<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

(Mark One)

  [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934
                  For the fiscal year ended December 31, 1997

  [ ] Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934
               For the transition period from                to

                       Commission file number: 33-99452

                             Hines Holdings, Inc.
            (Exact Name of Registrant as Specified in its Charter)

            Nevada                                               52-1720681
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

                              12621 Jeffrey Road
                           Irvine, California 92620
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (714) 559-4444

       Securities registered pursuant to Section 12(b) of the Act:  None
       Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 24, 1998, there were 10,492,014 shares of Common Stock of Hines
Holdings, Inc., par value $.01 per share, outstanding and 20,847,986 shares of
12% Cumulative Redeemable Junior Preferred Stock of Hines Holdings, Inc., par
value $.01 per share, outstanding. As of such date, persons other than
affiliates and employees of the registrant held none of such shares, and there
was no public market for such shares.
<PAGE>

Item 1.  BUSINESS

Introduction

     Hines Holdings, Inc. ("Holdings" or the "Company") is a leading producer
and distributor of a wide variety of horticultural products. Holdings is a
holding company that conducts its business through two operating divisions: (i)
its nursery division, Hines Nurseries ("Hines"), which conducts its operations
through the Company's wholly-owned subsidiaries, Hines Horticulture, Inc.
("Hines Horticulture") and Hines II, Inc. ("Hines II"), and (ii) its plant-
growing media division ("Sun Gro"), which conducts its operations through Sun
Gro Horticulture, Inc., a wholly-owned subsidiary of Hines Horticulture ("Sun
Gro-U.S."), and Sun Gro Horticulture Canada Ltd., a wholly-owned subsidiary of
Sun Gro-U.S. ("Sun Gro-Canada").

     Hines is the largest North American producer of ornamental container and
field grown plants in the market. Hines has a leading share in the highly
fragmented North American nursery products market. Sun Gro is one of the largest
North American producers of sphagnum peat moss and peat-based potting and
growing mixes. The Company distinguishes itself from its competitors based on
its ability to provide consistent, high quality products in large volumes, its
nationwide distribution and its value-added services.

History

     James W. Hines, Sr. in San Gabriel, California, founded Hines in 1920.
Hines was a family owned business until its acquisition by the Weyerhaeuser
Company in 1976. Holdings was incorporated in Nevada in June 1990 by a private
investment group and certain members of management of Hines to acquire the
assets of Hines' business from Weyerhaeuser. In June 1993, the Company and
certain members of management of Sun Gro acquired Sun Gro-U.S. and its
subsidiaries from Fisons plc in order to diversify the Company's operations and
expand its share of the market for horticultural products.

     In January 1995, Hines completed the acquisition of the assets of Oregon
Garden Products ("OGP"), including a nursery in Hillsboro, Oregon, which was
subsequently moved to Forest Grove, Oregon. The total purchase price for OGP
(including the real property acquired by an affiliated entity) was $17.6
million, including a cash investment of $3.5 million, the repayment of certain
long-term debt and the assumption of certain specified liabilities. The OGP
acquisition broadened Hines' product mix and, as a result of the Oregon
nursery's undeveloped acreage, has provided Hines with significant opportunities
for expansion.

     On August 4, 1995, Madison Dearborn Capital Partners, L.P., a private
venture capital firm ("MDCP"), together with certain members of management who
were minority stockholders of Hines Horticulture and its subsidiaries, acquired
the Company in a private transaction.

     On August 30, 1996, Hines Horticulture acquired substantially all of the
assets of Iverson Perennial Gardens, Inc. ("Iverson") for a total consideration
of $10.3 million in cash plus the assumption of certain liabilities. Iverson,
based in Trenton, South Carolina, is a producer of high quality perennial
flowers and plants which are sold to home centers, mass merchandisers and other
retail customers primarily located in the Southeast, East and Midwestern regions
of the

                                       1
<PAGE>

United States. Since its acquisition, Iverson has provided Hines with increased
market presence in the eastern and southeastern United States, increased
penetration into the perennial plant market and expansion capacity at the South
Carolina nursery location.

     On November 27, 1996, Hines Horticulture acquired all of the outstanding
shares of Flynn Nurseries, Inc. ("Flynn") for approximately $11.7 million in
cash. Flynn, located in Fallbrook, California, north of San Diego, produces
ornamental container-grown plants, flowering plants and perennials which are
sold to various retail customers throughout the United States. The Company
believes that the Flynn acquisition was attractive because of the proximity of
its location to Hines' Irvine, California nursery operations and the significant
customer and product overlap between Flynn and the Company. Management believes
this overlap has resulted in significant cost and market synergies as Flynn has
been integrated into the business of Hines.

     On October 7, 1997, Hines II was incorporated in Delaware as a wholly owned
subsidiary of the Company. On October 20, 1997, Hines II acquired substantially
all of the assets of Pacific Color Nurseries, Inc., a color-bedding grower
located in Chowchilla and Madera, California ("Pacific Color"), for $1.7 million
in cash.

     On December 16, 1997, Hines II purchased all of the outstanding shares of
Bryfogle's Wholesale, Inc., Bryfogle's Power Plants, and Power Plants II, Inc.
(collectively "Bryfogle's"), a color-bedding grower located in Danville,
Pennsylvania, for $13.0 million in cash, the issuance of a $1.0 million
convertible subordinated promissory note of Holdings, and the retirement of
approximately $3.8 million of debt.

     On March 25, 1998, subsequent to the period covered by this Report, 763427
Alberta Ltd., a recently formed Alberta corporation which is an indirect,
wholly-owned subsidiary of Hines II, entered into a definitive stock purchase
agreement with the shareholders of Lakeland Peat Moss, Ltd. to purchase all of
the issued and outstanding shares of capital stock of Lakeland Peat Moss, Ltd.
for approximately Cdn. $28.4 million (approximately $20.0 million U.S.). The
closing of the transaction is subject to customary closing conditions and the
receipt of certain Canadian regulatory approvals. If these conditions are
satisfied, the closing is expected to occur no later than May 31, 1998.

Business Overview

     Hines produces approximately 4,000 varieties of ornamental container-grown
plants at eight nursery facilities located in Southern California, Northern
California, Texas, Oregon, Pennsylvania and South Carolina. Most of these
varieties fall into the following categories: broadleafs, flowering color
plants, conifers and specialty plants. Hines sells to over 1,700 retail and
commercial customers, representing over 6,000 outlets throughout the United
States and Canada. Hines' retail customers include home centers such as Home
Depot and Lowe's, mass merchandisers such as Wal-Mart, Target and Kmart, garden
center chains such as Frank's Nursery and Crafts and Pike's Family Nursery, and
numerous independent garden centers. In 1997, Hines generated approximately 87%
of its revenue from sales of products to retail merchandisers. The remaining 13%
were generated from commercial customers such as rewholesalers and professional
landscapers. Most of Hines' products are sold under the Hines

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Nurseries(TM) trade name. Hines generated approximately 63% of the Company's
consolidated revenue in 1997 and approximately 56% of the Company's consolidated
revenue in 1996.

     Hines' business strategy is to increase its penetration of sales to the
rapidly growing home center chains as well as the lawn and garden departments of
mass merchandisers and independent garden center chains. Hines intends to
continue to offer an ever-increasing variety of high quality plants to its
customers coupled with improved merchandising and sales support, while expanding
its already strong position in value-added flowering color plants and specialty
products. In order to satisfy the increasing demand from its key customers,
Hines plans to invest in capital projects, which will increase the production
capacity of its existing nursery sites. Also, when appropriate and when
permissible under the terms of its debt agreements, the Company intends to
pursue selective acquisitions, where such acquisitions provide the Company with
the opportunity to broaden or complement its product lines, broaden its
geographic base, or to economically expand production capacity.

     Sun Gro produces high quality, sphagnum peat moss and value-added peat-
based potting and growing mixes. Sun Gro harvests peat moss from over 27,000
acres of peat bogs located in western, central and eastern Canada, and produces
its peat moss and peat-based mixes in seven facilities strategically located
across Canada and the United States. Sphagnum peat moss, a naturally
regenerating organic material, is considered the highest quality growing medium
available due to its excellent water retention and aeration characteristics. In
1997, Sun Gro generated approximately 74% of its sales from the professional
market, which includes greenhouse growers, nursery growers and golf course
developers. The remaining 26% was generated from the retail market through sales
to customers similar to those of Hines. Sun Gro generated approximately 37% of
the Company's consolidated revenue in 1997 and approximately 44% of the
Company's consolidated revenue in 1996. Sun Gro's products are sold under the
Sunshine(TM), Parkland(TM) and Fairway(TM) trade names.

     Key to Sun Gro's business strategy will be a focus towards providing value-
added products and services to its commercial customers and internal efficiency
improvements, such as reducing production costs and transportation and logistics
costs. Sun Gro plans to supplement its existing product lines through the
introduction of new peat-based mixes utilizing other high quality growing media
substances. Sun Gro also plans to improve its market penetration among retail
customers by introducing several new and improved retail growing media products.

Hines Nursery Business

     Hines produces approximately 4,000 varieties of ornamental container-grown
plants, most of which are sold under its Hines Nurseries(TM) trade name. Most of
Hines' varieties fall into the following categories:

     .  Broadleafs, including varieties such as azaleas, hibiscus and camellias;

     .  Flowering color plants, including annual varieties such as marigolds,
        daisies and petunias, and perennial varieties (which re-flower annually)
        such as daylilies and carnations;

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     .  Conifers, including varieties such as pine, cypress and junipers; and

     .  Specialty plants, including varieties that are packaged in unique
        containers or grown in unusual shapes or forms, such as topiary or dwarf
        plants.

     Since 1991, Hines has added numerous plant varieties to its product line.
Recently, Hines has aggressively expanded its offerings of flowering color
plants. Hines has also successfully developed patio-ready type products, which
it markets under the names of Patio Tropics(TM) and Festival Pots. These
products generally command premium prices and improve profit margins. The
Company anticipates that sales of these products will continue to grow over the
next several years.

     Hines sells its products to over 1,700 retail and commercial customers
representing over 6,000 outlets throughout the United States and Canada. Hines'
retail customers include home centers such as Home Depot and Lowe's, mass
merchandisers such as Wal-Mart, Target and Kmart, garden center chains such as
Frank's Nursery and Crafts and Pike's Family Nursery, and numerous independent
garden centers. The following table sets forth the estimated percentage of
Hines' net sales by customer type for the period indicated:

<TABLE>
<CAPTION>
            Customer Type               1997   1996   1995
            -------------               ----   ----   ----
<S>                                     <C>    <C>    <C>
Home centers and mass merchandisers..    59%    52%    48%
Independent garden centers...........    18     21     22
Garden center chains.................    11     11     12
Rewholesalers........................     9     13     14
Landscapers and Other................     3      3      4
                                        ----   ----   ----
      Total..........................   100%   100%   100%
                                        ====   ====   ====
</TABLE>

     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 and full electronic data interchange and technical support.
Management expects to participate in the overall growth in this channel to a
greater extent than its competitors that do not offer such services. Hines' top
ten customers accounted for approximately 58% of its net sales in 1997. Hines'
largest customer, Home Depot, accounted for approximately 18% and 15% of its net
sales in 1997 and 1996, respectively, and approximately 12% and 10% of the
Company's consolidated net sales in 1997 and 1996, respectively.

     Research and Development. Hines' product sourcing and development yields
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

                                       4
<PAGE>

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. Most of Hines nursery facilities have a separate sales
force, which includes a sales manager, in-house customer service
representatives, direct sales consultants and various support personnel. Hines
employs 83 direct sales consultants and key account managers. 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 also markets its products through trade shows, print advertising
in trade journals, direct mail promotion and catalogues.

    Competition. Competition in the nursery products segment of the lawn and
garden industry is based principally on breadth of product offering, consistency
of product quality and availability, customer service and price. The nursery
products segment is highly fragmented, comprised of approximately 30,000
primarily small and regionally based growers, with the top 100 growers
accounting for approximately 22% of the industry volume in 1997. Management
believes Hines 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 Oda Nurseries in California, Clinton Nurseries in the Northeast, Zelenka
Nurseries in the Midwest, Wight Nurseries in the South and many other smaller
regional and local growers. Hines' key competitive advantage is its ability to
provide consistent, high quality products in large volumes, its nationwide
distribution and its value-added services.

Sun Gro Peat and Peat-Based Products Business

    Both professional growers and experienced retail consumers regard sphagnum
peat moss as an optimal soil conditioner. Sphagnum peat moss is partially
decomposed sphagnum moss, a plant whose unique cellular structure consists of
large cavities that absorb air and water like a sponge. Because the right
balance of air and water is essential for root development and plant growth,
organic sphagnum peat moss is considered the highest quality growing medium
available. No alternative soil conditioner of comparable quality and value
currently exists. 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 and/or sewage wastes. However, these products do not contain the
superior soil aeration and water retention characteristics of peat moss.

    Sun Gro sells peat moss under its Sunshine(TM), Parkland(TM) and Fairway(TM)
trade names in both the professional and retail markets in four different
grades: fine, medium, coarse and super coarse. Medium grade is typically sold in
the retail market, while the other grades are sold to professional growers.

    Capitalizing on its leading position in the professional peat moss market,
Sun Gro has become one of the leading North American suppliers of value-added,
peat-based growing mixes used for specific professional applications such as
seed germination, cutting propagation and container plant production. As a
result of Sun Gro's success with this product line, higher margin

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<PAGE>

professional growing mixes now constitute a greater percentage of Sun Gro's
professional market sales than pure peat moss.

    Sun Gro potting mixes utilize the same blend of ingredients as its
professional growing mixes, but are specifically targeted to home gardeners. By
offering these mixes in attractive, conveniently sized packaging and
highlighting formulations for specific plant varieties such as "tropicals,"
"cacti," "succulents" and "African violets," Sun Gro has effectively expanded
its product offerings to the retail customer.

    Sun Gro distributes peat moss and peat-related products throughout the
United States, Canada, Mexico and Japan and, to a lesser extent, to other
countries in the Far East and South America. Peat moss is sold to both the
professional and retail markets, while growing mixes are sold to the
professional market and potting mixes are sold exclusively to the retail market.

    Sun Gro's professional customers consist of greenhouse growers, growers of
specialty crops such as mushrooms and seedlings for certain vegetables, and golf
course developers. Sun Gro's retail customers are similar to Hines. The
following table sets forth the estimated percentage of Sun Gro's net sales by
customer type for the period indicated:
<TABLE>
<CAPTION>

             Customer Type                     1997   1996   1995
             -------------                     ----   ----   ----
<S>                                           <C>    <C>    <C>
Professional:
  Greenhouse growers and vegetable farmers..    57%    61%    59%
  International/others......................    11     10      8
  Golf course developers....................     6      5      6
                                               ---    ---    ---
     Total Professional.....................    74     76     73
                                               ---    ---    ---

Retail:
  Home centers and mass merchandisers.......    18%    16%    18%
  Independent garden centers................     5      5      6
  Garden center chains......................     3      3      3
                                               ---    ---    ---
     Total Retail...........................    26     24     27
                                               ---    ---    ---
       Total Professional and Retail........   100%   100%   100%
                                               ===    ===    ===
</TABLE>

    Sun Gro plans to increase sales of its professional products by further
developing international markets such as Mexico, the Far East and Central and
South America and continuing to improve the quality and breadth of its product
line. Sun Gro seeks to increase its market share for retail products by
expanding its presence in regions of the country not currently served,
broadening its potting mix line and leveraging Hines' retail account
relationships. As is the case with Hines, Sun Gro has the capacity and
distribution network necessary to effectively service and distribute to national
and large regional retail chains. Sun Gro's top ten customers accounted for
approximately 28% of its net sales in 1997. No single Sun Gro customer accounted
for more than 10% of the Company's consolidated revenues in 1997.

    Research and Development. Professional customers use Sun Gro's technical
services to improve their growing methods and the overall quality of their
crops. This service enhances Sun Gro's reputation for technical expertise and
builds strong customer loyalty, which management

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<PAGE>

believes provides Sun Gro with a significant competitive advantage. Sun Gro also
develops new products to complement its existing product lines. Recent product
developments include specialty bark mixes and a professional growing mix
formulated for specific applications.

    Sales and Marketing. Sun Gro sells its products on a direct basis and
through a network of approximately 200 distributors located throughout North
America. There are 31 employees on Sun Gro's direct sales force. Sun Gro's sales
force is highly trained in the technical applications of its products.
Approximately 60% 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 professional growing and
potting mix 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 producer and marketer of plant-growing media in North
America. Sun Gro's principal competition comes from Premier Canadian
Enterprises, Ltd., a Canadian producer of peat moss, and The O.M. Scott & Sons
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

    See Note 20 to the Company's consolidated financial statements, which are
included as a separate section of this Report beginning on page F-1.

Seasonality

    The Company's nursery business is highly seasonal in nature, with the strong
retail demand for lawn and garden products typically occurring in the first half
of the year. The Company's peat moss business is more heavily weighted towards
the professional markets, which do not typically experience the large seasonal
variances present in the retail market. The table below sets forth quarterly net
sales, as a percentage of total year net sales, for the Company during the year
ended December 31, 1997:
<TABLE>
<CAPTION>

                                       Percentage of Total
                Quarter                   Year Net Sales
                -------                -------------------
            <S>                              <C>
             First Quarter                     24%
             Second Quarter                    47
             Third Quarter                     15
             Fourth Quarter                    14
                                              ---

                                              100%
                                              ===
</TABLE>
                                       7
<PAGE>

Patents and Trademarks

    The Company has built an excellent reputation in the horticulture industry
and regards its service marks as a valuable asset. 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 23 patents with 2
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 of its 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. No assurances can be given,
however, that such compliance, or compliance with other environmental laws and
regulations that may be enacted in the future, will not have such an adverse
effect.

    Hines obtains certain irrigation water supplied to local water districts by
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 utilizes reclamation water as
one of the water supplies for its Northern California and Oregon facilities.
While the Company believes it is 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 or increase the price of reclamation
water to the Company.

Employees

    As of December 31, 1997, the Company employed approximately 2,521 persons,
including approximately 460 seasonal employees. Of this total, approximately
1,991 were employed by Hines, including approximately 260 seasonal employees
(seasonal employment peaked at 1,345 in April), and approximately 530 were
employed by Sun Gro, including approximately 200 seasonal employees (its peak
seasonal employment). Approximately 400 of Sun Gro's employees were employed in
Canada. All of Hines' 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 May 1999. Its agreements with the
Brotherhood of Carpenters and Joiners of America, which cover 79 employees at
Sun Gro's Lameque, New Brunswick facility and 61 employees at its

                                       8
<PAGE>

Maisonnette, New Brunswick facility, expire in December 2000 and August 1998,
respectively. The Company's management believes its labor relations are good.


Year 2000 Compliance

  The Company has completed its review of the compliance issues related to the
Year 2000 and has implemented and successfully tested the changes to its
operational and financial reporting systems it believes are required. There can
be no assurance, however, until the year 2000 that all of the Company's systems
and the systems of its suppliers, shippers, customers and other external
business partners will function adequately. If the systems of the Company's
suppliers, customers and other external business partners are not compliant, it
could have a material adverse effect on the Company. The amount spent to
remediate the Company's Year 2000 issues was approximately $200,000 during the
year ended December 31, 1997.

ITEM 2.  PROPERTIES.

  The Company owns approximately 2,548 acres related to its nursery facilities
and approximately 1,100 acres of harvestable peat bogs in Canada. In addition,
the Company leases approximately 979 acres related to its nursery facilities and
approximately 26,231 acres of harvestable peat bogs in Canada from provincial
governments and various private parties. Sun Gro has approximately 50 such
leases, which have an average term of ten years. 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:
<TABLE>
<CAPTION>

Location                                      Description                        Status
----------------------------  -------------------------------------------  ------------------
<S>                           <C>                                          <C>

Hines
Chowchilla, California......  19 acre nursery                              Owned/leased (b)
Danville, Pennsylvania......  141 acre nursery                             Leased
Fallbrook, California.......  253 acre nursery                             Leased
Forest Grove, Oregon........  1,104 acre nursery                           Owned/leased (c)
Fulshear, Texas.............  450 acre nursery                             Owned
Irvine, California..........  454 acre nursery and headquarters            Leased
Lake Elsinore, California...  85 acres of undeveloped land                 Leased
Madera, California..........  29 acre nursery                              Owned
Northern California (a).....  501 acre nursery                             Owned
Trenton, South Carolina.....  572 acre nursery                             Owned/leased (d)

Sun Gro
Seba Beach, Alberta.........  53,000 square foot processing and mixing     Owned/leased (e)
                              facility and 3,982 acres of peat bogs
Elma, Manitoba..............  73,700 square foot processing and mixing     Owned/leased (e)
                              facility and 16,977 acres of peat bogs
Julius, Manitoba............  39,000 square foot processing facility and   Owned/leased (e)
                              1,801 acres of peat bogs
</TABLE>
                                       9
<PAGE>
<TABLE>
<S>                           <C>                                          <C>
Lameque, New Brunswick......  50,400 square foot processing and mixing     Owned/leased (e)
                              facility and 3,571 acres of peat bogs
Maisonnette, New Brunswick..  47,900 square foot processing facility bogs  Owned/leased (e)
                              and 1,000 acres of peat bogs
Quincy, Michigan............  83,700 square foot mixing facility           Owned
Terrell, Texas..............  55,800 square foot mixing facility           Owned
Surrey, British Columbia....  30,000 square foot depot/storage yard        Leased
Niagara Falls, Ontario......  8,000 square foot depot/storage yard         Owned
Montreal, Quebec............  33,000 square foot depot/storage yard        Owned
Bellevue, Washington........  10,000 square foot office (headquarters)     Leased
</TABLE>
(a)  The Northern California nursery consists of sites in Vacaville and
     Allendale, California.
(b)  The Company owns 9 acres and leases 10 acres.
(c)  The Company owns 745 acres and leases 361 acres.
(d)  The Company owns 512 acres and leases 60 acres.
(e)  These peat processing facilities are owned by the Company but are situated
     on land owned by and leased to the Company under long-term contracts by the
     provincial governments and various private parties. The Company leases all
     but 1,100 acres in the aggregate of these peat bogs.

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. Management believes, however,
that the ultimate resolution of such matters will not have a material adverse
impact on the Company's consolidated financial position or results of
operations.


ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS.

  No matters were submitted to a vote of security holders during the fourth
quarter of 1997.


                                    PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.

  There is currently no established public trading market for the Common Stock
of Holdings. As of March 24, 1998, there were 47 holders of Common Stock. Since
the Acquisition, Holdings has not paid any dividends on shares of its Common
Stock. The payment of dividends is restricted under the terms of the Company's
senior credit agreements and subordinated note indenture.

                                       10
<PAGE>

Recent Sales Of Unregistered Securities

  On October 20, 1997, in a transaction exempt from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act"), Holdings
issued to MDCP a 12% Demand Note in the aggregate principal amount of $2,500,000
(the "Demand Note") for $2,500,000 in cash.

  On December 15, 1997, in a transaction exempt from registration under rule 505
of Regulation D of the Securities Act, Holdings issued and sold 77,280 shares of
Common Stock and 162,720 shares of its 12% Cumulative Redeemable Junior
Preferred Stock, par value $.01 per share (the "Junior Preferred"), to three
management employees of Sun Gro-U.S. The management employees paid the purchase
price for such shares through the issuance of full-recourse promissory notes in
favor of Holdings in an aggregate amount of $240,000, due in three equal
installments on March 31 of each of 1998, 1999 and 2000.

  On December 16, 1997, in a transaction exempt from registration under Section
4(2) of the Securities Act, Holdings issued a Convertible Subordinated
Promissory Note with an initial aggregate principal amount of $1,000,000 (the
"Note") to Kenneth G. Bryfogle as partial consideration of the Company's
acquisition of Bryfogle's on such date. The Note bears interest at 6%, is due on
the eighth anniversary of its issue date, and may be optionally prepaid by
Holdings without premium or penalty upon the occurrence of an initial public
offering of Common Stock or sale of the Company. Upon and at any time after the
occurrence of an initial public offering of Common Stock, the holder may convert
all (but not less than all) of the principal amount outstanding under the Note
into shares of Common Stock at the offering price of the Common Stock in such
offering (net of any sales or underwriting commissions).

  On December 16, 1997, in a transaction exempt from registration under Section
4(2) of the Securities Act, Holdings issued and sold to MDCP, for an aggregate
consideration of $1,000,000 in cash and $2,500,000 of outstanding indebtedness
under the Demand Note, (i) 3,500 shares of its 12% Cumulative Redeemable Senior
Preferred Stock, par value $.01 per share (the "Senior Preferred"), at a price
of $970.21 per share, and (ii) presently exercisable warrants to purchase
104,282 shares of Common Stock, with an exercise price of $.01 per share, at a
price of $1.00 for each warrant to purchase one share of Common Stock.

  On December 16, 1997, in a transaction exempt from registration under Section
4(2) of the Securities Act, Holdings issued and sold to Abbott Capital 1330
Investors I, LP, for an aggregate consideration of $6,000,000 in cash (i) 6,000
shares of Senior Preferred, at a price of $970.21 per share, and (ii) presently
exercisable warrants to purchase 178,769 shares of Common Stock, with an
exercise price of $.01 per share, at a price of $1.00 for each warrant to
purchase one share of Common Stock.

  On February 5, 1998, Holdings issued to MDCP, on an arm's length basis, 2,000
shares of Senior Preferred, having an aggregate liquidation value of $2,000,000,
for $2,000,000 in cash.

                                       11
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

  The following selected historical consolidated financial data for the years
ended December 31, 1993 through December 31, 1995 have been derived from the
Company's consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent accountants. The selected historical consolidated
financial data for the years ended December 31, 1996 through December 31, 1997
have been derived from the Company's consolidated financial statements, which
have been audited by Price Waterhouse LLP, independent accountants, as indicated
in their report included elsewhere herein. 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.

                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                                     Hines Holdings, Inc.
                                                                    Year Ended December 31,
                                                  ------------------------------------------------------------
                                                    1997(a)       1996(b)      1995(c)       1994     1993(d)
                                                  -----------   -----------   ----------   --------   --------
                                                                    (dollars in thousands)
<S>                                               <C>           <C>           <C>          <C>        <C>
Income Statement Data:
Net sales                                         $   201,256   $   164,323   $  156,909   $134,781   $ 85,006
Cost of goods sold                                     99,407        80,812       72,245     60,827     40,457
                                                  -----------   -----------   ----------   --------   --------
     Gross profit                                     101,849        83,511       84,664     73,954     44,549

Operating expenses:
     Selling and distribution expenses                 50,233        43,308       39,904     36,789     21,097
     General and administrative expenses               20,403        18,239       17,467     13,102      9,465
     Management fees to related parties(e)                 --            --          789        919        617
     Other operating expenses (income)(f)                (228)         (790)         232       (536)       273
     Unusual expenses(g)                                  343           830           --         --         --
                                                  -----------   -----------   ----------   --------   --------
Total operating expenses                               70,751        61,587       58,392     50,274     31,452
                                                  -----------   -----------   ----------   --------   --------
     Operating income                                  31,098        21,924       26,272     23,680     13,097
                                                  -----------   -----------   ----------   --------   --------
Other expenses (income):
     Interest expense                                  20,708        20,140       13,274      7,555      6,014
     Amortization of deferred financing costs           1,097           940        4,557      1,069      1,079
     Other expenses (income)(h)                            --            --           --        798       (225)
                                                  -----------   -----------   ----------   --------   --------
Total other expenses (income)                          21,805        21,080       17,831      9,422      6,868
                                                  -----------   -----------   ----------   --------   --------
     Income before provision for income taxes           9,293           844        8,441     14,258      6,229
Provision for income taxes                              3,516           636        2,850      3,635      2,248
                                                  -----------   -----------   ----------   --------   --------
     Income before loss (income) from
     discontinued operations                            5,777           208        5,591     10,623      3,981
Loss (income) from discontinued operations (i)             --            --       (3,307)       (26)         8
                                                  -----------   -----------   ----------   --------   --------
     Income before extraordinary loss                   5,777           208        8,898     10,649      3,973
Extraordinary loss, net of taxes(j)                        --            --        2,513      2,487         --
                                                  -----------   -----------   ----------   --------   --------
     Income before minority interest                    5,777           208        6,385      8,162      3,973
Minority interest in earnings of subsidiary                --            --        3,958      2,740      1,131
                                                  -----------   -----------   ----------   --------   --------
          Net income                                    5,777           208        2,427      5,422      2,842
Less: Preferred stock dividends                        (6,666)       (3,775)      (1,460)        --         --
                                                  -----------   -----------   ----------   --------   --------
Net (loss) income applicable to common stock      $      (889)  $    (3,567)  $      967   $     --   $     --
                                                  ===========   ===========   ==========   ========   ========

Basic and Diluted Earnings Per Share:
     (Loss) income before income from
     discontinued operations and
     extraordinary loss                           $     (0.09)  $     (0.35)  $     0.04   $          $
                                                                                                 --         --
     Extraordinary loss                                    --            --        (0.60)        --         --
     Income from discontinued operations                   --            --         0.79         --         --
                                                  -----------   -----------   ----------   --------   --------
(Loss) income from continuing operations
     per common share                             $     (0.09)  $     (0.35)  $     0.23   $     --   $     --
                                                  ===========   ===========   ==========   ========   ========

Weighted average shares outstanding                10,276,542    10,125,481    4,166,667         --         --
                                                  ===========   ===========   ==========   ========   ========

Balance Sheet Data (at end of period):
Working capital                                   $    27,548   $    29,597   $   42,825   $ 26,132   $ 35,845
Total assets                                          268,819       227,515      188,544    140,906    143,713
Long term debt                                        160,356       152,769      157,742     63,107     67,310
Redeemable preferred stock                             70,682        54,525       31,460         --         --
Shareholders' equity (deficit)                        (71,751)      (70,900)     (67,798)     9,930     12,508

Other Data:
Capital expenditures                              $    10,130   $     8,752   $    7,684   $  7,389   $  4,899
Cash dividends paid                                        --            --           --   $  8,000         --
</TABLE>
                                      13
<PAGE>

                 NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
                            (dollars in thousands)


(a)  The Company acquired Bryfogle's and Pacific Color on December 16, 1997 and
     October 20, 1997, respectively. The financial results for the year ended
     December 31, 1997 include the operations of Bryfogle's and Pacific Color
     since the date of their acquisition.

(b)  The Company acquired Flynn and Iverson on November 27, 1996 and August 30,
     1996, respectively. The financial results for the year ended December 31,
     1996 include the operations of Flynn and Iverson since the date of their
     acquisition.

(c)  The Company acquired OGP on January 27, 1995. The financial results for the
     year ended December 31, 1995 include the operations of OGP since the date
     of its acquisition.

(d)  The Company acquired Sun Gro on June 30, 1993. The financial results for
     the year ended December 31, 1993 include the operations of Sun Gro since
     the date of its acquisition.

(e)  Management fees to related parties represents amounts paid to affiliates of
     the former controlling shareholder under management agreements which were
     terminated upon consummation of the acquisition of the Company by MDCP and
     members of the Company's management on August 4, 1995.

(f)  Other operating expenses (income) consist of amortization of goodwill and
     negative goodwill, the write-off costs relating to the evaluation of the
     acquisition of land which was not consummated, litigation settlement costs
     and foreign exchange (gains) and losses.

(g)  Unusual expenses consist of certain severance and other restructuring costs
     of $1,537,000 and $830,000 in fiscal 1997 and 1996, respectively, and a
     $1,194,000 gain on involuntary disposal of fixed assets incurred in fiscal
     1997.

(h)  Other expenses (income) include payments received (net of related expenses)
     relating to a road expansion project, the write-off of certain deferred
     financing costs and certain fire insurance proceeds.

(i)  Loss (income) from discontinued operations relates to the sale of Sun Gro's
     Green Cross business on January 4, 1995.

(j)  Extraordinary loss, net of taxes, includes the write-off of unamortized
     deferred financing costs and prepayment penalties relating to the early
     extinguishment of debt.


                                      14
<PAGE>

ITEM 7.   MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITIONS AND RESULTS OF OPERATIONS.

     The discussion in this section and elsewhere in this report contains trend
analysis and other forward-looking statements. Actual results could differ
materially from those projected in such forward-looking statements.


Results of Operations

Fiscal Year Ended December 31, 1997 compared to Fiscal Year Ended December 31,
1996.

     Net Sales.  The Company had consolidated net sales of $201.3 million for
the fiscal year ended December 31, 1997. This represents an increase of $37
million, or 22.5%, from net sales of $164.3 million for the comparable period in
1996. The Company's sales of its nursery products increased 38.2% from net sales
of $92.2 million for the comparable period in 1996. This increase reflects $26.3
million of sales in 1997 from two acquisitions completed in August and November
1996 and two acquisitions completed in October and December 1997, as well as
increased sales volumes and prices from its existing nursery operations.
Excluding these acquisitions, sales from the remaining core nursery operations
increased 9.6% from the comparable period in 1996. The increased sales volumes
resulted primarily from increasing sales to home centers and mass merchandisers
as well as increased sales volumes of flowering color plants. Net sales of peat
moss and peat-based products increased 2.3% from the comparable period in 1996
with continued volume growth from the professional business. For the retail
business, sales increased 6.6% from the comparable period in 1996, primarily due
to increased sales volume growth, which was partially offset by lower retail
peat prices. Peat prices in the first half of 1997 continued to be affected by
the unusually favorable peat moss harvest in Eastern Canada in 1995, which
created an excess supply of peat moss in the Company's eastern markets.

     Gross Profit.  Gross profit of $101.8 million (50.6% of net sales) for the
fiscal year ended December 31, 1997 represents an increase of $18.3 million, or
21.9%, from gross profit of $83.5 million (50.8% of net sales) for the
comparable period in 1996. The increase was primarily attributable to the
Company's nursery acquisitions and the higher sales from the Company's core
nursery operations. The slight decrease in gross margin percentage is primarily
due to lower margins from these acquisitions, which are still in the process of
being integrated into the Company's core nursery operations.

     Operating Expenses.  Operating expenses of $70.8 million (35.2% of net
sales) for the fiscal year ended December 31, 1997 represent an increase of $9.2
million, or 14.9%, from $61.6 million (37.5% of net sales) for the comparable
period in 1996. The increase was primarily attributable to the Company's nursery
acquisitions.

     Operating Income.  Operating income of $31.1 million (15.4% of net sales)
for the fiscal year ended December 31, 1997 represents an increase of $9.2
million, or 42.0%, from $21.9 million (13.3% of net sales) for the comparable
period in 1996. The increase was primarily due to the Company's nursery
acquisitions and the higher sales from the Company's core nursery operations.


                                      15
<PAGE>

     Interest Expense.  Interest expense of $20.7 million for the fiscal year
ended December 31, 1997 increased $0.6 million from $20.1 million for the
comparable period in 1996. The increase was attributable to higher borrowing
levels under the Company's revolving credit facilities as a result of increased
capital expenditures.

     Income before income from discontinued operations, extraordinary loss and
minority interest. The income before income from discontinued operations,
extraordinary loss and minority interest of $5.8 million for the fiscal year
ended December 31, 1997 increased by $5.6 million from income of $0.2 million
for the comparable period in 1996. The increase was primarily due to the
Company's nursery acquisitions and the higher sales from the Company's core
nursery operations.

     Provision for income taxes.  The effective income tax rate was 38% and 75%
for the years ended December 31, 1997 and 1996, respectively. The decrease in
the Company's effective income tax rate was due primarily to the increase in the
valuation allowance in 1996 against certain net operating loss carry forwards
and investment tax credits related to Sun Gro-Canada.


Fiscal Year Ended December 31, 1996 compared to Fiscal Year Ended December 31,
1995.

     Net Sales. The Company had consolidated net sales of $164.3 million for the
fiscal year ended December 31, 1996. This represents an increase of $7.4
million, or 4.7%, from net sales of $156.9 million for the comparable period in
1995. Net sales of the Company's nursery products increased 5.7%, reflecting
both increased sales volumes and prices. Sales in 1995 included approximately
$1.6 million of brokered material at the Oregon nursery which were not repeated
in 1996 as they were not profitable. Excluding these brokered sales, the
increase in sales for the fiscal year ended December 31, 1996 for the Company's
nursery products was 7.7% from the comparable period in 1995. The increased
sales volumes resulted primarily from increasing sales to home centers and mass
merchandisers as well as increased sales volumes of flowering color plants. Net
sales of the Company's peat moss and peat-based products increased 3.4%,
reflecting increased sales volumes primarily to the professional market. These
increases were partially offset by lower peat prices, which were more
significant in the retail market. Peat moss sale price declines were primarily
due to the continued effect of the unusually favorable peat moss harvest in
Eastern Canada in 1995, which created an excess supply of peat moss in the
Company's eastern markets. These lower peat moss prices continued throughout
1996 and adversely affected gross profit margins in the Company's peat moss
business.

     Gross Profit.  Gross profit of $83.5 million (50.8% of net sales) for the
fiscal year ended December 31, 1996 decreased $1.2 million, or 1.4%, from gross
profit of $84.7 million (54.0% of net sales) for the comparable period in 1995.
The decrease was attributable to the Company's peat and peat-based products due
to (i) lower sales prices resulting from the excess supply of peat moss, and
(ii) higher production costs due to lower production and harvest volumes and
inefficiencies due to numerous product mix changes. Gross margins on the
Company's nursery products remained relatively unchanged from the comparable
period in 1995.

     Operating Expenses.  Operating expenses of $61.6 million (37.5% of net
sales) for the fiscal year ended December 31, 1996 increased $3.2 million, or
5.5%, from $58.4 million (37.2% of


                                      16
<PAGE>

net sales) for the comparable period in 1995. The increase was attributable to
the Company's higher selling and distribution expenses incurred as a result of
higher overall sales volumes and general cost increases. Included in operating
expenses for the fiscal year ended December 31, 1996 is $0.8 million of non-
recurring expenses representing severance and other reorganization costs
incurred by the Company's Sun Gro business.

     Operating Income.  Operating income of $21.9 million for the fiscal year
ended December 31, 1996 decreased $4.4 million, or 16.7%, from $26.3 million for
the comparable period in 1995. The decrease was attributable to the Company's
peat and peat-based products due to the reasons described above. In addition,
included in the 1996 operating income is $0.3 million of operating losses
relating to the Iverson and Flynn operations since the date of their
acquisition.

     Interest Expense.  Interest expense of $20.1 million for the fiscal year
ended December 31, 1996 increased $6.8 million from $13.3 million for the
comparable period in 1995. The increase was attributable to the issuance of $120
million of Senior Subordinated Notes on October 19, 1995, which replaced the
$110 million senior subordinated credit facility obtained in conjunction with
the acquisition of the Company by MDCP and certain members of management on
August 4, 1995.

     Income before income from discontinued operations, extraordinary loss and
minority interest. The income before income from discontinued operations,
extraordinary loss and minority interest of $0.2 million for the fiscal year
ended December 31, 1996 decreased by $5.4 million from income of $5.6 million
for the comparable period in 1995. This decrease was attributable to the
decrease in operating income and the increase in interest expense due to the
reasons described above.

     Provision for income taxes.  The effective income tax rate was 75% and 34%
for the years ended December 31, 1996 and 1995, respectively. The increase in
the Company's effective income tax rate was due primarily to the increase in the
valuation allowance in 1996 against certain net operating loss carry forwards
and investment tax credits related to Sun Gro-Canada.


Liquidity and Capital Resources

     As a result of the highly seasonal nature of the Company's nursery products
operations, the Company has historically satisfied its working capital
requirements through revolving credit facilities and operating cash flow. The
Company maintains a $75 million revolving credit facility pursuant to a Credit
Agreement dated as of August 4, 1995, as subsequently amended, by and among
Hines Horticulture, Sun Gro-U.S. and Sun Gro-Canada, as borrowers, the lenders
listed therein and BT Commercial Corporation, as agent (the "Bank Credit
Agreement"). The Company also maintains a $10 million revolving credit facility
pursuant to a Credit Agreement dated as of December 16, 1997, as subsequently
amended, by and among Hines II, as borrower, the lenders listed therein and BT
Commercial Corporation, as agent (the "Hines II Bank Credit Agreement").

     The revolving credit facility under the Bank Credit Agreement is subject to
a borrowing base tied to accounts receivable and inventory and expires on
December 31, 2000. The revolving credit facility and all other obligations under
the Bank Credit Agreement are secured by substantially all of the assets and
common stock of Hines Horticulture and Sun Gro-U.S., as well


                                       17
<PAGE>

as a pledge of 66% of the common stock of Sun Gro-Canada. Proceeds from the
revolving credit facility can be distributed to any of Hines Horticulture's
subsidiaries, including Sun Gro-Canada. The revolving credit facility under the
Hines II Bank Credit Agreement is subject to a borrowing base tied to accounts
receivable and inventory of Hines II and expires on December 31, 2002.
Substantially all of the assets and common stock of Hines II secure the
revolving credit facility and all other obligations under the Hines II Bank
Credit Agreement.

     The Company typically draws under its revolving credit facilities in its
first and fourth fiscal quarters to fund its nursery products inventory buildup
and continuing operating expenses. Approximately 80% of Hines' sales occur in
the first half of the year, which allows the Company to reduce borrowings under
its revolving credit facilities after the first quarter. Working capital
requirements for the Company's peat moss operations are less seasonal in nature,
with slight inventory buildups occurring in the third and fourth quarters. On
March 20, 1998 the Company had $8.2 million of unused borrowing capacity under
its revolving credit facility under the Bank Credit Agreement and $2.1 million
of unused borrowing capacity under its revolving credit facility under the Hines
II Bank Credit Agreement.

     The debt service costs associated with the borrowings under the Bank Credit
Agreement, the Hines II Bank Credit Agreement and the Senior Subordinated Notes
have significantly increased the Company's liquidity requirements. All
borrowings under the Bank Credit Agreement, including term loans made to Hines
Horticulture and Sun Gro-Canada in an initial aggregate principal amount of
$25.0 million, will mature prior to the Senior Subordinated Notes. The Company's
remaining principal repayment schedule for the term loans under the Bank Credit
Agreement is $5.0 million, $5.5 million and $6.5 million for the years 1998
through 2000, respectively. All borrowings under the Hines II Bank Credit
Agreement will also mature prior to the Senior Subordinated Notes.

     On October 19, 1995, Hines Horticulture issued $120,000,000 in aggregate
principal amount of 11 3/4% Senior Subordinated Notes due 2005, which were
subsequently exchanged in a registered offering for $120,000,000 of its 11 3/4%
Senior Subordinated Notes due 2005, Series B (the "Senior Subordinated Notes").
The Indenture pursuant to which the Senior Subordinated Notes were issued
imposes a number of restrictions on Hines Horticulture and Sun Gro-U.S. The
Indenture limits, among other things, their ability to incur additional
indebtedness, to make certain restricted payments, 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 Bank Credit Agreement
and the Hines II Bank Credit Agreement, causing all amounts owing thereunder to
become immediately due and payable.

     Hines II maintains an acquisition term loan facility under the Hines II
Bank Credit Agreement (the "Acquisition Facility"). The Acquisition Facility
provides for borrowings of up to $30.0 million to finance acquisitions permitted
under the Hines II Bank Credit Agreement and is secured by substantially all of
the assets and common stock of Hines II. Principal payments under the
Acquisition Facility are due quarterly beginning March 31, 2000 through 2002
ranging from 2.5 to 5.0 percent of the total principal amount borrowed under the
Acquisition Facility as specified in the Acquisition Facility, with all
remaining principal due on December 31, 2002.


                                      18
<PAGE>

     The Company has financed its acquisitions through a combination of
borrowings under the Bank Credit Agreement and the Hines II Bank Credit
Agreement and through the issuance of promissory notes, Senior Preferred and
warrants to investors.

     On October 20, 1997, Hines II financed its $1.7 million acquisition of
Pacific Color through the issuance of the Demand Note to MDCP, which was
subsequently exchanged for shares of Senior Preferred and warrants to purchase
Common Stock.

     On December 16, 1997, Hines II financed its $19.0 million acquisition of
Bryfogle's through the issuance of shares of Senior Preferred and warrants to
purchase Common Stock to MDCP and an unaffiliated equity investor, the issuance
of a $1,000,000 convertible subordinated promissory note of Holdings to the
seller, and borrowings of $12,000,000 under the Hines II Acquisition Facility.

     On March 25, 1998, subsequent to the period covered by this Report, 763427
Alberta Ltd., an indirect, wholly owned subsidiary of Hines II, entered into a
definitive stock purchase agreement with the shareholders of Lakeland Peat Moss,
Ltd. to purchase all of the issued and outstanding shares of capital stock of
Lakeland Peat Moss, Ltd. for approximately Cdn. $28.4 million (approximately
$20.0 million U.S.). The transaction, if consummated, is expected to be financed
principally through borrowings under the Hines II Bank Credit Facility and
through the issuance of subordinated debt to the sellers.

     The Company's capital expenditures totaled $10.1 million for the fiscal
year ended December 31, 1997. These capital expenditures consisted primarily of
vehicles, machinery and equipment purchases and the purchase of other nursery-
related structures required to execute the Company's expansion plans and capital
expenditures related to preparing peat bogs for harvest. The Company's capital
expenditures for 1998 are expected to be approximately $15 million, and will be
used for capacity expansion at several of the Company's nursery facilities and
for other maintenance expenditures.

     On February 5, 1998, Holdings issued to MDCP 2,000 shares of Senior
Preferred, having an aggregate liquidation value of $2,000,000, for $2,000,000
in cash, to fund the Company's short-term working capital requirements. The
Company expects that cash flow from operating activities together with
borrowings available under the revolving credit facilities will be sufficient to
fund working capital needs, capital spending requirements and the debt service
requirements of the Company's current capital structure for the foreseeable
future.


Effects of Inflation

     Management believes the Company's results of operations have not been
materially impacted by inflation over the past three years.


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 F-1.


                                      19
<PAGE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURES.

     On October 28, 1996, Holdings dismissed Arthur Andersen LLP as its
independent accountants. The reports of Arthur Andersen LLP on the consolidated
financial statements for the years ended December 31, 1995 and 1994 did not
contain an adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. The Board of
Directors and Audit Committee of Holdings participated in and approved the
decision to change independent accountants. In connection with its audits for
the fiscal years ended December 31, 1995 and 1994 and its work through October
28, 1996, there were no disagreements with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
Arthur Andersen LLP would have caused them to make reference thereto in their
report on the consolidated financial statements for such years. During the
fiscal years ended December 31, 1995 and 1994 and its work through October 28,
1996, there were no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)). Holdings requested that Arthur Andersen LLP furnish it with a
letter addressed to the SEC stating whether or not it agreed with the above
statements. A copy of such letter, dated December 6, 1996, was filed as an
exhibit to the Company's Form 8-K/A dated December 9, 1996, and was filed as
Exhibit 16.1 to Holdings' Annual Report on Form 10-K for the year ended December
31, 1996.

     Holdings engaged Price Waterhouse LLP as its new independent accountants as
of October 28, 1996. During the fiscal years ended December 31, 1995 and 1994
and its work through October 28, 1996, Holdings did not consult with Price
Waterhouse LLP on items which (1) were or should have been subject to SAS 50 or
(2) concerned the subject matter of a disagreement or reportable event with the
former auditor (as described in Regulation S-K Item 304(a)(2)).


                                   PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Set forth below is the name, age as of March 24, 1998, and a brief account
of the business experience of each person who is a director or executive officer
of Holdings. Such information is also provided with respect to each director and
executive officer of Hines Horticulture and Sun Gro-U.S.

<TABLE>
<CAPTION>

        Name            Age   Position
---------------------  -----  -----------------------------------------
<S>                   <C>     <C>
Douglas D. Allen        55    Chairman of the Board of Hines Horticulture, Vice
                              President and Director of Holdings and Director of
                              Sun Gro-U.S.
Stephen P. Thigpen      42    President and Chief Executive Officer and Director
                              of Hines Horticulture and Director of Holdings and
                              Sun Gro-U.S.
</TABLE>

                                      20

<PAGE>


<TABLE>
<S>                   <C>     <C>
Claudia M. Pieropan      42   Chief Financial Officer of Holdings, Hines
                              Horticulture and Sun Gro-U.S.
Paul R. Wood             44   Chairman of the Board and President of Holdings,
                              Director, Vice President and Assistant Secretary
                              of Hines Horticulture and Director, Vice President
                              and Assistant Secretary of Sun Gro-U.S.
Thomas R. Reusche        43   Director, Secretary and Treasurer of Holdings,
                              Director, Vice President and Assistant Secretary
                              of Hines Horticulture and Director, Vice President
                              and Assistant Secretary of Sun Gro-U.S.
Gary J. Little           47   Director of Holdings, Hines Horticulture and Sun
                              Gro-U.S.
David F. Mosher          42   Director of Holdings, Hines Horticulture and Sun
                              Gro-U.S.
</TABLE>


     The Board of Directors of each of Holdings, Hines Horticulture and Sun Gro-
U.S. presently consists of seven directors with one vacancy. All directors hold
their positions until the next annual meeting of shareholders and until their
respective successors are elected. Executive officers are elected by and serve
at the discretion of the Board of Directors. The directors of Holdings have been
elected in accordance with the terms of the Stockholders Agreement. See Item 12,
"Security Ownership of Certain Beneficial Owners and Management--Stockholders
Agreement."


Background of Executive Officers and Directors

     Mr. Allen has served as Chairman of the Board of Hines Horticulture since
September 1995 and as Vice President and a director of Holdings and as a
director of Sun Gro-U.S. and Hines Horticulture since August 1995. Prior to that
time, he served as President of Hines Horticulture from 1984 to August 1995.
Previously, Mr. Allen held positions within Weyerhaeuser's Paper Division as a
General Manager from 1975 to 1984 and as a Sales Manager from 1971 to 1975. He
has been a director of Hines Horticulture since 1990. He received his
undergraduate degree in business from Ball State University in 1964.

     Mr. Thigpen has served as President, Chief Executive Officer of Hines
Horticulture since September 1995 and a director of Hines Horticulture, Holdings
and Sun Gro-U.S. since August 1995. Before that, he served as General Manager of
the Vacaville Nursery for Hines Horticulture from 1985 to August 1995 and as
Technical Resource Manager for Hines Horticulture from 1984 to 1985. Previously
Mr. Thigpen was Research and Development Program Manager with Weyerhaeuser's
Nursery Products Division from 1982 to 1984. Mr. Thigpen received his BS in
Plant & Soil Sciences from the University of Massachusetts in 1977. Mr. Thigpen
also received a Ph.D. in Plant Physiology from the University of California at
Davis in 1981.

     Ms. Pieropan has served as Chief Financial Officer of Holdings, Hines
Horticulture and Sun Gro-U.S. since January 1996, Vice President of Finance and
Administration of Sun Gro-U.S. since October 1991 and Secretary and Treasurer of
Sun Gro-U.S. since September 1995. Prior to that time, Ms. Pieropan spent 14
years with Price Waterhouse in Montreal, Toronto and Vancouver. Ms. Pieropan
received a Bachelor of Commerce--Accounting & Marketing in 1977 and a Graduate
Diploma in public accounting from McGill University, Montreal in 1979. She


                                      21
<PAGE>

received a Chartered Accountant Designation in Canada in 1979 and her CPA in the
state of Washington in 1994.

     Mr. Wood has served as director and President of Holdings, a director of
Hines Horticulture and Vice President and a director of Sun Gro-U.S. since
August 1995 and as Chairman of the Board of Holdings, Vice President and
Assistant Secretary of Hines Horticulture and Assistant Secretary of Sun Gro-
U.S. since September 1995. Since its formation in January 1993, Mr. Wood has
served as a principal of MDCP and as Vice President of Madison Dearborn
Partners, Inc. ("MDP"), its indirect general partner. Prior to that time, Mr.
Wood served as Vice President of First Chicago Venture Capital, which comprised
the private equity investment activities of First Chicago Corporation, the
holding company parent of First National Bank of Chicago. Mr. Wood serves on the
board of directors of a number of private companies.

     Mr. Reusche has served as Secretary and Treasurer and a director of
Holdings, Assistant Secretary and a director of Hines Horticulture and Assistant
Secretary and a director of Sun Gro-U.S. since August 1995 and Vice President of
Hines Horticulture and Vice President of Sun Gro-U.S. since September 1995.
Since its formation in January 1993, Mr. Reusche has served as a principal of
MDCP and Vice President of MDP. Prior to that time, Mr. Reusche was a senior
investment manager at First Chicago Venture Capital. Mr. Reusche serves on the
board of directors of a number of private companies.

     Mr. Little has served as a director of Holdings, Hines Horticulture and Sun
Gro-U.S. since August 1995. Since its formation in January 1993, Mr. Little has
served as a principal of MDCP and as Vice President of Finance of MDP. Prior to
that time, Mr. Little served as Vice President of Finance and Administration of
First Chicago Venture Capital.

     Mr. Mosher has served as a director of Holdings, Hines Horticulture and Sun
Gro-U.S. since August 1995. Since its formation in January 1993, Mr. Mosher has
served as a principal of MDCP and as a Vice President of MDP. Prior to that
time, he served as an investment manager of First Chicago Venture Capital.


ITEM 11.  EXECUTIVE COMPENSATION.

     The following table sets forth the compensation of (i) the chief executive
officers of Holdings and Hines Horticulture, (ii) the Company's three most
highly compensated executive officers as of December 31, 1997, and (iii) one
additional individual for whom disclosure would have been necessary but for the
fact such individual was not an executive officer at year end (the "Named
Executive Officers") during the three years ended December 31, 1997:


                                      22
<PAGE>

                          Summary Compensation Table

<TABLE>
<CAPTION>
                                                         Annual Compensation
                                                    ----------------------------       All Other
Name and Principal Position                         Year   Salary      Bonus (1)   Compensation (2)
------------------------------------------------    ----   ------      ---------   ----------------
<S>                                                 <C>   <C>          <C>         <C>
Paul R. Wood                                        1997        --           --                  --
  Chief Executive Officer of Holdings               1996        --           --                  --
                                                    1995        --           --                  --

Douglas D. Allen                                    1997  $200,825     $146,905          $    4,746
  Vice President of Holdings                        1996  $202,161           --          $    5,631
  Chairman of the Board of Hines Horticulture       1995  $295,842     $361,920          $    3,507

Stephen R. Thigpen                                  1997  $217,851     $197,453          $    6,194
  President and Chief Executive Officer of Hines    1996  $210,135     $ 13,904          $    5,861
  Horticulture                                      1995  $181,221     $184,904          $    2,108

Michael R. Crowe (3)                                1997  $ 26,187           --          $  420,916
  President of Sun Gro-US                           1996  $209,496           --          $   19,953
                                                    1995  $212,815     $ 81,938          $   17,935

Claudia M. Pieropan                                 1997  $159,628     $ 24,484          $    7,831
  Chief Financial Officer of Holdings, Hines        1996  $150,000           --          $   13,563
  Horticulture and Sun Gro-U.S.                     1995  $116,024     $ 31,907          $   13,366
</TABLE>

(1)  Represents annual incentive compensation paid during the calendar year.

(2)  Represents (i) the dollar value of premiums paid by the Company with
     respect to health and term life insurance, (ii) the leased value of Company
     automobiles attributable to personal use by the Named Executive Officer,
     (iii) a one-time gain on the sale of a Company automobile purchased by Mr.
     Crowe from the Company upon lease expiration, (iv) contributions made by
     the Company on behalf of Mr. Crowe and Ms. Pieropan under Sun Gro-U.S.'s
     401(k) Plan and, (v) a $418,992 payment to Mr. Crowe on March 20, 1997 in
     connection with his departure from the Company.

(3)  Mr. Crowe departed from the Company effective February 17, 1997.

Pension Plan

     The Company's defined benefit plan, the Sun Gro Horticulture Inc. U.S.
Executive Supplemental Retirement Plan (the "Pension Plan"), covers only certain
of the senior management of Sun Gro. The following table shows the estimated
annual pension benefits payable to a covered participant upon normal retirement
at age 65 under the Pension Plan based on the remuneration that is covered under
the Pension Plan and years of service:

                                      23
<PAGE>

Pension Plan Table

<TABLE>
<CAPTION>
   Annual
Remuneration                  Years of Qualifying Service
------------        ------------------------------------------------
                       15        20        25        30        35
                    --------  --------  --------  --------  --------
<S>                 <C>       <C>       <C>       <C>       <C>
$    150,000        $ 40,871  $ 54,494  $ 68,118  $ 68,118  $ 68,118
     200,000          55,871    74,494    93,118    93,118    93,118
     250,000          70,871    94,494   118,118   118,118   118,118
     300,000          85,871   114,494   143,118   143,118   143,118
     400,000         115,871   154,494   193,118   193,118   193,118
</TABLE>

     Of the Named Executive Officers, Mr. Crowe, who resigned as an officer and
director of the Company and its subsidiaries effective February 17, 1997, is the
only participant in the Pension Plan. Mr. Crowe had 11.6 years of credited
service on February 17, 1997. Benefits under the Pension Plan are calculated
based on 2% of the participants' final average salary multiplied by the years of
qualifying service, up to a maximum of 50% of final average salary, reduced by
certain specified offsets.

Bonus Plans

     The Company has two bonus plans, the Hines Horticulture, Inc. Executive
Variable Compensation Plan (the "Hines Bonus Plan") and the Sun Gro Horticulture
Inc. Executive Bonus Plan (the "Sun Gro Bonus Plan"). Bonuses under these plans
are designed to be a significant portion of the management team's compensation.
The plans are directly tied to operating cash flows (defined as earnings before
interest, taxes, depreciation and amortization and after maintenance capital
expenditures and certain changes in working capital). The Hines Bonus Plan
provides for a compensation pool equivalent to 6.7% of operating cash flows of
Hines for each fiscal year. The Sun Gro Bonus Plan provides for a compensation
pool equivalent to 4% of operating cash flows of Sun Gro for each fiscal year.

Employment Agreements

     The Company and each of Messrs. Allen, Thigpen and Crowe and Ms. Pieropan
are parties to employment agreements (the "Employment Agreements"). The
Employment Agreements provide that the executives shall devote full time (half
time in the case of Mr. Allen) attention, skill and ability to discharge the
duties assigned and to use their best efforts to promote and protect the
interests of the Company. Except for the Employment Agreement with Mr. Allen
which is terminable "at will" by Mr. Allen but not by the Company, the
Employment Agreements are terminable by each of the respective parties thereto
at any time, for any reason and with or without cause, upon 30 days' advance
written notice. The Employment Agreements provide, among other things, for an
annual base salary, an annual cash bonus in an amount determined by the Board of
Directors and certain other benefits. If any such executive's employment is
terminated for any reason, other than for cause, death or the executive's
voluntary "at-will" termination, the executive will receive the following: (i)
in the case of Mr. Allen, he will receive an amount equal to his annual base
salary multiplied by 230%, plus a pro rata share of his bonus for the fiscal
year in which such termination occurs, and (ii) in the case of each of Messrs.
Thigpen and Crowe and Ms. Pieropan, the executive will receive an amount equal
to

                                      24
<PAGE>

their annual base salary multiplied by 200%, plus a pro rata share of their
bonus for the fiscal year in which such termination occurs. On March 20, 1997,
Sun Gro-U.S. paid Mr. Crowe $418,992 in connection with his departure from the
Company.

Compensation of Directors

     During 1997, the directors received no compensation for serving as
directors. However, all directors were reimbursed for all travel-related
expenses incurred in connection with their activities as directors.

Compensation Committee Interlocks and Insider Participation

     The Compensation Committee of the Board of Directors consists of Messrs.
Wood, Reusche and Allen, all of whom are officers of the Company. Messrs. Wood
and Reusche each serve as principals of MDCP and Vice Presidents of MDP. MDCP
holds, of record and beneficially, in excess of 5% of each class of the
Company's equity securities.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT.

     The following table sets forth certain information as to the beneficial
ownership of Junior Preferred and of Common Stock as of March 24, 1998 by (i)
each person known to Holdings and the Company to own beneficially 5% or more of
the Common Stock or Junior Preferred, (ii) each director and Named Executive
Officer of the Company and (iii) all executive officers and directors of the
Company as a group. The holders of the Junior Preferred have the right to vote
together with the Common Stock on a one-vote per share basis in the election of
directors.

<TABLE>
<CAPTION>
                                                               Beneficial Ownership(1)
                                                   ------------------------------------------------
                                                    Number of                 Number of
                                                    Shares of                 Shares of
                                                      Junior      Percent      Common       Percent
          Beneficial Owner                          Preferred    of Class       Stock      of Class
-------------------------------------------------  ----------    --------     ---------    --------
<S>                                                <C>           <C>          <C>          <C>

Madison Dearborn Capital Partners, L.P.(2)         16,383,050       78.6%     7,967,530       68.7%

California State Teachers' Retirement System (3)           --         --        705,500        6.1%

Douglas D. Allen                                      278,942        1.3%       171,058        1.5%

Stephen P. Thigpen                                    433,910        2.1%       366,090        3.2%

Michael R. Crowe                                      650,865        3.1%       399,135        3.4%

Claudia M. Pieropan                                   111,577        *           68,423        *

Paul R. Wood(2)                                            --        --              --         --

Thomas R. Reusche(2)                                       --        --              --         --

David F. Mosher(2)                                         --        --              --         --

Gary J. Little(2)                                          --        --              --         --
</TABLE>

                                      25
<PAGE>

<TABLE>
<S>                                                             <C>           <C>     <C>           <C>
All Executive Officers and Directors as a Group
     (7 persons)                                                824,429       4.0%    605,571       5.2%
</TABLE>

* Denotes less than one percent.

(1)  "Beneficial owner" generally means any person whom, directly or indirectly,
     has or shares voting power or investment power with respect to a security.
     All of the stockholders of Holdings are party to the Stockholders
     Agreement, pursuant to which such stockholders have agreed to vote their
     shares in the election of directors in accordance with the terms of the
     Stockholders Agreement. The number of shares indicated in this table does
     not include the shares of Junior Preferred Stock or the shares of Common
     Stock that are held by other stockholders subject to the Stockholders
     Agreement. See "Stockholders Agreement." Unless otherwise indicated, the
     Company believes that, except with regard to the provisions in the
     Stockholders Agreement, each stockholder has sole voting and investment
     power with regard to shares listed as beneficially owned by such
     stockholder.

(2)  The address of Madison Dearborn Capital Partners, L.P. and Messrs. Wood,
     Reusche, Mosher and Little is Three First National Plaza, Suite 3800,
     Chicago, Illinois 60602. Messrs. Wood, Reusche, Mosher and Little are
     executive officers of Madison Dearborn Partners, Inc., the general partner
     of Madison Dearborn Partners, L.P., the general partner of MDCP, and
     therefore may be deemed to share voting and investment power over the
     shares owned by MDCP and therefore to beneficially own such shares.

(3)  The address of the California State Teachers' Retirement System is c/o
     Abbott Capital Management LLC, 1330 Avenue of the Americas, Suite 2800, New
     York, New York 10019.

Stockholders Agreement

     The Management Stockholders and MDCP, who together hold all of the voting
stock of Holdings, are parties to a Stockholders Agreement dated August 4, 1995
(as subsequently amended, the "Stockholders Agreement"). Pursuant to the
Stockholders Agreement, the disposition and voting of the shares of Junior
Preferred Stock and Common Stock of Holdings held by the Management Stockholders
is restricted. MDCP and the Management Stockholders have agreed to vote their
shares to elect a board of seven directors of Holdings, consisting of four
directors designated by MDCP and three directors who shall be members of
management. The Stockholders Agreement also contains (i) certain "co-sale"
rights exercisable by the Management Stockholders in the event of certain sales
by MDCP of Junior Preferred Stock or Common Stock, (ii) certain "drag along"
sale rights exercisable by MDCP in the event of certain "approved sales" and
(iii) certain "piggyback" registration rights in the case of primary and
secondary offerings. The restrictions on disposition and voting and the co-sale
and drag along rights will terminate upon the occurrence of a public offering
registered under the Securities Act of Common Stock having an aggregate value of
$30.0 million and a per share price of at least three times the original cost of
the Common Stock to the Management Stockholders, except that the voting
restrictions may terminate sooner on the earlier of the tenth anniversary of the
date of the Stockholders Agreement or such time as MDCP, together with its
partners and affiliates, hold less than 30% of the Junior Preferred Stock and
Common Stock held by MDCP on the date of the Stockholders Agreement.

                                      26
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED PARTIES.

Issuance of Debt and Equity Securities

     On September 29, 1997, Holdings issued 100,000 shares of Common Stock to
Stephen P. Thigpen, the chief executive officer of Hines Horticulture, for
$100,000 (representing the fair market value of such shares on the issuance
date). The purchase price was payable by a full-recourse promissory note in
favor of Holdings bearing 6% interest and due in three equal installments on
April 30 of each of 1998, 1999 and 2000.

     On October 20, 1997, Holdings issued to MDCP, the controlling stockholder
of Holdings, the Demand Note, in an aggregate principal amount of $2,500,000,
for $2,500,000 in cash. The Demand Note bore interest at a rate equal to the
dividend rate on the Senior Preferred. The Demand Note was used to finance the
acquisition of Pacific Color and to provide working capital to Hines II, and was
subsequently exchanged on December 16, 1997 for Senior Preferred and warrants of
Holdings.

     On December 16, 1997, Holdings issued to MDCP, for an aggregate
consideration of $1,000,000 in cash and the surrender and cancellation of the
Demand Note (for which $2,500,000 of indebtedness was then outstanding), (i)
3,500 shares of Senior Preferred, at a price of $970.21 per share, and (ii)
presently exercisable warrants to purchase 104,282 shares of Common Stock, with
an exercise price of $.01 per share, at a price of $1.00 for each warrant to
purchase one share of Common Stock. Such issuance was on equivalent terms and
subject to the same conditions as a contemporaneous sale of Senior Preferred and
warrants to an unaffiliated third party investor. See Item 5, "Market for the
Registrant's Common Equity and Related Stockholder Matters."

     On February 5, 1998, Holdings issued to MDCP, on an arm's length basis,
2,000 shares of Senior Preferred, having an aggregate liquidation value of
$2,000,000, for $2,000,000 in cash.

Blooming Farm Transactions

     On August 4, 1995, Oregon Garden Products ("OGP"), a then wholly-owned
subsidiary of Hines Horticulture which was subsequently merged into Hines
Horticulture, acquired the assets of Gales Creek Nurseries, L.P., a Delaware
limited partnership ("GCN"), including in excess of 640 acres of agricultural
land. Under applicable Federal reclamation water law, however, Hines
Horticulture and its affiliates were eligible to receive federal reclamation
water for only 640 net irrigable acres. Accordingly, MDCP and the senior
management stockholders of Holdings formed Blooming Farm, Inc., a Delaware
corporation ("Blooming Farm"), which is not an affiliate of Hines Horticulture
under applicable Federal reclamation water law, to hold title to approximately
290 acres of the GCN property. The stock of Blooming Farm held by MDCP and the
senior management stockholders of Holdings is held in direct proportion to their
stock ownership of Holdings at that time.

     Simultaneously with the acquisition of assets of GCN by OGP, OGP sold to
Blooming Farm approximately 290 acres of the agricultural land it acquired from
GCN. As payment in full for such land, Blooming Farm issued a secured five-year
amortizing promissory note to OGP in

                                      27
<PAGE>

the amount of $826,625. Blooming Farm and OGP then entered into a five-year
Agricultural Lease pursuant to which Blooming Farm currently leases the property
to Hines Horticulture (as successor-in-interest to OGP). Hines Horticulture
subsequently pledged the note and security instruments to BT Commercial
Corporation as security under the Bank Credit Agreement.

     In June 1996, Hines Horticulture discovered that approximately 53 acres of
land purchased from GCN had inadvertently not been disclosed on the Federal
reclamation water forms it had filed. As this additional land caused Hines
Horticulture to be over the 640 net irrigable acre limit, on June 21, 1996,
Hines Horticulture sold the 53 acres of agricultural land to Blooming Farm in
exchange for a secured five-year amortizing Promissory Note in the amount of
$151,050. Blooming Farm and Hines Horticulture then entered into a five-year
Agricultural Lease pursuant to which Blooming Farm currently leases the property
to Hines Horticulture. Hines Horticulture subsequently pledged the note and
security instruments as security under the Bank Credit Agreement.

In connection with Hines Horticulture's acquisition of certain real property in
Allendale, California in July, 1995, Hines Horticulture designated 128 acres of
such property to receive Federal reclamation water. To avoid exceeding the 640
net irrigable acre limit, Hines Horticulture and Blooming Farm entered into a
Section 1031 like-kind exchange on February 28, 1997, pursuant to which Hines
Horticulture transferred to Blooming Farm 128 acres of property then owned by
Hines Horticulture which was receiving Federal reclamation water, in exchange
for 128 acres of land then owned by Blooming Farm and leased to Hines
Horticulture, which was not receiving Federal reclamation water.

     The Company's management believes that the terms of the sale-leaseback and
like-kind exchange transactions with Blooming Farm are at market rates and are
at least as favorable as those which could be negotiated with an unaffiliated
third party.


                                    PART IV

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
               fiscal year ended December 31, 1997.

                                      28
<PAGE>

                                  SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly cause this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 30, 1998.

                                       HINES HOLDINGS, INC.

                                         By: /s/ Paul R. Wood
                                             -----------------
                                             Paul R. Wood
                                             President

          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 30, 1998.

<TABLE>
<CAPTION>


        Signature                       Capacity
<S>                                <C>
/s/ Paul R. Wood                   President and Director (principal executive
--------------------------         officer)
    Paul R. Wood


/s/ Claudia M. Pieropan            Chief Financial Officer (principal financial
----------------------------       and accounting officer)
    Claudia M. Pieropan


/s/ Thomas R. Reusche              Secretary, Treasurer and Director
----------------------------
    Thomas R. Reusche


/s/ Douglas D. Allen               Vice President and Director
--------------------
    Douglas D. Allen


/s/ Stephen P. Thigpen             Director
----------------------
    Stephen P. Thigpen


/s/ David F. Mosher                Director
-------------------
    David F. Mosher


/s/ Gary J. Little                 Director
------------------
    Gary J. Little
</TABLE>

     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.

          The registrant has not sent an annual report or proxy material to its
security holders during the period covered by this report.

                                      29


<PAGE>

                     HINES HOLDINGS, INC. AND SUBSIDIARIES

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                Page
                                                              --------

<S>                                                           <C>
Report of Independent Accountants - Years Ended
     December 31, 1997 and 1996 - Price Waterhouse LLP           F-2

Report of Independent Public Accountants - Year Ended
     December 31, 1995 - Arthur Andersen LLP                     F-3

Consolidated Balance Sheets as of December 31, 1997 and 1996     F-4

Consolidated Statements of Income for the years ended
     December 31, 1997, 1996 and 1995                            F-6

Consolidated Statements of Shareholders' Equity (Deficit)
     for the years ended December 31, 1997, 1996 and 1995        F-7

Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995                            F-8

Notes to Consolidated Financial Statements as of
     December 31, 1997, 1996 and 1995                            F-9
</TABLE>

                                      F-1
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ---------------------------------



To the Board of Directors and
Shareholders of Hines Holdings, Inc.


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of Hines
Holdings, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows the years then ended in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards, 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.



PRICE WATERHOUSE LLP

Costa Mesa, California
March 16, 1998, except as to Note 2, which
is as of March 25, 1998

                                      F-2
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors of
    Hines Holdings, Inc.:


We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Hines Holdings, Inc. for the year ended
December 31, 1995. 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 audit. We did not audit the financial
statements of Sun Gro Horticulture Inc., which statements represent revenues of
44 percent of Hines Holdings, Inc. for the year ended December 31,1995. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to the amounts included for that entity,
is based solely on the report of the other auditors.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated results of operations and cash flows of Hines Holdings, Inc.
for the year ended December 31,1995, in conformity with generally accepted
accounting principles.



                             ARTHUR ANDERSEN LLP

Orange County, California
April 5, 1996

                                      F-3
<PAGE>


                     HINES HOLDINGS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                          December 31, 1997 and 1996
                            (Dollars in thousands)

<TABLE>
<CAPTION>

               ASSETS
               ------
                                                         1997         1996
                                                      ----------   ----------
<S>                                                   <C>          <C>
CURRENT ASSETS:
  Cash                                                $   2,543    $     631
  Accounts receivable, net of allowance for
     doubtful accounts of $1,193 and $1,019              20,569       15,644
  Inventories                                           106,007       95,224
  Prepaid expenses and other current assets               1,958        3,213
                                                      ----------   ----------

               Total current assets                     131,077      114,712
                                                      ----------   ----------



FIXED ASSETS, net of accumulated depreciation
  and depletion of $20,459 and $14,169                   92,406       81,870
                                                      ----------   ----------



DEFERRED FINANCING EXPENSES, net of
  accumulated amortization of $2,332 and $1,235           6,477        6,352
                                                      ----------   ----------



GOODWILL, net of accumulated
  amortization of $1,474 and $1,490                      38,859       24,581
                                                      ----------   ----------


                                                      $ 268,819    $ 227,515
                                                      ==========   ==========
</TABLE>



  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                      F-4
<PAGE>

                     HINES HOLDINGS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                          December 31, 1997 and 1996
                            (Dollars in thousands)

<TABLE>
<CAPTION>

    LIABILITIES AND SHAREHOLDERS' DEFICIT                    1997        1996
    -------------------------------------                  --------    --------
<S>                                                        <C>         <C>
CURRENT LIABILITIES:
  Accounts payable                                         $  8,046    $  7,875
  Accrued liabilities                                         5,309       5,627
  Accrued payroll and benefits                                6,521       5,957
  Long-term debt, current portion                             5,400       4,897
  Revolving line of credit                                   43,102      29,357
  Deferred income taxes                                      35,151      31,402
                                                           --------    --------
         Total current liabilities                          103,529      85,115
                                                           --------    --------

LONG-TERM DEBT                                              160,356     152,769
                                                           --------    --------

DEFERRED INCOME TAXES                                         6,003       6,006
                                                           --------    --------

COMMITMENTS AND CONTINGENCIES

CUMULATIVE REDEEMABLE SENIOR PREFERRED
  STOCK 12 PERCENT, par value $.01 per share;
  liquidation preference of $1,000 per share; 50,000
  shares authorized; 39,500 and 30,000 shares issued
  at December 31, 1997 and 1996                              43,967      30,921

CUMULATIVE REDEEMABLE JUNIOR PREFERRED
  STOCK 12 PERCENT, par value $.01 per share;
  liquidation preference of $1 per share; 22,000,000
  shares authorized; 20,847,986 and 20,498,816
  shares issued at December 31, 1997 and 1996                26,715      23,604

SHAREHOLDERS' DEFICIT
  Common Stock
       Authorized - 30,000,000 shares  $.01 par value;
       Issued and outstanding - 10,492,014 and
       10,226,184 at December 31, 1997 and 1996                 105         102

  Accumulated accretion of cumulative redeemable
    preferred stock (in excess) less than additional
    paid-in capital                                            (857)      5,600

  Notes receivable from stock sales                            (366)       (192)

  Deficit                                                   (70,633)    (76,410)
                                                           --------    --------
         Total shareholders' deficit                        (71,751)    (70,900)
                                                           --------    --------
                                                           $268,819    $227,515
                                                           ========    ========
</TABLE>

             The accompanying notes are an integral part of these
                       consolidated fiancial statements.

                                      F-5
<PAGE>

                     HINES HOLDINGS, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
             For the Years Ended December 31, 1997, 1996 and 1995
                 (Dollars in thousands except per share data)
<TABLE>
<CAPTION>
                                                          1997          1996         1995
                                                       ----------    ----------    ---------
<S>                                                    <C>           <C>           <C>
SALES, NET                                             $  201,256    $  164,323    $ 156,909

COST OF GOODS SOLD                                         99,407        80,812       72,245
                                                       ----------    ----------    ---------
                             Gross Profit                 101,849        83,511       84,664
                                                       ----------    ----------    ---------

SELLING AND DISTRIBUTION EXPENSES                          50,233        43,308       39,904
GENERAL AND ADMINISTRATIVE EXPENSES                        20,403        18,239       17,467
OTHER OPERATING (INCOME) EXPENSES                            (228)         (790)       1,021
UNUSUAL EXPENSES                                              343           830            -
                                                       ----------    ----------    ---------
                 Total operating expenses                  70,751        61,587       58,392
                                                       ----------    ----------    ---------

                         Operating income                  31,098        21,924       26,272
                                                       ----------    ----------    ---------
OTHER EXPENSES:
  Interest                                                 20,708        20,140       13,274
  Amortization of deferred financing expenses               1,097           940        4,557
                                                       ----------    ----------    ---------
                                                           21,805        21,080       17,831
                                                       ----------    ----------    ---------
Income before provision for income taxes, minority
  interest and income from discontinued operations          9,293           844        8,441

PROVISION FOR INCOME TAXES                                  3,516           636        2,850
                                                       ----------    ----------    ---------
Income before minority interest and income
  from discontinued operations                              5,777           208        5,591
MINORITY INTEREST IN EARNINGS OF
  SUBSIDIARIES                                                  -             -        3,958
                                                       ----------    ----------    ---------
Income before income from discontinued  operations          5,777           208        1,633
INCOME FROM DISCONTINUED
  OPERATIONS,  net of tax                                       -             -       (3,307)
                                                       ----------    ----------    ---------
Income before extraordinary loss                            5,777           208        4,940
EXTRAORDINARY LOSS, net of tax                                  -             -        2,513
                                                       ----------    ----------    ---------
NET INCOME                                                  5,777           208        2,427
Less: Preferred stock dividends                            (6,666)       (3,775)      (1,460)
                                                       ----------    ----------    ---------
NET (LOSS) INCOME APPLICABLE TO COMMON STOCK                ($889)      ($3,567)        $967
                                                       ==========    ==========    =========
BASIC AND DILUTED EARNINGS PER SHARE:
  (Loss) income before income from discontinued            ($0.09)       ($0.35)       $0.04
    operations and extraordinary loss
  Extraordinary loss                                            -             -        (0.60)
  Income from discontinued operations                           -             -         0.79
                                                       ----------    ----------    ---------
  Net (loss) income per common share                       ($0.09)       ($0.35)       $0.23
                                                       ==========    ==========    =========
  Weighted average shares outstanding                  10,276,542    10,125,481    4,166,667
                                                       ==========    ==========    =========
</TABLE>

             The accompanying notes are an integral part of these
                      consolidated financial statements.

                                      F-6
<PAGE>

                     HINES HOLDINGS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
             For the Years Ended December 31, 1997, 1996 and 1995
                 (Dollars in thousands except for share data)

<TABLE>
<CAPTION>
                            Common Stock
                            no par value       Common Stock - A       Common Stock - B                Notes                  Share-
                          -----------------    -----------------    --------------------              Rec.     Retained     holders'
                          Number of            Number of            Number of                         Stock    Earnings      Equity
                           Shares    Amount     Shares    Amount     Shares       Amount     (i)      Sales    (Deficit)   (Deficit)
                          ---------  ------    ---------  ------   -----------    ------   -------    -----    ---------   ---------
<S>                         <C>     <C>        <C>         <C>     <C>            <C>      <C>        <C>      <C>         <C>
BALANCE, December 31, 1994   360    $3,600            -    $  -              -    $   -    $   433    $   -    $  5,897    $  9,930

 Exchange of common stock
  for minority interests       -          -     684,783      32     24,709,622      247     27,674        -           -      27,953
 Merger transactions           -          -           -       -          1,000        -          1        -           -           1
 Repurchase and retirement
  of stock                  (360)    (3,600)   (684,783)    (32)             -        -     (3,644)       -     (84,662)    (91,938)
 Cumulative undeclared
  dividends                    -          -           -       -              -        -     (1,460)       -           -      (1,460)
 Exchange of common
  stock for preferred
  stock                        -          -           -       -    (14,710,622)    (147)   (14,564)       -           -     (14,711)
  Net income                   -          -           -       -              -        -          -        -       2,427       2,427
                            ----    -------    --------    ----    -----------    -----    --------   -----    --------    --------

BALANCE, December 31, 1995     -          -           -       -     10,000,000      100      8,440        -     (76,338)    (67,798)
                            ----    -------    --------    ----    -----------    -----    --------   -----    --------    --------

 Net proceeds from
  issuance of stock,
  net of expenses              -          -           -       -        283,360        3        168        -           -         171
 Redemption of stock           -          -           -       -        (57,176)      (1)       (57)       -           -         (58)
 Repurchase and
  retirement of stock          -          -           -       -              -        -          -        -        (280)       (280)
 Cumulative undeclared
  dividends                    -          -           -       -              -        -     (3,775)       -           -      (3,775)
 Issuance of warrants,
  net of discount              -          -           -       -              -        -        824        -           -         824
 Notes receivable from
  stock sales                  -          -           -       -              -        -          -     (192)          -        (192)
 Net income                    -          -           -       -              -        -          -        -         208         208
                            ----    -------    --------    ----    -----------    -----    --------   -----    --------    --------

BALANCE, December 31, 1996     -          -           -       -     10,226,184      102      5,600     (192)    (76,410)    (70,900)
                            ----    -------    --------    ----    -----------    -----    --------   -----    --------    --------

 Net proceeds from
  issuance of stock,
  net of expenses              -          -           -       -        289,980        3         23        -          -           26
 Redemption of stock           -          -           -       -        (24,150)       -        (24)       -           -         (24)
 Cumulative undeclared
  dividends                    -          -           -       -              -        -     (6,666)       -           -      (6,666)
 Issuance of warrants,
  net of discount              -          -           -       -              -        -        210        -           -         210
 Notes receivable from
  stock sales                  -          -           -       -              -        -          -     (174)          -        (174)
 Net income                    -          -           -       -              -        -          -        -       5,777       5,777
                            ----    -------    --------    ----    -----------    -----    --------   -----    --------    --------

BALANCE, December 31, 1997     -    $     -           -    $   -    10,492,014    $ 105    $  (857)   $(366)   $(70,633)   $(71,751)
                            ====    =======    ========    ====    ===========    =====    ========   =====    ========    ========
</TABLE>

(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.

                                      F-7
<PAGE>
                     HINES HOLDINGS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             For the Years Ended December 31, 1997, 1996 and 1995
                            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                           1997         1996         1995
                                                         ---------    ---------    ---------
<S>                                                      <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                 $5,777         $208       $2,427
 Adjustments to reconcile net income to
   net cash provided by operating activities -
    Amortization of deferred financing costs                 1,097          940        4,557
    Depreciation, depletion and amortization                 6,407        4,962        3,828
    Write-off of deferred financing costs                                              3,993
    Minority interest in earnings of subsidiaries                -            -        3,958
    Gain on sale of discontinued operations                      -            -       (4,871)
    Gain on involuntary disposal of assets                  (1,194)           -            -
    Deferred income taxes                                    3,647          508        3,942
    Other                                                      (81)         525          483
                                                         ---------    ---------    ---------
                                                            15,653        7,143       18,317
CHANGE IN WORKING CAPITAL ACCOUNTS:
 Accounts receivable                                        (4,373)         824          836
 Inventories                                                (9,495)      (4,270)      (8,605)
 Prepaid expenses and other current assets                   1,008         (815)       1,169
 Other assets                                                 (322)        (577)           -
 Accounts payable and accrued liabilities                      297       (3,500)        (951)
 Other liabilities                                            (581)        (361)      (1,000)
                                                         ---------    ---------    ---------
   Net cash provided by (used in) operating activities       2,187       (1,556)       9,766
                                                         ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of fixed assets                                  (10,130)      (8,752)      (7,684)
 Proceeds from sales of fixed assets                           154          175        1,417
 Proceeds from insurance claims                              1,194            -            -
 Purchase of fixed assets from insurance claims             (1,324)           -            -
 Acquisitions, net of cash acquired                        (19,632)     (21,915)      (3,498)
                                                         ---------    ---------    ---------
   Net cash used in investing activities                   (29,738)     (30,492)      (9,765)
                                                         ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from revolving line of credit                    220,188      202,785       77,911
 Repayments on revolving line of credit                   (206,443)    (186,121)     (83,596)
 Proceeds from the issuance of long-term debt               12,000            -      255,000
 Repayments of long-term debt                               (4,910)      (4,209)    (160,567)
 Deferred financing costs                                   (1,223)        (253)      (9,833)
 Repurchase and retirement of preferred and
   common stock                                                (75)        (280)     (91,938)
 Issuance of preferred and common stock                      9,926       20,612       11,673
 Other                                                           -          (36)      (1,120)
                                                         ---------    ---------    ---------
  Net cash provided by (used in) financing activities       29,463       32,498       (2,470)
                                                         ---------    ---------    ---------
NET INCREASE (DECREASE) IN CASH                              1,912          450       (2,469)
CASH, beginning of year                                        631          181        2,650
                                                         ---------    ---------    ---------
CASH, end of year                                           $2,543         $631         $181
                                                         =========    =========    =========

CASH PAID - INTEREST                                       $20,729      $23,702       $8,689
                                                         =========    =========    =========
CASH PAID - INCOME TAXES                                      $161           $4           $3
                                                         =========    =========    =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
                                      F-8
<PAGE>

                     HINES HOLDINGS, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       DECEMBER 31, 1997, 1996 AND 1995
                            (Dollars in Thousands)



1.   Summary of Significant Accounting Policies
     ------------------------------------------

     Description of Business
     -----------------------

Hines Holdings, Inc. (Holdings) produces and distributes horticultural products
through its two operating divisions, Hines Nurseries (Hines) and Sun Gro
Horticulture (Sun Gro). The business of Hines is conducted through Hines
Horticulture, Inc. (Hines Horticulture) and Hines II, Inc. (Hines II), and the
business of Sun Gro is conducted through Sun Gro Horticulture Inc. (Sun Gro-
U.S.) and its wholly owned subsidiary, Sun Gro Horticulture Canada Ltd. (Sun
Gro-Canada). Holdings, together with Hines, Sun Gro and Sun Gro-Canada, are
hereafter collectively referred to as the "Company."

Hines is a national supplier of ornamental, container-grown plants with nursery
facilities located in California, Oregon, Texas, South Carolina and
Pennsylvania. Hines markets its products to retail customers in North America.

Sun Gro produces, markets and distributes a range of peat-based horticulture
products for both retail and professional customers. Sun Gro markets its
products in North America and various international market areas. Manufacturing
is conducted in facilities located in Canada and the United States.

     Consolidation
     -------------

The consolidated financial statements include the accounts of Holdings and its
wholly owned subsidiaries Hines, Hines II 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 trade receivables. Credit risk on trade receivables is
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, 1997 and 1996, significant amounts of accounts
receivable are subject to dating terms. The Company's largest customer

                                      F-9
<PAGE>

accounted for approximately 12% and 10% of the Company's consolidated net sales
in 1997 and 1996, respectively. In 1995, no individual customer accounted for
more than 10% of consolidated net sales.

     Depreciation and Depletion
     --------------------------

Fixed assets are stated at cost less accumulated depreciation. Depreciation has
been provided for on a straight-line basis over the following estimated economic
useful lives:

          Buildings                    20 to 60 years
          Machinery and equipment      2 to 25 years
          Vehicles and trailers        2 to 15 years
          Furniture and fixtures       3 to 5 years

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.

     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.

     Goodwill and Negative Goodwill
     ------------------------------

In connection with its acquisition of Hines in 1990, the Company recorded $6.1
million 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, as further discussed in Note 21, approximately $14.7
million of goodwill was recorded and is being amortized over a 35-year period as
a component of other operating expenses.

Goodwill recorded in connection with the Company's recent acquisitions, as
discussed in Note 2, 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.

                                      F-10
<PAGE>

     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' nursery stock has an average growing period of approximately eighteen
months. The nursery stock is classified as a current asset based on Hines'
normal operating cycle.

     Foreign Currency Translation
     ----------------------------

The Company considers the U.S. dollar to be the functional currency of Sun Gro's
Canadian operations. Monetary assets and liabilities are translated at the
foreign exchange rate in effect as of the balance sheet date. Non-monetary
assets and liabilities are translated at historical rates and revenues and
expenses at average exchange rates for the period. Gains or losses from changes
in exchange rates are recognized in the consolidated results of operations in
the year of occurrence.

     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 liabilities and assets 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.

     Derivatives
     -----------

Gains and losses related to qualifying hedges of firm commitments or anticipated
transactions are deferred and are recognized in income when the hedge
transaction occurs. Gains or losses on forward foreign currency exchange
contracts that do not qualify as hedges are recognized currently and are
included as a component of other operating expenses in the consolidated
statements of income.

                                      F-11
<PAGE>

     Advertising
     -----------

The Company expenses advertising costs at the time the advertising first takes
place. Advertising expense was $1,898, $1,658 and $1,544 for the years ended
December 31, 1997, 1996 and 1995, 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 (Loss) 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 warrants were
converted into common stock in each year.

In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," (SFAS 128). In accordance with the implementation
provisions of SFAS 128, the Company has restated earnings per share in the
Consolidated Statements of Income for the years ended December 31, 1996 and
1995.

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 1997 and 1996 because
the effect would be anti-dilutive. There were no outstanding common stock
equivalents in fiscal year 1995.

     Recent Accounting Pronouncements
     --------------------------------

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information," in June 1997. SFAS 131 establishes
standards for the reporting of information about operating segments of a
business. Generally, financial information is required to be reported on the
basis that it is used internally by management for evaluating segment
performance.

SFAS 131 addresses disclosure matters and will have no effect on the Company's
consolidated financial position, results of operations or cash flows. The
Company will adopt SFAS 131 in 1998.

                                      F-12
<PAGE>

     Reclassifications
     -----------------

Certain prior year amounts have been reclassified to conform to current year
presentations.


2.   Acquisitions
     ------------

     Bryfogle's
     ----------

On December 16, 1997, Hines II acquired all of the issued and outstanding shares
of Bryfogle's Wholesale, Inc., Bryfogle's Power Plants, and Power Plants II,
Inc. (collectively "Bryfogle's") for approximately $19 million. The acquisition
was accounted for using the purchase method. The purchase price allocation is
summarized as follows:

<TABLE>
<CAPTION>

<S>                                              <C>
     Cash                                        $    54
     Accounts receivable                             452
     Inventories                                   1,088
     Fixed assets                                  4,163
     Other assets                                    639
     Goodwill                                     13,752
     Accounts payable and accrued liabilities       (756)
     Deferred tax liability - non-current           (411)
                                                 -------
            Total purchase price                 $18,981
                                                 =======
</TABLE>

     Pacific Color Nurseries
     -----------------------

On October 20, 1997, Hines II acquired certain assets and assumed certain
liabilities of Pacific Color Nurseries, Inc. (PCN) for $1.7 million. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:

<TABLE>
<CAPTION>

<S>                                              <C>
     Accounts receivable                         $  100
     Inventories                                    200
     Prepaid expenses                                 5
     Fixed assets                                 1,385
     Goodwill                                       285
     Accounts payable and accrued liabilities      (270)
                                                 ------

           Total purchase price                  $1,705
                                                 ======
</TABLE>

     Flynn Nurseries
     ---------------

On November 27, 1996, Hines Horticulture acquired all of the issued and
outstanding shares of Flynn Nurseries, Inc. (Flynn) for $11.7 million. The
acquisition was accounted for using the purchase method. The purchase price
allocation is summarized as follows:

                                      F-13
<PAGE>

<TABLE>
<CAPTION>

<S>                                              <C>
     Cash                                        $    39
     Accounts receivable                             642
     Inventories                                  11,644
     Prepaid expenses                                 48
     Fixed assets                                  3,162
     Goodwill                                      5,279
     Accounts payable and accrued liabilities     (3,981)
     Long-term debt                                  (16)
     Deferred tax liability  non-current          (5,164)
                                                 -------

            Total purchase price                 $11,653
                                                 =======
</TABLE>

     Iverson Perennial Gardens
     -------------------------

On August 30, 1996, Hines Horticulture acquired certain assets and assumed
certain liabilities of Iverson Perennial Gardens, Inc. (Iverson) for $10.3
million. The acquisition was accounted for using the purchase method. The
purchase price allocation is summarized as follows:

<TABLE>
<CAPTION>

<S>                                              <C>
     Accounts receivable                         $ 1,181
     Inventories                                   2,416
     Prepaid expenses                                 40
     Fixed assets                                  1,296
     Goodwill                                      6,114
     Accounts payable and accrued liabilities       (691)
     Long-term debt                                  (55)
                                                 -------

            Total purchase price                 $10,301
                                                 =======
</TABLE>

The consolidated financial statements reflect the operations of Bryfogle's, PCN,
Flynn, and Iverson since the date of their acquisition. The following is a
summary of the condensed consolidated unaudited pro forma results of operations
for the years ended December 31, 1997 and 1996 as if the acquisitions had
occurred on January 1, 1997 and January 1, 1996, respectively (in thousands,
except per share data):

<TABLE>
<CAPTION>

                                            December 31
                                        ------------------
                                          1997      1996
                                        --------  --------
<S>                                     <C>       <C>

     Net sales                          $215,721  $199,487
     Net income (loss) applicable to
         common stock (a)               $    271  $ (3,692)
     Basic earnings per share           $   0.03  $  (0.39)
     Diluted earnings per share         $   0.02  $  (0.39)

</TABLE>

                                      F-14
<PAGE>

(a) After deduction of preferred stock dividends of $6,666 and $3,775 for the
    years ended December 31, 1997 and 1996, respectively.

The pro forma results do not necessarily represent results, which, would have
occurred if the acquisitions had taken place as of the dates assumed, nor are
they indicative of the results of future combined operations.

      Subsequent Event -- Pending Acquisition of Lakeland Peat Moss Ltd.
      ------------------------------------------------------------------

On March 25, 1998, 763427 Alberta Ltd., a recently-formed Alberta corporation
which is an indirect, wholly-owned subsidiary of Hines II, entered into a
definitive stock purchase agreement with the shareholders of Lakeland Peat Moss,
Ltd. to purchase all of the issued and outstanding shares of capital stock of
Lakeland Peat Moss, Ltd. for approximately Cdn. $28.4 million (approximately
U.S. $20.0 million). The closing of the transaction is subject to customary
closing conditions and the receipt of certain Canadian regulatory approvals. If
these conditions are satisfied, the closing is expected to occur no later than
May 31, 1998.


3.  Unusual Expenses
    ----------------

During the year ended December 31, 1997, the Company received $1,194 of proceeds
from insurance claims to replace assets that had been damaged and, accordingly,
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, 1997,
the Company had acquired $1,324 of fixed assets utilizing the insurance
proceeds.

In May 1997, the Company approved a restructuring plan for Sun Gro which, for
the year ended December 31, 1997, resulted in an unusual charge of $1,537. The
charge represents $1,100 of severance-related payments and $437 of other related
restructuring charges. As of December 31, 1997, $1,137 has been paid and charged
against the liability.


4.  Inventories
    -----------

As of December 31, 1997 and 1996, inventories consisted of the following:

<TABLE>
<CAPTION>


                                 December 31
                              -----------------
                                1997     1996
                              --------  -------
<S>                            <C>      <C>

     Nursery stock            $ 95,195  $85,611
     Finished goods              4,003    2,975
     Materials and supplies      6,809    6,638
                              --------  -------

                              $106,007  $95,224
                              ========  =======

</TABLE>

                                      F-15
<PAGE>

5.  Fixed Assets
    ------------

As of December 31, 1997 and 1996, fixed assets consisted of the following:

<TABLE>
<CAPTION>

                                        December 31
                                     ------------------
                                       1997      1996
                                     --------  --------
<S>                                   <C>      <C>

     Land                            $  7,103  $  6,845
     Peat reserves and bog costs       49,146    48,887
     Buildings and improvements        21,915    14,778
     Machinery and equipment           27,691    22,785
     Construction in progress           7,010     2,744
                                     --------  --------
                                      112,865    96,039
     Less-Accumulated depreciation
       and depletion                   20,459    14,169
                                     --------  --------

                                     $ 92,406  $ 81,870
                                     ========  ========
</TABLE>

6.  Financial Instruments and Risk Management
    -----------------------------------------

Sun Gro has entered into forward exchange contracts and options for hedging
future anticipated expenses denominated in Canadian dollars. As of December 31,
1997, Sun Gro has no forward exchange contracts and options outstanding. As of
December 31, 1996, Sun Gro held call options totaling Cdn. $29,700, each in the
amount of Cdn. $3,300 per month expiring at the end of each month with the last
one expiring on September 30, 1997. The premium paid was U.S. $264, which was
amortized over the life of the hedged transactions. As of December 31, 1995, Sun
Gro held a call option for Cdn. $25,000. On June 20, 1996, Sun Gro sold the
unexercised balance of this option of Cdn. $12,000 for proceeds of U.S. $364 and
recorded a gain of U.S. $158 representing the excess of the proceeds over the
unamortized premium. Amortization expense of the premiums paid in connection
with the call options was $255 and $363 for the years ended December 31, 1997
and 1996, respectively.


7.  Revolving Lines of Credit
    -------------------------

On August 4, 1995, the Company entered into a new revolving loan agreement, as
amended on December 16, 1997, providing for a line of credit equal to the lesser
of $75 million or a percentage of accounts receivable and inventory balances as
stipulated in the agreement. Borrowings under this line bear interest at rates
approximating the U.S. prime rate plus 1.5 percent or the Eurodollar rate plus
2.5 percent. The line of credit is secured by substantially all of the assets
and common stock of Hines and Sun Gro-U.S. as well as a pledge of 66% of the
common stock of Sun Gro-Canada. The agreement contains

                                      F-16
<PAGE>

covenants that, among other matters, establish 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 is
subject to a commitment fee of 0.5 percent per annum. The line of credit expires
on December 31, 2000.

On December 16, 1997 the Company entered into another revolving loan agreement
providing for a line of credit equal to the lesser of $10 million or a
percentage of accounts receivable and inventory balances as stipulated in the
agreement. Borrowings under this line bear interest at rates approximating the
U.S. prime rate plus 0.75 percent or the Eurodollar rate plus 2.25 percent. The
line of credit is secured by substantially all of the assets of Hines II. The
agreement contains covenants, which, among other matters, establish 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 is subject to a commitment fee of 0.5 percent per annum. The
line of credit expires on December 31, 2002.

The weighted average interest rate on borrowings outstanding under the Company's
revolving lines of credit as of December 31, 1997 and 1996 was approximately
8.4% and 9.0%, respectively.


8.  Long-term Debt
    --------------

<TABLE>
<CAPTION>

                                                                December 31
                                                            -------------------
                                                              1997       1996
                                                            --------   --------
<S>                                                         <C>        <C>
Acquisition term loan, interest at the bank's
reference rate (8.5 percent per annum at
December 31, 1997) plus 1.25 percent or
the Eurodollar rate plus 2.75 percent per annum.
Principal payments due quarterly beginning
March 31, 2000 through 2002 ranging from
$300 to $600 as specified in the loan agreement,
with all remaining principal due on
December 31, 2002, secured by inventory
and fixed assets.                                           $ 12,000         -

Convertible subordinated promissory note, interest
at 6 percent per annum. Principal due
December 16, 2005.                                             1,000         -

Senior term debt, interest at the bank's reference
rate (8.5 percent per annum at December 31, 1997)
plus 1.5 percent or the Eurodollar rate plus 2.5
percent per annum. Principal payments due on
</TABLE>

                                      F-17
<PAGE>

<TABLE>

<S>                                                         <C>        <C>
June 30, September 30 and December 31 through
2000 ranging from $500 to $3,250 as specified in the
loan agreement, secured by inventories and fixed assets.      17,000    21,500

Senior subordinated notes, Series B, interest at
11.75 percent per annum payable semi-annually
on each June 30 and December 31, maturing on
October 15, 2005.                                            120,000   120,000

Note payable; interest at 10 percent per annum,
non recourse, secured by specified real property,
monthly interest payments only until June 1, 1992,
blended payments of $81 per month from July 1, 1992
through June 1, 2005, with all remaining principal
due on June 28, 2005.                                          7,999     8,162

Note payable; interest at 10 percent per annum,
until June 1, 1995, and 11.75 percent, thereafter,
non recourse, secured by specified real property,
monthly interest payments only until June 1, 1992,
blended payments of $77 per month for 36 months
commencing July 1, 1992, with blended payments
of $88 per month from July 1, 1995, through
June 1, 2005, with all remaining principal due on
June 27, 2005.                                                 7,693     7,833

Capital lease obligations and equipment financing
contracts due at various dates through 1999,
secured by leased equipment.                                      64       171
                                                            --------  --------

                                                             165,756   157,666
Less-Current portion                                           5,400     4,897
                                                            --------  --------
                                                            $160,356  $152,769
                                                            ========  ========
</TABLE>

The convertible subordinated promissory note may be optionally prepaid by the
Company without premium or penalty upon occurrence of an initial public offering
of common stock or sale of the Company. Upon and at any time after the
occurrence of an initial public offering of common stock, the holder may convert
all (but not less than all) of the principal amount outstanding under the note
into shares of common stock at the offering price of the common stock in such
offering (net of any sales or underwriting commissions).

Estimated principal maturities of long-term debt outstanding at December 31,
1997 are as follows:

                                      F-18
<PAGE>

     1998                                           $  5,400
     1999                                              5,874
     2000                                              6,919
     2001                                                465
     2002                                                387
     Thereafter                                      146,711
                                                    --------
                                                    $165,756
                                                    ========

The Senior Subordinated Notes were issued by Hines 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). In addition, prior to October 15,
1998, the Company, at its option, may redeem the notes, in part, with the net
proceeds of one or more public equity offerings at prices specified by the
indenture agreement (109.139% in 1998), provided, however, that after any such
redemption the aggregate principal amount of notes outstanding must equal at
least 65 percent of the aggregate principal amount of notes originally issued.
Upon a change of control, each holder will have the right to require the Company
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 notes are unsecured and subordinated to all existing and future
senior debt and unconditionally guaranteed on a senior subordinated basis by
Holdings 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. In addition, Hines must also meet
certain specified financial covenants related to its Senior Term Debt.


9.   Commitments
     -----------

The Company leases certain land, office and warehouse facilities under various
renewable long-term operating leases, which expire through 2010. 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. Two of the
operating land leases provide the Company with the option to purchase the
property at the appraised fair value through 1997 or to renew the leases,
effective June, 1997, at the fair rental value for periods of five to twenty-
five years. Total rent expense under these operating lease agreements for the
years ended December 31, 1997, 1996 and 1995 was $1,684, $1,302 and $1,068,
respectively.

                                      F-19
<PAGE>

As of December 31, 1997, the Company's future minimum annual payments under its
non-cancelable operating leases are as follows:


     1998                                           $ 3,200
     1999                                             2,810
     2000                                             2,605
     2001                                             2,154
     2002                                             1,325
     Thereafter                                       6,354
                                                    -------
                                                    $18,448
                                                    =======

10.  Contingencies
     -------------

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 or results of
operations.


11.  Redeemable Preferred Stocks
     ---------------------------

On August 4, 1995, Holdings issued $10 million of 12 percent cumulative
redeemable senior preferred stock (the Senior Preferred Stock) and $20 million
of 12 percent cumulative redeemable junior preferred stock (the Junior Preferred
Stock). The Senior Preferred Stock is redeemable on December 31, 2006, and is
non-voting. Holdings has the option to redeem all or any portion of the Senior
Preferred Stock at any time prior to the scheduled redemption date. Upon
redemption, Holdings is obligated to pay the holder a $1,000 liquidation value
for each share of Senior Preferred Stock plus any accrued but unpaid dividends.

The Junior Preferred Stock is redeemable on January 1, 2007. Holdings has the
option to redeem all or any of the Junior Preferred Stock at any time prior to
the scheduled redemption date. Upon redemption, Holdings is obligated to pay the
holder a $1 liquidation value for each share of Junior Preferred Stock plus any
accrued but unpaid dividends. The holders of the Junior Preferred Stock are
allowed to vote (one vote for each share) in the election of Holding's
directors, but not in any other matters. Holdings is prevented, without prior
consent from a majority of the holders of the Senior and Junior Preferred Stock,
from redeeming, repurchasing or otherwise acquiring any junior securities or
paying or declaring any dividends on any junior securities without first paying
the full amount of any preferred stock dividends accrued but not paid.

                                      F-20
<PAGE>

In June 1996, Holdings issued an additional 596,640 shares of Junior Preferred
Stock and 283,360 shares of common stock to certain employees for cash of $283
and promissory notes totaling $597. The promissory notes bear interest at a rate
of 6% per annum, compounded annually. The principal amount, together with all
accrued and unpaid interest thereon, will be due and payable in three equal
installments on March 31, 1996, 1997 and 1998, or earlier upon an event of
default under the promissory note or in certain other limited events. In
December 1996, 20,340 shares of the Junior Preferred Stock and 9,660 shares of
the common stock were redeemed and the promissory note relating to this stock,
in the amount of $20, was cancelled and $10 in cash was paid. The outstanding
promissory note balance of $385 at December 31, 1996 relating to the issuance of
Junior Preferred Stock is recorded as a deduction from Cumulative Redeemable
Junior Preferred Stock in the consolidated Balance Sheets.

On November 27, 1996, Holdings issued an additional $20 million of Senior
Preferred Stock with warrants to purchase 830,000 shares of Holdings common
stock at an exercise price of $.01 per share during a period which expires at
the earlier of (i) ten years from date of issuance (ii) a qualified public
offering or (iii) the sale of the Company. An amount approximating the fair
value of the stock of $830 was allocated to the warrants at the date of issuance
and is being accreted using the interest method over the period from issuance
until redemption first becomes available to the holder of the stock.

During the year ended December 31, 1997, Holdings issued an additional 400,020
shares of Junior Preferred Stock and 289,980 shares of common stock to certain
employees for cash of $63 and promissory notes totaling $627. The promissory
notes bear interest at a rate of 6% per annum, compounded annually. The
principal amount, together with all accrued and unpaid interest thereon, will be
due and payable in equal installments over a period of one to five years from
March 31, 1998 through March 31, 2001, or earlier upon an event of default under
the promissory note or in certain other limited events. In May 1997, 50,850
shares of the Junior Preferred Stock and 24,150 shares of the common stock were
redeemed and the promissory note relating to this stock, in the amount of $25,
was cancelled and $50 was paid in cash. The outstanding promissory note balance
of $533 at December 31,1997 relating to the issuance of Junior Preferred Stock
is recorded as a deduction from Cumulative Redeemable Junior Preferred Stock in
the consolidated Balance Sheets.

On December 16, 1997, Holdings issued an additional $9.5 million of Senior
Preferred Stock with warrants to purchase 283,051 shares of Holdings common
stock at an exercise price of $.01 per share during a period which expires at
the earlier of (i) ten years from the date of issuance (ii) a qualified public
offering or (iii) the sale of the Company. An amount approximating the fair
value of the stock of $283 was allocated to the warrants at the date of issuance
and is being accreted using the interest method over the period from issuance
until redemption first becomes available to the holder of the stock.

                                      F-21
<PAGE>

12.  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:

<TABLE>
<CAPTION>

                                             December 31
                                      -------------------------
                                       1997     1996      1995
                                      ------   -------   ------
<S>                                   <C>      <C>       <C>
Income (loss) before income taxes:
     U.S.                             $8,321   $ 1,902   $8,787
     Foreign                             972    (1,058)    (346)
                                      ------   -------   ------
                                      $9,293   $   844   $8,441
                                      ======   =======   ======

Current:
     Federal                              --       264      942
     State                                10        34       81
     Foreign                              --        --       92
                                      ------   -------   ------
                                          10       298    1,115
                                      ------   -------   ------
Deferred:
     Federal                           3,345       456    1,276
     State                               698        74      197
     Foreign                            (537)     (192)     262
                                      ------   -------   ------
                                       3,506       338    1,735
                                      ------   -------   ------

                                      $3,516   $   636   $2,850
                                      ======   =======   ======
</TABLE>

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 for the years ended December 31, 1997, 1996 and 1995,
as follows:

<TABLE>
<CAPTION>

                                                 December 31
                                          ------------------------
                                           1997     1996     1995
                                          ------   ------   ------
<S>                                       <C>      <C>      <C>

Provision computed at statutory rate      $3,161   $  287   $2,870
Increase (decrease) resulting from:
     State tax, net of federal benefit       433       71      278
     Foreign taxes                           (63)     (95)     (38)
     Goodwill                                (93)    (127)    (217)
     Meals and entertainment                 113      100       92
     Change in valuation allowance            --      328       --
     Other                                   (35)      72     (135)
                                          ------   ------   ------

                                          $3,516   $  636   $2,850
                                          ======   ======   ======
</TABLE>

Deferred tax assets (liabilities) are comprised of the following at December 31,
1997 and 1996:

                                      F-22
<PAGE>

<TABLE>
<CAPTION>


                                                  December 31
                                              -------------------
                                                1997       1996
                                              --------   --------
<S>                                           <C>        <C>
Deferred tax assets:
     Deferred expenses                        $  1,210   $  1,116
     Capital loss carryforwards                    660        618
     Deferred currency loss                        304         --
     Net operating loss carryforwards           14,417     14,732
     Investment tax credit carryforwards           384        439
     Other                                         650        156
     Valuation allowance                        (3,166)    (2,916)
                                              --------   --------
Gross deferred tax assets                       14,459     14,145
                                              --------   --------

Deferred tax liabilities:
     Accrual to cash adjustment                (36,280)   (31,567)
     Deferred currency gain                       (235)      (533)
     Fixed asset basis differences             (15,255)   (15,318)
     Investment in foreign subsidiary           (1,749)    (1,178)
     Other                                      (2,094)    (2,957)
                                              --------   --------
Gross deferred tax liabilities                 (55,613)   (51,553)
                                              --------   --------

Net deferred tax liability                     (41,154)   (37,408)
                                              --------   --------

Deferred income tax liability, current         (35,151)   (31,402)

Deferred income tax liability, non-current      (6,003)    (6,006)
                                              --------   --------

                                              $(41,154)  $(37,408)
                                              ========   ========
</TABLE>

At December 31, 1997 the Company, had approximately $35,657 in net operating
loss carryforwards for federal income tax reporting purposes. The Company's
federal net operating losses begin to expire in 2005.

Included in the valuation allowance is $1.4 million that relates to the deferred
tax assets recorded from acquisitions. Any tax benefits subsequently recognized
for these deferred tax assets will be allocated to goodwill.

At December 31, 1997, Sun Gro-Canada had capital loss carryforwards, net
operating loss carryforwards and investment tax credits of approximately Cdn.
$2,096 (U.S. $1,466), Cdn. $7,247 (U.S. $5,070) and Cdn. $549 (U.S. $384),
respectively, related to Sun Gro-Canada. Their use is limited to future taxable
earnings of Sun Gro-Canada. A substantial valuation allowance has been recorded
against the deferred tax assets associated with the capital loss carryforwards
and the investment tax credits. The capital loss may be carried forward
indefinitely and the net operating loss carryforwards and the investment tax
credits expire as follows (Canadian dollars):

                                      F-23
<PAGE>

<TABLE>
<CAPTION>


                                           Net         Investment
                                        Operating         Tax
Year of Expiration                       Losses         Credits
------------------                      ---------      ----------
<S>                                     <C>            <C>

       1998                               $6,013          $ 90
       1999                                   --           165
       2000                                  713           150
       2001                                   --           123
       2002                                  521            21
       2003                                   --            --
                                          ------          ----

                                          $7,247          $549
                                          ======          ====
</TABLE>

13.  Employee Benefit Plans
     ----------------------

Sun Gro sponsors benefit contribution plans for certain salaried U.S. employees,
certain salaried Canadian employees and certain hourly Canadian employees.
Participants of the salaried U.S. investment plan may make voluntary
contributions to the plan up to 15 percent of their compensation (as defined).
Sun Gro contributes five percent of each participant's compensation (as defined)
up to a maximum of $3,500 per participant.

Participants of the salaried and hourly Canadian investment plan must contribute
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) with no maximum for the salaried and hourly plans,
respectively.

The total expense related to these plans was $284, $395 and $368 for the years
ended December 31, 1997, 1996 and 1995, respectively.


14.  Related Party Transactions
     --------------------------

During the year ended December 31, 1995, Hines and Sun Gro paid management fees
of $789 to certain individuals who through affiliates were the former owners of
the Company. During 1995, Hines and Sun Gro paid a total of $140 to these
individuals to cover administrative expenses incurred by these individuals for
office space. These expenses are included in general and administrative expenses
in the accompanying financial statements.

During the year ended December 31, 1995, the Company entered into an agreement
to receive financial advisory services from a company controlled by a former
minority shareholder. Under the terms of the consulting agreement, the Company
agreed to pay a financial advisory fee equal to a percent of the amount by which
the value of the common stock of Agri Holdings, Inc., a former subsidiary of
Holdings, exceeded $2.5 million

                                      F-24
<PAGE>

upon the occurrence of a change of control (as defined in the agreement). As a
result of the shareholder transaction described in Note 21, the Company paid
$3.3 million to this related party under the terms of this agreement.

15.  Discontinued Operations
     -----------------------

Sun Gro incorporated its Green Cross division as a wholly-owned subsidiary,
Green Cross Garden Products, Ltd. (GCGP), effective May 31, 1994. Immediately
thereafter, Sun Gro adopted a plan to discontinue operations of GCGP and entered
into an asset purchase agreement with Monsanto Canada, Ltd. (Monsanto). In
accordance with the agreement, Sun Gro agreed to sell to Monsanto the operating
assets of GCGP on January 4, 1995, for an amount equal to $15,800 Cdn. ($11,262
U.S. at December 31, 1994), which resulted in the recognition of a gain in the
amount of $3,307, net of estimated taxes of $1,564.


16.  Extraordinary Losses
     --------------------

During 1995, as a result of retiring long-term debt prior to maturity, the
Company recorded an extraordinary loss of $4,272 less the related estimated
income tax benefit of $1,759. The loss was comprised primarily of unamortized
deferred financing costs and prepayment fees.

In 1993, Sun Gro entered into a combined interest rate and currency swap related
to its former subordinated debt, which was denominated in Canadian dollars. As a
result of the change in ownership described in Note 21, this agreement was
terminated and a fee of $1,030 was paid, which is included as a component of
extraordinary loss in 1995.


17.  Supplemental Cash Flow Information
     ----------------------------------

Supplemental disclosure of non-cash investing and financing activities were as
follows:
<TABLE>
<CAPTION>

                                                December 31
                                         -------------------------
                                          1997     1996     1995
                                         -------  -------  -------
<S>                                      <C>      <C>      <C>

     Fair value of assets acquired       $22,069  $31,822  $20,993
     Liabilities assumed and incurred      2,437    9,907   17,495
                                         -------  -------  -------

     Cash paid                           $19,632  $21,915  $ 3,498
                                         =======  =======  =======
</TABLE>

During the year ended December 31, 1995, minority shareholders exchanged their
shares of common stock in Hines and Sun Gro for $27,953 of common stock of the
Company.

                                      F-25
<PAGE>

On October 20, 1997, the Company issued to Madison Dearborn Capital Partners,
L.P., the controlling stockholder of the Company, a demand note, in an aggregate
principal amount of $2,500,000. On December 16, 1997, this demand note was
subsequently exchanged for Senior Preferred stock and warrants of the Company,
as discussed in Note 11.


18.  Fair Values of Financial Instruments
     ------------------------------------

The Company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:

     Cash
     ----

The carrying amount reported in the balance sheet for cash approximates its fair
value.

     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, 1997 and 1996. 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.

     Redeemable Preferred Stock
     --------------------------

The fair value of the redeemable preferred stock approximates its carrying
value, as the stock was recently issued.

     Off-Balance Sheet Instruments
     -----------------------------

The fair values associated with the foreign exchange contracts and foreign
currency options have been estimated based on broker quotes and published
foreign currency market rates.

The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>


                                                           December 31
                                            ------------------------------------------
                                                     1997                 1996
                                            --------------------  --------------------
                                            Carrying  Estimated   Carrying  Estimated
                                             Amount   Fair Value   Amount   Fair Value
                                            --------  ----------  --------  ----------
<S>                                         <C>       <C>         <C>       <C>

     Cash                                   $  2,543    $  2,543  $    631    $    631
     Short-term debt                          43,102      43,102    29,357      29,357
</TABLE>

                                      F-26
<PAGE>

<TABLE>
<CAPTION>

<S>                                          <C>         <C>       <C>         <C>
     Long-term debt (including
        current portion)                      165,756     177,756   157,666     167,266
     Redeemable preferred
        stock                                  70,682      70,682    54,525      54,525

Off-Balance Sheet Financial Instruments:

     Forward currency
        call options                         $     --    $     --  $    255    $     29

</TABLE>

19.  Valuation and Qualifying Accounts

For the years ended December 31, 1997, 1996 and 1995, activity with respect to
the Company's allowance for doubtful accounts receivable is summarized as
follows:

<TABLE>
<CAPTION>

                                   December 31
                            ------------------------
                             1997     1996     1995
                            ------   ------   ------
<S>                         <C>      <C>      <C>

Beginning balance           $1,019   $1,165   $  622
     Charges to expense        474      225      678
     Amounts written off      (300)    (371)    (135)
                            ------   ------   ------

Ending balance              $1,193   $1,019   $1,165
                            ======   ======   ======
</TABLE>

20.  Geographic Information

Geographic information for the years ended December 31, 1997, 1996 and 1995, is
summarized as follows:
<TABLE>
<CAPTION>

                                                  December 31
                                           -------------------------------
                                             1997        1996       1995
                                           ---------   --------   --------
<S>                                        <C>         <C>        <C>
Net Sales:
     United States
        Sales to unaffiliated customers    $ 191,150   $155,136   $148,355
     Canada
        Sales to unaffiliated customers       10,106      9,187      8,554
        Transfers to other geographic
           areas                              13,852     14,531     16,530
     Eliminations                           ( 13,852)   (14,531)   (16,530)
                                           ---------   --------   --------

                                           $ 201,256   $164,323   $156,909
                                           =========   ========   ========

</TABLE>

                                      F-27
<PAGE>

<TABLE>
<CAPTION>


Operating income:
<S>                        <C>            <C>             <C>
     United States         $ 28,637       $ 21,379        $ 24,438
     Canada                   2,461            545           1,834
     Eliminations                --             --              --
                           --------       --------        --------

                           $ 31,098       $ 21,924        $ 26,272
                           ========       ========        ========

Total assets:
     United States         $241,679       $196,579        $154,486
     Canada                  54,174         54,689          58,489
     Eliminations           (27,034)       (23,753)        (24,431)
                           --------       --------        --------

                           $268,819       $227,515        $188,544
                           ========       ========        ========
</TABLE>

Export sales from the United States totaled $7,872, $6,780 and $6,244 for the
years ended December 31, 1997, 1996 and 1995, respectively.


21.  Shareholder Transaction
     -----------------------

On August 4, 1995, Madison Dearborn Capital Partners, L.P. (MDCP) and certain
members of management who were minority shareholders of Hines and its
subsidiaries (the Management Shareholders) became owners of Holdings in a
transaction in connection with which (i) Hines, Sun Gro-U.S. and Sun Gro-Canada
first each became wholly-owned (direct or indirect) subsidiaries of the Company
through the exchange by the Management Shareholders and other investors of their
minority interests therein for stock of the Company, (ii) MDCP and the
Management Shareholders became the sole shareholders of Holdings through a
merger in which the shareholders of the Company (other than the Management
Shareholders) exchanged their shares for cash, (iii) certain assets were sold to
or acquired from entities owned by certain of the current and/or former
shareholders of the Company and (iv) Hines, Sun Gro-U.S. and Sun Gro-Canada
incurred $35.8 million of indebtedness under the Bank Credit Agreement and Hines
incurred $110 million of indebtedness under a senior subordinated credit
facility, which indebtedness together with MDCP's equity investment was used to
pay off certain existing indebtedness of the Company, to pay the consideration
owing to the shareholders of the Company who exchanged their shares for cash in
the merger, and to pay related fees and expenses. On October 19, 1995, Hines
refinanced the $110 million indebtedness under the senior subordinated credit
facility referred to above and reduced the balance outstanding on its revolving
lines of credit by issuing $120 million of Senior Subordinated Notes due in
2005.

The transaction was accomplished by the Management Shareholders and certain
other investors exchanging their stock in Hines and certain of its subsidiaries
for stock in Holdings, followed by the merger of a newly formed company (in
which MDCP was the

                                      F-28
<PAGE>

sole shareholder) into the Company. In the merger, the shareholders of Holdings
other than the Management Shareholders received cash for their stock, and MDCP
and the Management Shareholders became the sole shareholders of Holdings.
Immediately following the merger, the Management Shareholders exchanged a
portion of their stock in the Company with MDCP for cash.

The financial statements for the year ended December 31, 1995 reflect purchase
accounting for the exchange by the Management Shareholders and other investors
of their minority interests for stock of Holdings. The repurchase by Holdings of
its own stock from shareholders (other than the Management Shareholders) was
recorded as a repurchase and retirement of treasury stock.


22.  Guarantor/Non-guarantor Disclosures
     -----------------------------------

The 11.75% Senior Subordinated Notes issued by Hines Horticulture (the issuer)
have been guaranteed by Holdings (the parent guarantor) and by Sun Gro-U.S. (the
subsidiary guarantor). The issuer and the subsidiary guarantor are wholly-owned
subsidiaries of the parent guarantor and the parent and subsidiary guarantees
are full, unconditional, and joint and several. Separate financial statements of
Hines and Sun Gro-U.S. are not presented and Hines and Sun Gro-U.S. are not
filing separate reports under the Securities Exchange Act of 1934 because
management believes that they would not be material to investors. The Senior
Subordinated Notes are not guaranteed by Hines II, Sun Gro-Canada or their
respective present or future subsidiaries.

The following condensed consolidating information shows (a) Holdings on a parent
company basis only as the parent guarantor (carrying its investment in
subsidiary under the equity method), (b) Hines as the issuer (carrying its
investment in its subsidiary under the equity method), (c) Sun Gro-U.S. as
subsidiary guarantor (carrying its investment in Sun Gro-Canada under the equity
method), (d) Hines II and Sun Gro-Canada as subsidiary non-guarantors, (e)
eliminations necessary to arrive at the information for the parent guarantor and
its direct and indirect subsidiaries on a consolidated basis and (f) the parent
guarantor on a consolidated basis as follows:

     .  Condensed consolidating balance sheets as of December 31, 1997 and 1996;

     .  Condensed consolidating statements of income and condensed consolidating
        statements of cash flows for the years ended December 31, 1997, 1996 and
        1995.

                                      F-29
<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

  Consolidating Condensed Balance Sheet
  As of December 31, 1997
  (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                      Sun Gro Canada
                                   Hines                   Sun Gro     & Hines II
                                  Holdings    Hines          U.S.     (Subsidiary
                                  (Parent    Horticulture  (Subsidiary     Non-                    Consolidated
                                  Guarantor)  (Issuer)     Guarantor)   Guarantors)  Eliminations     Total
                                  -----------------------------------------------------------------------------
<S>                               <C>        <C>           <C>         <C>           <C>           <C>
ASSETS
CURRENT ASSETS:
 Cash                             $      -   $    941       $     0     $ 1,602       $      -     $   2,543
 Accounts receivable, net                -      6,253        10,188       4,128              -        20,569
 Inventories                             -     97,202         2,162       6,643              -       108,007
 Prepaid expenses and other
   current assets                        -        842           536         580              -         1,958
 Deferred income taxes                   -         50           804         169         (1,023)            -
                                  --------------------------------------------------------------------------
            Total current assets         -    105,288        13,690      13,122         (1,023)      131,077
                                  --------------------------------------------------------------------------
FIXED ASSETS, net                        -     38,851         4,242      49,313              -        92,406
DEFERRED FINANCING EXPENSES, net         -      4,612           247       1,618              -         6,477
GOODWILL, net                            -     24,021             -      14,838              -        38,859
DEFERRED INCOME TAXES                   16     10,163             -           -        (10,179)            -
INVESTMENTS IN SUBSIDIARIES         55,596      8,925         7,832           -        (72,353)            -
                                  --------------------------------------------------------------------------
                                  $ 55,612   $191,860       $26,011     $78,891       $(83,555)    $ 268,819
                                  ==========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
 Accounts payable                 $      -    $  4,041      $ 1,117     $ 2,888       $      -     $  8,046
 Accrued liabilities                     3       1,971        1,930       1,405              -        5,309
 Accrued payroll and benefits            -       4,930          887         704              -        6,521
 Long-term debt, current portion         -       2,400            -       3,000              -        5,400
 Revolving line of credit                -      36,231        6,871           -              -       43,102
 Deferred income taxes                   -      36,096            0           78        (1,023)      35,151
 Other liabilities                       -           -         (224)         224             -            -
 Intercompany accounts              55,678     (75,804)      (1,308)      21,434             -            -
                                  -------------------------------------------------------------------------
       Total current liabilities    55,681       9,865        9,273       29,733        (1,023)     103,529
                                  -------------------------------------------------------------------------
LONG-TERM DEBT                       1,000     139,856            -       19,500             -      160,356
DEFERRED INCOME TAXES                    -       2,418        1,555       12,209       (10,179)       6,003
CUMULATIVE REDEEMABLE SENIOR
 PREFERRED STOCK                    43,967           -            -            -             -       43,967
CUMULATIVE REDEEMABLE JUNIOR
 PREFERRED STOCK                    26,715           -            -            -             -       26,715
SHAREHOLDERS' EQUITY
 Common stock                          105       3,971       11,413        9,500       (24,884)         105
 Accumulated accretion of cumulative
   redeemable preferred stock
   (in excess) less than additional
   paid-in capital                    (857)     21,364        5,889        1,777       (29,030)        (857)
 Notes receivable from stock sales    (366)         -             -            -             -         (366)
 Retained earnings (deficit)       (70,633)     14,386       (2,119)       6,172       (18,439)     (70,633)
  Total shareholders' equity      -------------------------------------------------------------------------
    (defict)                       (71,751)     39,721       15,183       17,449       (72,353)     (71,751)
                                  -------------------------------------------------------------------------
                                  $ 55,612    $191,860     $ 26,011     $ 78,891      $(83,558)    $268,819
                                  =========================================================================
</TABLE>
                                      F-30
<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

  Consolidating Condensed Balance Sheet
  As of December 31, 1996
  (Dollars in thousands)


<TABLE>
<CAPTION>

                                                                                      Sun Gro
                                              Hines                     Sun Gro        Canada
                                             Holdings      Hines          U.S.       (Subsidiary
                                             (Parent    Horticulture   (Subsidiary       Non-                     Consolidated
                                            Guarantor)     (Issuer)     Guarantor)   Guarantor)    Eliminations      Total
                                            ----------   -----------   -----------   -----------   ------------   ------------
ASSETS
<S>                                         <C>            <C>            <C>           <C>          <C>            <C>
CURRENT ASSETS:
 Cash                                      $      -         $    631      $    91       $   (91)      $      -       $    631
 Accounts receivable, net                         -            5,316        8,679         1,649              -         15,644
 Inventories                                      -           88,361        1,455         5,408              -         95,224
 Prepaid expenses and other current assets        -            1,074        1,027         1,112              -          3,213
 Deferred income taxes                            -               50          603             -           (653)             -
                                           --------         --------      -------       -------       --------       --------
                  Total current assets            -           95,432       11,855         8,078           (653)       114,712
                                           --------         --------      -------       -------       --------       --------
FIXED ASSETS, net                                 -           32,851        4,540        44,479              -         81,870
DEFERRED FINANCING EXPENSES, net                  -            5,020           43         1,289              -          6,352
GOODWILL, net                                     -           23,738            -           843              -         24,581
DEFERRED INCOME TAXES                             -           10,163            -             -        (10,163)             -
INVESTMENTS IN SUBSIDIARIES                  40,296           15,606        7,729             -        (63,631)             -
                                           --------         --------      -------       -------       --------       --------
                                           $ 40,296         $182,810      $24,167       $54,689       $(74,447)      $227,515
                                           ========         ========      =======       =======       ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
 Accounts payable                           $     -         $  4,048      $ 1,426        $2,401       $      -       $  7,875
 Accrued liabilities                              -            2,718        2,190           719              -          5,627
 Accrued payroll and benefits                     -            4,270        1,318           369              -          5,957
 Long-term debt, current portion                  -            2,147            -         2,750              -          4,897
 Revolving line of credit                         -           24,201        5,156             -              -         29,357
 Deferred income taxes                            -           31,942            -           113           (653)        31,402
 Intercompany accounts                       56,671          (65,199)      (9,023)       17,551              -              -
                                           --------         --------      -------       -------       --------       --------
             Total current liabilities       56,671            4,127        1,067        23,903           (653)        85,115
                                           --------         --------      -------       -------       --------       --------
LONG-TERM DEBT                                    -          142,269            -        10,500              -        152,769
DEFERRED INCOME TAXES                             -            2,377        1,235        12,557        (10,163)         6,006
CUMULATIVE REDEEMABLE SENIOR
 PREFERRED STOCK                             30,921                -            -             -              -         30,921
CUMULATIVE REDEEMABLE JUNIOR
 PREFERRED STOCK                             23,604                -            -             -              -         23,604
SHAREHOLDERS' EQUITY
 Common stock                                   102            3,971       11,414                      (15,385)           102
 Additional paid-in capital                   5,600           21,364        5,793         1,777        (28,934)         5,600
 Notes receivable from stock sale              (192)               -            -             -              -           (192)
 Retained earnings (deficit)                (76,410)           8,702        4,658         5,952        (19,312)       (76,410)
                                           --------         --------      -------       -------       --------       --------
  Total shareholders' equity (deficit)      (70,900)          34,037       21,865         7,729        (63,631)       (70,900)
                                           --------         --------      -------       -------       --------       --------
                                           $ 40,295         $182,810      $24,167       $54,689       $(74,447)      $227,515
                                           ========         ========      =======       =======       ========       ========
</TABLE>


                                      F-31
<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

     Consolidating Condensed Statement of Income
     For the year ended December 31, 1997
     (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                          Sun Gro
                                                                                         Canada &
                                                   Hines                     Sun Gro     Hines II
                                                  Holding       Hines          U.S.     (Subsidiary
                                                  (Parent    Horticulture  (Subsidiary      Non-                   Consolidated
                                                 Guarantor)    (Issuer)     Guarantor)  Guarantors)  Eliminations      Total
                                                 ---------   ------------  -----------  -----------  ------------  ------------
<S>                                              <C>         <C>           <C>          <C>          <C>           <C>
SALES, NET                                         $  --       $126,193      $63,685      $25,320      $(13,852)     $201,256
COST OF GOODS SOLD                                    --         63,524       33,980       15,755       (13,852)       99,407
                                                   -----       --------      -------      -------      --------      --------
                                   Gross Profit       --         62,669       29,705        9,475            --       101,849
OPERATING EXPENSES                                    --         33,647       30,380        6,724            --        70,751
                                                   -----       --------      -------      -------      --------      --------
                               Operating income       --         29,022         (675)       2,751            --        31,098
                                                   -----       --------      -------      -------      --------      --------
OTHER EXPENSES:
    Interest                                          39         18,831          708        1,130            --        20,708
    Interest--intercompany                            --         (1,036)         889          147            --            --
    Other, net                                        --            739           48          310            --         1,097
                                                   -----       --------      -------      -------      --------      --------
                                                      39         18,534        1,645        1,587            --        21,805
                                                   -----       --------      -------      -------      --------      --------
Income (loss) before provision for income taxes      (39)        10,488       (2,320)       1,164            --         9,293
PROVISION FOR (RECOVERY OF) INCOME TAXES             (16)         4,196         (239)        (425)           --         3,516
                                                   -----       --------      -------      -------      --------      --------
NET INCOME (LOSS)                                  $ (23)      $  6,292      $(2,081)     $ 1,589      $     --      $  5,777
                                                   =====       ========      =======      =======      ========      ========
</TABLE>

     Consolidating Condensed Statement of Income
     For the year ended December 31, 1996
     (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                          Sun Gro
                                                   Hines                     Sun Gro       Canada
                                                  Holding       Hines          U.S.     (Subsidiary
                                                  (Parent    Horticulture  (Subsidiary      Non-                   Consolidated
                                                 Guarantor)    (Issuer)     Guarantor)  Guarantors)  Eliminations      Total
                                                 ---------   ------------  -----------  -----------  ------------  ------------
<S>                                              <C>         <C>           <C>          <C>          <C>           <C>
SALES, NET                                         $  --       $ 92,214      $62,922      $23,718      $(14,531)     $164,323
COST OF GOODS SOLD                                    --         45,650       33,544       16,149       (14,531)       80,812
                                                   -----       --------      -------      -------      --------      --------
                                   Gross Profit       --         46,564       29,378        7,569            --        83,511
OPERATING EXPENSES                                    --         26,393       28,170        7,024            --        61,587
                                                   -----       --------      -------      -------      --------      --------
                               Operating income       --         20,171        1,208          545            --        21,924
                                                   -----       --------      -------      -------      --------      --------
OTHER EXPENSES:
    Interest                                          --         18,420          536        1,184            --        20,140
    Interest--intercompany                            --           (672)         552          120            --            --
    Other, net                                      (208)         1,485          867          299        (1,503)          940
                                                   -----       --------      -------      -------      --------      --------
                                                    (208)        19,233        1,955        1,603        (1,503)       21,080
                                                   -----       --------      -------      -------      --------      --------
Income (loss) before provision for income taxes      208            938         (747)      (1,058)        1,503           844
PROVISION FOR (RECOVERY OF) INCOME TAXES              --            730           98         (192)           --           636
                                                   -----       --------      -------      -------      --------      --------
NET INCOME (LOSS)                                  $ 208       $    208      $  (845)     $  (866)     $  1,503      $    208
                                                   =====       ========      =======      =======      ========      ========
</TABLE>


                                     F-32

<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

        Consolidating Condensed Statement of Income
        For the year ended December 31, 1995
        (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                                Sun Gro
                                                           Hines                    Sun Gro     Canada
                                                          Holdings     Hines          U.S.    (Subsidiary
                                                          (Parent   Horticulture  (Subsidiary     Non-                  Consolidated
                                                         Guarantor)   (Issuer)     Guarantor)  Guarantor)   Eliminations   Total
                                                         -------------------------------------------------------------------------
<S>                                                     <C>          <C>           <C>          <C>         <C>          <C>
SALES, NET                                               $            $87,222       $61,133     $25,084      $(16,530)    $156,909
COST OF GOODS SOLD                                             -       42,874        30,886      15,015       (16,530)      72,245
                                                         -------------------------------------------------------------------------
                                    Gross Profit               -       44,348        30,247      10,069             -       84,664
OPERATING EXPENSES                                             -       24,786        25,371       8,235             -       58,392
                                                         -------------------------------------------------------------------------
                                Operating income               -       19,562         4,876       1,834             -       26,272
                                                         -------------------------------------------------------------------------
OTHER EXPENSES:
 Interest                                                      -       11,031           486       1,757             -       13,274
 Interest - intercompany                                       -         (343)          284          59             -            -
 Other, net                                               (2,427)       1,021        (1,269)        364         6,868        4,557
                                                         -------------------------------------------------------------------------
                                                          (2,427)      11,709          (499)      2,180         6,868       17,831
                                                         -------------------------------------------------------------------------
Income (loss) before provision for income taxes,
 minority interest, income from discontinued
 operations and extraordinary loss                         2,427        7,853         5,375        (346)       (6,868)       8,441
PROVISION FOR INCOME TAXES                                     -        1,655           841         354             -        2,850
                                                         -------------------------------------------------------------------------
Income (loss) before minority interest, income
 from discontinued operations and
 extraordinary loss                                        2,427        6,198         4,534        (700)       (6,868)       5,591
MINORITY INTEREST IN EARNINGS OF
 SUBSIDIARIES                                                  -            -             -           -         3,958        3,958
                                                         -------------------------------------------------------------------------
Income (loss) before income from discontinued
 operations and extraordinary loss                         2,427        6,198         4,534        (700)      (10,826)       1,633
INCOME FROM DISCONTINUED OPERATIONS,
 net of tax                                                    -            -             -      (3,307)            -       (3,307)
                                                         -------------------------------------------------------------------------
Income (loss) before extraordinary loss                    2,427        6,198         4,534       2,607       (10,826)       4,940
Extraordinary loss, net of tax                                 -        1,101           176       1,236             -        2,513
                                                         -------------------------------------------------------------------------
NET INCOME (LOSS)                                        $ 2,427      $ 5,097       $ 4,358     $ 1,371      $(10,826)    $  2,427
                                                         =========================================================================

</TABLE>

                                     F-33
<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

       Consolidating Condensed Statement of Cash Flows
       For the year ended December 31, 1997
       (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                         Sun Gro Canada
                                            Hines                          Sun Gro         & Hines II
                                           Holdings         Hines            U.S.         (Subsidiary
                                           (Parent      Horticulture     (Subsidiary          Non-                      Consolidated
                                          Guarantor)      (Issuer)        Guarantor)      Guarantors)    Eliminations       Total
                                          -----------------------------------------------------------------------------------------
<S>                                       <C>            <C>              <C>              <C>             <C>            <C>
CASH PROVIDED BY (USED IN)
 OPERATING ACTIVITIES:                    $(9,858)       $   2,483        $ (6,998)        $  6,965        $ 9,595        $   2,187
                                          -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of fixed assets                      -           (7,300)           (741)          (2,089)             -          (10,130)
  Sales proceeds                                -              154               -                -              -              154
  Acquisitions, net of cash                     -                -               -          (19,632)             -          (19,632)
  Proceeds from insurance claims                -            1,194               -                -              -            1,194
  Purchase of fixed assets from insurance
   claims proceeds                              -           (1,324)              -                -              -           (1,324)
                                          -----------------------------------------------------------------------------------------
    Net cash used in investing activities       -           (7,276)           (741)         (21,721)             -          (29,738)
                                          -----------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings on revolving line of credit        -          153,378          66,810                -              -          220,188
  Repayments on revolving line of credit        -         (141,348)        (65,095)               -              -         (206,443)
  Intercompany advances (repayments)            7          (10,605)         10,893             (295)             -                -
  Proceeds from the issuance of
   long-term debt                               -                -               -           12,000              -           12,000
  Repayments of long-term debt                  -           (2,160)              -           (2,750)             -           (4,910)
  Deferred financing costs                      -             (331)           (257)            (635)             -           (1,223)
  Dividends received (paid)                     -            6,169          (6,169)               -              -                -
  Repurchase and retirement of stock          (75)               -               -                -              -              (75)
  Issuance of preferred and common stock    9,926                -              95            9,500         (9,595)           9,926
                                          -----------------------------------------------------------------------------------------
    Net cash provided by (used in)
     financing activities                   9,858            5,103           6,277           17,820         (9,595)          29,463
                                          -----------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH                 -              310          (1,462)           3,064              -            1,912
CASH, beginning of year                         -              631               -                -              -              631
                                          -----------------------------------------------------------------------------------------
CASH, end of year                         $     -        $     941        $ (1,462)        $  3,064        $     -        $   2,543
                                          =========================================================================================
</TABLE>

                                     F-34
<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

       Consolidating Condensed Statement of Cash Flows
       For the year ended December 31, 1996
       (Dollars in thousands)
<TABLE>
<CAPTION>

                                           Hines                           Sun Gro       Sun Gro Canada
                                          Holdings          Hines            U.S.         (Subsidiary
                                          (Parent       Horticulture     (Subsidiary          Non-                     Consolidated
                                         Guarantor)       (Issuer)        Guarantor)      Guarantor)     Eliminations      Total
                                         -------------------------------------------------------------------------------------------
<S>                                       <C>             <C>              <C>             <C>             <C>             <C>
CASH PROVIDED BY (USED IN)
 OPERATING ACTIVITIES:                    $  (577)        $ (8,963)        $   884         $ 3,084         $ 4,016         $ (1,556)
                                          -----------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of fixed assets                      -           (5,761)         (1,446)         (1,370)              -           (8,577)
  Acquisitions, net of cash acquired            -          (21,915)              -               -               -          (21,915)
                                          -----------------------------------------------------------------------------------------
    Net cash used in investing
     activities                                 -          (27,676)         (1,446)         (1,370)              -          (30,492)
                                          -----------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from (repayments on)
   revolving line of credit                     -           12,388           4,276               -               -           16,664
  Repayments of long-term debt                  -           (2,459)              -          (1,750)              -           (4,209)
  Deferred financing costs                      -              (87)            (44)           (122)              -             (253)
  Dividends received (paid)                     -            7,427          (7,427)              -               -                -
  Repurchase and retirement of stock         (280)               -               -               -               -             (280)
  Issuance of preferred and
   common stock                            20,612                -           4,016               -          (4,016)          20,612
  Intercompany                            (19,755)          19,820            (132)             67               -                -
  Other                                         -                -             (36)              -               -              (36)
                                          -----------------------------------------------------------------------------------------
    Net cash provided by (used in)
     financing activities                     577           37,089             653          (1,805)         (4,016)          32,498
                                          -----------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH                 -              450              91             (91)              -              450
CASH AND CASH EQUIVALENTS, beginning
   of year                                      -              181               -               -               -              181
                                          -----------------------------------------------------------------------------------------
CASH, end of year                         $     -         $    631         $    91         $   (91)        $     -         $    631
                                          =========================================================================================
</TABLE>

                                     F-35
<PAGE>

21.  Guarantor / Non-guarantor Disclosures - (Continued)

       Consolidating Condensed Statement of Cash Flows
       For the year ended December 31, 1995
       (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                            Sun Gro
                                           Hines                           Sun Gro           Canada
                                          Holdings          Hines            U.S.         (Subsidiary
                                          (Parent       Horticulture     (Subsidiary          Non-                      Consolidated
                                         Guarantor)       (Issuer)        Guarantor)      Guarantors)    Eliminations       Total
                                         ----------     ------------     -----------     --------------  ------------   ------------
<S>                                       <C>            <C>               <C>              <C>            <C>            <C>
CASH PROVIDED BY (USED IN)
 OPERATING ACTIVITIES:                    $  4,000       $  10,608         $(6,649)         $  5,807       $(4,000)       $   9,766
                                          --------       ---------         -------          --------       -------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of fixed assets                       -          (2,970)         (1,007)           (2,290)            -           (6,267)
  Acquisitions, net of cash acquired             -          (3,498)              -                 -             -           (3,498)
                                          --------       ---------         -------          --------       -------        ---------
    Net cash used in investing activities        -          (6,468)         (1,007)           (2,290)            -           (9,765)
                                          --------       ---------         -------          --------       -------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from  (repayments on)
   revolving line of credit                      -          (3,987)         (1,698)                -             -           (5,685)
  Proceeds from the issuance of
   long-term debt                                -         240,000               -            15,000             -          255,000
  Repayments of long-term debt                   -        (146,799)              -           (17,768)        4,000         (160,567)
  Deferred financing costs                       -          (8,257)              -            (1,576)            -           (9,833)
  Repurchase and retirement of stock       (91,833)              -               -                 -             -          (91,938)
  Issuance of preferred and common stock    11,673               -               -                 -             -           11,673
  Intercompany                              76,426         (85,019)          7,583             1,010             -                -
  Other                                       (161)              2             346            (1,307)            -           (1,120)
                                          --------       ---------         -------          --------       -------        ---------
    Net cash provided by (used in)
      financing activities                  (4,000)         (4,060)          6,231            (4,641)        4,000           (2,470)
                                          --------       ---------         -------          --------       -------        ---------

NET INCREASE (DECREASE) IN CASH                  -              80          (1,425)           (1,124)            -           (2,469)
CASH AND CASH EQUIVALENTS,
 beginning of year                               -             101           1,425             1,124             -            2,650
                                          --------       ---------         -------          --------       -------        ---------
CASH AND CASH EQUIVALENTS, end of year    $      -       $     181         $     -          $      -       $     -        $     181
                                          ========       =========         =======          ========       =======        =========
</TABLE>

                                     F-36