Item 1. BUSINESS
Introduction
Hines Horticulture, Inc., a Delaware corporation ("Hines"), produces and distributes horticultural products through two operating divisions: (1) its nursery division, Hines Nurseries and (2) its growing media division, Sun Gro Horticulture ("Sun Gro"). On June 12, 1998, Hines Horticulture became the successor to the business of Hines Holdings, Inc., a Nevada corporation ("Holdings"), as a result of the merger of Hines Holdings, Inc. into Hines, the purpose of which was to change the Company's name and jurisdiction of incorporation. The business of Hines is currently conducted through Hines Nurseries, Inc. ("Hines Nurseries") a wholly owned subsidiary of Hines, and through Sun Gro Horticulture Inc. ("Sun Gro-U.S.") a wholly owned subsidiary of Hines Nurseries, Sun Gro-U.S.'s wholly owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun Gro-Canada's direct and indirect Canadian subsidiaries. Unless otherwise specified, references to "Hines" or the "Company" refer to Hines Horticulture, Inc. and its subsidiaries.
Hines Nurseries produces approximately 4,100 varieties of ornamental shrubs and color plants through its 13 nursery facilities located in Arizona, California, Florida, New York, Oregon, Pennsylvania, South Carolina and Texas. Hines Nurseries sells to more than 1,700 retail and commercial customers, representing more than 14,700 outlets throughout the United States and Canada. Sun Gro produces high quality, sphagnum peat moss and professional peat and bark-based growing media. Sphagnum peat moss is a natural, organic material that is generally considered the highest quality growing medium available due to its excellent water and nutrient retention and aeration characteristics. Sun Gro controls approximately 49,000 acres of peat bogs throughout Canada and produces peat moss, peat-based mixes and bark-based mixes in 14 facilities strategically located across Canada and the United States.
History
Ownership
Hines was founded in 1920 by James W. Hines Sr. in San Gabriel, California. Hines was a family owned business until its acquisition by the Weyerhauser Company in 1976. Hines was sold in 1990 to a private investment group and certain members of management. In August 1995, Hines was acquired by Madison Dearborn Capital Partners, L.P. ("MDCP"), a private equity investment firm and certain members of management. On June 22, 1998, Hines completed an initial public offering of 5.1 million shares of its common stock (the "Offering").
Recent Acquisitions
Hines has completed a number of recent acquisitions to expand and diversify its operations which complement the Company's existing operations and enhance its product offerings.
The following table sets forth information with respect to these acquisitions:
Acquisitions Subsequent to December 31, 1999
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 is expected to result in goodwill of approximately $70 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 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 $10.5 million.
Acquisitions during the Year Ended December 31, 1999
On August 2, 1999, the Company entered into a stock purchase agreement to acquire all of the outstanding capital stock of Strong Lite, Inc. ("Strong Lite"), a producer and marketer of bark-based growing media. The total acquisition price was approximately $13.4 million, which resulted in goodwill of approximately $8.1 million.
On August 23, 1999, the Company acquired certain assets (primarily inventory and fixed assets) relating to the bark-based growing media business of Pro-Gro Products, Inc. and related companies ("Pro Gro"). The total acquisition price was approximately $17.1 million, which resulted in goodwill of approximately $13.4 million.
On September 9, 1999, the Company entered into a stock purchase agreement to acquire all of the outstanding capital stock of Atlantic Greenhouses, Inc. ("Atlantic"), a specialized producer of florist quality, flowering potted plants and annual bedding plants. The total acquisition price was approximately $30.1 million, which resulted in goodwill of approximately $1.5 million.
Business Overview
Hines Nurseries is one of the largest commercial nursery operations in North America, producing one of the broadest assortments of container-grown plants in the industry. Hines Nurseries sells its nursery products primarily to the retail segment which includes the premium independent garden centers, as well as the leading home centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and Target. Sun Gro is the largest North American producer and marketer of sphagnum peat moss and professional peat- based growing mixes, which it primarily sells to professional customers, including greenhouse growers, nursery growers and golf course developers. As a result of both internal expansion and acquisitions, the Company has grown sales from approximately $50 million in 1992 to almost $278 million in 1999, representing a compound annual growth rate of approximately 28%. Unaudited pro forma net sales for 1999, after giving effect to acquisitions of Strong Lite, Pro Gro and Atlantic as if they had occurred on January 1, 1999, would have been approximately $312 million.
Key Growth Strategies
Expand Production. The Company is experiencing unfulfilled demand from a number of key nursery customers. Accordingly, the Company plans to continue expanding its nursery acreage and greenhouse facilities in 2000 in order to increase production of key product lines (including the color bedding plant category), and to commercially introduce new plant varieties. By expanding production at existing facilities, the Company seeks not only to increase sales volume, but also to leverage its established operating processes and management, thereby reducing unit costs.
Increase Customer Penetration and Expand Customer Base. With its strategically-located nurseries and its emphasis on customer service, the Company has established a national customer base and distribution system for a wide variety of ornamental plants. The Company is pursuing opportunities to increase its volume with existing customers by (1) selling to newly opened outlets of successful "big box" retailers and premium independent garden centers, and (2) increasing same-store sales by capitalizing on its customers' continued expansion of lawn and garden floor space with a broader variety of merchandise, particularly in the color plant category. The Company also intends to pursue new relationships with other high volume retailers and premium garden centers. With regard to growing media, management believes that the demand for value-added peat-based mixes by professional growers is increasing and that there is a trend among professional growers to outsource the mixing of these products. Sun Gro intends to further penetrate the professional market by expanding its offerings of customized value-added mixes and technical expertise in order to capitalize on this trend.
Pursue Strategic Acquisitions. The Company believes that strategic acquisitions will continue to play an important role in expanding its geographic presence and product offerings in both the nursery and growing media segments. For example, since optimizing production and distribution of color plants such as holiday crops, annual bedding plants and perennials requires regional growing capacity, the Company will seek additional acquisitions of regional color plant growers to expand its nursery network. The Company will continue to apply its proprietary operating processes to recently acquired businesses to facilitate integration and improve operating performance. In the growing media division, the Company will continue to seek acquisitions of businesses that offer operating synergies and complementary products.
Hines' Nursery Business
Hines Nurseries produces and markets approximately 4,100 varieties of ornamental, container-grown plants grown primarily for outdoor use, most of which are sold under its Hines Nurseries(TM) and Iverson(TM) trade names. Most of Hines Nurseries' revenues fall into the following variety categories for the years ended December 31:
Since 1993, Hines Nurseries has added numerous plant varieties to its product line. Recently, Hines Nurseries has aggressively expanded its offering of flowering color plants. Hines Nurseries has also successfully developed patio-ready type products, which it markets under the names of Patio Tropics(TM) and Festival Pots(TM). These products generally command premium prices and improved profit margins compared with other plants offered by the Company.
The Company sells its nursery products primarily to the retail segment which includes the premium independent garden centers, as well as the leading home centers and mass merchandisers, such as Home Depot, Lowe's, Wal-Mart, Kmart and Target. The following table sets forth the estimated percentage of Hines Nurseries' net sales by customer type for the period indicated:
The Company believes sales to home centers and mass merchandisers have increased significantly during the past several years as a result of the rapid growth of this channel of distribution. Management believes the Company enjoys competitive advantages in selling into this channel due to its ability to provide a broad assortment of consistently high quality products in large volumes, its nationwide distribution and its value-added services such as custom labeling, bar-coding, full electronic data interchange and technical support. Management expects to participate in the overall growth of this channel to a greater extent than its competitors that do not offer such services. Hines Nurseries' top ten customers accounted for approximately 68%, 62% and 58% of Hines Nurseries' net sales in 1999, 1998 and 1997, respectively. Hines Nurseries' largest customer, Home Depot, accounted for approximately 29%, 20% and 18% of its net sales in 1999, 1998 and 1997, respectively, and approximately 19%, 14% and 12% of the Company's consolidated net sales in 1999, 1998 and 1997, respectively.
Research and Development. Hines Nurseries' product sourcing and development yield unique plant varieties, which are marketed under a trade name and patented whenever possible. The Company applies for patents on plant varieties that are significantly different from existing varieties. Differences among plant varieties may include coloration, size at maturity or hardiness in drought or cold conditions. These varieties command higher prices, provide higher unit margins and enhance the Company's reputation as a product innovator.
Sales and Marketing. During 1999, most of Hines Nurseries' facilities had separate sales forces, which included a sales manager, in-house customer service representatives, direct sales consultants and various support personnel. As of December 31, 1999, Hines Nurseries employed approximately 186 direct sales consultants, key account managers and merchandisers. National accounts are serviced through "National Account Task Teams" comprised of a senior management member and direct sales personnel from each nursery supplying the account. Hines Nurseries also markets its products through trade shows, print advertising in trade journals, direct mail promotion and catalogues.
As of January 2000, the sales forces have been reorganized by region. All direct sales consultants, account managers and merchandisers report to and service a specific region.
Competition. Competition in the nursery products segment of the lawn and garden industry is based principally on breadth of product offering, consistent product quality and availability, customer service and price. The nursery products segment is highly fragmented. According to the 1997 Census of Agriculture released by the USDA's National Agricultural Statistics Service, the nursery business is comprised of approximately 30,000 primarily small and regionally-based growers, with the top 100 growers accounting for approximately 22% of the industry volume. Management believes Hines Nurseries is one of only two growers able to serve every major regional market in North America; the Company's only national competitor being Monrovia Nursery Company. In each of its markets, Hines competes with regional growers such as Color Spot in the West, Clinton Nurseries in the Northeast, Zelenka Nurseries in the Midwest, Wight Nurseries in the South and many other smaller regional and local growers. Hines Nurseries' key competitive advantages are its ability to provide consistent, high quality products in large volumes, its nationwide distribution and its value-added services.
Sun Gro Growing Media Products Business
Sun Gro harvests and produces high quality, sphagnum peat moss and professional bark-based growing mixes. Sphagnum peat moss is partially decomposed sphagnum moss, a plant whose unique cellular structure consists of large cavities with sponge-like absorption characteristics for air and water. Because the optimal balance of air and water is essential for root development and plant growth, organic sphagnum peat moss is generally considered the highest quality growing medium available. While there are less expensive products on the market that are used for similar purposes, such as top soil, manure, bark, mulch and composts made from yard or sewage wastes, these products do not contain the superior soil aeration and water and nutrient retention characteristics of peat moss.
Sun Gro markets peat moss under the Sunshine(TM), Parkland(TM), Fairway(TM), Black Gold(TM), Lakeland Grower(TM), Alberta Rose(TM), Nature's(TM) and Gardener's Gold(TM) trade names to both the professional and retail
markets in four different grades: fine, medium, coarse and super coarse. Fine grade is typically sold in the retail market, while the other grades, particularly coarse grade, are sold to professional growers. Capitalizing on its strong market position in the professional peat moss market, Sun Gro has become one of the leading North American suppliers of value-added, peat-based growing media mixes used for specific professional applications such as seed germination, cutting propagation and greenhouse crop production. With the completion of the acquisitions of Strong Lite and Pro Gro, Sun Gro has expanded its leadership position in providing high quality growing media to the professional markets as well as expanding both its geographical reach and its product lines. Sun Gro's retail potting mixes use a similar blend of ingredients as its professional growing mixes, but are specifically targeted to home gardeners. By highlighting formulations for specific plant varieties, Sun Gro has expanded its product offerings to the retail customer.
Sun Gro's peat moss and growing media products are sold directly and by distributors throughout the United States and Canada. Sun Gro also markets its product internationally through distributors who sell to Mexico and Japan and, to a lesser extent, other countries in Asia and South America. Peat moss is sold to both the professional and retail markets, while growing mixes are sold exclusively to the professional market as potting mixes are to the retail market. Sun Gro's professional customers consist of greenhouse growers, nursery growers and golf course developers. Sun Gro's retail customers are similar to those of Hines Nurseries.
The following table sets forth the estimated percentage of Sun Gro's net sales by customer type for the period indicated:
Sun Gro's top ten customers accounted for approximately 25%, 26% and 28% of Sun Gro's net sales in 1999, 1998 and 1997, respectively. No single Sun Gro customer accounted for more than 10% of consolidated net sales in 1999, 1998 or 1997.
Research and Development. Sun Gro's research and development efforts focus on the creation and development of new value-added growing media mixes for retail and professional customers. Such mixes often command higher prices and provide higher profit margins than peat alone. Differences in growing media may relate to differences in coarseness of peat and amounts of nutrient additives, including limestone, and other mix constituents, such as perlite, vermiculite and bark. Sun Gro's research and development efforts have resulted in the commercial introduction of approximately 35 new growing media products since 1992.
Sales and Marketing. Sun Gro sells its products on a direct basis and through a network of approximately 322 distributors located throughout North America. As of December 31, 1999, Sun Gro's direct sales force was comprised of approximately 42 employees who are highly trained in the technical applications of its products. Approximately 56% of Sun Gro's sales are conducted through the distributor network. Sun Gro's distributor network provides broad market coverage, reduces credit exposure and distributes products to smaller growers cost effectively.
Competition. Competition in the peat moss and growing media segment of the lawn and garden industry is based principally upon product quality, distribution, service and price. Management believes Sun Gro is one of the largest producers and marketers of growing media in North America. Sun Gro's principal competition comes from Premier Canadian Enterprises, Ltd., a Canadian producer of peat moss, and The Scotts Company, which competes mostly in the retail growing mix and potting mix markets. Sun Gro's key competitive advantages are its control over high quality peat moss reserves, its strong relationships throughout its distributor network and its ability to provide significant technical support.
Financial Information on the Company's Foreign Operations and Operating Segments
See Notes 13, 17 and 19 to the Company's consolidated financial statements, which are included as a separate section of this Report beginning on page.
Seasonality
The Company's nursery business is highly seasonal in nature, with most of its sales typically occurring in the first half of the year. Sun Gro's business is more heavily weighted towards the professional markets, which do not typically experience the large seasonal variances present in the retail peat market. The table below sets forth the Company's quarterly net sales, as a percentage of total year net sales, during the year ended December 31, 1999:
Patents and Trademarks
The Company has registered numerous trademarks, service marks and logos used in its businesses in the United States and Canada. In addition, the Company has developed and continues to develop specialty plants for which it holds patents registered with the U.S. Patent and Trademark Office. The Company currently holds 25 patents with 12 patent applications pending.
Government Regulation
The Company is subject to certain United States and Canadian federal, state, local and provincial health, safety and environmental laws and regulations regarding the production, storage and transportation of certain products and the disposal of its wastes. The EPA and similar state and local agencies regulate the Company's operations and activities, including but not limited to water runoff and the use of certain pesticides in its nursery operations. With respect to its peat moss operations, the Company has various operating, monitoring and site maintenance obligations, which are prescribed by various Canadian and U.S. agencies. The Company does not anticipate that future expenditures for compliance with such environmental laws and regulations will have a material adverse effect on the Company's financial position or results of operations. The Company cannot give any assurance, however, that compliance with such laws and regulations, or compliance with other environmental laws and regulations that may be enacted in the future, will not have an adverse effect.
Hines Nurseries obtains certain irrigation water supplied to local water districts from facilities owned and operated by the United States acting through the Department of Interior Bureau of Reclamation ("reclamation water"). The use and price of reclamation water, including availability of subsidized water rates, is governed by
federal reclamation laws and regulations. Hines Nurseries utilizes reclamation water as one of the water supplies for its Northern California and Oregon facilities. While the Company believes that the nursery operations are in compliance with applicable regulations and it maintains a continuous compliance program, there can be no assurance that changes in law will not reduce availability of or increase the price of, reclamation water to the Company.
Employees
As of December 31, 1999, the Company employed approximately 3,250 persons, including approximately 710 seasonal employees. Of this total, approximately 2,500 were employed by Hines Nurseries, including approximately 460 seasonal employees (seasonal employment peaked at approximately 1,580 in April), and approximately 750 were employed by Sun Gro, including approximately 250 seasonal employees (its peak seasonal employment). As of December 31, 1999, approximately 500 of Sun Gro's employees were employed in Canada. All of Hines Nurseries' employees are non-union. The non-management employees at Sun Gro's Canadian peat processing facilities, which vary seasonally in number from approximately 200 to 300, are represented by various labor unions, with collective bargaining agreements in effect for all such facilities. Sun Gro's agreement with the United Food and Commercial Workers Union, which covers 135 employees at its Manitoba facility, expires in June 2002. Sun Gro's agreements with the Brotherhood of Carpenters and Joiners of America, which cover 72 employees at Sun Gro's Lameque, New Brunswick facility and 49 employees at its Maisonnette, New Brunswick facility, expire in December 2000 and August 2001, respectively. Negotiations for the Lameque contract expiring December 2000 are expected to begin in October 2000. The Company's management believes labor relations are good.
Item 2.
Item 2. PROPERTIES
At December 31, 1999 the Company owned approximately 3,300 acres related to its nursery facilities and approximately 1,800 acres of harvestable peat bogs in Canada. In addition, the Company leases approximately 1,400 acres related to its nursery facilities (including leases from Blooming Farm, Inc., an affiliated entity) and approximately 49,000 acres of harvestable peat bogs in Canada from provincial governments and various private parties as of December 31, 1999. Sun Gro has historically been able to renew its leases upon expiration. However, no assurance can be given that Sun Gro will be able to do so in the future. The Company's management believes that its owned and leased facilities are sufficient to meet its operating requirements for the foreseeable future.
The Company's facilities are identified in the table below:
- -------- (a) The lease contains a purchase option that the Company has exercised. The Company is in negotiations regarding the purchase price, and expects to consummate the purchase of this property in 2000.
(b) The Company owns 745 acres and leases 361 acres at this nursery.
(c) The Northern California nursery consists of sites in Vacaville and Allendale, California.
(d) The Company owns 31 acres and leases 29 acres at this nursery.
(e) The San Joaquin Valley nursery consists of sites in Chowchilla and Madera, California.
(f) The Company owns 38 acres and leases 10 acres at this nursery.
(g) The Company owns 512 acres and leases 60 acres at this nursery.
(h) The Company leases all but 1,792 acres in the aggregate of these peat bogs from Canadian provincial governments and various private parties. The Company's peat processing facilities are owned by the Company but, with the exception of the Vilna peat-processing facility, these facilities are situated on land leased to the Company by Canadian provincial governments and various private parties.
(i) The Company owns 21.1 acres and leases 24 acres at this mixing facility.
Item 3.
Item 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in various disputes and litigation matters, which arise in the ordinary course of business. The litigation process is inherently uncertain and it is possible that the resolution of these disputes and lawsuits may adversely affect the Company's financial position. Management believes, however, that the ultimate resolution of such matters will not have a material adverse impact on the Company's consolidated financial position, results of operations or cash flows.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As a result of the Company's initial public offering on June 22, 1998, the common stock of Hines trades on The Nasdaq National Market under the symbol "HORT". As of March 15, 2000, there were 71 registered holders of record of the Company's common stock. The following table sets forth the quarterly high and low share price for the years ended December 31:
Hines has not paid dividends on the common stock in the past and does not presently plan to pay dividends on the common stock. The payment of dividends is restricted under the terms of the Company's senior credit agreement and senior subordinated note indenture. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the year ended December 31, 1999.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands)
(a) From January 1, 1995 through December 31, 1999, the Company acquired the following nine companies: OGP (January 27, 1995), Iverson (August 30, 1996), Flynn (November 27, 1996), Pacific Color (October 20, 1997), Bryfogle's (December 16, 1997), Lakeland (April 6, 1998), Strong Lite (August 2, 1999), Pro Gro (August 23, 1999) and Atlantic (September 9, 1999). The financial results include the operations of each acquisition since its respective acquisition date.
(b) Unusual operating expenses consist of certain severance and other restructuring costs of $1,537 and $830 in 1997 and 1996, respectively, net of a $1,194 gain from receipt of insurance proceeds on an involuntary disposal of fixed assets in 1997.
(c) After deduction of the accrued preferred stock dividends of $5,609, $6,666, $3,775 and $1,460 for the years ended December 31, 1998, 1997, 1996 and 1995, respectively and minority interest in earnings of subsidiaries of $3,958 for the year ended December 31, 1995.
(d) All shares and per share amounts reflect a 1.3611-for-one reverse stock split effected on June 22, 1998.
(e) Hines derives significant benefits under the U.S. federal tax code by qualifying to use the cash method of accounting and by qualifying under the "farming exception" to the uniform cost capitalization rules. As a result, the Company has generally not been required to pay significant cash income taxes and has generated net operating losses for federal income tax purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview--Tax Matters."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains trend analyses and other forward-looking statements that involve risks and uncertainties. Such risks and uncertainties are discussed at "Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995" on page 2 of the Annual Report on Form 10-K.
Overview
General. Hines is one of the largest commercial nursery operations in North America, producing one of the broadest assortments of container-grown plants in the industry. The Company sells its nursery products primarily to the retail segment which includes 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 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 nursery and growing media products have been positively affected by societal and demographic trends, such as greater levels of homeownership, the aging of the American population and the increasing popularity of gardening. Recent trends in the retail distribution channel, such as the expansion of large "big box" retailers and their growing emphasis on the lawn and garden category, have increased consumer exposure to lawn and garden products. Management believes these trends have favorably impacted the Company and provide excellent opportunities for improved operating performance.
Seasonality. The Company's nursery business, like that of its competitors, is highly seasonal. The Company has, and expects to continue to experience significant variability in net sales, operating income and net income on a quarterly basis.
Acquisitions. The Company has completed a number of recent acquisitions to expand and diversify its operations. In the three years ended December 31, 1999, the Company completed six 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 relating to each transaction was accounted for as goodwill. Amounts allocated to goodwill are being amortized on a straight-line basis over thirty-five years. The funds used for the acquisitions were provided by the Company's existing acquisition facility. The consolidated financial statements include the operating results of each acquisition from the date of acquisition.
These acquisitions have and will continue to affect the period-to-period comparability of the operating results discussed below. The Company intends to pursue strategic acquisitions from time to time that increase its production capacity, broaden or complement its existing product lines, expand its geographic presence or offer operating synergies. The Company believes that the highly fragmented nature of the nursery industry presents it with a number of opportunities to make such acquisitions, though the Company does not have current agreements to consummate any such acquisitions.
Tax Matters. The Company derives significant benefits under the U.S. federal tax code by qualifying to use the cash method of accounting for federal income tax purposes. Under the cash method, sales are included in taxable income when payments are received and expenses are deducted as they are paid. The primary benefit the Company receives is the ability to deduct the cost of inventory as it is incurred. As a result of the Company's ability to deduct its growing costs under the farming exception, the Company has generally not been required to pay cash income taxes and has generated net operating losses for federal income tax purposes. In 1999, the Company has generated taxable income for federal income tax purposes. To the extent taxable income is offset with net operating loss carry forwards, no cash federal income tax will be paid apart from a small amount due to
the alternative minimum tax. During the same period, the Company has continued to show a tax provision relating to the recording of deferred taxes. At December 31, 1999, the Company had approximately $36.5 million in net operating loss carry forwards for federal income tax reporting purposes.
Foreign Currency Translation. Prior to April 1, 1999, the Company considered the U.S. dollar to be the functional currency of Sun Gro's Canadian operations. Monetary assets and liabilities denominated in Canadian dollars were translated into U.S. dollars at the foreign exchange rate in effect as of the balance sheet date. Non-monetary assets and liabilities, cost of goods sold and depreciation were remeasured into U.S. dollars at historical exchange rates. Revenues and other expenses were remeasured at average exchange rates. Gains or losses from these remeasurements were recognized in the consolidated results of operations.
Effective April 1, 1999, the Company changed the functional currency of Sun Gro's Canadian operations to the Canadian dollar. In 1998 the Company acquired Lakeland significantly expanding the scope of its Canadian operations. Since the acquisition of Lakeland, the Company's Canadian operations have become increasingly self-sufficient and less dependent upon its U.S.-based parent. As a result, the Canadian dollar has become the principal operating currency of Sun Gro's Canadian operations and effective April 1, 1999, the Company changed the functional currency of Sun Gro's Canadian operations to the Canadian dollar. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars at the foreign exchange rate in effect as of the balance sheet date. Revenues and expenses are translated into U.S. dollars at the weighted average exchange rate for the period. Translation adjustments are recorded in accumulated other comprehensive loss.
Results of Operations
Fiscal Year Ended December 31, 1999 compared to Fiscal Year Ended December 31, 1998.
Net sales. Net sales of $277.7 million for the fiscal year ended December 31, 1999 increased $42.7 million, or 18.2%, from net sales of $235.0 million for the comparable period in 1998. The Company's sales of nursery products increased 16.5%, which included $5.3 million of sales from Atlantic (acquired on September 9, 1999). Excluding this acquisition, sales from the Company's nursery operations increased 13.0% from the comparable period in 1998, with the most significant gains being in the Western and Southern regions due to the successful leveraging of store service programs, a strategy involving in-store servicing and merchandising. Increased volumes in 1999 were also attributable to the successful integration of the Irvine and Fallbrook, California operations and to a recovery from the adverse effects of El Nino in 1998.
Net sales of the Company's growing media business increased by $17.7 million, or 21.2%, from the comparable period in 1998. Fiscal year 1999 sales included $6.5 million from Strong Lite (acquired on August 2, 1999) and Pro-Gro (acquired on August 23, 1999). Excluding these acquisitions, sales increased 13.4% from the comparable period in 1998 from internally generated growth. These sales gains resulted primarily from a mix line expansion at the Company's East Coast growing media operations and introduction of the Company's co- packing strategy to produce retail growing mixes on behalf of regional bagged- good companies.
Gross profit. Gross profit of $137.7 million for the year ended December 31, 1999 increased $17.8 million, or 14.8%, from gross profit of $119.9 million for the comparable period in 1998. The increase was primarily attributable to higher sales at both the Company's nursery and growing media operations as described above. Gross margins decreased to 49.6% from 51.1% for the comparable period in 1998, primarily due to the impact of recent acquisitions having lower gross margins than the existing base business both within the nursery and growing media operations.
Operating expenses. Operating expenses of $95.5 million for the year ended December 31, 1999 increased $13.3 million, or 16.2%, from $82.2 million for the comparable period in 1998. 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 decreased to 34.4% from 35.0% for the comparable period in 1998, primarily due to the Company's ability to leverage operating expenses on higher sales volume.
Operating income. Operating income of $42.2 million for the year ended December 31, 1999 increased $4.4 million, or 11.8%, from $37.8 million for the comparable period in 1998 primarily as a result of sales and related gross profit increases, offset somewhat by increases in operating expenses. As a percentage of net sales, operating income decreased to 15.2% from 16.1% due primarily to a decrease in gross margins, as described above.
Interest expense. Interest expense of $17.4 million for the year ended December 31, 1999 decreased $2.1 million from $19.5 million for the comparable period in 1998. The reduction was primarily attributable to the redemption of $42.0 million of senior subordinated notes with a portion of the proceeds from the Company's initial public offering of common stock in June 1998.
Provision for income taxes. The Company's effective income tax rate was 35.9% and 39.5% for the years ended December 31, 1999 and 1998, respectively. The lower effective tax rate in 1999 was primarily the result of the release of tax reserves management determined will no longer be necessary.
Net income. Net income of $15.4 million for the year ended December 31, 1999 increased $9.4 million, or 154.1%, from $6.1 million for the comparable period in 1998. Excluding the $4.4 million extraordinary loss on the early extinguishment of debt during 1998, net income increased by $4.9 million, or 47.2%, from net income of $10.5 million for the comparable period in 1998. The increase was primarily attributable to higher sales, higher operating income and lower interest expense as described above.
Fiscal Year Ended December 31, 1998 compared to Fiscal Year Ended December 31, 1997.
Net sales. Net sales of $235.0 million for the fiscal year ended December 31, 1998 increased $33.7 million, or 16.7%, from net sales of $201.3 million for the comparable period in 1997. The Company's sales of nursery products increased 19.1%, which included $16.2 million of sales from Pacific Color (acquired on October 20, 1997) and Bryfogle's (acquired on December 16, 1997). Excluding these acquisitions, sales from the Company's nursery operations increased 7.4% from the comparable period in 1997. The higher sales were primarily due to increased sales in the Eastern and Southern regions of the country, resulting from continued expansion of existing operations. This increase was partially offset by lower sales in the Western and Southwestern regions of the country, particularly in California, where the historically strong seasonal demand was reduced due to excessive rainfall attributable to El Nino during the period.
Net sales of the Company's growing media products increased by $9.4 million, or 12.7%, from the comparable period in 1997. Fiscal year 1998 sales included $11.7 million from Lakeland, acquired on April 6, 1998. Excluding the Lakeland acquisition, sales decreased 3.1% from the comparable period in 1997. Sales of growing media products in the western United States were negatively impacted during the first half of the year by unseasonably wet weather attributable to El Nino. The Company's strategy of emphasizing sales to professional customers was reflected in a 3.3%, or $1.8 million, increase in sales to this customer segment during the period. Likewise, the Company's strategy to move away from unprofitable and low margin customers resulted in reduced sales to retail customers of $4.1 million, or 22.0%, compared to 1997.
Gross profit. Gross profit of $119.9 million (51.1% of net sales) for the year ended December 31, 1998 increased $18.1 million, or 17.8%, from gross profit of $101.8 million (50.6% of net sales) for the comparable period in 1997. The increase was primarily attributable to higher sales and improved gross profit from the Company's peat moss operations resulting from the heightened emphasis on professional customers and pricing improvements in all professional products. As a percent of sales, gross margin improved by .5% to 51.1% from 50.6% for the comparable period in 1997 as lower nursery operation gross margins were more than offset by
improved margins in the growing media operations. The gross margins of the nursery operations were depressed by the newly-acquired companies, which initially have lower margins than those of the core nursery business. However, the gross profit and operating performance of recently acquired companies have generally improved following the installation of Hines' operating systems and their integration into the Company.
Operating expenses. Operating expenses of $82.2 million (35.0% of net sales) for the year ended December 31, 1998 increased $11.4 million, or 16.1%, from $70.8 million (35.2% of net sales) for the comparable period in 1997. The increase was primarily attributable to acquisitions and the significant investment in sales and management infrastructure required to support the Company's current and future growth. Excluding the impact of acquisitions, the operating expenses of the Company's nursery operations increased 21.7% while operating expenses of the Company's growing media operation decreased 13.6%. The increase in operating expenses of the nursery operations was due to higher selling and general and administrative expenses, related to significant investments in sales and management infrastructure required to support the Company's current and future growth. The decrease in operating expenses of the Company's growing media operations was primarily due to the reduction in promotional and advertising programs targeted at retail customers resulting from the shift away from the lower margin retail peat business. Total operating expenses as a percentage of net sales decreased .2% to 35.0% due primarily to improved operating leverage at the Company's growing media operations.
Operating income. Operating income of $37.8 million for the year ended December 31, 1998 increased $6.7 million, or 21.5%, from $31.1 million for the comparable period in 1997. Operating income increased primarily due to higher sales and gross profit margins, which were partially offset by higher operating expenses, as described above. As a percentage of net sales, operating income increased to 16.1% from 15.5% due primarily to improved gross margins and a reduction in operating expenses as a percentage of net sales.
Interest expense. Interest expense of $19.5 million for the year ended December 31, 1998 decreased $1.2 million from $20.7 million for the comparable period in 1997. The decrease was attributable to lower borrowing levels and financing costs under the Company's revolving credit facilities during the third and fourth quarter of the year. Another contributing factor was the redemption of $42.0 million of senior subordinated notes in connection with the Company's initial public offering of common stock in June 1998.
Provision for income taxes. The Company's effective income tax rate was 39.5% and 37.8% for the years ended December 31, 1998 and 1997, respectively. The higher effective tax rate in 1998 was due to the non-deductibility of the goodwill amortization related to recent acquisitions.
Net income. Net income of $6.1 million for the year ended December 31, 1998 increased $0.3 million, or 5.2%, from $5.8 million for the comparable period in 1997. Excluding the $4.4 million extraordinary loss on the early extinguishment of debt, net income increased by $4.7 million, or 81.4%, from net income of $5.8 million for the comparable period in 1997. The increase in net income was primarily attributable to an increase in sales and gross margins, partially offset by an increase in operating expenses, as described above.
Liquidity and Capital Resources
The Company has historically satisfied its working capital requirements through operating cash flow. Due to the highly seasonal nature of the Company's nursery operations, the company historically borrows under its revolving credit facilities to fund peak needs.
In conjunction with the Company's initial public offering in June 1998, the Company entered into a new senior credit facility (the "Senior Credit Facility") with Bankers Trust Company, Bank of America, N.T. & S.A. and Harris Trust & Savings Bank. The Senior Credit Facility amended and restated the Company's previous senior credit facilities to provide for a new $50.0 million term loan and a $200.0 million revolving credit facility, increasing the Company's total borrowing capacity by $100.0 million. The revolving credit facility is comprised of a $100.0 million working capital facility and a $100.0 million acquisition facility. The Senior Credit Facility has a five- year term. The revolving credit facility and all other obligations under the Senior Credit Facility are
secured by substantially all of the assets and common stock of Hines Nurseries and Sun Gro-U.S., as well as a pledge of 65% of the common stock of Sun Gro- Canada. The principal repayment schedule for the term loan is $7.0 million in 2000, $11.25 million in 2001, $18.75 million in 2002 and $11.25 million in 2003. The principal repayment schedule for the acquisition facility is $3.98 million in 2000, $6.97 million in 2001, $23.9 million in 2002 and $44.8 million in 2003. The Senior Credit Facility, among other things, limits the ability of Hines and 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 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.
In October 1995, Hines Nurseries issued $120.0 million in aggregate principal amount of 11 3/4% senior subordinated notes due 2005 (the "Senior Subordinated Notes") to refinance certain indebtedness incurred in connection with the acquisition of Hines by MDCP and certain members of management. These Senior Subordinated Notes were subsequently exchanged in a registered offering for $120.0 million of its 11 3/4% Senior Subordinated Notes due 2005, Series B. As of December 31, 1999, $78.0 million in aggregate principal amount remains outstanding. The indenture pursuant to which the Senior Subordinated Notes were issued imposes a number of restrictions on Hines Nurseries and Sun Gro-U.S. The indenture limits, among other things, their ability to incur additional indebtedness, to make certain restricted payments (including dividends to Hines), to make certain asset dispositions, to incur certain liens and to enter into certain significant transactions. In addition, breach of a material term of the indenture or any other material indebtedness that results in the acceleration of such indebtedness would trigger an event of default under the Amended Senior Credit Facility, causing all amounts owing thereunder to become immediately due and payable. The Amended Senior Credit Facility imposes a number of similar and certain additional restrictions (including financial covenants) on Hines Nurseries and Sun Gro-U.S and its subsidiaries.
Net cash provided by operating activities for the year ended December 31, 1999 of $20.5 million increased $4.5 million, from $16.0 million for the comparable period in 1998. The higher cash level generated was primarily due to increases in net income (and adjustments to reconcile net income to net cash provided by operating activities) and accounts payable levels which were partially offset by increased accounts receivable and inventory levels as a result of the Company's growth. The seasonal nature of the Company's operations results in a significant increase in certain components of working capital (primarily accounts receivable and inventory) during the growing and selling cycles. As a result, operating activities during the first and fourth quarters of 1999 used significant amounts of cash, totaling $29.7 million and $16.5 million, respectively. In contrast, the operating activities for the second and third quarters generated substantial cash, totaling $43.5 million and $23.2 million, respectively, as the Company shipped inventory and collected accounts receivable.
Net cash used for investment activities during the year ended December 31, 1999 increased $44.2 million to $83.0 million from $38.8 million for the comparable period in 1998. The increase primarily related to the higher level of acquisitions completed during the year along with a small increase in the level of fixed asset purchases.
Net cash provided by financing activities during the year ended December 31, 1999 increased $42.5 million to $63.3 million from $20.8 million for the comparable period in 1998. The increase was directly related to additional advances under the acquisition facility to finance the higher level of acquisitions completed during the year.
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 March 15, 2000, the Company had unused borrowing capacity of $1.4 million and $30.7 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 carry forwards to offset all of its tax liability under the alternative minimum tax system.
The Company's capital expenditures were approximately $21.8 million for the year ended December 31, 1999. The capital expenditures for Hines Nurseries ($15.9 million) related primarily to the purchase and development of additional nursery acreage and the purchase of nursery-related structures, certain vehicles, machinery and equipment. The capital expenditures for Sun Gro ($5.9 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 $39 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 expenditure 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 available on terms favorable to the Company, or at all.
Year 2000 Compliance
The Company had instituted a program to determine whether its computerized information systems were able to interpret dates beyond the year 1999 (the "Year 2000 Compliance Program") and implemented programming modifications to its main operational and financial reporting systems that addressed these issues. The financial systems of companies recently acquired by the Company were also evaluated to determine whether they were Year 2000 compliant. The Company has either implemented programming modifications to the financial systems of these acquired companies or integrated the financial data of these acquired companies into the Company's main system during 1999 thereby eliminating the need to rely on any non-compliant systems.
The Company evaluated non-information technology systems and personal computers to determine whether they were Year 2000 compliant. The Company also evaluated the Year 2000 status of suppliers where the Company had a significant reliance on third party suppliers for finished goods, raw materials, water, other utilities, transportation and a variety of other key services.
To date, the Company has not incurred any significant failures, interruptions of supplies or services related to the Year 2000 issue.
The foregoing represents a Year 2000 readiness disclosure entitled to protection as provided in the Year 2000 Information and Readiness Disclosure Act.
New Accounting Pronouncements
There were no new accounting pronouncements in 1999 which would significantly impact the Company.
Effects of Inflation
Management believes the Company's results of operations have not been materially impacted by inflation over the past three years.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of its ongoing business, the Company is exposed to certain market risks, including fluctuations in interest rates, foreign currency exchange rates, commodity prices and its common stock price. The Company does not enter into transactions designed to mitigate its market risks for trading or speculative purposes. As of December 31, 1999, the Company had no foreign exchange contracts and options outstanding.
The Company manages its interest rate risk by balancing the amount of its fixed and variable long-term debt. For fixed rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely, for variable rate debt, interest rate changes generally do not affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. At December 31, 1999, Hines had fixed rate long-term debt of $78.0 million and variable rate long-term debt of $127.9 million. Holding other variables constant (such as foreign exchange rates and debt levels), a one percentage point increase in interest rates would have decreased the unrealized fair market value of the fixed rate debt at December 31, 1999 by approximately $3.9 million and would be expected to have an estimated impact on pre-tax earnings and cash flows for next year of approximately $1.3 million related to the variable rate debt.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to this item is submitted as a separate section of this Report on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
Not applicable.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Securities and Exchange Commission.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Securities and Exchange Commission.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Securities and Exchange Commission.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's 1999 Proxy Statement to be filed with the Securities and Exchange Commission.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. The financial statements listed in "Index to Financial Statements."
2. The exhibits listed in "Index to Exhibits."
(b) Reports on Form 8-K:
The Registrant filed no current reports on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1999.
INDEX TO EXHIBITS
- -------- + Filed herewith.
* Management contract or compensatory arrangement.
(1) Incorporated by reference to Hines Holdings, Inc.'s Registration Statement on Form S-4, File No. 33-99452, filed on November 15, 1995 and amended on December 22, 1995 and January 8, 1996.
(2) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference to Hines Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(4) Incorporated by reference to Hines Horticulture, Inc.'s Registration Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and amended on May 26, 1998 and June 16, 1998.
(5) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(6) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to Hines Holdings, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998.
(8) Incorporated by reference to Hines Horticulture, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(9) Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed on March 17, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 24, 2000.
HINES HORTICULTURE, INC.
/s/ Claudia M. Pieropan By: _________________________________ Claudia M. Pieropan Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant in the capacities indicated on March 24, 2000.
HINES HORTICULTURE, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Hines Horticulture, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Hines Horticulture, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 16, 2000, except as to Note 18 which is as of March 3, 2000
HINES HORTICULTURE, INC.
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Dollars in thousands except for share data)
- ------- (i) Accumulated accretion of cumulative redeemable preferred stock (in excess) less than additional paid-in capital
The accompanying notes are an integral part of these consolidated financial statements
HINES HORTICULTURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Hines Horticulture, Inc. ("Hines"), a Delaware corporation, produces and distributes horticultural products through its two operating divisions, Hines Nurseries and Sun Gro Horticulture ("Sun Gro"). On June 12, 1998, Hines succeeded to the business of Hines Holdings, Inc., a Nevada corporation, as a result of the merger of Hines Holdings, Inc. into Hines, the purpose of which was to change the Company's name and jurisdiction of incorporation. The business of Hines is currently conducted through Hines Nurseries, Inc. (formerly Hines Horticulture, Inc.) ("Hines Nurseries") and through Sun Gro Horticulture Inc. ("Sun Gro-U.S.") its wholly owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun Gro-Canada's direct and indirect Canadian subsidiaries. Hines, together with Hines Nurseries, Sun Gro- U.S., Sun Gro-Canada, and Sun Gro-Canada's direct and indirect Canadian subsidiaries, are hereafter collectively referred to as the "Company."
Hines Nurseries is a leading operator of commercial nurseries in North America, producing one of the broadest assortments of container-grown plants in the industry with nursery facilities located in Arizona, California, Florida, New York, Oregon, Pennsylvania, South Carolina and Texas. Hines Nurseries sells its nursery products throughout the United States primarily to the retail segment, which includes premium independent garden centers, as well as leading home centers and mass merchandisers.
Sun Gro is a leading producer, marketer and distributor of sphagnum peat moss and professional peat and bark-based growing media with manufacturing facilities located in Canada and the United States. Sun Gro markets its products in North America and various international markets to both retail and professional customers, including greenhouse growers, nursery growers and golf course developers.
Consolidation
The consolidated financial statements include the accounts of Hines and its wholly owned subsidiaries Hines Nurseries and Sun Gro, including Sun Gro's wholly owned subsidiary, Sun Gro-Canada. All material intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition and Concentration of Credit Risk
The Company recognizes revenue, net of sales discounts and allowances, upon product shipment to the customer. The Company is subject to credit risk primarily through accounts receivable balances. Credit risk on accounts receivable balances are minimized as a result of the large and diverse nature of the Company's customer base throughout North America. The Company does not require collateral for its accounts receivable. Certain customers are granted deferred payment terms (dating). At December 31, 1999 and 1998, significant accounts receivable balances were subject to dating terms. Hines Nurseries's largest customer accounted for approximately 29%, 20% and 18% of its net sales in 1999, 1998 and 1997, respectively, and approximately 19%, 14% and 12% of the Company's consolidated net sales in 1999, 1998 and 1997, respectively. No single Sun Gro customer accounted for more than 10% of consolidated net sales in 1999, 1998 or 1997.
Amortization of Deferred Financing Expenses
Deferred financing expenses are being amortized using a method, which approximates the effective interest method over the term of the associated financing agreements.
Depreciation and Depletion
Fixed assets are stated at cost less accumulated depreciation. Interest is capitalized for qualifying assets during the assets' acquisition period. The amount of interest capitalized for the years ended December 31, 1999,
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
1998 and 1997 was $467, $709 and $0. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the respective asset's estimated useful life. Depreciation has been provided for on a straight-line basis over the following estimated economic useful lives:
Bog depletion is based on the volume of peat produced during the year at rates which will amortize the bog acquisition costs, as well as the initial bog clearing and development costs, over the period of production of peat from the bog.
Goodwill and Negative Goodwill
In connection with the sale of the Company in 1990, the Company recorded $6,100 of negative goodwill. Negative goodwill equals the excess of the fair market value of the acquired net assets over the acquisition purchase price after reducing the amount allocated to the fixed assets acquired to zero. The Company has amortized negative goodwill on a straight-line basis as a component of other operating expenses over the period from June 29, 1990 to December 31, 1997.
In connection with the acquisition of the interests of minority shareholders for stock in the Company in 1995, approximately $14,700 of goodwill was recorded and is being amortized over a 35-year period as a component of other operating expenses.
Goodwill is being amortized over an estimated life of 35 years. At each balance sheet date, the Company reviews the recoverability of goodwill by comparing projected operating income on an undiscounted basis to the net book value of the related assets. If the carrying value of goodwill exceeds projected operating income, the carrying value of goodwill is written down to undiscounted projected operating income.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including identifiable intangible assets, for potential impairment. When circumstances indicate that the carrying amount of the asset may not be recoverable, as demonstrated by the projected undiscounted cash flows, an impairment loss would be recognized based on fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. Hines' ornamental nursery stock has an average growing period of approximately eighteen months. All nursery stock is classified as a current asset based on Hines Nurseries' normal operating cycle.
Foreign Currency Translation
Prior to April 1, 1999, the Company considered the U.S. dollar to be the functional currency of Sun Gro's Canadian operations. Monetary assets and liabilities denominated in Canadian dollars were translated into U.S.
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
dollars at the foreign exchange rate in effect as of the balance sheet date. Non-monetary assets and liabilities, cost of goods sold and depreciation were remeasured into U.S. dollars at historical exchange rates. Revenues and other expenses were remeasured at average exchange rates. Gains or losses from these remeasurements were recognized in the consolidated results of operations.
Effective April 1, 1999, the Company changed the functional currency of Sun Gro's Canadian operations to the Canadian dollar. In 1998 the Company acquired Lakeland Peat Moss, Ltd. and certain affiliated entities ("Lakeland") significantly expanding the scope of its Canadian operations. Since the acquisition of Lakeland, the Company's Canadian operations have become increasingly self-sufficient and less dependent upon its U.S.-based parent. As a result, the Canadian dollar has become the principal operating currency of Sun Gro's Canadian operations and effective April 1, 1999, the Company changed the functional currency of Sun Gro's Canadian operations to the Canadian dollar. Assets and liabilities denominated in Canadian dollars are translated into U.S. dollars at the foreign exchange rate in effect as of the balance sheet date. Revenues and expenses are translated into U.S. dollars at the weighted average exchange rate for the period. Translation adjustments are recorded in accumulated other comprehensive loss.
Income Taxes
Hines' operations are agricultural in nature. Hines reports its results for income tax purposes on the cash basis.
The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Advertising
The Company expenses advertising costs at the time the advertising first takes place. Advertising expense was $1,372, $1,124 and $1,898 for the years ended December 31, 1999, 1998 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share ("EPS")
Basic earnings per share is computed by dividing net income, after deduction of preferred dividends, by the weighted average number of common shares outstanding in each year. Diluted earnings per share is computed by dividing net income, after deduction of preferred dividends, by the weighted average number of common shares outstanding plus any potential dilution that could occur if options, warrants or convertible notes were converted into common stock in each year.
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
There is no difference between the numerators and denominators for basic and diluted earnings per share since common stock equivalents have been excluded from the earnings per share calculation for fiscal years 1999 and 1997 (in the amounts of 0 and 618 shares, respectively) because the effect would be anti-dilutive. The only potentially dilutive shares in 1999 related to stock options (Refer to Note 10 Shareholders' Equity). A reconciliation of the numerators and denominators of basic and diluted earnings per share for the year ended December 31, 1998 is as follows (in thousands, except per share amounts):
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP provides guidance on accounting for certain costs in connection with obtaining or developing computer software for internal use and requires that entities capitalize such costs once certain criteria are met. The Company adopted SOP 98-1 as of January 1, 1999. There was no material impact in the year ended December 31, 1999 as a result of the adoption of SOP 98-1.
Comprehensive Income
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to the Company's stockholders. The Company's comprehensive income is composed of cumulative foreign currency adjustments. The adoption of SFAS 130 had no effect on the Company's consolidated results of operations, financial position or cash flows.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentations.
2. Initial Public Offering
On June 22, 1998, the Company completed the issuance of 5.1 million shares of common stock through an initial public offering ("the Offering"), resulting in net proceeds to the Company (after deducting issuance costs)
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
of approximately $50,200. A portion of the proceeds were used to repay, in part, certain borrowings secured by real property bearing interest at 11.75% per annum maturing on June 27, 2005. The remaining proceeds were used for the redemption on July 29, 1998, of $42,000 in aggregate principal amount of the 11.75% Senior Subordinated Notes due 2005, Series B (the "Senior Subordinated Notes"). The Senior Subordinated Notes were redeemed at a price of 109.139% of the aggregate principal amount thereof ($45,800 at July 29, 1998), plus accrued and unpaid interest thereon through the date of redemption. Payment of the redemption premium and the recognition of a portion of the deferred costs related to the Senior Subordinated Notes resulted in an extraordinary loss of $3,000, net of related income taxes of $2,000, in the quarter ended September 30, 1998.
Concurrent with the closing of the Offering, the Company entered into an amended and restated senior credit facility (the "Senior Credit Facility") to provide for a new $50,000 term loan and $200,000 revolving credit facility, as further discussed in Note 7. The revolving credit facility is comprised of a $100,000 working capital revolver and a $100,000 acquisition revolver. The Senior Credit Facility replaced the Company's existing senior credit facility and increased the aggregate size of the Company's borrowing facilities by $100,000. The prepayment of the previous credit facilities resulted in an extraordinary loss related to the write-off of unamortized financing costs of $1,400, net of $1,000 in related income taxes, during the three months ended June 30, 1998.
In connection with the Offering, on June 22, 1998, Hines effected a 1.3611- for-one reverse stock split with respect to its common stock which has been reflected in the accompanying financial statements for all periods presented.
Immediately prior to the Offering, (i) all of the outstanding shares of the Company's 12% Cumulative Redeemable Senior Preferred Stock, par value $.01 per share, and all of the outstanding shares of the Company's 12% Cumulative Redeemable Junior Preferred Stock, par value $.01 per share, together, in each case, with all accrued and unpaid dividends thereon through the date of the closing of the Offering, were converted into shares of common stock at the initial public offering price less underwriting discounts and commissions, (ii) a portion of the Company's outstanding 6% convertible subordinated promissory notes, which were issued in connection with certain acquisitions in the aggregate principal amount of $1,200, was converted into shares of common stock at the initial public offering price less underwriting discounts and commissions, and (iii) all of the outstanding warrants to purchase common stock were exercised in accordance with their terms. These actions, as well as the above noted stock split, are collectively referred to herein as the "Equity Recapitalization".
3. Acquisitions
During the three years ended December 31, 1999, the Company made six acquisitions, all of which have been accounted for under the purchase method for accounting purposes. 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 relating to each transaction was accounted for as goodwill. Amounts allocated to goodwill are being amortized on a straight-line basis over thirty-five years. The funds used for the acquisitions were provided by the Company's existing acquisition facility. The consolidated financial statements include the operating results of each acquisition from the date of acquisition.
For the Year Ended December 31, 1999
On August 2, 1999, the Company entered into a stock purchase agreement to acquire all of the outstanding capital stock of Strong Lite, Inc. ("Strong Lite"), a producer and marketer of bark-based growing media. The total acquisition price was approximately $13,400, which resulted in goodwill of approximately $8,100.
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
On August 23, 1999, the Company acquired certain assets (primarily inventory and fixed assets) relating to the bark-based growing media business of Pro-Gro Products, Inc. and related companies ("Pro Gro"). The total acquisition price was approximately $17,100, which resulted in goodwill of approximately $13,400.
On September 9, 1999, the Company entered into a stock purchase agreement to acquire all of the outstanding capital stock of Atlantic Greenhouses, Inc. ("Atlantic"), a specialized producer of florist quality, flowering potted plants and annual bedding plants. The total acquisition price was approximately $30,100, which resulted in goodwill of approximately $1,500.
For the Year Ended December 31, 1998
On April 6, 1998, the Company entered into a stock purchase agreement to acquire all of the issued and outstanding shares of capital stock of Lakeland, a producer of sphagnum peat moss in western Canada. The total acquisition price was approximately $22,400.
For the Year Ended December 31, 1997
On December 16, 1997, the Company acquired all of the issued and outstanding capital stock of Bryfogle's Wholesale, Inc., Bryfogle's Power Plants, and Power Plants II, Inc. (collectively "Bryfogle's"), a producer of color bedding plants sold primarily to home centers and mass merchandisers in Pennsylvania and surrounding states. The total acquisition price was approximately $19,000, which resulted in goodwill of approximately $13,800.
On October 20, 1997, the Company acquired certain assets and assumed certain liabilities of Pacific Color Nurseries, Inc. ("PCN") a producer of color bedding plants sold primarily to home centers and mass merchandisers in California. The total acquisition price was approximately $1,700, which resulted in goodwill of approximately $300.
Acquisition of Willow Creek Greenhouses, Inc.
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 $18,800, which resulted in goodwill of approximately $10,500.
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
Pro Forma Operating Data
The following summary of condensed unaudited pro forma results of operations for the years ended December 31, 1999 and 1998 gives effect to the following transactions as if they had occurred on January 1, 1998: (i) the acquisition of Lakeland; (ii) the Equity Recapitalization; (iii) the closing of the new Senior Credit Facility; (iv) the Offering; and (v) the acquisitions of Strong Lite, Pro Gro and Atlantic (in thousands, except per share data):
4. Unusual Expenses
During 1997, the Company received $1,194 of insurance proceeds from claims to replace assets that had been damaged and recorded a gain of $1,194, representing the difference between the proceeds received and the carrying amount of the damaged assets. As of December 31, 1998, the Company had acquired $1,324 of fixed assets utilizing the insurance proceeds.
In December 1996, the Company approved a restructuring plan and recognized an unusual charge in that year for Sun Gro. An additional liability of $1,537 was recognized during the year ended December 31, 1997, representing $1,100 of severance-related payments and $437 of other related restructuring charges. As of December 31, 1998, there was no remaining reserve balance.
5. Inventories
Inventories consisted of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
6. Fixed Assets
Fixed assets consisted of the following:
7. Revolving Lines of Credit
On August 4, 1995, the Company entered into a revolving credit agreement that, as amended on December 16, 1997, provided for a line of credit equal to the lesser of $75,000 or a specified percentage of accounts receivable and inventory. Borrowings under this line were at interest rates approximating the U.S. prime rate plus 1.5 percent or the Eurodollar rate plus 2.5 percent. The line of credit was secured by substantially all of the assets and common stock of Hines Nurseries and Sun Gro-U.S., as well as a pledge of 66% of the common stock of Sun Gro-Canada. The agreement contained covenants that, among other matters, established minimum interest coverage and maximum leverage ratios and minimum earnings and maximum capital expenditure amounts. The average daily amount of the unused portion of the line of credit was subject to a commitment fee of 0.5 percent per annum.
On December 16, 1997 the Company entered into another revolving loan agreement that provided for a line of credit equal to the lesser of $10,000 or a percentage of accounts receivable and inventory balances, as stipulated in the agreement. Borrowings under this line were at interest rates approximating the U.S. prime rate plus 0.75 percent or the Eurodollar rate plus 2.25 percent. The line of credit was secured by substantially all of the assets of Hines Nurseries. The agreement contained covenants, which, among other matters, established minimum interest coverage and maximum leverage ratios and minimum earnings and maximum capital expenditure amounts. The average daily amount of the unused portion of the line of credit was subject to a commitment fee of 0.5 percent per annum.
Concurrent with the Offering, the Company entered into the Senior Credit Facility to provide for a new $50,000 term loan and a $200,000 revolving credit facility, which replaced the Company's existing senior credit facility and increased the aggregate size of the Company's borrowing facilities by $100,000. At December 31, 1999 the revolving credit facility was comprised of a $100,000 working capital revolver and a $100,000 acquisition revolver. (Refer to Note 18 Subsequent Events).
After an initial period, the interest rate spread over the U.S. prime rate and Eurodollar rate varies depending upon the Company's quarterly leverage and interest coverage ratios as defined in the Senior Credit Facility agreement. The revolving credit facility and all other obligations under the Senior Credit Facility are secured by substantially all of the assets and common stock of Hines Nurseries and Sun Gro-US, as well as a pledge of 65% of the common stock of Sun Gro-Canada. The Senior Credit Facility contains covenants
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
that, among other matters, establish minimum interest coverage and net worth and maximum leverage ratios and capital expenditure amounts. After an initial period, the average daily amount of the unused portion of the revolving credit facility is subject to a commitment fee that varies depending upon the Company's quarterly leverage ratio as defined in the Senior Credit Facility agreement. The revolving credit facility expires on June 30, 2003. Amounts borrowed under the acquisition facility will convert into a term loan on June 30, 2000 and will begin to amortize thereafter. The weighted average interest rate on borrowings outstanding under the Company's revolving lines of credit for the years ended December 31, 1999 and 1998 were approximately 6.7% and 7.7%, respectively.
8. Long-term Debt
Estimated principal maturities of long-term debt outstanding at December 31, 1999 are as follows:
The Senior Subordinated Notes were issued by Hines Nurseries and are redeemable, in whole or in part, at the option of the Company, on or after October 15, 2000 at prices specified by the indenture agreement (105.875% as a percentage of the principal amount thereof in 2000 to 100.000% in 2004). Upon a change of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
control, each holder will have the right to require Hines Nurseries to repurchase such holder's notes at a price equal to 101 percent of the principal amount thereof plus accrued interest, if any, to the date of repurchase. The Senior Subordinated Notes are uncollateralized and subordinated to all existing and future senior debt and unconditionally guaranteed on a senior subordinated basis by Hines and Sun Gro-U.S.
The indenture governing the Senior Subordinated Notes imposes certain limitations on the ability of Hines and Sun Gro-U.S. to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments and consummate certain asset sales.
9. Commitments and Contingencies
Operating Leases
The Company leases certain land, office and warehouse facilities under various renewable long-term operating leases. Certain of these leases include escalation clauses based upon changes in the consumer price index and/or the fair rental value of leased land. One of the operating land leases requires the Company to pay rent equal to the greater of 2.25 percent, increasing to 3 percent by the year 2010, of the sales derived from the related land or a minimum per acre amount, as defined in the agreement. Total rent expense under these operating lease agreements for the years ended December 31, 1999, 1998 and 1997 was $1,683, $1,592 and $1,684 respectively.
As of December 31, 1999, the Company's future minimum annual payments under its non-cancelable operating leases are as follows:
Legal Matters
From time to time, the Company is involved in various disputes and litigation matters, which arise in the ordinary course of business. The litigation process is inherently uncertain and it is possible that the resolution of these disputes and lawsuits may adversely affect the Company. Management believes, however, that the ultimate resolution of such matters will not have a material adverse impact on the Company's consolidated financial position, results of operations or cash flows.
10. Shareholders' Equity
Stock Option Plan: On June 22, 1998, the Board adopted the 1998 Long-Term Equity Incentive Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides for grants of stock options, stock appreciation rights ("SARs"), restricted stock, performance awards and any combination of the foregoing to certain directors, officers and employees of the Company and its subsidiaries. The purpose of the 1998 Stock Plan is to provide such individuals with incentives to maximize shareholder value and otherwise contribute to the success of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
Company and to enable the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The options are granted at the fair market value of the shares underlying the options at the date of grant, generally become exercisable over a four-year period and expire in ten years.
Approximately 2.6 million shares of common stock are available for issuance pursuant to the 1998 Stock Plan, subject to adjustment in the event of a reorganization, stock split, merger or similar change in the corporate structure of the Company or the outstanding shares of common stock.
The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") in 1998. As permitted by SFAS 123, the Company measures compensation cost in accordance with Accounting Principles Board Opinon No. 25, "Accounting for Stock Issued to Employees", and related interpretations, but provides pro forma disclosures of net income and earnings per share as if the fair value method (as defined in SFAS 123) had been applied. Had compensation cost been determined using the fair value method prescribed by SFAS 123, the Company's net income (loss) and earnings (loss) per share for the year ended December 31 would have been as follows (in thousands, except per share amounts):
The Company estimates the weighted average fair value of each stock option on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
A summary of the status of the Company's stock option plan as of December 31 is presented below:
The weighted average remaining contractual lives were 8.6 and 9.5 years for the years ended December 31, 1999 and 1998, respectively. As of December 31, 1999 expiration dates ranged from June 22, 2008 to December 30, 2009. The range of exercise prices was $6.875 to $11.00 for options outstanding as of December 31, 1999. The weighted average fair value of options granted during the year ended December 31, 1999 and 1998 was $4.40 and $4.93, respectively. There were 774,963 and 267,797 options exercisable as of December 31, 1999 and 1998, respectively with weighted average exercise prices of $10.99 per share.
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
11. Income Taxes
The components of income (loss) from continuing operations before provision for income taxes and the provision for income taxes consisted of the following:
The reported provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 34 percent to income before provision for income taxes as follows:
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
Deferred tax assets (liabilities) are comprised of the following:
The Company derives significant benefits by qualifying to use the cash method of accounting for federal income tax purposes. Under the cash method, sales are included in taxable income when payments are received and expenses are deducted as they are paid. The primary benefit the Company receives is the ability to deduct the cost of inventory as it is incurred. The net benefit realized by the Company thus far is represented by the "Accrual to Cash Adjustment" item above. Because the items to which this "Accrual to Cash Adjustment" relate to are comprised of current assets and current liabilities in the balance sheet (such as inventory, accounts receivable, accounts payable, etc.), this deferred tax item is also characterized as current.
At December 31, 1999, the Company had approximately $36,500 in net operating loss carry forwards for federal income tax reporting purposes. The Company's federal net operating losses begin to expire in 2005.
At December 31, 1999, Sun Gro-Canada had capital loss carry forwards of approximately Cdn. $2,121 (U.S. $1,447). These capital loss carry forwards may be carried forward indefinitely but may only be used to the extent of capital gains realized by Sun Gro-Canada. A full valuation allowance has been recorded against the deferred tax asset associated with the capital loss carry forwards.
During 1999, the Company generated sufficient income to fully utilize the Canadian investment tax credit and net operating loss carry forwards relating to the 1996 acquisition of Flynn Rainbow Nurseries, Inc. ("Flynn"). Both items had a full valuation allowance at December 31, 1998. The release of the valuation allowance related to the Flynn net operating loss reduced goodwill by $991.
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
12. Employee Benefit Plans
Sun Gro sponsors a 401(K) Retirement Savings Plan for salaried and permanent hourly U.S. employees (the "US Plan") and a Registered Pension Plan for Canadian salaried and certain hourly employees (the "Canadian Plan").
Participants of the US Plan may make voluntary contributions to the plan up to 15 percent of their compensation (as defined). The Sun Gro match contribution formula is based on return on sales for the previous year. The Sun Gro match contribution to the US Plan may not exceed $3,500 per participant per calendar year.
Certain participants of the Canadian Plan must make contributions to the plan up to 5 percent and 3 percent of their compensation (as defined) and may make voluntary contributions to the plan up to 18 percent of their compensation (as defined). Sun Gro contributes up to 5 percent and 3 percent of each participant's compensation (as defined) to the Canadian Plan with no maximum for the salaried and hourly plans, respectively. The participants required contributions and employer contributions vary for those employees under a collective bargaining agreement.
The total expense related to these plans was $444, $0 and $284 for the years ended December 31, 1999, 1998 and 1997, respectively.
13. Segment Information
The Company operates in two business segments in the horticultural industry: the nursery business and the growing media business. The Company evaluates the performance of its segments based primarily on operating income. Refer to Note 19 "Guarantor/Non-guarantor Disclosures" for the required disclosures about the Company's segments for the three years ended December 31, 1999.
14. Supplemental Cash Flow Information
Supplemental disclosure of non-cash investing and financing activities were as follows:
15. Fair Values of Financial Instruments
The Company used the following methods and assumptions in estimating its fair value disclosures for financial instruments:
Cash
The carrying amount reported in the balance sheet for cash approximates its fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
Short-term and Long-term Debt
The fair value of the Senior Subordinated Notes is based on the closing price of the debt securities at December 31, 1999 and 1998. The carrying amount of the Company's other long-term debt approximates its fair value based upon borrowing rates currently available to the Company. The carrying amount of the short-term debt approximates the fair value based on the short-term maturity of the instrument.
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows:
16. Valuation and Qualifying Accounts
Activity with respect to the Company's allowance for doubtful accounts receivable is summarized as follows:
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
17. Geographic Information
Geographic information is summarized as follows:
Export sales from the United States totaled $7,434, $9,952 and $7,872 for the years ended December 31, 1999, 1998 and 1997, respectively.
18. Subsequent Events
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 $92,000, which is expected to result in goodwill of approximately $70,000. Acquisition related costs related to the Lovell acquisition are estimated to be $1,000. In addition, under the terms of the purchase agreement, the Company may be required to make additional payments of up to $12,500, contingent upon Lovell achieving certain operating results during 2000 and 2001.
In connection with the Lovell acquisition, the Company entered into an amendment to its existing senior credit facility (the "Amended Senior Credit Facility") dated March 3, 2000 to provide for a new $100,000 term loan and a $15,000 increase in the Company's existing working capital revolving credit facility. The term loan requires annual principal payments of $1,000 through December 31, 2003, $47,000 in fiscal year 2004 and the
HINES HORTICULTURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in Thousands)
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.
19. Guarantor/Non-guarantor Disclosures
The Senior Subordinated Notes issued by Hines Nurseries (the issuer) have been guaranteed by Hines (the parent guarantor) and by Sun Gro-U.S. (the subsidiary guarantor). The issuer and the subsidiary guarantor are wholly owned subsidiaries of the parent guarantor and the parent and subsidiary guarantees are full, unconditional, and joint and several. Separate financial statements of Hines Nurseries and Sun Gro-U.S. are not presented and Hines Nurseries and Sun Gro-U.S. are not filing separate reports under the Exchange Act because management believes that they would not be material to investors. The Senior Subordinated Notes are not guaranteed by Sun Gro-Canada or its present or future subsidiaries.
The following condensed consolidating information shows (a) Hines on a parent company basis only as the parent guarantor (carrying its investment in its subsidiary under the equity method), (b) Hines Nurseries as the issuer (carrying its investment in its subsidiary under the equity method), (c) Sun Gro-U.S. as subsidiary guarantor (carrying its investment in Sun Gro-Canada under the equity method), (d) Sun Gro-Canada and its direct and indirect subsidiaries, as subsidiary non-guarantors, (e) eliminations necessary to arrive at the information for the parent guarantor and its direct and indirect subsidiaries on a consolidated basis and (f) the parent guarantor on a consolidated basis, as follows:
. Consolidating balance sheets as of December 31, 1999 and December 31,
. Consolidating statements of operations for the years ended December 31, 1999, 1998 and 1997; and
. Consolidating statements of cash flows for the years ended December 31, 1999, 1998 and 1997
GUARANTOR / NON-GUARANTOR DISCLOSURES
CONSOLIDATING BALANCE SHEET
As of December 31, 1999 (Dollars in thousands)
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING BALANCE SHEET
As of December 31, 1998 (Dollars in thousands)
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1999 (Dollars in thousands)
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1998 (Dollars in thousands)
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 1999 (Dollars in thousands)
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF OPERATIONS
For the year ended December 31, 1998 (Dollars in thousands)
GUARANTOR / NON-GUARANTOR DISCLOSURES--(Continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the year ended December 31, 1997 (Dollars in thousands)