended March
31, 1997 and 1998.
7
<PAGE>
Guarantor / Non-guarantor Disclosures
Consolidating Condensed Balance Sheet
As of December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Sun Gro Canada
Hines Sun Gro & Hines II
Holdings Hines U.S. (Subsidiary
(Parent Horticulture (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
--------- ------------ ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash $ - $ 941 $ 0 $ 1,602 $ - $ 2,543
Accounts receivable, net - 6,253 10,188 4,128 - 20,569
Inventories - 97,202 2,162 6,643 - 106,007
Prepaid expenses and other current assets - 842 536 580 - 1,958
Deferred income taxes - 50 804 169 (1,023) -
--------- ------------ ----------- -------------- ------------ ------------
Total current assets - 105,288 13,690 13,122 (1,023) 131,077
--------- ------------ ----------- -------------- ------------ ------------
FIXED ASSETS, net - 38,851 4,242 49,313 - 92,406
DEFERRED FINANCING EXPENSES, net - 4,612 247 1,618 - 6,477
GOODWILL, net - 24,021 - 14,838 - 38,859
DEFERRED INCOME TAXES 16 10,163 - - (10,179) -
INVESTMENTS IN SUBSIDIARIES 55,596 8,925 7,832 - (72,353) -
--------- ------------ ----------- -------------- ------------ ------------
$ 55,612 $ 191,860 $ 26,011 $ 78,891 $ (83,555) $ 268,819
--------- ------------ ----------- -------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ - $ 4,041 $ 1,117 $ 2,888 $ - $ 8,046
Accrued liabilities 3 1,971 1,930 1,405 - 5,309
Accrued payroll and benefits - 4,930 887 704 - 6,521
Long-term debt, current portion - 2,400 - 3,000 - 5,400
Revolving line of credit - 36,231 6,871 - - 43,102
Deferred income taxes - 36,096 0 78 (1,023) 35,151
Other liabilities - - (224) 224 - -
Intercompany accounts 55,678 (75,804) (1,308) 21,434 - -
--------- ------------ ----------- -------------- ------------ ------------
Total current liabilities 55,681 9,865 9,273 29,733 (1,023) 103,529
--------- ------------ ----------- -------------- ------------ ------------
LONG-TERM DEBT 1,000 139,856 - 19,500 - 160,356
DEFERRED INCOME TAXES - 2,418 1,555 12,209 (10,179) 6,003
CUMULATIVE REDEEMABLE SENIOR
PREFERRED STOCK 43,967 - - - - 43,967
CUMULATIVE REDEEMABLE JUNIOR
PREFERRED STOCK 26,715 - - - - 26,715
SHAREHOLDERS' EQUITY
Common stock 105 3,971 11,413 9,500 (24,884) 105
Accumulated accretion of cumulative redeemable
preferred stock (in excess) less than additional
paid-in capital (857) 21,364 5,889 1,777 (29,030) (857)
Notes receivable from stock sales (366) - - - - (366)
Retained earnings (deficit) (70,633) 14,386 (2,119) 6,172 (18,439) (70,633)
--------- ------------ ----------- -------------- ------------ ------------
Total shareholders'
equity (deficit) (71,751) 39,721 15,183 17,449 (72,353) (71,751)
--------- ------------ ----------- -------------- ------------ ------------
$ 55,612 $ 191,860 $ 26,011 $ 78,891 $ (83,555) $ 268,819
========= ============ =========== ============== ============ ============
</TABLE>
8
<PAGE>
Guarantor / Non-Guarantor Disclosures
Consolidating Condensed Balance Sheet
As of March 31, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Sun Gro
Sun Gro Canada
Hines Hines U.S. & Hines II
Holdings Horticul- (Subsid- (Subsidiary Consoli-
(Parent ture iary Non- Elimina- dated
Guarantor) (Issuer) Guarantor) Guarantors) tions Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash $ - $ - $ 0 $ 2,195 $ $ 2,195
Accounts receivable, net - 27,816 18,496 4,818 51,130
Inventories - 106,248 1,654 7,772 115,674
Prepaid expenses and other current
assets - 718 708 315 1,741
Deferred income taxes - 50 804 498 (1,352) -
-----------------------------------------------------------------
Total current assets - 134,832 21,662 15,598 (1,352) 170,740
-----------------------------------------------------------------
FIXED ASSETS, net - 40,195 3,900 48,951 - 93,046
DEFERRED FINANCING EXPENSES, net - 4,418 227 1,509 - 6,154
GOODWILL, net - 23,834 - 14,731 - 38,565
DEFERRED INCOME TAXES 22 10,163 - - (10,185) -
INVESTMENTS IN SUBSIDIARIES 59,636 9,415 7,614 - (76,665) -
OTHER ASSETS - - - 708 - 708
-----------------------------------------------------------------
$59,658 $222,857 $33,403 $81,497 $(88,202) $309,213
=================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ - $ 10,056 $ 1,738 $ 5,280 $ (2) $ 17,072
Accrued liabilities 18 5,023 2,107 2,105 (2) 9,251
Accrued payroll and benefits - 3,212 911 683 - 4,806
Long-term debt, current portion - 2,400 - 3,000 - 5,400
Revolving line of credit - 60,950 5,326 - - 66,276
Deferred income taxes - 35,906 - 350 (1,352) 34,904
Other liabilities - - - - - -
Intercompany accounts 53,678 (76,804) 6,150 16,976 - -
-----------------------------------------------------------------
Total current liabilities 53,696 40,743 16,232 28,394 (1,356) 137,709
-----------------------------------------------------------------
LONG-TERM DEBT 1,000 139,768 - 19,500 - 160,268
DEFERRED INCOME TAXES - 2,418 1,498 12,543 (10,185) 6,274
CUMULATIVE REDEEMABLE SENIOR
PREFERRED STOCK 51,847 - - - - 51,847
CUMULATIVE REDEEMABLE JUNIOR
PREFERRED STOCK 27,703 - - - - 27,703
SHAREHOLDERS' EQUITY
Common stock 105 3,971 11,413 13,747 (29,131) 105
Accumulated accretion of cumulative
redeemable preferred stock (in
excess) less than additional
paid-in capital (3,475) 21,364 5,889 1,777 (29,030) (3,475)
Notes receivable from stock sales (366) - - - - (366)
Retained earnings (deficit) (70,852) 14,593 (1,629) 5,536 (18,500) (70,852)
-----------------------------------------------------------------
Total shareholders' equity
(deficit) (74,588) 39,928 15,673 21,060 (76,661) (74,588)
-----------------------------------------------------------------
$ 59,658 $222,857 $33,403 $81,497 ($88,202) $309,213
=================================================================
</TABLE>
9
<PAGE>
Guarantor/Non-guarantor Disclosures
Consolidating Condensed Statement of Income
For the quarter ended March 31, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Sun Gro
Hines Sun Gro Canada
Holdings Hines U.S. (Subsidiary
(Parent Horticulture (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantor) Eliminations Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES, NET $ - $28,113 $17,223 $6,674 $(4,243) $47,767
COST OF GOODS SOLD - 14,870 9,699 4,605 (4,243) 24,931
-----------------------------------------------------------------------------------------
Gross Profit - 13,243 7,524 2,069 - 22,836
OPERATING EXPENSES - 7,959 7,566 1,662 - 17,187
-----------------------------------------------------------------------------------------
Operating Income - 5,284 (42) 407 - 5,649
-----------------------------------------------------------------------------------------
OTHER EXPENSES:
Interest - 4,796 172 270 - 5,238
Interest - Intercompany - (181) 151 30 - -
Other, net (280) 190 (200) 72 468 250
-----------------------------------------------------------------------------------------
(280) 4,805 123 372 468 5,488
-----------------------------------------------------------------------------------------
Income (loss) before income tax
provision (benefit) 280 479 (165) 35 (468) 161
INCOME TAX PROVISION (BENEFIT) - 199 (147) (171) - (119)
-----------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 280 $ 280 $ (18) $ 206 $ (468) $ 280
=========================================================================================
</TABLE>
Consolidating Condensed Statement of Income
For the quarter ended March 31, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Sun Gro
Canada
Hines Sun Gro & Hines II
Holdings Hines U.S. (Subsidiary
(Parent Horticulture (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantor) Eliminations Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES, NET $ - $27,161 $17,226 $8,126 $(4,439) $48,174
COST OF GOODS SOLD - 13,696 9,088 5,168 (4,439) 23,515
-----------------------------------------------------------------------------------------
Gross Profit - 13,583 8,138 2,958 - 24,659
OPERATING EXPENSES - 9,180 6,708 $3,044 - 18,912
-----------------------------------------------------------------------------------------
Operating Income - 4,403 1,430 (86) - 5,747
-----------------------------------------------------------------------------------------
OTHER EXPENSES:
Interest 15 5,122 153 $ 416 - 5,706
Interest - Intercompany - (440) 382 $ 58 - -
Other, net - 194 21 $ 108 - 323
-----------------------------------------------------------------------------------------
15 4,876 556 582 - 6,029
-----------------------------------------------------------------------------------------
Income (loss) before provision for
income taxes (15) (473) 874 (668) - (282)
PROVISION FOR (RECOVERY OF) INCOME TAXES (6) (190) 166 $ (33) - (63)
-----------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (9) $ (283) $ 708 $ (635) $ - $ (219)
=========================================================================================
</TABLE>
10
<PAGE>
Guarantor/Non-guarantor Disclosures
Consolidating Condensed Statement of Cash Flows
For the quarter ended March 31, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Sun Gro
Hines Sun Gro Canada
Holdings Hines U.S. (Subsidiary
(Parent Horticulture (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantor) Eliminations Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES: $ - ($18,935) ($6,759) $ 744 $ (4) ($24,954)
---------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets - (1,277) (355) (720) - (2,352)
---------------------------------------------------------------------------------
Net cash used in investing activities - (1,277) (355) (720) - (2,352)
---------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit - 30,846 15,894 - - 46,740
Repayments on revolving line of credit - (9,398) (10,172) - - (19,570)
Intercompany advances (repayments) - (1,372) 1,392 (20) - -
Repayments of long-term debt - (116) - - - (116)
Deferred financing costs - (379) - - - (379)
Issuance of preferred and common stock - - - (4) 4 -
---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities - 19,581 7,114 (24) 4 26,675
---------------------------------------------------------------------------------
NET DECREASE IN CASH - (631) - - - (631)
CASH, beginning of period - 631 - - - 631
---------------------------------------------------------------------------------
CASH, end of period $ - $ - $ - $ - $- $ -
=================================================================================
</TABLE>
Consolidating Condensed Statement of Cash Flows
For the quarter ended March 31, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Sun Gro Canada
Hines Sun Gro & Hines II
Holdings Hines U.S. (Subsidiary
(Parent Horticulture (Subsidiary Non- Consolidated
Guarantor) (Issuer) Guarantor) Guarantors) Eliminations Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES: $ - ($22,561) ($1,369) ($3,209) $ - ($27,139)
------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets - (2,011) (9) (719) - (2,739)
Proceeds from sales of fixed assets - - 3 191 - 194
------------------------------------------------------------------------------
Net cash used in investing activities - (2,011) (6) (528) - (2,545)
------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit - 37,027 10,445 - - 47,472
Repayments on revolving line of credit - (12,308) (11,990) - - (24,298)
Intercompany advances (repayments) (6,250) (1,000) 3,000 4,250 - -
Repayments of long-term debt - (88) - - - (88)
Issuance of preferred stock 6,250 - - - - 6,250
------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities - 23,631 1,455 4,250 - 29,336
------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH - (941) 80 513 - (348)
CASH, beginning of year - 941 - 1,602 - 2,543
------------------------------------------------------------------------------
CASH, end of year $ - $ - $ 80 $2,115 $ - $ 2,195
==============================================================================
</TABLE>
11
<PAGE>
Item 2.
HINES HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this report contains trend analysis and other forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements throughout this report.
Overview
General. The Company 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 is also the largest North American producer
and marketer of sphagnum peat moss and professional peat-based growing mixes.
The Company sells its nursery products primarily to leading home centers and
mass merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and Target, and
to premium independent garden centers, such as Frank's Nursery and Crafts and
Pike's Family Nursery. The Company sells its peat-based products primarily to
professional customers, including greenhouse growers, nursery growers and golf
course developers.
The Company believes that sales of its nursery products have been
positively affected by societal and demographic trends, such as greater levels
of home ownership, the aging of the American population and the increasing
popularity of gardening, as well as by trends in the retail distribution
channel, as large "big box" retailers have expanded and have increased their
emphasis on the lawn and garden category, thereby increasing consumer exposure
to lawn and garden products. Management believes that these trends provide the
Company with excellent opportunities to improve its operating performance.
Seasonality. The Company's nursery business, like that of its competitors,
is highly seasonal. The Company has experienced and expects to continue to
experience significant variability in net sales, operating income and net income
on a quarterly basis. See "Results of Operations."
Acquisitions. The Company has completed a number of recent acquisitions to
expand and diversify its operations. In fiscal 1997, the Company completed two
acquisitions, and in April 1998 completed the Lakeland Acquisition. These
acquisitions have affected 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 in the future 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 the Company with a
number of opportunities to make such acquisitions, though the Company does not
have any current agreements with any parties to consummate any such
acquisitions.
12
<PAGE>
Tax Matters. The Company derives significant benefits under the Internal
Revenue Code by qualifying to use the cash method of accounting for federal
income taxes purposes. Under the cash method, sales are included in taxable
income only 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 by qualifying under the "farming exception"
to the uniform cost capitalization rules, which allows nursery growers to deduct
for federal income tax purposes certain costs of growing plants as they are
incurred rather than when the products are sold. As a result of the Company's
ability to deduct its growing costs under the farming exception, together with
its deduction of interest expense on indebtedness for borrowed money, 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. During
the same period, the Company has continued to show a tax provision relating to
the recording of deferred taxes. As of December 31, 1997, the Company had net
operating loss carryforwards of approximately $35.7 million for federal income
tax purposes.
Results of Operations
The Company's nursery business, like that of its competitors, is highly
seasonal. In 1997, approximately 80% of Hines Nurseries' net sales
(approximately 71% of the Company's consolidated net sales) and approximately
102% of Hines Nurseries' operating profits occurred in the first half of the
year, with approximately 58% of Hines Nurseries' net sales (approximately 47% of
the Company's consolidated net sales) and approximately 84% of Hines Nurseries'
operating profits occurring in the second quarter of 1997. The Company has
experienced and expects to continue to experience variability in net sales,
operating income and net income on a quarterly basis. This variability is
primarily the result of variability in weather conditions, particularly weekend
weather during the peak growing season, as well as other factors. Sun Gro's
sales generally are not seasonal, and are only slightly weighted towards the
first half of the year.
As a result of the seasonality of the nursery business and, in particular,
the negative impact of "El Nino" on the sales of both nursery and peat-based
products into the western region of the United States, management believes the
first quarter results are not indicative of future results of operations or
underlying favorable trends that are occurring in the Company's business.
Three Months Ended March 31, 1998 compared to Three Months Ended March 31, 1997
Net sales. Net sales of $48.2 million for the three months ended March 31,
1998 increased $0.4 million, or 0.8%, from net sales of $47.8 million for the
comparable period in 1997. The Company's sales of its nursery products
increased 1.2%, which included $1.2 million of sales from the Company's
acquisition of the nursery operations of Pacific Color Nurseries, Inc. ("Pacific
Color") on October 20, 1997 and of Bryfogle's Wholesale, Inc. and certain
affiliated entities (collectively, "Bryfogle's") on December 16, 1997.
Excluding the acquisitions,
13
<PAGE>
sales from the Company's nursery operations decreased 3.0% from the comparable
period in 1997. The decrease in net sales was primarily due to lower sales in
the western and southwestern states, particularly in California, due to
excessive and prolonged rainfall during the period attributable to El Nino,
which reduced sales in these regions by $3.6 million, or 22.2%, from the
comparable period in 1997, but was partially offset by increased sales in other
regions of the country which experienced unseasonably warm weather as a result
of El Nino. Sales to the eastern region of the country increased by $2.9
million, or 57.3%, with $1.0 million of the increase in sales attributable to
the Bryfogle's acquisition and $1.9 million of the increase attributable to the
Company's existing nursery operations (representing an increase of 37.9% in
sales from the comparable prior period). Sales in the southern region of the
country increased $1.0 million, or 14.7%, from sales during the comparable
period in 1997. Management believes the negative impact of El Nino on the
Company's first quarter sales was particularly pronounced because the majority
of the Company's first quarter sales (approximately 57.2% in 1997) are to the
western and southwestern markets, in which the selling season for nursery
products begins earlier than in less temperate areas of the country.
Net sales of the Company's peat moss and peat-based products were virtually
unchanged from the comparable period in 1997. As with the Company's nursery
products, sales of peat-based products in the western states were negatively
impacted during the quarter by unseasonably wet weather attributable to El Nino,
decreasing 10.5% from the comparable period in 1997, while sales to the eastern
and central United States increased 7.1% due to unseasonably warm weather in
these regions. While net sales were virtually unchanged, the mix of Sun Gro's
customers and products changed significantly. The Company has sought to improve
profitability by increasing sales to professional customers and by eliminating
unprofitable sales to certain retail customers. Sales to the Company's
professional customers increased $1.7 million, or 13.8%, during the period,
while sales to retail decreased $1.7 million, or 23.9%. The Company's
acquisition on April 6, 1998 of Lakeland Peat Moss, Ltd. and certain affiliated
entities (collectively, "Lakeland"), a leading producer of sphagnum peat moss in
Western Canada, will increase the Company's sales to retail customers as a
result of its predominantly retail customer base. Management believes that
sales to retail customers, located primarily in the western United States, have
historically provided higher margins than sales of products to similar customers
in other regions of the country.
During the second quarter of 1998, the Company anticipates some recovery of
sales of both nursery and peat products into the western states, with continued
growth of nursery products in other regions of the country.
Gross profit. Gross profit of $24.7 million (51.2% of net sales) for the
three months ended March 31, 1998 increased $1.9 million, or 8.3%, from gross
profit of $22.8 million (47.7% of net sales) for the comparable period in 1997.
The increase was primarily attributable to the improved gross profit at the
Company's peat moss operations resulting from (i) a shift in sales from retail
to professional customers, (ii) the elimination of unprofitable sales to certain
retail customers, and (iii) pricing improvements in Sun Gro's professional
products, and to the
14
<PAGE>
improved gross profit at the Company's nursery operations primarily resulting
from the contribution from the Pacific Color and Bryfogle's nursery
acquisitions.
Operating expenses. Operating expenses of $18.9 million (39.2% of net
sales) for the three months ended March 31, 1998 increased $1.7 million, or
9.9%, from $17.2 million (36.0% of net sales) for the comparable period in 1997.
The increase was primarily attributable to the Pacific Color and Bryfogle's
nursery acquisitions, and to increased general and administrative expenses of
the Company resulting from the accelerated management hiring and training and
increased investment in information systems required to support the Company's
growth. Management believes that the higher operating expenses in the first
quarter of 1998 as a percentage of sales were in part the result of the more
pronounced seasonality experienced during the period and the later selling
season of the Bryfogle's acquisition, whose sales were not included in the first
quarter of 1997, which was prior to its acquisition.
Operating income. Operating income of $5.7 million for the three months
ended March 31, 1998 increased $0.1 million, or 1.8%, from $5.6 million for the
comparable period in 1997. Operating income included a loss of $0.5 million from
the Pacific Color and Bryfogle's acquisitions, which typically incur losses
during the first quarter due to the seasonality of their sales. Excluding the
operating loss from the acquisitions, operating income increased $0.6 million,
or 10.7%, to $6.2 million for the comparable period in 1997 primarily due to the
increased gross profit margins from the Company's peat operations for the
reasons described above.
Interest expense. Interest expense of $5.7 million for the three months
ended March 31, 1998 increased $0.5 million, or 9.6%, from $5.2 million for the
comparable period in 1997. The increase was attributable to higher borrowing
levels under the Company's revolving credit facilities, which were used to a
significant extent to support capacity expansion capital projects for the
Company's nursery operations, including the related inventory buildup.
Provision for income taxes. The effective income tax rate was 22% and 74%
for the three months ended March 31, 1998 and 1997, respectively. The decrease
in the Company's effective income tax rate was due primarily to the effect of
foreign exchange translation gains and losses, which are included in operating
income.
Net income (loss). The Company incurred a net loss of $0.2 million for
the three months ended March 31, 1998, compared to net income of $0.3 million
for the comparable period in 1997. The decrease was primarily the result of the
Pacific Color and Bryfogle's nursery acquisitions, which typically incur losses
during the first quarter due to the seasonality of their sales.
15
<PAGE>
Liquidity and Capital Resources
The Company has historically satisfied its working capital requirements
through operating cash flow and, as a result of the highly seasonal nature of
the Company's nursery operations, through borrowings under its revolving credit
facilities. The Company's existing senior credit facilities consist of (i) two
revolving credit facilities providing for borrowings of up to $85.0 million,
subject to a borrowing base tied to accounts receivable and inventory, (ii) a
$25.0 million term loan, of which $8.0 million has been repaid, and (iii) an
acquisition facility providing for borrowings of up to $30.0 million to finance
certain acquisitions (collectively, the "Existing Senior Credit Facilities").
As a result of the Company's ability to deduct its growing costs under the
farming exception, together with its deduction of interest expense on
indebtedness for borrowed money, 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. However, even with benefits of the farming
exception, the Company may nevertheless be required to pay cash income taxes in
future years after use, loss or expiration of its net operating loss
carryforwards. Such cash income taxes could also result from increased taxable
income due to, among other things, (i) reduction in the Company's deduction for
interest expense triggered by the Company's repayment of indebtedness, (ii) any
slowdown in, or elimination of, future growth in the Company's inventory of
growing plants, or (iii) 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 typically draws under its revolving credit facilities in the
first and fourth quarters to fund its inventory buildup of nursery products and
to fund continuing operating expenses. Approximately 80% of the sales of the
nursery operations occur in the first half of the year, generally allowing the
Company to reduce borrowings under its revolving credit facilities after the
first quarter. Working capital requirements for the Company's peat moss
operations are less seasonal in nature, with slight inventory buildups generally
occurring in the third and fourth quarters. On April 30, 1998, the Company had
$6.4 million of unused borrowing capacity under the revolving credit facilities
included within the Existing Senior Credit Facilities.
On May 6, 1998, Hines Horticulture, Inc., a newly-formed Delaware
corporation filed a registration statement with the Securities and Exchange
Commission on Form S-1 seeking to register the offer and sale by Hines
Horticulture, Inc. and certain selling stockholders of up to $80,000,000 of
Common Stock to the public (the "Offering"). The Company will merge with and
into Hines Horticulture, Inc. prior to the Offering. If consummated, the net
proceeds of the Offering to be received by the Company are expected to be used
to redeem or prepay certain indebtedness of Hines Horticulture and to fund a
portion of the Company's expansion plans for 1998. The Company currently
expects to consummate the Offering at the end of the second
16
<PAGE>
quarter of 1998 or the beginning of the third quarter. There can be no
assurances, however, that the Offering will be consummated at such time, or at
all.
In connection with the Offering, the Company has entered into negotiations
with BT Alex. Brown, as arranger for Bankers Trust Company, to amend and restate
the Existing Senior Credit Facilities to provide for a new $100.0 million
revolving credit facility, a new $50.0 million term loan and a new $100.0
million acquisition facility (collectively, the "New Senior Credit Facility").
The New Senior Credit Facility will replace the Existing Senior Credit
Facilities and increase the Company's borrowing capacity by up to $100.0
million. The New Credit Senior Credit Facility is expected to close
concurrently with the closing of the Offering and is expected to have a five-
year maturity. The principal repayment schedule for the term loan is expected
to be $5.0 million in 2000, $7.5 million in 2001, $15.0 million in 2002 and
$22.5 million in 2003. Amounts borrowed under the acquisition facility will
convert into a term loan in 2000 and will begin to amortize thereafter. The
Company has not entered into any agreements to make any acquisitions at the
present time, and will evaluate acquisition opportunities on a case-by-case
basis. The revolving credit facility and all other obligations under the
amended and restated credit agreement will be secured by substantially all of
the assets and common stock of Hines Horticulture and Sun Gro-U.S., as well as a
pledge of 66% of the common stock of Sun Gro-Canada. The closing of the New
Senior Credit Facility is conditioned upon the closing of the Offering.
The Company has financed its recent acquisitions and working capital
requirements through a combination of borrowings under the Existing Senior
Credit Facilities and through the issuance of promissory notes, shares of 12%
Cumulative Redeemable Senior Preferred Stock ("Senior Preferred") and warrants
to purchase shares of Common Stock. On April 6, 1998, the Company financed the
Lakeland Acquisition through the issuance of 4.5 million shares of Senior
Preferred and warrants to purchase 134,077 shares of Common Stock to an
unaffiliated equity investor, the issuance to the seller of a $2.1 million
convertible subordinated promissory note of the Company and borrowings of $15.0
million under the Existing Senior Credit Facilities.
On February 5, 1998, the Company issued to Madison Dearborn Capital
Partners, L.P. ("MDCP") 2,000 shares of Senior Preferred, having an aggregate
liquidation value of $2,000,000, for $2,000,000 in cash, to fund the Company's
short-term working capital requirements.
In October 1995, Hines Horticulture issued $120,000,000 in aggregate
principal amount of 11 3/4% Senior Subordinated Notes due 2005 to refinance
certain indebtedness incurred in connection with the acquisition of the Company
by MDCP in 1995, which notes were subsequently exchanged in a registered
offering for $120,000,000 of its 11 3/4% Senior Subordinated Notes due 2005,
Series B (the "Senior Subordinated Notes"). Approximately $78.0 million in
aggregate principal amount of the Senior Subordinated Notes is expected to be
outstanding after the Offering and the application of the estimated net proceeds
thereof.
17
<PAGE>
The indenture pursuant to which the Senior Subordinated Notes were issued
imposes a number of restrictions on Hines Horticulture 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 the
Company), to make certain asset dispositions, to incur certain lines 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
Existing Senior Credit Facilities or the New Senior Credit Facility, causing all
amounts owing thereunder to become immediately due and payable. The Existing
Senior Credit Facilities impose, and the New Senior Credit Facility will impose,
a number of similar and certain additional restrictions on Hines Horticulture
and Sun Gro-U.S. As a result of these restrictions, the Company will be limited
in its ability to pay dividends to its stockholders.
The Company's capital expenditures were approximately $2.7 million for the
three month period ended March 31, 1998. The capital expenditures for the
nursery operations related primarily to the development of additional nursery
acreage and the purchase of nursery-related structures and certain vehicles,
machinery and equipment. The capital expenditures for the peat moss operations
related primarily to preparing peat bogs for harvest. The Company's capital
expenditures for 1998 are expected to be approximately $15 million, and will be
used for capacity expansion, primarily through the development of available
acreage at several of the Company's existing nursery facilities (including
Northern California, Texas, South Carolina and Pennsylvania), and for other
maintenance capital expenditures.
Management believes that cash generated by operations, borrowings expected
to be available under the New Senior Credit Facility, when established, and the
estimated net proceeds of the Offering will be sufficient to meet the Company's
anticipated working capital, capital expenditure and debt service requirements
for the foreseeable future. However, as a result of the Company's strategy to
make strategic acquisitions, the Company may require additional debt or equity
financing in the future. If the Offering is not consummated or the New Senior
Credit Facility is not established, the Company would be required to seek
additional sources of capital or to modify its existing growth plans.
Year 2000 Compliance
The Company has completed its review of the compliance issues related to
the year 2000 and has implemented programming modifications to its operational
and financial reporting systems that it believes are required to address the
problem. All modified programming is currently operational, with testing
scheduled to be completed in 1998. There can be no assurance, however, until the
year 2000 that all of the Company's systems and the systems of its suppliers,
shippers, customers and other external business partners will function
adequately. If the systems of the Company's and the systems of its suppliers,
shippers, customers and other external business partners are not compliant, it
could have a material adverse effect on the Company.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On February 5, 1998, Holdings issued 2,000 shares of Senior Preferred
Stock, having an aggregate liquidation value of $2 million, for $2 million in
cash.
On March 18, 1998 and on April 3, 1998, Holdings issued an additional 4,250
and 250 shares, respectively, of Senior Preferred with warrants to purchase
126,628 and 7,449 shares, respectively, of Holdings Common Stock at an exercise
price of $0.01 per share during a period which expires at the earlier of (i) ten
years from the date of issuance, (ii) a qualified public offering or (iii) the
sale of the Company. An amount approximating the fair value of the stock of
$126,628 and $7,449, respectively, was allocated to the warrants at the date of
issuance and is being accreted using the interest method over the period from
issuance until such time as the warrants become redeemable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Hines Horticulture Nursery Division Management Vision 2000 Variable
Compensation Plan
10.2 Sun Gro Division Management Variable Compensation Plan
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Registrant during the
period covered by this Report.
Items 1, 3, 4, and 5 are not applicable and have been omitted.
19
<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 HOLDINGS, INC.
(Registrant)
By: __________________________
Claudia M. Pieropan
Chief Financial Officer
Date: May 5, 1998
Claudia M. Pieropan is signing in the dual capacities of (i) principal
financial officer and (ii) a duly authorized officer of the Company.
20
<PAGE>
EXHIBIT 10.1
HINES HORTICULTURE NURSERY DIVISION MANAGEMENT
VISION 2000 VARIABLE COMPENSATION PLAN
- - The Hines Horticulture Nursery Division Management Vision 2000 Variable
Compensation Plan (the "Plan") is a long-term incentive which is results
oriented and directly tied to net cash flow (as defined below) performance.
The Plan has been designed to be self-regulating and for bonuses awarded
thereunder to be a significant portion of the wages of Key Managers, Region
Managers and Key Business Conditions Managers whenever net cash flow targets
are achieved.
- - The Plan is effective on January 1, 1998 and will remain in effect until
terminated. The Plan is subject to change by the Compensation Committee of
the Board of Directors of Hines Horticulture.
- - Bonuses under the Plan will be based on net cash flow in each fiscal year.
Each bonus will be calculated based on all dollars of net cash flow greater
than $0.
- - Net cash flow ("N.C.F.") is defined as follows:
Sales less all cash operating costs including:
- Production costs (excluding costs relating to expansion inventory as
defined below)
- Distribution Costs
- Selling Costs
- G & A Costs
- Bad Debts, Royalties, & Miscellaneous costs (or income)
- Maintenance Capex
_________________________
Equals Net Cash Flow
Costs excluded from Operating Net Cash Flow
- Expansion Capex
- All Management Variable Compensation Plans
- Hines Holdings G & A Costs
- Financing Costs (Interest, Fees, etc)
- Income Taxes
- Hines Holdings Capex
- All Acquisition Related Costs
- Rent charges for the Irvine Nursery in excess of 2% of sales
- Production Costs related to expansion inventory (incremental expansion
inventory units x 75% of current year site average equivalent unit cost)
- Depreciation or amortization
- Non cash changes in GAAP reserve accounts
- - The total variable compensation pool will be allocated to participants based
on the attached schedule, as approved by Hines CEO and the Compensation
Committee of the Board of Directors of Hines Horticulture (see attached).
<PAGE>
ALLOCATION SCHEDULE FOR THE HINES HORTICULTURE NURSERY
DIVISION MANAGEMENT VISION 2000 VARIABLE COMPENSATION PLAN
<TABLE>
<CAPTION>
% Net Cash Flow
<S> <C>
President 1.1
CFO 0.22
Central Resources Managers (3)/1/ 1.0 (0.333 each)
Regional V.P. 1.1
Regional Sales Manager 0.7
General Manager/2/ 1.1
Sales Manager (site)/2/ 0.7
Production Managers (2)/2/ 0.9 (0.45 each)
All other Business Condition and Regional Managers 0.93 (pro rata split)
TOTAL 7.75%
</TABLE>
_____________________________
/1/ Includes the Capital and Special Projects Manager, the Financial Resources
Manager and the Socio-Technical Resource Manager and will include the position
of Chief Information Officer should the Company create such a position in the
future.
/2/ General Managers, Sales Managers and Production Managers for newly acquired
facilities will immediately participate in the Plan and receive bonuses as
provided above.
2
<PAGE>
EXHIBIT 10.2
SUN GRO DIVISION MANAGEMENT
VARIABLE COMPENSATION PLAN
- - The bonus plan is a long-term incentive which is results oriented and
directly tied to net cash flow (as defined below) performance. It has been
designed to be self-regulating and for such bonuses to constitute a
significant portion of the wages of Key Managers, Region Managers and Key
Business Conditions Managers whenever net cash flow targets are achieved.
- - This plan is effective on January 1, 1998 and will remain in effect until
terminated. The plan is subject to change by the Compensation Committee of
the Board of Directors of Hines Horticulture.
- - Variable compensation will be based on net cash flow in each fiscal year.
Each bonus will be calculated based on all dollars of net cash flow greater
than $0.
- - Net cash flow ("N.C.F.") is defined as follows:
Sales less all cash operating costs including:
- Production costs
- Distribution Costs
- Selling Costs
- G & A Costs
- Bad Debts, Royalties, & Miscellaneous costs (or income)
- Maintenance Capex
____________________________
Equals Net Cash Flow
Costs excluded from Operating Net Cash Flow
- Expansion Capex
- All Management Variable Compensation Plans
- Hines Holdings G & A Costs
- Financing Costs (Interest, Fees, etc)
- Income Taxes
- Hines Holdings Capex
- All Acquisition Related Costs
- Depreciation or amortization
- Non cash changes in GAAP reserve accounts
- - The total variable compensation pool will be allocated to participants based
on the attached schedule, as approved by Hines Horticulture's CEO and the
Compensation Committee of the Board of Directors of Hines Horticulture (see
attached).
<PAGE>
ALLOCATION SCHEDULE FOR SUN GRO
-------------------------------
DIVISION MANAGEMENT VARIABLE COMPENSATION PLAN
----------------------------------------------
<TABLE>
<CAPTION>
1) If N.C.F. is less than $10,000,000 for Sun Gro
<S> <C>
. Region Pool (Eastern, Western
or Central) = 3.2% of N.C.F. for the applicable Region
. Level 2 Pool = 0.35% of Sun Gro N.C.F.
. Division Key Management Team
("K.M.T.") Pool = 1.45% of Sun Gro N.C.F.
. Hines Horticulture Corporate Pool = 0.82% of Sun Gro N.C.F.
-----
TOTAL = 5.82%
<CAPTION>
2) If N.C.F. is more that $10,000,000 for Sun Gro
. Region Pool = 3.84% of N.C.F. for the applicable Region
. Level 2 Pool = 0.42% of Sun Gro N.C. F.
. Division K.M.T. Pool = 1.74% of Sun Gro N.C. F.
. Hines Horticulture Corporate Pool = 0.82% of Sun Gro N.C.F.
-----
TOTAL = 6.82%
<CAPTION>
3) Region Pool Allocation at 3.2% (N.C.F. less than $10 million for Sun Gro) or
3.84% (N.C.F. greater than $10 million for Sun Gro)
Region V.P. 35% S.T.R. }
Region S.M. 25% Acc. Mgr. }
Production Mgr. 10% Bog Mgr. } Split 20%
Mix Plan Mgr. 10% Tech. Resource } Equally
P.M. Small Plant }
Cust. Res. Mgr. }
<CAPTION>
4) Level 2 Pool Allocation at .35% (N.C.F. less than $10 million for Sun Gro)
or .42% (N.C.F. greater than $10 million for Sun Gro)
Director N.P.D. 20% Manager N.P.D. 14%
I.T. Manager 18% Corp. STR 13%
Corp. Credit Mgr. 15% Controller 12%
Cust. Resource 8%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5) Division K.M.T. Pool at 1.45% (N.C.F. less than $10 million for Sun Gro)
and at 1.74% (N.C.F. greater than $10 million for Sun Gro)
At 2.27% At 2.56%
-------- --------
<S> <C> <C>
. President, Sun Gro 0.64% 0.75%
. V.P. Finance 0.27% 0.33%
. V.P. Organization Development 0.27% 0.33%
. Sales/Logistics 0.27% 0.33%
<CAPTION>
6) Hines Horticulture Corporate Pool at .82%
. CEO Hines Horticulture 0.6% 0.6%
. CFO Hines Horticulture 0.22% 0.22%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,195
<SECURITIES> 0
<RECEIVABLES> 52,393
<ALLOWANCES> 1,263
<INVENTORY> 115,674
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105
79,550
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</TABLE>
