HINES HORTICULTURE INC
INTRODUCTION       Hines Horticulture, Inc. ("Hines," the "Company," "we," "our" or "us"), a Delaware corporation, produces and distributes horticultural products through its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries") and Hines Fertilizer, Inc. ("Hines Fertilizer"), formerly known as Enviro-Safe Laboratories, Inc., which no longer actively conducts business. Unless otherwise specified, references to "Hines" or the "Company" refer to Hines Horticulture, Inc. and its subsidiaries.                                          1        Hines is a leading national supplier of ornamental shrubs, color plants and container-grown plants with 13 commercial nursery facilities located in Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and Texas. Hines markets its products to retail and commercial customers throughout the United States and Canada. Hines produces approximately 5,700 varieties of ornamental shrubs and color plants. Hines sells to more than 2,400 retail and commercial customers, representing more than 8,750 outlets throughout the United States and Canada.       On March 27, 2002, the Company completed the sale of its growing media business, Sun Gro Horticulture, Inc. and its wholly owned subsidiary, Sun Gro Horticulture Canada Ltd. (collectively known as "Sun Gro") to Sun Gro Horticulture Income Fund, a newly-established Canadian income fund. The assets sold included 14 facilities located across Canada and the United States and control of approximately 50,000 acres of peat bogs in Canada. We will no longer harvest, produce or sell peat moss or other growing media soil mixes. We received net proceeds of approximately $125 million from the sale, the majority of which were used to pay down outstanding bank debt.       On July 25, 2005, Hines Fertilizer and Hines Nurseries entered into an asset purchase agreement with a non-affiliated third party vendor to sell substantially all of the assets of Hines Fertilizer, excluding cash, accounts receivables and intercompany receivables. The purchase price for the assets was approximately $0.6 million and was paid through the issuance of customer credits for past purchases. The gain on sale of assets was approximately $0.1 million. In accordance with the asset purchase agreement, the Company entered into a three year non-compete agreement, which restricts our ability to own and manage a competing fertilizer company and restricts our Miami production facility's ability to co-brand and market with competing fertilizer companies, unless directly requested by our customers. Upon a change in control of Hines Horticulture or Hines Nurseries, all non-compete restrictions shall cease and no longer be of any effect.       On November 7, 2005, the Company successfully completed the sale of 122 acres of unimproved property in Miami, Florida ("Miami Land Sale") and received net proceeds of $47.0 million. In accordance with the amendment to our Senior Credit Facility, the proceeds from the Miami Land Sale have been used to payoff the entire outstanding balance of the term loan; the residual amount having paid down our revolving credit facility. The Company has entered into a two-year lease agreement with the buyer to lease the property while transitioning operations to other locations. The Company will lease the entire property for a one-year period, with a thirty-day extension right, and will then vacate approximately 33 acres. The Company will lease the remaining 89 acres for an additional one-year period, with extension rights for an additional ninety days, and will then vacate the remaining acreage. The Company will pay the buyer rent of five hundred dollars per outstanding acre, annually, during the lease term. For accounting purposes, the entire gain has been deferred due to our continuing involvement, as defined in Statement of Financial Accounting Standards ("SFAS") No. 98, "Accounting for Leases," in the property.       In April 2003, the Company entered into an option agreement to sell 168-acre nursery property in Vacaville, California. The Company entered into the option agreement because the nursery property is located in an area which the city of Vacaville is planning to develop as a residential project. This agreement was subsequently amended in March 2005 to extend the option term to March 1, 2006 contingent upon payments of $1.8 million during the option term. On March 1, 2006, the buyer exercised its option to purchase the property. Total proceeds from the option agreement and sale of the land will be approximately $16.9 million, with the final payment of $14.3 million due no later than April 3, 2006. Under the terms of the option agreement, Hines is able to transition off the land in three phases from 2006 to 2008. The Company is continuing to develop replacement acreage and infrastructure at our 842-acre Winters facility in Northern California.       The Company's Consolidated Financial Statements included in this Annual Report on Form 10-K reflect the financial position, results of operations and cash flows of the Sun Gro business as "discontinued operations." In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," the Company's Consolidated Financial Statements have been restated to reflect the financial position, results of operations and cash flows of the Sun Gro business as "discontinued operations."  HISTORY    OWNERSHIP       James W. Hines Sr. founded Hines in 1920 in San Gabriel, California. Hines was a family owned business until its acquisition by the Weyerhauser Company in 1976. Hines was sold in 1990 to a private investment group and certain members of our management. In August 1995, Hines was acquired by Madison Dearborn Capital Partners, L.P. ("MDCP"), a private equity investment firm and certain members of our management. On June 22, 1998, Hines completed an initial public offering of 5.1 million shares of its Common Stock.                                          2   BUSINESS OVERVIEW       Hines is one of the largest commercial nursery operations in North America, producing one of the broadest assortments of container-grown plants in the industry. Hines sells its green goods primarily to the retail segment which includes the premium independent garden centers, as well as the leading home centers and mass merchandisers, such as The Home Depot, Lowe's and Wal-Mart.       Hines produces and markets approximately 5,700 varieties of ornamental, container-grown plants grown primarily for outdoor use, most of which are sold under its Hines Nurseries(TM) and Iverson(TM) trade names. The Company grows most of its product categories at several of its nurseries. However, the Company emphasizes certain product categories at particular nurseries depending on the growing climate conducive to a particular product and on regional customer needs. Most of Hines' revenues fall into the following variety categories for the years ended December 31:   PRODUCT CATEGORY           REPRESENTATIVE PRODUCTS                           2005        2004       2003 - -------------------------- --------------------------------------------- ----------- ----------- ----------     Evergreens    Broadleafs              Azalea, boxwood, camellia, euonymous, holly          24%         24%        21%     Conifers                Pines, spruce, junipers                               7%          7%         7%  Deciduous Plants           Barberry, dogwood, forsythia, spirea                  8%          8%         7%  Flowering Color Plants     Perennials, Annual bedding plants,                                Tropical flowering plants, bulbs                 54%         54%        60%  Other                      Ferns, trees                                          7%          7%         5%                                                                           ----------- ----------- ----------                                                                                100%        100%       100%                                                                          =========== =========== ==========        Since 1993, Hines has added numerous plant varieties to its product line. Hines has also successfully developed patio-ready type products, which it markets under the names of Patio Tropics(TM) and Festival Pots(TM). These products generally command premium prices and improved profit margins compared with other plants offered by the Company.       Plants (other than annual bedding plants) are produced by propagating young plants called "liners" using cuttings from mature plants. Using propagation techniques for each specific crop with respect to growing media, hormonal stimulation and growing conditions, these cuttings are cultivated into viable liners and are then transplanted into one gallon containers. These plants are placed in the nursery for six to 24 months until they reach certain specified sizes and levels of maturity, according to market demand, and are sold at different price points depending on their size and levels of maturity. During the field growing stages, plants are typically pruned by mechanized pruning machines that are designed for specific plant categories and watered and fertilized by integrated irrigation and fertilization systems, which are closely monitored and regulated to ensure consistency and quality.       The Company's water and fertilizer recycling systems are designed to minimize the costs of these elements and maximize water conservation. Each of the Company's facilities has infrastructure and procedures in place to protect its growing stock from most frost, snow and freezing conditions typically prevailing at these facilities.       To produce annual bedding plants, a nursery either buys and germinates seeds to produce small plants, called "plugs," or purchases plugs from specialized plug producers. The plugs are then transplanted to bedding packs, gallon hanging baskets and containers of various sizes. The growth cycle of color plants is typically less than one year, with many color plants having a growing season as short as eight to 16 weeks, allowing certain of the Company's nurseries to produce approximately three to four inventory turns per year. As with ornamental plants, the Company applies controlled watering and fertilizing in order to ensure high quality.                                          3   CUSTOMERS. Our retail customers include home centers, mass merchandisers, independent garden centers and garden center chains. The following table sets forth the estimated percentage of Hines' net sales by customer type for the period indicated:                                                        YEARS ENDED DECEMBER 31,                 CUSTOMER TYPE                        2005       2004       2003                 -------------                        ----       ----       ----  Home centers.................................         65%        63%        63% Mass merchandisers...........................         13         16         17 Independent garden centers...................         13         11         10 Garden center chains.........................          3          4          5 Re-wholesalers...............................          4          4          4 Landscapers and others.......................          2          2          1                                                     -------    ------     ------             Total.............................        100%       100%       100%                                                     =====      =====      =====       Our management believes the Company enjoys competitive advantages in selling into these channels due to its ability to provide a broad assortment of consistently high quality products in large volumes, its nationwide distribution and its value-added services such as custom labeling, bar-coding, full electronic data interchange and technical support. Our management expects to participate in the overall growth of these channels to a greater extent than its competitors that do not offer such services. Hines' top ten customers accounted for approximately 78%, 77% and 78% of its net sales in 2005, 2004 and 2003, respectively. Hines' largest customer, The Home Depot, accounted for approximately 47%, 45% and 47% of its net sales in 2005, 2004 and 2003, respectively. Hines' next largest customer, Lowe's Companies, Inc., accounted for approximately 17%, 16% and 14% of its net sales in 2005, 2004 and 2003, respectively. No other customer accounted for more than 10% of net sales.       DISTRIBUTION. Hines distributes its products directly from its nursery sites to its retail customers primarily through common carriers and through the Company's fleet of approximately 150 trucks, 30 of which are owned and the balance of which are leased. The Company believes that common carriers are available to accommodate seasonal delivery peaks. The Company uses a variety of product shipping techniques, such as specialized shelving, protective racks and special loading techniques. Nursery products are distributed nationwide, except color plants, which are typically distributed within a 300-mile radius of each nursery.       RESEARCH AND DEVELOPMENT; PATENTS AND TRADEMARKS. Hines' product sourcing and development yield unique plant varieties, which are marketed under a trade name and patented whenever possible. The Company applies for patents on plant varieties that are significantly different from existing varieties. Differences among plant varieties may include coloration, size at maturity or hardiness in drought or cold conditions. These varieties command higher prices, provide higher unit margins and enhance the Company's reputation as a product innovator. The Company's expenses associated with research and development are not material and are recorded in selling and distribution expenses.       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 44 patents, with 9 patent applications pending. The Company's management does not believe that the loss of any particular patent would have a material adverse effect on the Company.       PRODUCTION. Raw materials consist of starter materials, containers and soil mixtures. The Company's management believes that there are alternate sources of supply readily available.       SALES AND MARKETING. Most of Hines' facilities have separate sales forces, which include a sales manager, in-house customer service representatives, direct sales consultants and various support personnel. As of December 31, 2005, Hines employed approximately 300 direct sales consultants, key account managers, market area managers and merchandisers. National accounts are serviced through "National Account Task Teams" comprised of a senior management member and direct sales personnel from each nursery supplying the account. Hines 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 the breadth of product offering, consistent product quality and availability, customer service and price. The nursery products segment is highly fragmented. According to the 2002 Census of Agriculture released in June 2004 by the U.S. Department of Agriculture's National Agricultural Statistics Service, the nursery business is comprised of                                          4   approximately 60,000 primarily small and regionally based growers. 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 Color Spot in the West, Clinton Nurseries in the Northeast, Zelenka Nurseries in the Midwest, Wight Nurseries in the South and many other smaller regional and local growers. Hines' key competitive advantages are its ability to provide consistent, high quality products in large volumes, its nationwide distribution and its value-added services.  SEASONALITY       Our business is highly seasonal in nature, with most of sales typically occurring in the first half of the year. In particular, our sales are strongest in the second quarter, which corresponds to the Spring gardening season. In 2005, approximately 74% of net sales and approximately 165% of operating profits occurred in the first half of the year. Approximately 54% of net sales and approximately 151% of operating profits occurring in the second quarter of 2005. The table below sets forth the Company's quarterly net sales, as a percentage of total year net sales, for the periods indicated:                                               PERCENTAGE OF TOTAL NET SALES                                              -----------------------------                                              2005        2004         2003                                              ----        ----         ----                First Quarter                  20%         18%          17%                Second Quarter                 54          54           56                Third Quarter                  15          15           15                Fourth Quarter                 11          13           12                                              ----        ----         ----                                              100%        100%         100%                                              ====        ====         ====  GOVERNMENT REGULATION       The Company is subject to certain United States federal, state and local provincial health, safety and environmental laws and regulations regarding the production, storage and transportation of certain products and the disposal of its wastes. The Environmental Protection Agency ("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. In the ordinary course of business, the Company uses substances that are regulated or may be hazardous under environmental laws. The Company does not anticipate that future expenditures for compliance with such environmental laws and regulations will have a material adverse effect on the Company's financial position, results of operations or competitive position. The Company cannot give any assurance, however, that compliance with such laws and regulations, or compliance with other environmental laws and regulations that may be enacted in the future, will not have an adverse effect on the Company's financial position, results of operations or competitive position.       Hines obtains certain irrigation water supplied to local water districts from facilities owned and operated by the United States acting through the Department of Interior Bureau of Reclamation ("reclamation water"). Federal reclamation laws and regulations govern the use and price of reclamation water, including availability of subsidized water rates. Hines utilizes reclamation water as one of the water supplies for its Northern California and Oregon facilities. The Company's management believes that the nursery operations are in compliance with applicable regulations and it maintains a continuous compliance program; however, changes in law may reduce availability of, or increase the price of, reclamation water to the Company.  EMPLOYEES       As of December 31, 2005, the Company employed approximately 2,940 persons. At the peak of our growing cycle, an additional 1,480 seasonal employees were employed during 2005. All of the Company's employees are non-union, and the Company's management believes that its labor relations are good.
You should carefully consider and evaluate all of the information in this Form 10-K, including the risk factors listed below. The risks described below are the ones we currently deem material, but they may not be the only risks facing our company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations.       The risks described below and the risks described elsewhere in this Form 10-K, including in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," could materially adversely affect our business, prospects, financial condition, operating results or cash flow. If our business is harmed, the trading price of our common stock could decline.                                         5        This Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in these statements. Factors that could contribute to these differences include those discussed below and elsewhere in this Form 10-K. The cautionary statements made in this Form 10-K, including those in the risk factors below, should be read as being applicable to all forward-looking statements wherever they appear. Our operations are subject to a variety of risks and uncertainties and the following risk factors are not to be considered a definitive list of all risks associated with our operations and should be read in conjunction with the risks and uncertainties contained in our other filings with the Securities and Exchange Commission. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The cautionary statements contained in the risk factors below are being made pursuant to the provisions of the Private Securities Litigation Reform Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. We caution investors that any forward-looking statements made by us are not guarantees of future performance and that a variety of factors, including those discussed below, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. The risks and uncertainties which may affect the operations, performance and results of our business are described in more detail below. We undertake no duty to update any of the forward-looking statements after the date of this Form 10-K.  RISKS RELATED TO OUR CAPITAL STRUCTURE  WE HAVE A SUBSTANTIAL AMOUNT OF DEBT OUTSTANDING, WHICH COULD HURT OUR FUTURE PROSPECTS AND PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS.       We have a significant amount of debt outstanding, including 10.25% Senior Notes issued on September 30, 2003, which we refer to as the Senior Notes. As of December 31, 2005, we had total consolidated debt outstanding of $185.1 million. This debt may have several important consequences as it could:            o    make it more difficult for us to satisfy our obligations,                including making scheduled interest payments under the Senior                Notes and other debt obligations;            o    limit our ability to obtain additional financing;            o    increase our vulnerability to adverse general economic                conditions, including changes in interest rates and adverse                changes in the commercial nursery industry conditions;            o    require us to dedicate a substantial portion of our cash flow                from operations to payments on our debt, thereby reducing the                availability of our cash flow for other purposes;            o    limit our flexibility in planning for, or reacting to, changes in                our business and the commercial nursery industry; and            o    place us at a competitive disadvantage compared to our                competitors that have less debt.  THE TERMS OF OUR DEBT MAY LIMIT OUR ABILITY TO PLAN FOR OR RESPOND TO CHANGES IN OUR BUSINESS.       We have an amended Senior Credit Facility that consists of a revolving facility with availability of up to $120.0 million (subject to borrowing base limits) and a term loan facility of up to $40.0 million, which was fully paid down in 2005. Our Senior Credit Facility and the indenture governing the Senior Notes issued by Hines Nurseries contain covenants that restrict our ability to, among other things:            o    incur additional debt or issue certain preferred stock;            o    pay dividends or distributions on, or redeem or repurchase,                capital stock;            o    create liens or negative pledges with respect to our assets;            o    make investments, loans or advances;                                          6             o    make capital expenditures;            o    issue, sell or allow distributions on capital stock of specified                subsidiaries;            o    enter into sale and leaseback transactions;            o    prepay or defease specified debt;            o    enter into transactions with affiliates;            o    enter into specified hedging arrangements;            o    merge, consolidate or sell our assets; or            o    engage in any business other than the commercial nursery                business.       These covenants may affect our ability to operate our business, may limit our ability to take advantage of business opportunities as they arise and may adversely affect the conduct of our current business. A breach of a covenant in our debt instruments could cause acceleration of a significant portion of our outstanding indebtedness.  REPAYMENT OF THE PRINCIPAL OF THE SENIOR NOTES AND OUR OTHER DEBT MAY REQUIRE ADDITIONAL FINANCING. WE ARE NOT CERTAIN OF THE SOURCE OR AVAILABILITY OF ANY SUCH FINANCING AT THIS TIME.       Our anticipated operating cash flows will not be sufficient to repay the principal of the Senior Notes issued by Hines Nurseries and our other debt. Accordingly, in order to pay the principal of the Senior Notes and our other debt, we will be required to refinance our debt, sell our equity securities, sell our assets or take other actions. The foregoing actions may not enable us to pay the principal of the Senior Notes or such other debt or may not be permitted by the terms of our debt instruments then in effect.  RISKS RELATED TO OUR BUSINESS  OUR PRODUCTION OF PLANTS MAY BE ADVERSELY AFFECTED BY A NUMBER OF AGRICULTURAL FACTORS BEYOND OUR CONTROL. IN ADDITION, OUR NURSERY OPERATIONS WERE ADVERSELY AFFECTED BY THE ACUTE TROPICAL WEATHER SEASON THAT PLAGUED THE SOUTHERN AND SOUTH-EASTERN REGIONS OF THE UNITED STATES IN 2005, AND SIGNIFICANT TROPICAL STORMS IN THE FUTURE COULD ADVERSELY IMPACT OUR OPERATIONS.       Our production of plants may be adversely affected by a number of agricultural risks, including disease, pests, freezing conditions, snow, drought or other inclement weather, and improper use of pesticides or herbicides. These factors could cause production difficulties which could damage or reduce our inventory, resulting in sales, profit and operating cash flow declines, which could be material.  INCREASES IN WATER PRICES OR INSUFFICIENT AVAILABILITY OF WATER COULD ADVERSELY AFFECT OUR PLANT PRODUCTION, RESULTING IN REDUCED SALES AND PROFITABILITY.       Plant production depends upon the availability of water. Our nurseries receive their water from a variety of sources, including on-site wells, creeks, reservoirs and holding ponds, municipal water districts and irrigation water supplied to local districts by facilities owned and operated by the United States acting through the Department of Interior Bureau of Reclamation. The loss or reduction of access to water at any of our nurseries could have a material adverse effect on our business, results from operations and operating cash flows. In addition, increases in our costs for water could adversely impact our profitability and operating cash flows.       Our nursery in Arizona receives its water from on-site wells. Under Arizona's Groundwater Management Act, these wells have been issued "grandfathered non-irrigation water" permits, which limit the amount of groundwater we can use. The availability of water depends on the groundwater aquifer, which at this time, we believe is adequate to supply our needs for this nursery as it is currently operated.       Our Northern California and Oregon nurseries rely primarily on surface water supplies and, therefore, may experience fluctuations in available water supplies and serious reductions in their supplies of surface water in the event of prolonged droughts. If such reductions occur, those nurseries would have to rely on backup water supplies which are more costly than surface water supplies.                                          7        The use and price of water supplied by facilities owned and operated by the Bureau of Reclamation, including availability of subsidized water rates, is governed by federal reclamation laws and regulations. Such water is used at our Northern California nursery and is the source of a substantial majority of the water for our Oregon nursery. While we believe we are in material compliance with applicable regulations and maintain a compliance program, there can be no assurance that changes in law will not reduce availability or increase the price of reclamation water to us. Any such change could have a material adverse effect on our business, financial position, results of operations and operating cash flows.       The reclamation regulations govern who may hold an interest in irrigation lands. Under the reclamation regulations, persons having a direct or indirect beneficial economic interest in us will be treated as "indirect holders" of irrigation land owned by us in proportion to their beneficial interest in us. If any holder of our common stock (whether directly or indirectly through a broker-dealer or otherwise) is ineligible under applicable reclamation regulations to hold an indirect interest in our irrigation land, we may not be eligible to receive reclamation water on this land. Generally, the eligibility requirement of the reclamation regulations would be satisfied by a person:       o    who is a citizen of the United States or an entity established under           federal or state law or a person who is a citizen of or an entity           established under the laws of certain foreign countries (including           Canada and Mexico and members of the Organization for Economic           Cooperation and Development); and       o    whose ownership, direct and indirect, of other land which is qualified           to receive water from a reclamation project, when added to such           person's attributed indirect ownership of irrigation land owned by us,           does not exceed certain maximum acreage limitations (generally, 960           acres for individuals and 640 acres for entities).       While our restated certificate of incorporation contains provisions intended to prohibit ineligible holders of irrigation land from owning our common stock, such provisions may not be effective in protecting our right to continue to use reclamation water.  WE FACE RISKS ASSOCIATED WITH SUDDEN OAK DEATH ("SOD"). QUARANTINES OF OUR PRODUCTS OR OTHER ACTIONS BY FEDERAL AND STATE REGULATORY AUTHORITIES IN RESPONSE TO SUDDEN OAK DEATH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.       SOD is caused by a fungus-like pathogen recently identified by scientists in California and named Phytophthora ramorum ("P. ramorum"). Since its appearance in 1995, P. ramorum has killed thousands of coast live oak, black oak, tan oak and Shreve oak in Northern California. P. ramorum can also infect the leaves and branches of other plants referred to as SOD host plants. Currently, approximately 90 plant species grown by commercial nurseries have been identified as SOD hosts.       In February 2004, as part of the SOD National Nursery Survey, the United States Department of Agriculture (the "USDA") encouraged all states to conduct a survey of nurseries that ship SOD host plants interstate. Accordingly, the California Department of Food & Agriculture ("CDFA") and the USDA conducted joint tests at nurseries located throughout California. On March 9, 2004, two nurseries in California, which we do not own or operate, tested positive for P. ramorum. As a result of these findings certain states declared a quarantine on all plant material coming from California and several others imposed a quarantine on SOD host and associated host plants only.       On March 19, 2004, we took the precautionary measure of voluntarily suspending the shipment of all SOD host plants grown in our California facilities pending the results of the joint CDFA and USDA testing of all interstate shippers, including our facilities. On March 26, 2004, we were notified by the CDFA that all of our California growing facilities had tested negative for P. ramorum. As a result of these findings, the CDFA and the USDA issued SOD Compliance Agreements with our Fallbrook and Irvine facilities, allowing us to ship host and associated host plants interstate, if we meet, and continue to meet, certain inspection requirements. Our Vacaville and Winters facilities are located in a California quarantined county and have continued to operate under the terms of their Compliance Agreement with the CDFA and USDA since 2002. Its Compliance Agreement requires that potential SOD host plants be inspected and tested monthly during the growing season for the presence of the pathogen.                                          8        Currently, our Forest Grove, Oregon facility and all of our California facilities that ship product interstate are SOD-free and are operating under USDA SOD Compliance Agreements. However, if in the future we do test positive for SOD, our products could be subject to quarantine by federal and state regulatory authorities. If this were to occur, we could experience a significant loss of sales and may be required to destroy inventory, which could have a material adverse effect on our business, results from operations, and operating cash flows.  BECAUSE OUR BUSINESS IS HIGHLY SEASONAL, OUR REVENUES, CASH FLOWS FROM OPERATIONS AND OPERATING RESULTS MAY FLUCTUATE ON A SEASONAL AND QUARTERLY BASIS.       Our business is highly seasonal. The seasonal nature of our operations results in a significant increase in our working capital during the growing and selling cycles. As a result, operating activities during the first and fourth quarters use significant amounts of cash, and in contrast, operating activities for the second and third quarters generate substantial cash as we ship inventory and collect accounts receivable. We have experienced, and expect to continue to experience, significant variability in net sales, operating cash flows and net income on a quarterly basis. One significant factor contributing to this variability is weather, particularly on weekends during the peak gardening season in the second quarter. Unfavorable weather conditions during the peak gardening season could have a material adverse effect on our net sales, cash flows from operations and operating income.       Other factors that may contribute to this variability include:            o    shifts in demand for live plant products;            o    changes in product mix, service levels and pricing by us and our                competitors;            o    period-to-period changes in holidays;            o    the economic stability of our retail customers; and            o    our relationship with each of our retail customers.  BECAUSE WE DEPEND ON A CORE GROUP OF SIGNIFICANT CUSTOMERS, OUR SALES, CASH FLOWS FROM OPERATIONS AND RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED IF OUR KEY CUSTOMERS REDUCE THE AMOUNT OF PRODUCTS THEY PURCHASE FROM US.       Our top ten customers together accounted for approximately 78% of our net sales in 2005. Our largest customer, The Home Depot, accounted for approximately 47% and our second largest customer, Lowes Companies, Inc., accounted for approximately 17% of our 2005 net sales. We expect that a small number of customers will continue to account for a substantial portion of our net sales for the foreseeable future. We do not have long-term contracts with any of our retail customers, and they may not continue to purchase our products.       The loss of, or a significant adverse change in, our relationship with The Home Depot, Lowes Companies, Inc. or any other major customer could have a material adverse effect on us. The loss of, or a reduction in orders from, any significant retail customers, losses arising from retail customers' disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major retail customer could have a material adverse effect on us. In addition, revenue from customers that have accounted for significant revenue in past periods, individually or as a group, may not continue, or if continued, may not reach or exceed historical levels in any period.  WE FACE INTENSE COMPETITION, AND OUR INABILITY TO COMPETE EFFECTIVELY FOR ANY REASON COULD ADVERSELY AFFECT OUR BUSINESS.       Our competition varies by region, each of which is highly competitive. Although many of our largest customers are national retailers, buying decisions are generally made locally by our customers. We compete primarily on the basis of breadth of product mix, consistency of product quality, product availability, customer service and price. We generally face competition from several local companies and usually from one or two regional companies in each of our current markets. Competition in our existing markets may also increase considerably in the future. Some of our competitors may have greater market share in a particular region or market, less debt, greater pricing flexibility or superior marketing or financial resources. Increased competition could result in lower profit margins, substantial pricing pressure, reduced market share and lower operating cash flows. Price competition, together with other forms of competition, could have a material adverse effect on our business, financial position, results of operations and operating cash flows.                                          9   OUR NURSERY FACILITY IN IRVINE, CALIFORNIA IS ENTIRELY ON LEASED LAND AND WE DO NOT EXPECT THE LEASES TO BE EXTENDED BEYOND THEIR CURRENT TERMS.       Our 542-acre nursery facility and headquarters in Irvine, California are entirely on leased land. In 2003, we entered into an amended lease agreement for this facility in which 63 new acres were added and the lease expiration schedule was changed. Under the amended lease agreement, the lease on 114 acres expires on June 30, 2006, the lease on 140 acres expires on December 31, 2006, and the lease on the remaining 288 acres expires on December 31, 2010. We do not expect these leases to be extended beyond their current terms. For the 254 acres that will expire in 2006, we are developing plans to transition a majority of the production to our Winters, California facility and the remaining production to the parcel recently added to our facility in Irvine. For the 288 acres that will expire at the end of 2010, we will be required to establish new production facilities or transition production to existing facilities. We may incur substantial costs in connection with the establishment of these new production facilities or the transition of production to existing facilities.       We may not be successful in executing our transition plan or establishing suitable replacement production facilities. If we are unsuccessful in these efforts, our net sales, cash flows and operating income could be materially adversely affected. In addition, when we vacate 254 acres in 2006, we currently estimate that we will incur approximately a total of $0.3 million of removal and remediation costs. We may incur significant expenses beyond what we have forecasted if additional remedial action is required. Significant costs in excess of our estimates could have a material adverse effect on our business, financial position, results of operations and operating cash flow.  OUR ANTICIPATED TRANSITION OF OUR OPERATIONS RESULTING FROM RECENT LAND SALES MAY NOT BE AS SUCCESSFUL AS WE ANTICIPATE AND UNEXPECTED DELAYS AND DIFFICULTIES OR INCREASED COSTS COULD ADVERSELY AFFECT OUR BUSINESS AND PROSPECTS.       In 2005, we sold approximately 122 acres located in Miami-Dade County, Florida (which property we refer to as the Florida Property) and in March 2006 we received notice that an optionee had exercised its option to purchase our 168-acre property in Vacaville, California (which property we refer to as the Northern California Property). Under the terms of the sale for the Florida Property, we are expected to transition our operations located on such property to other locations. In connection with the sale of the Northern California Property, the option agreement provides that we are to transition off the land in three phases from 2006 to 2008. Interruptions or delays in the transitioning from the Florida Property or the Northern California Property could adversely impact our nursery operations and increase our costs. In addition, we could incur significant expenses beyond those which we have forecasted in connection with such relocations. Our failure to effectively manage the transition from these properties or the incurrence of additional related costs beyond those which we forecast could result in a decrease in revenue or other adverse effects in our business and results of operations.  WE ARE SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND REGULATIONS THAT GOVERN, AND IMPOSE LIABILITY, FOR OUR ACTIVITIES AND OPERATIONS. IF WE DO NOT COMPLY WITH THESE LAWS AND REGULATIONS, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED.       We are subject to federal, state and local laws and regulations that govern, and impose liability for, our activities and operations which may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for hazardous substances and other wastes. Some of our nursery operations are conducted near residential developments, which could increase our exposure to liability for the environmental effects of our operations. Our operations have resulted, or may result, in noncompliance with or liability for cleanup under these laws. In addition, the presence of hazardous substances on our properties, or the failure to properly remediate any resulting contamination may adversely affect our ability to sell, lease or operate our properties or to borrow using them as collateral. In some cases, our liability may not be limited to the value of the property or its improvements. We cannot assure you that these matters, or any similar matters that may arise in the future, will not have a material adverse effect on us.       Certain of our operations and activities, such as water runoff from our production facilities and the use of certain pesticides, are subject to regulation by the United States Environmental Protection Agency and similar state and local agencies. These agencies may regulate or prohibit the use of such products, procedures or operations, thereby affecting our operations and profitability. In addition, we must comply with a broad range of environmental laws and regulations. Additional or more stringent environmental laws and regulations may be enacted in the future and such changes could have a material adverse effect on our business.                                          10   WE ARE SUBJECT TO FEDERAL AND STATE "FAIR TRADE" LAWS AND WEIGHTS AND MEASURES REGULATIONS THAT GOVERN AND IMPOSE LIABILITY FOR IMPROPERLY MARKETING, LABELING OR ADVERTISING PLANT CONTAINER SIZE. IF WE DO NOT COMPLY WITH THESE LAWS AND REGULATIONS, OUR BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED.       We are subject to federal and state weights and measures regulations that govern and impose liability for improperly labeling or advertising our plant container sizes. It is common in our industry, at the wholesale and retail levels, to market, label, and advertise container grown nursery stock with varying types of measurements, such as imperial volume or diameter of container. These measurements, although consistent with industry practice, may not represent the exact size of the actual product. If the Federal Trade Commission or any state regulator determines that our current marketing, labeling, or advertising is in violation of "fair trade" laws or weights and measures regulations in their jurisdiction, we may incur significant costs to become compliant, be forced to terminate further shipments of inventory into certain jurisdictions, be fined, or otherwise suffer a material adverse affect on our business.  CHANGES IN LOCAL ZONING LAWS MAY ADVERSELY AFFECT OUR BUSINESS.       We are subject to local zoning laws regulating the use of our owned and leased property. Some of our facilities are located in areas experiencing rapid development and growth, which typically are characterized by changes in existing zoning. Changes in local zoning laws could require us to establish new production facilities or transition production to other facilities, which could have a material adverse effect on our cash flows, financial position and results of operations.  COMPLIANCE WITH, AND CHANGES TO, LABOR LAWS, PARTICULARLY THOSE CONCERNING SEASONAL WORKERS, COULD SIGNIFICANTLY INCREASE OUR COSTS.       The production of our plants is labor intensive. We are subject to the Fair Labor Standards Act as well as various federal, state and local regulations that govern matters such as minimum wage requirements, overtime and working conditions, including, but not limited, to federal and state health and worker safety rules and regulations. A large number of our seasonal employees are paid at or slightly above the applicable minimum wage level and, accordingly, changes in minimum wage laws could materially increase our costs. Non-U.S. nationals comprise a large portion of our seasonal employee workforce and changes to U.S. immigration policies that restrict the ability of immigrant workers to obtain employment in the United States and which may contribute to shortages of available seasonal labor could increase our costs. Non-compliance with applicable regulations or modifications to existing regulations may increase costs of compliance, require a termination of certain activities, result in fines or loss of a portion of our labor force or otherwise have a material adverse impact on our business and results of operations.  OUR TRANSPORTATION COSTS ARE SIGNIFICANT AND WE DEPEND ON INDEPENDENT CONTRACTORS FOR TRUCKING SERVICES TO SHIP LARGE QUANTITIES OF OUR PRODUCTS AND INCREASES IN TRANSPORTATION COSTS, CHANGES IN AVAILABLE TRUCKING CAPACITY AND OTHER CHANGES AFFECTING SUCH CARRIERS, AS WELL AS INTERRUPTIONS IN SERVICE OR WORK STOPPAGES, COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.       We rely extensively on the services of agents and independent contractors to provide trucking services to us. Transportation costs accounted for approximately 24% of our net sales in 2005. Our ability to ship our products, particularly during our peak shipping seasons, could be adversely impacted by shortages in available trucking capacity, changes by carriers and transportation companies in policies and practices, such as scheduling, pricing, payment terms and frequency of service, or increases in the cost of fuel, taxes and labor, and other factors not within our control. We compete with other companies who ship perishable goods for available trucking capacity and, accordingly, reductions in capacity or shortages of the agents and independent contractors who provide trucking services to us could potentially adversely impact our sales. Higher diesel fuel costs and increased third party carrier charges adversely impacted our results of operations during 2005 and future significant increases in transportation costs could have a material adverse effect on our business, particularly if we are not able to pass on such price increases to our customers in the form of higher prices for our products. Material interruptions in service or stoppages in transportation, whether caused by strike or otherwise, could adversely impact our business, results of operations, financial position and operating cash flows.  OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT BE SUCCESSFUL.       Our success is based, in part, upon our ability to discover and develop new products that customers will want. As a result, we continue to invest in research and development in order to enable us to identify and develop new products to meet consumer demands. Despite investments in this area, our research and development may not result in the discovery or successful development of new products which will be accepted by our customers.                                          11   OUR CURRENT PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE OVER OUR BUSINESS AND COULD DELAY, DETER OR PREVENT A CHANGE OF CONTROL OR OTHER BUSINESS COMBINATION.       Investment partnerships controlled by Madison Dearborn Partners, L.P. beneficially own approximately 53% of the outstanding common stock of Hines Horticulture, Inc. and have sufficient voting power to control, or at the least significantly influence, the election of directors and the approval of other actions requiring the approval of our shareholders. In addition, Madison Dearborn Partners has two of its designees on Hines Horticulture, Inc.'s six member board of directors.  OUR BUSINESS WILL SUFFER IF CERTAIN SENIOR EXECUTIVES DISCONTINUE EMPLOYMENT WITH US OR IF WE ARE UNABLE TO RECRUIT AND RETAIN HIGHLY SKILLED STAFF.       Our success is largely dependent on the skills, experience and efforts of our senior management, including Robert A. Ferguson (President and Chief Executive Officer) and Claudia M. Pieropan (Chief Financial Officer, Secretary and Treasurer). The loss of services of one or more members of our senior management could have a material adverse effect on us. We do not maintain key-man life insurance policies on any members of management. No members of senior management are bound by non-compete agreements, and if any such members were to depart and subsequently compete with us, such competition could have a material adverse effect on us. Our business also depends on our ability to continue to recruit, train and retain skilled employees, particularly skilled growers and sales personnel. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.  PRICE INCREASES OF CERTAIN RAW MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.       We are vulnerable to price increases for raw materials. For 2005, raw material costs accounted for approximately 20% of net sales. We do not have long-term contracts with the majority of our raw material suppliers. Increases in the cost of raw materials essential to our operations, including seed, plastic, chemicals and fertilizer, would increase our costs of production. Significant increases in the price of petrochemicals or a scarcity of raw materials essential to plant propagation could have a material adverse effect on our business. We may not be able to pass such price increases on to our customers in the form of higher prices for our products, which could materially adversely affect our results of operations and operating cash flows.  IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS AND PROSPECTS MAY BE HARMED.       Our success depends in part on proprietary techniques and plant designs. Although we attempt to protect our proprietary property and processes through a combination of patents, trade secrets and non-disclosure agreements, these may be insufficient. Litigation may be necessary to protect our intellectual property and determine the validity and scope of the proprietary rights of competitors. Intellectual property litigation could result in substantial costs and diversion of our management and other resources. If we are unable to successfully protect our intellectual property rights, our competitors could be able to market products that compete with our proprietary products without obtaining a license from us.  CHANGES IN CORPORATE GOVERNANCE AND SECURITIES DISCLOSURE AND COMPLIANCE PRACTICES HAVE INCREASED AND MAY CONTINUE TO INCREASE OUR LEGAL COMPLIANCE AND FINANCIAL REPORTING COSTS AND MAY MAKE IT MORE DIFFICULT AND EXPENSIVE TO OBTAIN DIRECTOR AND OFFICER LIABILITY INSURANCE.       The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices. The Sarbanes Oxley-Act of 2002 and related rules and regulations promulgated by the Securities and Exchange Commission have increased, and may continue to increase, our legal compliance and financial reporting costs. These developments may also make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This, in turn, could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers.
Not applicable.                                          12
At December 31, 2005, the Company owned approximately 4,180 acres related to its nursery facilities. In addition, the Company leases approximately 1,270 acres related to its nursery facilities (including leases from Blooming Farm, Inc., an affiliated entity). Approximately 4,000 acres were usable for production, with approximately 2,500 acres currently in production. We believe that our owned and leased facilities are sufficient to meet our operating requirements for the foreseeable future.  The Company's current facilities are identified in the table below:     LOCATION                               DESCRIPTION                             STATUS - --------                               -----------                             ------  Blairsville, Georgia................   43 acre nursery                         Owned (a) Chino Valley, Arizona...............   66 acre nursery                         Owned Danville, Pennsylvania..............   154 acre nursery                        Leased (b) Fallbrook, California...............   261 acre nursery                        Owned/leased (c) Forest Grove, Oregon................   1,013 acre nursery                      Owned/leased (d) Fulshear, Texas.....................   435 acre nursery                        Owned Irvine, California..................   542 acre nursery and headquarters       Leased (e) Miami, Florida......................   334 acre nursery                        Owned/leased (f) Newark, New York....................   37 acre nursery                         Owned Northern California.................   1,389 acre nursery                      Owned (g) Pipersville, Pennsylvania...........   60 acre nursery                         Owned/leased (h) San Joaquin Valley, California .....   57 acre nursery                         Owned/leased (i) Trenton, South Carolina.............   1,001 acre nursery                      Owned/leased (j) Utica, New York.....................   65 acre nursery                         Owned   (a)  Blairsville, Georgia is managed by the Miami, Florida location and they are      both considered to be a single nursery operation. (b)  141 acres are year-to-year and 13 acres expire in 2009. (c)  We own 248 acres and lease 13 acres at this nursery. (d)  We own 668 acres and lease 345 acres at this nursery. (e)  The lease expires with respect to 114 acres in June 2006 and 140 acres in      December 2006. The lease for the remaining acreage does not expire until      December 2010. (f)  We own 212 acres and lease 122 acres at this nursery. (g)  The Northern California nursery consists of sites in Allendale, Vacaville      and Winters, California. In March 2006, an option to purchase 168 acres of      property in Vacaville has been exercised. (h)  We own 31 acres and lease 29 acres at this nursery. (i)  The San Joaquin nursery consists of sites in Chowchilla and Madera,      California. We own 48 acres and lease 9 acres at this nursery. (j)  We own 941 acres and lease 60 acres at this nursery.        In May 2003, we amended the lease for our 479-acre Irvine, California nursery and headquarters. Under the amendment, we agreed to vacate 254 acres covered by the lease in 2006 in exchange for an extension of the term of the lease on 170 acres that was set to expire in September 2003 to December 2010 and the lease of an additional 63 acres contiguous to our existing facility from July 2003 to December 2010. Our landlord also agreed to assist with the costs of developing the new acreage and transition costs of up to $4.0 million, which include payments of $2.0 million and percentage rent credits of up to $2.0 million. The landlord also agreed to assist us with our objective of trying to secure beyond 2010 an acceptable nursery property relatively near our current location in Irvine, California, although we cannot be sure that we will accomplish this objective.         In April 2003, we entered into an option agreement to sell our 168-acre nursery property in Vacaville, California. We entered into the option agreement because the nursery property is located in an area which the city of Vacaville is planning to develop as a residential project. This agreement was subsequently amended in March 2005 to extend the option term to March 1, 2006 contingent upon payments of $1.8 million during the option term. On March 1, 2006, the buyer exercised its option to purchase the property. Total proceeds from the option agreement and sale of the land will be approximately $16.9 million, with the final payment of $14.3 million due no later than April 3, 2006. Under the terms of the option agreement, we are able to transition off the land in three phases from 2006 to 2008. We are continuing to develop replacement acreage and infrastructure at our 842-acre Winters facility in Northern California.         On November 7, 2005, we successfully completed the Miami Land Sale and received net proceeds from the sale of approximately $47.0 million. We will lease the entire property for a one-year period, with a thirty-day extension right, and will then vacate approximately 33 acres. We will lease the remaining 89 acres for an additional one-year period, with extension rights for an                                          13   additional ninety days, and will then vacate the remaining acreage. The terms of the lease agreement require us to pay the buyer rent of five hundred dollars per outstanding acre, annually, during the lease term.
From time to time, the Company is involved in various disputes and litigation matters, which arise in the ordinary course of business. While the litigation process is inherently uncertain and it is possible that the resolution of these disputes and lawsuits may adversely affect the Company's financial position. Our management believes that we are not currently involved in any material legal proceedings and we know of no such proceedings contemplated by governmental authorities.
No matters were submitted to a vote of security holders during the fourth quarter of 2005.                                       PART II
The Common Stock of Hines currently trades on The Nasdaq National Market under the symbol "HORT." As of March 15, 2006, there were 74 registered holders of record of the Company's Common Stock. The following table sets forth the quarterly high and low sale prices of our Common Stock as reported on The Nasdaq National Market for the periods indicated:  Fiscal year ended December 31, 2005                                           High            Low - ----                                         ---------      --------- 1st quarter                                    $4.65          $3.30 2nd quarter                                    $4.36          $3.36 3rd quarter                                    $4.06          $3.18 4th quarter                                    $3.84          $3.10  Fiscal year ended December 31, 2004                                           High            Low - ----                                         ---------      --------- 1st quarter                                    $5.27          $3.68 2nd quarter                                    $5.00          $3.88 3rd quarter                                    $4.35          $2.61 4th quarter                                    $4.15          $2.70        Hines has not paid dividends on its Common Stock in the past and does not presently plan to pay dividends on the Common Stock. The payment of dividends is restricted under the terms of the Company's senior credit agreement and senior subordinated note indenture. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."                                          14        The Company currently maintains its 1998 Long-Term Equity Incentive Plan (the "1998 Stock Plan") under which Common Stock is authorized for issuance to employees and directors upon the exercise of options. As of December 31, 2005, the Company did not have outstanding any options, warrants or rights under any other equity compensation plan. The following table provides aggregate information regarding the shares of Common Stock that may be issued upon the exercise of options, warrants and rights under all of the Company's equity compensation plans as of December 31, 2005.                                        Number of securities to be     Weighted-average     Number of securities remaining                                       issued upon exercise of       exercise price of     available for future issuance                                         outstanding options,          outstanding           under equity compensation                                         warrants and rights         options, warrants      plans (excluding securities                                                                        and rights            reflected in column (a))            Plan Category                         (a)                      (b)                          (c) - -----------------------------------------------------------------------------------------------------------------------     EQUITY COMPENSATION PLANS  APPROVED BY SECURITY HOLDERS:      1998 Long-Term Equity      Incentive Plan                                   869,110     $            6.22                       2,720,100 EQUITY COMPENSATION PLANS NOT  APPROVED BY SECURITY HOLDERS:                             --     $              --                              --                                         -----------------------                               -----------------------                                Total                  869,110                                             2,720,100                                        =======================                               =======================                                          15
The selected financial data presented below as of the end of and for each of the years in the five-year period ended December 31, 2005 has been derived from the consolidated financial statements of Hines Horticulture and its subsidiaries. The consolidated financial statements as of December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005, and the independent registered public accounting firm report thereon, are included elsewhere in this filing. Certain reclassifications have been made in prior periods' financial statements to confirm to fiscal 2005 classifications.                                                                                 YEAR ENDED DECEMBER 31,                                                   --------------------------------------------------------------------------------                                                       2005             2004             2003             2002            2001                                                   ------------     ------------     ------------     ------------     ------------                                                                            (IN THOUSANDS, EXCEPT SHARE DATA)       STATEMENT OF OPERATIONS DATA: Sales, net                                        $    327,913     $    335,168     $    341,189     $    339,359     $    329,048 Cost of goods sold                                     174,580          170,694          170,750          169,807          158,565                                                   ------------     ------------     ------------     ------------     ------------  Gross profit                                           153,333          164,474          170,439          169,552          170,483 Operating expenses                                     132,599          125,928          125,784          122,338          121,975                                                   ------------     ------------     ------------     ------------     ------------  Operating income                                        20,734           38,546           44,655           47,214           48,508 Other expense, primarily interest expense               24,815           24,510           35,223           33,900           38,188 (Benefit from) provision for income taxes               (1,523)           5,800            3,867            5,456            4,627                                                   ------------     ------------     ------------     ------------     ------------  (Loss) income from continuing operations                (2,558)           8,236            5,565            7,858            5,693 Income (loss) from discontinued operations,   net of tax (a)                                            --               --            4,148           (5,413)          (2,268) Cumulative effect of change in accounting   principle, net of tax (b)                                 --               --               --          (55,148)              --                                                   ------------     ------------     ------------     ------------     ------------  Net (loss) income                                 $     (2,558)    $      8,236     $      9,713     $    (52,703)    $      3,425                                                   ============     ============     ============     ============     ============  EARNINGS (LOSS) PER SHARE:      (Loss) income from continuing operations           Basic                                   $      (0.12)    $       0.37     $       0.25     $       0.36     $       0.26           Diluted                                 $      (0.12)    $       0.37     $       0.25     $       0.36     $       0.26      Net (loss) income           Basic                                   $      (0.12)    $       0.37     $       0.44     $      (2.39)    $       0.16           Diluted                                 $      (0.12)    $       0.37     $       0.44     $      (2.39)    $       0.16  Weighted average shares outstanding -- Basic        22,072,549       22,072,549       22,072,549       22,072,549       22,072,549 Weighted average shares outstanding -- Diluted      22,072,549       22,121,182       22,072,549       22,078,012       22,091,208  SUMMARY CASH FLOW DATA: Net cash provided by operating activities         $      7,074     $     19,012     $     22,963     $     29,712     $     26,551 Net cash provided by (used in) investing   activities                                            40,423           (6,541)           2,464          109,738          (28,886) Net cash (used in) provided by financing   activities                                           (48,035)         (12,574)         (25,157)        (139,450)           2,335  SUPPLEMENTAL DATA: Depreciation and amortization                     $     11,384     $     10,681     $      9,394     $      8,565     $     12,436 Capital expenditures                                    10,258            5,869            5,589            7,209           18,178  BALANCE SHEET DATA (AT END OF PERIOD): Cash and cash equivalents                         $         62     $        600     $        703     $        433     $        676 Working capital                                         94,818           74,634           61,976           12,051          (41,086) Short-term debt                                         10,080           29,328           36,107           90,335          143,159 Total assets                                           388,135          398,329          402,911          406,245          610,820 Long-term debt                                         175,000          203,571          209,287          164,829          209,639 Shareholders' equity                                    58,408           60,966           52,730           41,802           88,745                                                                   16                 NOTES TO SELECTED CONSOLIDATED YEARLY FINANCIAL DATA                              (DOLLARS IN THOUSANDS)   (a)  On March 27, 2002, we sold Sun Gro, our peat moss and soil mix business,      for net proceeds of approximately $125,000, the majority of which we used      to repay indebtedness. Our consolidated financial statements in this filing      reflect the financial position, results of operations and cash flows of the      Sun Gro business as "discontinued operations." For the year ended December      31, 2003, we recognized a $4,148 gain, net of tax of $2,784, from the sale.      For the year ended December 31, 2002, we recognized a $5,562 loss, net of      tax of $10,729, from the sale and a $149 gain, net of tax of $287, from the      operations through the date of the sale. For the year ended December 31,      2001 the loss from discontinued operations of $2,268 represents the loss      from the operations of that period.  (b)  The cumulative effect of change in accounting principle for the year ended      December 31, 2002 of $55,148, net of tax of $23,609, represents the      goodwill impairment charge resulting from the Company's adoption of SFAS      No. 142, "Goodwill and Other Intangible Assets."                                          17
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward looking statements due to factors, including but not limited to, those set forth under "Risk Factors" and elsewhere in this Form 10-K. We assume no obligation to update any of the forward-looking statements after the date of this Form 10-K.  OVERVIEW       We are a leading national supplier of ornamental shrubs, color plants and container-grown plants with 13 commercial nursery facilities located in Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and Texas. We produce approximately 5,700 varieties of ornamental shrubs and color plants and we sell to more than 2,400 retail and commercial customers, representing more than 8,750 outlets throughout the United States and Canada. Hines Horticulture, Inc. produces and distributes horticultural products through its wholly owned subsidiary, Hines Nurseries.  REFINANCING       On September 30, 2003, we refinanced substantially all of our outstanding debt (the "Refinancing"), which included the issuance of $175.0 million of 10.25% Senior Notes ("Notes") due in 2011 and an amended and restated Senior Credit Facility ("Senior Credit Facility") that expires in 2008. Our Senior Credit Facility currently consists of a revolving facility with availability of up to $120.0 million (subject to certain borrowing base limits). Our Refinancing enabled us to extend the maturity of our previous debt, which we believe will provide us with greater financial and operating flexibility in the future. For additional information concerning our Notes and Senior Credit Facility, see "Liquidity and Capital Resources."  SALE OF 122 ACRES IN MIAMI, FLORIDA       On November 7, 2005, we successfully completed the Miami Land Sale and received net proceeds from the sale of approximately $47.0 million. We will lease the entire property for a one-year period, with a thirty-day extension right, and will then vacate approximately 33 acres. We will lease the remaining 89 acres for an additional one-year period, with extension rights for an additional ninety days, and will then vacate the remaining acreage. The terms of the lease agreement require us to pay the buyer rent of five hundred dollars per outstanding acre, annually, during the lease term. For accounting purposes, the entire gain has been deferred due to our continuing involvement, as defined in SFAS No. 98, in the property.  SALE OF 168 ACRES IN VACAVILLE, CALIFORNIA       In April 2003, we entered into an option agreement to sell our 168-acre nursery property in Vacaville, California. We entered into the option agreement because the nursery property is located in an area which the city of Vacaville is planning to develop as a residential project. This agreement was subsequently amended in March 2005 to extend the option term to March 1, 2006 contingent upon payments of $1.8 million during the option term. On March 1, 2006, the buyer exercised its option to purchase the property. Total proceeds from the option agreement and sale of the land will be approximately $16.9 million, with the final payment of $14.3 million due no later than April 3, 2006. Under the terms of the option agreement, we are able to transition off the land in three phases from 2006 to 2008. We are continuing to develop replacement acreage and infrastructure at our 842-acre Winters facility in Northern California.  DISCONTINUED OPERATIONS       In March 2002, we completed the sale of Sun Gro Horticulture, which we refer to as Sun Gro, to a newly established Canadian income fund. We received net proceeds of approximately $125.0 million from the sale, which includes the tax refunds from the Canadian Customs & Revenue Authority ("CCRA") recorded in the fourth quarter of 2002 and third quarter of 2003, the majority of which were used to pay down outstanding indebtedness. As a result of the sale of Sun Gro, we no longer harvest or produce peat moss or other growing soil mixes. Our consolidated financial statements included in this Form 10-K for 2003 reflect the financial position, results of operations and cash flows of Sun Gro as discontinued operations.                                          18   UNITED STATES TAX MATTERS       As a result of our business activities, we qualify for a special exception under the U.S. federal tax code that allows us to use the cash method of accounting for federal income tax purposes. Under the cash method, sales are included in taxable income when payments are received and expenses are deducted as they are paid. We derive significant tax benefits by being able to deduct the cost of inventory as the cost is incurred. As a result of our ability to utilize the cash method of accounting, we have historically generated net operating losses for federal income tax purposes. During the year, we were required to pay federal cash income taxes in the form of alternative minimum tax as a result of the Miami Land Sale. At December 31, 2005, we had $2.6 million in net operating loss carryforwards for federal income tax purposes, which begin to expire in 2024. In addition, we had approximately $6.9 million in net operating loss carryforwards for state income tax reporting purposes. Our state net operating losses in certain states begin expiring in 2008.       Based on our current projections, we anticipate that we will incur tax liability and begin paying cash income taxes for federal purposes in 2006 and 2007. We are currently paying cash income taxes for state income tax purposes in certain states due to the differing rules regarding the utilization of net operating losses.       The use of the cash method of accounting for federal income tax purposes resulted in a current deferred tax liability for accounting purposes. At December 31, 2005, we had a current deferred liability of $66.1 million related to the use of the cash method of accounting. The deferred tax liability is deemed current for accounting purposes because the majority of the items to which this liability relates are comprised of current assets and current liabilities in our balance sheet (such as inventory, accounts receivable and accounts payable). The classification of this liability as a current item, however, does not mean that it is required to be paid within the next twelve months.  CANADIAN TAX MATTERS       In connection with the sale of Sun Gro, the Canadian Customs & Revenue Authority ("CCRA") required that approximately $13.1 million Canadian of the gross proceeds from the transaction be withheld in an escrow account pending the determination of whether certain aspects of the sale were taxable for Canadian purposes. The proceeds withheld were not included in the initial measurement of the loss on the sale of Sun Gro. On November 7, 2002, we filed a tax return, submitted a tax payment of $8.2 million Canadian from the escrow funds and submitted a claim for refund on the basis that the transaction is exempt from tax for Canadian purposes. The balance of the escrow funds of $4.9 million Canadian (US $3.1 million) was then remitted to us and was recorded in the fourth quarter of 2002 as an adjustment to the loss on the sale of Sun Gro. On September 30, 2003, the CCRA completed its assessment of our tax return in which it determined that the transaction was exempt from tax for Canadian purposes and issued a refund to us of all taxes paid, plus accrued interest. We received the refund check of $8.7 million Canadian (US $6.3 million) on October 2, 2003 and recorded it in the third quarter of 2003 as an adjustment to the loss on the sale of Sun Gro.  SEASONALITY       Our business is highly seasonal. The seasonal nature of our operations results in a significant increase in our working capital between the growing and selling cycles. As a result, operating activities in the first and fourth quarters use significant amounts of cash, and in contrast, operating activities in the second and third quarters generate substantial cash as we ship inventory and collect accounts receivable. We have experienced, and expect to continue to experience, significant variability in net sales, operating income and net income on a quarterly basis.  LOVELL FARMS ARBITRATION SETTLEMENT       In connection with the acquisition of Lovell Farms, we agreed, subject to various provisions in the purchase agreement, to make earn-out payments to the sellers ("Claimants") of up to approximately $5.0 million for fiscal 2001 if certain performance thresholds were met. We determined that the thresholds were not met and that no earn-out payment be made. In response to this decision, the Claimants initiated arbitration proceedings, which concluded in May 2004. Going into the hearings, the Claimants demanded that the arbitrator award $5.0 million and payment of their attorney's fees and costs. A final determination was made on July 26, 2004 awarding the Claimants $0.9 million and denying their request for attorney fees and costs. Payment of the $0.9 million increased our goodwill during the third quarter of 2004. Legal defense fees and other costs incurred in connection with the arbitration of $0.5 million were expensed during the fiscal year ended December 31, 2004.                                          19   PHYTOPHTHERA RAMORUM OR SUDDEN OAK DEATH       On September 20, 2004, we announced that our Forest Grove, Oregon facility had suspended the shipment of all plant material known capable of carrying Phytophthora RAMORUM, the plant pathogen known to cause Sudden Oak Death ("SOD"), as a result of receiving an Emergency Action Notification from the U.S. Department of Agriculture ("USDA") stating that a routine inspection had resulted in a positive detection of the pathogen. After several months of testing, it was determined that only two areas within the nursery had been exposed to the pathogen, which resulted in the destruction of approximately $0.5 million, or 1%, of our Oregon inventory. As a result of a trace forward test, we identified that several customers had received product from the two exposed areas, and accordingly, we agreed to assist them with the destruction of the identified inventory. This resulted in customer credits of approximately $0.3 million and lost sales of approximately $1.0 million in 2004. We have also incurred approximately $0.4 million in SOD clean-up costs in 2004. On December 20, 2004, the USDA determined that our Forest Grove, Oregon facility was free of SOD and lifted the Emergency Action Notification. As of December 31, 2005, our Forest Grove, Oregon facility and all of our California facilities are SOD-free and are operating under USDA SOD Compliance Agreements. For additional information concerning SOD, see "Risks Related to Our Business."  PAY BY SCAN       In January 2005, we entered into an agreement with our largest customer to sell a portion of our product under a pay by scan program. Under this program, our customer does not take ownership of the inventory at its stores until the product is scanned at the check out register. Revenue is recorded at the point the store sells our product to its customer. Sales under this program began in February 2005 on a limited basis. Annuals and perennials are the only products impacted by this agreement.  RESULTS OF OPERATIONS  FISCAL YEAR ENDED DECEMBER 31, 2005 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2004       NET SALES. Net sales of $327.9 million for the fiscal year ended December 31, 2005 decreased $7.3 million, or 2.2%, from net sales of $335.2 million in 2004. The decline in net sales was primarily due to lower sales unit volume, partially offset by a slight increase in our overall average unit selling price per unit compared to last year. The decline in sales unit volume of 6.1 million, or 5.9%, from units sold in 2004 was mainly due to the impact of hurricanes Katrina, Rita and Wilma in the South and the Southeastern regions, while the slight price increase was primarily due to improved product mix and the new pay by scan program. Looking at sales from a quarterly perspective:       First quarter net sales in 2005 increased approximately $3.6 million, or 6.0%, from net sales for the comparable period in 2004. The increase in first quarter net sales was a result of improved customer pricing, favorable changes to our product mix and a higher volume of early spring shipments into markets in the East. First quarter net sales in 2005 in the Southwest declined compared to the first quarter in 2004 as southern California and Arizona experienced low consumer demand as a result of record breaking amounts of winter rain. First quarter net sales in 2005 in the Northeast increased compared to the same period in 2004 as a result of the timing of Easter sales, while sales in the Southeast declined mainly as a result of our new pay by scan program, which deferred approximately $0.8 million of net sales from the first quarter of 2005 into the second quarter of 2005.       Second quarter net sales in 2005 decreased approximately $4.2 million, or 2.3%, from net sales for the comparable period in 2004. The decrease in second quarter net sales in 2005 was primarily due to lower sales unit volume offset by an increase in average selling price per unit. Net sales in the Southwest increased during the second quarter of 2005 as the record-breaking winter rains finally dissipated and consumers returned to gardening. Second quarter net sales in 2005 in the Northeast declined as a result of the timing of Easter sales and lower consumer demand for bedding plants. Second quarter net sales in 2005 in the South were down due to fewer assigned customer store locations, while in the Southeast sales were essentially flat compared to second quarter net sales in 2004.       Third quarter net sales in 2005 decreased approximately $2.4 million, or 4.6%, from net sales for the comparable period in 2004. Fourth quarter net sales in 2005 decreased approximately $4.3 million, or 10.2%, compared to the fourth quarter in 2004. Our third and fourth quarter net sales in 2005 have decreased compared to the same periods in 2004 primarily due to lower consumer demand throughout the South and Southeast mainly as a result of hurricanes Katrina, Rita and Wilma.                                          20        GROSS PROFIT. Gross profit of $153.3 million for the fiscal year ended December 31, 2005 decreased $11.1 million, or 6.8%, from gross profit of $164.5 million in 2004. As a percentage of net sales, gross profit for the year decreased to 46.8% compared to 49.1% in 2004. The decline in gross profit and gross profit margin percentage was attributable to lower sales volume, increased scrap as a result of the hurricanes in the third and fourth quarters of 2005 and higher raw material and commodity costs. This was especially true for petroleum-based plastic containers and higher fuel costs. Although we received a minimal increase in our average selling price per unit, it was not significant enough to offset the increased raw material and commodity costs that we experienced during 2005.       SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of $108.9 million for the fiscal year ended December 31, 2005 increased $5.9 million, or 5.7%, from $103.0 million in 2004. Selling expenses for the fiscal year ended December 31, 2005 of $33.0 million decreased $0.3 million, or 0.9%, from a year ago mainly as a result of the cost savings generated from the reorganization carried out in the second quarter of 2005 which included the realignment of certain aspects of management as well as a permanent reduction in headcount, but such cost savings were partially offset by an increase in advertising costs of $0.4 million, as well as an increase in third-party merchandising costs of $0.6 million. Distribution expenses of $75.9 million for the fiscal year ended December 31, 2005 increased $6.2 million, or 8.9%, from $69.7 million for the comparable period in 2004. The increase in distribution expenses was attributable to higher diesel fuel costs and increased third party carrier charges, which were primarily driven by more expensive diesel fuel.       GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of $22.1 million for the fiscal year ended December 31, 2005 decreased $0.2 million, or 1.1%, from $22.3 million in 2004. General and administrative expenses declined as management continued to focus on controlling costs and creating more efficiency during the year.       OTHER OPERATING EXPENSES. Other operating expenses of $1.6 million for the fiscal year ended December 31, 2005 increased $1.0 million, or 168.8%, from $0.6 million in 2004. Other operating expense in 2005 consisted primarily of $1.0 million of consulting fees relating to productivity improvements and severance costs of $0.5 million incurred during our strategic reorganization in the second quarter of 2005.       OPERATING INCOME. Operating income of $20.7 million for the fiscal year ended December 31, 2005 decreased $17.8 million, or 46.2%, from $38.5 million in 2004. The decline in operating income was mainly due to the decrease in gross profit primarily due to the hurricanes in the third and fourth quarters of 2005 and an increase in distribution expenses due to rising fuel costs and common carrier charges.       OTHER EXPENSES. Other expenses of $24.8 million for the fiscal year ended December 31, 2005 increased $0.3 million, or 1.2%, from $24.5 million in 2004. The small increase was due to lower interest rate swap agreement income and deferred financing fees written off in connection with the early termination of our Senior Credit-term loan of $1.1 million. This was offset by a decline in interest expense due to lower overall debt.       INCOME TAX (BENEFIT) PROVISION. Our effective income tax rate was 37.3% and 41.3% for the fiscal years ended December 31, 2005 and 2004, respectively. Benefit from income taxes was $1.5 million for the fiscal year ended December 31, 2005, compared to provision for income taxes of $5.8 million in the fiscal year ended December 31, 2004. The decrease in the effective income tax rate was mainly due to the decrease in earnings before tax to a loss of $4.1 million in 2005 from income of $14.0 million in 2004.       NET (LOSS) INCOME. The net loss of $2.6 million for the fiscal year ended December 31, 2005 decreased by $10.8 million, or 131.1%, from net income of $8.2 million for the comparable period in 2004 as a result of the decline in operating income, as discussed above.  FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2003       NET SALES. Net sales of $335.2 million for the fiscal year ended December 31, 2004 decreased $6.0 million, or 1.8%, from net sales of $341.2 million in 2003. The decline in net sales was primarily due to reduced sales volume, partially offset by 2.3% increase in average net unit selling price. Units sold for the fiscal year ended December 31, 2004 decreased 4.3 million, or 3.9%, from units sold in 2003 mainly due to our strategic decision to consolidate and realign our current customer base. Looking at sales from a quarterly perspective:       First quarter net sales in 2004 increased approximately $1.1 million, or 1.9%, from net sales for the comparable period in 2003. The increase in first quarter net sales in 2004 was due to strong sales of bedding plants and shrubs throughout the Sunbelt markets primarily as a result of favorable weather and our new market strategy. However, net sales slowed at the end of the first quarter in 2004 as the gardening retailers continued their trend of better managing inventory levels by reducing pre-spring stocking orders.                                          21        Second quarter net sales in 2004 decreased approximately $8.3 million, or 4.4%, from net sales for the comparable period in 2003. The decline in second quarter net sales in 2004 was primarily isolated to the Midwest and Southeast markets where consumer demand for color products wavered as a result of excessive rain in May and June of 2004. Compounding the effect of the decline in demand was the inability of two of our east coast facilities to transition perennial and annual color plant sales to new customers as part of a strategic decision to consolidate and realign our customer base.       Third quarter net sales in 2004 decreased approximately $0.1 million, or 0.1%, from net sales for the comparable period in 2003. Third quarter net sales in 2004 in the Sunbelt markets increased $2.9 million as strong spring-like demand continued into July as a result of favorable weather and as we continued to focus on the merchandising of our products. Third quarter 2004 shrub sales in these regions also benefited from a successful joint marketing effort with a major customer. Third quarter 2004 net sales in the Southeast declined $2.0 million compared to the same period in 2003 mainly as a result of hurricanes Charley, Frances, Ivan and Jeanne.       Fourth quarter net sales in 2004 increased approximately $1.2 million, or 2.8%, compared to the fourth quarter in 2003 as we began to see some early signs of recovery in the markets affected by the four hurricanes that hit the Southeast region during the third quarter of 2004. In addition, our holiday crop sales in 2004 were up as a result of incremental store listings in the Southeast.       GROSS PROFIT. Gross profit of $164.5 million for the fiscal year ended December 31, 2004 decreased $6.0 million, or 3.5%, from gross profit of $170.4 million in 2003. As a percentage of net sales, gross profit for the year decreased to 49.1% compared to 50.0% in 2003. The decline in gross profit was mainly due to the decline in net sales volume, which mainly resulted from lower customer demand in the second quarter and the impact of the four major hurricanes during the third quarter of 2004. The decline in gross profit margin was due to higher labor costs, fuel costs and scrap rates on bedding plants, partially offset by a 2.3% increase in average net unit selling price.       SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses of $103.0 million for the fiscal year ended December 31, 2004 increased $1.5 million, or 1.4%, from $101.6 million in 2003. Selling expenses increased $2.6 million, or 8.5%, mainly as a result of increased merchandising costs and total SOD remediation costs at our Oregon facility of approximately $0.6 million. Distribution expenses of $69.7 million for the fiscal year ended December 31, 2004 decreased from $70.9 million for the comparable period in 2003. Distribution expense as a percentage of net sales remained consistent at 20.8% for both periods. Improved logistics, increased payloads and better carrier relations have been effective in mitigating rising fuel costs and increased common carrier charges resulting from new trucking regulations.       GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses of $22.3 million for the fiscal year ended December 31, 2004 decreased $0.3 million, or 1.2%, from $22.6 million in 2003. General and administrative expenses declined as management continued to focus on controlling costs and creating more efficiency.       OTHER OPERATING LOSS. Other operating expenses of $0.6 million for the fiscal year ended December 31, 2004 decreased $1.0 million, or 63.5%, from $1.6 million in 2003. The decline was due to severance costs associated with the resignation of our former Chief Executive Officer in February of 2003, offset by 2004 legal fees of $0.5 million incurred as a result of the Lovell Farms arbitration settlement.       OPERATING INCOME. Operating income of $38.5 million for the fiscal year ended December 31, 2004 decreased $6.1 million, or 13.7%, from $44.7 million in 2003. The decline in operating income in 2004 was mainly due to the decrease in gross profit and increase in selling expense, as discussed above.       OTHER EXPENSES. Other expenses of $24.5 million for the fiscal year ended December 31, 2004 decreased $10.7 million, or 30.4%, from $35.2 million in 2003. The decline in other expenses was mainly due to the $9.2 million loss on debt extinguishment recognized during the third quarter of 2003 as a result of our Refinancing. The improvement was also due to the impact of the mark to market adjustment on our interest rate swap and a $2.0 million decline in the amortization of deferred financing expenses, partially offset by higher interest expense. For the fiscal year ended December 31, 2004, the mark to market adjustment amounted to income of $4.4 million compared with income of $2.7 million for the same period in 2003. Interest expense increased to $27.2 million in 2004 from $24.9 million in 2003 due to our Refinancing, which shifted more of our revolving debt to higher interest rate fixed-term instruments in order to increase availability under our new revolving credit facility.                                          22        INCOME TAX PROVISION. Our effective income tax rate was 41.3% and 41.0% for the years ended December 31, 2004 and 2003, respectively. Provision for income taxes was $5.8 million for the fiscal year ended December 31, 2004, compared to $3.9 million in the fiscal year ended December 31, 2003.       INCOME FROM CONTINUING OPERATIONS. Income from continuing operations of $8.2 million for the fiscal year ended December 31, 2004 increased $2.7 million, or 48.0%, from $5.6 million in 2003. The increase in income from continuing operations was mainly due to the decline in other expenses, partially offset by operating income, as discussed above.       INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income from discontinued operations of $4.1 million for the fiscal year ended December 31, 2003, represented the after tax portion of the $6.3 million received as a result of collecting the receivable for withheld Canadian income taxes from the Canadian government, as discussed above in the section entitled "Canadian Tax Matters." The $6.3 million received included the collection of the $5.1 million receivable for previously withheld Canadian income taxes and $1.2 million due to the favorable exchange rate at the time the receivable was collected.       NET INCOME. Net income of $8.2 million for the fiscal year ended December 31, 2004 decreased by $1.5 million, or 15.2%, from $9.7 million for the fiscal year ended December 31, 2003 as a result of the decline in operating income and change in income (loss) from discontinued operations, partially offset by the improvements in other expenses, as discussed above.  LIQUIDITY AND CAPITAL RESOURCES       Our primary sources of liquidity are funds generated by operations and borrowings under our Senior Credit Facility. The seasonal nature of our operations results in significant fluctuation in certain components of working capital (primarily accounts receivable and inventory) during the growing and selling cycles. As a result, operating activities during the first and fourth quarters use significant amounts of cash, and in contrast, operating activities for the second and third quarters generate substantial cash as we ship inventory and collect accounts receivable.       Net cash provided by operating activities was $7.1 million for the fiscal year ended December 31, 2005 compared to $19.0 million for 2004. The decrease in cash provided by operating activities was mainly due to lower earnings driven by lower gross profit and higher operating expenses. In addition, net cash provided from the interest rate swap agreement decreased in 2005 by $3.5 million compared to 2004, due to the agreement maturing in February 2005. Net cash used in working capital was primarily affected by the increase in inventory levels, partially offset by the decrease in accounts receivable. The increase in inventory for 2005 and the corresponding decrease in accounts receivable was primarily due to lower net sales.       Net cash provided by investing activities was $40.4 million for the fiscal year ended December 31, 2005 compared to net cash used in investing activities of $6.5 million for 2004. The increase in cash provided by investing activities was mainly due to the Miami Land Sale for gross proceeds of approximately $47.9 million. In addition to this, we received $2.0 million in option payments in 2005 related to the sale of our 168-acre nursery property in Vacaville, California. These proceeds were partially offset by an increase in capital expenditures, discussed below.       Our capital expenditures were $10.3 million for the fiscal year ended December 31, 2005 compared to capital expenditures of $5.9 million in 2004. The increase in capital expenditures for the fiscal year ended December 31, 2005 was mainly due to our increased investment in property and equipment as we prepared to transition production capacity from our Irvine facility to our Winters facility in Northern California. In 2006 we expect our capital expenditures to increase due to the land sales at our Miami, Florida and Vacaville, California facilities. The increase in capital expenditures is necessary to transition off of these properties to other facilities. This is in addition to completing the transition of production capacity from our Irvine, California facility to our Winters facility.       Net cash used in financing activities was $48.0 million for the fiscal year ended December 31, 2005 compared to $12.6 million for 2004. The proceeds from the Miami Land Sale were used to pay-off the entire $30.5 million outstanding balance of our term loan and approximately $16.5 million to pay down our revolver and other expenses related to the sale.                                          23        We typically draw down our revolving credit facilities in the first and fourth quarters to fund our seasonal inventory buildup and seasonal operating expenses. Approximately 74% of our sales occur in the first half of the year, generally allowing us to reduce borrowing under our revolving credit facilities in the second and third quarters. On December 31, 2005, we had $10.1 million of borrowings under our working capital revolver, resulting in unused borrowing capacity of $61.6 million after applying the borrowing base limitations to our available borrowings.       At December 31, 2005, we had total indebtedness outstanding of $185.1 million.       As previously mentioned, in 2006 we will receive gross proceeds of approximately $14.3 million related to the sale of land in Vacaville, California, which is incremental to the $2.6 million we have already received as option payments. The majority of the $14.3 million will be used to fund the transition costs discussed above.  OFF BALANCE SHEET ARRANGEMENTS       We do not have any off balance sheet financing or any financial arrangements with related parties, other than operating leases. The following table discloses aggregate information about our contractual obligations and commercial commitments as of December 31, 2005.                                                                        Payments Due by Period                                                    ---------------------------------------------------------- Contractual Cash Obligations          Total        Less than 1 year   1-3 years    4-5 years   After 5 years - --------------------------------- ---------------  ----------------  -----------  -----------  --------------                                                                      (in millions)       Revolving facility                $         10.1   $           10.1  $         -  $         -  $           - Senior notes                               175.0                  -            -        175.0              - Interest                                   111.0               19.8         58.4         32.8              - Operating leases                            19.2                4.9          6.4          2.0            5.9                                   ---------------  ----------------  -----------  -----------  --------------              Total                $        315.3   $           34.8  $      64.8  $     209.8  $         5.9                                   ===============  ================  ===========  ===========  ==============        We believe that cash generated by operations and from borrowings expected to be available under our Senior Credit Facility will be sufficient to meet our anticipated working capital, capital expenditures and debt service requirements for at least the next twelve months.       The following is a summary of certain material terms of our Senior Credit Facility and Hines Nurseries' 10.25% Senior Notes due 2011.  OUR SENIOR CREDIT FACILITY       We entered into our Senior Credit Facility on September 30, 2003. Hines Nurseries and its domestic operating subsidiaries are borrowers under the Senior Credit Facility. The credit facility currently consists of a revolving facility with availability of up to $120.0 million (subject to borrowing base limits). The revolving facility also permits us to obtain letters of credit up to a sub-limit.       The Senior Credit Facility was amended by First Amendment to Credit Agreement dated as of June 30, 2005 (the "First Amendment"), then again pursuant to a Waiver Regarding Financial Covenants dated as of October 13, 2005 (the "Waiver"), and by Second Amendment to Credit Facility dated as of February 3, 2006 (the "Second Amendment"). On November 8, 2005, in accordance with the Waiver, at our request, the availability of the revolving facility was reduced from $145.0 million to $120.0 million (subject to borrowing base limits).       GUARANTEES; COLLATERAL. Obligations under the Senior Credit Facility are guaranteed by us and any of our domestic subsidiaries that are not borrowers under the credit facility. Borrowings under the Senior Credit Facility are collateralized by substantially all of our assets.       RESTRICTIONS; COVENANTS. The Senior Credit Facility places various restrictions on Hines Nurseries and its subsidiaries, including, but not limited to, limitations on our ability to incur additional debt, pay dividends or make distributions, sell assets or make investments. The Senior Credit Facility specifically restricts Hines Nurseries and its subsidiaries from making distributions to Hines Horticulture. Distributions to Hines Horticulture are limited to (i) payments covering customary general and administrative expenses, not to exceed $0.5 million in any fiscal year, (ii) payments to discharge any consolidated tax liabilities, (iii) and payments, not to exceed as much as $8.3 million in any fiscal year or $9.3 million over the term of the Senior Credit Facility, to enable Hines Horticulture to repurchase its own outstanding common stock from holders other than our majority shareholder. Dividends to Hines Horticulture are disallowed under the Senior Credit Facility.                                          24        The Senior Credit Facility requires Hines Nurseries and its subsidiaries to meet specific covenants and financial ratios, including a minimum fixed charge coverage test, a maximum leverage test and a maximum capital expenditure test. The Senior Credit Facility contains customary representations and warranties and customary events of default and other covenants. As of December 31, 2005, we were not in compliance with some of our covenants; however, as discussed below, the non-compliance was cured with the Second Amendment.       FIRST AMENDMENT TO SENIOR CREDIT FACILITY. Effective June 30, 2005, Hines Nurseries negotiated and entered into the First Amendment to the Senior Credit Facility. The First Amendment amended the Senior Credit Facility to require that the proceeds from the Miami Land Sale be used to pay down the term loan. In accordance with the First Amendment, we repaid the term loan in its entirety on November 8, 2005 with the completion of the Miami Land Sale. The First Amendment also amended the calculation of the fixed charge coverage ratio and the leverage ratio to allow as an addition to Earnings Before Income Taxes, Depreciation and Amortization ("EBITDA") certain adjustments related to work force reductions and requires Hines to meet less restrictive minimum fixed charge coverage ratios for the last fiscal quarter of 2005, for 2006 and for the first quarter of 2007 and maximum leverage ratios for the last fiscal quarter of 2005, for 2006 and the first and second quarters of 2007.       WAIVER REGARDING FINANCIAL COVENANTS. On October 13, 2005, the Hines Nurseries obtained the Waiver from the financial institutions party to its Senior Credit Facility to waive compliance with the minimum fixed charge coverage ratio and the maximum leverage ratio covenants of the Senior Credit Facility for the third fiscal quarter of 2005. The Waiver was subject to the Miami Land Sale occurring no later than November 30, 2005 and the net asset sale proceeds of the sale being no less than $40.0 million. These conditions to the Waiver were satisfied on November 7, 2005 when we successfully completed the sale.       SECOND AMENDMENT TO SENIOR CREDIT FACILITY. In February 2006, Hines Nurseries negotiated and entered into the Second Amendment to the Senior Credit Facility dated as of September 30, 2003. The Second Amendment amends the calculation of the minimum fixed charge coverage ratio for the first quarter of 2006 and thereafter. The Second Amendment also eliminates the maximum leverage ratio which, as a result of, cured the non-compliance as of December 31, 2005.       INTEREST RATE; FEES. The interest rate on the loans under the Senior Credit Facility may be, at our option, prime rate loans or London Inter Bank Offering Rate ("LIBOR") rate loans. Prime rate loans under the revolving loan facility bear interest at the prime lending rate plus an additional amount that ranges from 0.75% to 1.75%, depending on our consolidated leverage ratio. Currently, the applicable margin for prime rate loans is 1.75% for the revolving loan facility.       LIBOR rate loans under the revolving loan facility bear interest at the LIBOR rate plus an additional amount that ranges from 1.75% to 2.75%, depending on our consolidated leverage ratio. Currently, the applicable margin for LIBOR rate loans is 2.75% for the revolving loan facility. In addition to paying interest on outstanding principal, we are required to pay a commitment fee on the daily average unused portion of the revolving facility which accrues based on the utilization of the revolving facility.       BORROWING BASE. Availability of borrowing under the revolving facility are subject to a borrowing base consisting of the sum of (i) 85% of eligible accounts receivable plus (ii) the lesser of (x) up to 55% of eligible inventory or (y) 85% of the appraised net orderly liquidation value of eligible inventory.       We must deliver borrowing base certificates and reports at least monthly. The borrowing base also may be subject to certain other adjustments and reserves to be determined by the agent. Eligible accounts receivable of both The Home Depot, our largest customer, and Lowe's Companies, Inc., our second largest customer, may not exceed 30% of total eligible accounts receivable at any time.       REPAYMENT. On November 8, 2005, we used the proceeds from the Miami Land Sale to pay-off the entire outstanding balance of the term loan, which was approximately $30.5 million.  OUR SENIOR NOTES       On September 30, 2003, Hines Nurseries issued $175.0 million of Senior Notes that mature on October 1, 2011. The Senior Notes bear interest at the rate of 10.25% per annum and will be payable semi-annually in arrears on each April 1 and October 1, which commenced on April 1, 2004.                                          25        GUARANTEES. Hines Horticulture and each of its domestic subsidiaries, subject to certain exceptions, has, jointly and severally, fully and unconditionally guaranteed, on a senior unsecured basis, the obligations of Hines Nurseries under the Senior Notes.       REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate principal amount of the Senior Notes may be redeemed with the net cash proceeds from one or more public equity offerings, at our option, at a redemption price of 110.250% of the principal amount thereof plus accrued interest, if any, to the date of redemption. On or after October 1, 2007, we are entitled, at our option, to redeem all or a portion of the Senior Notes at redemption prices ranging from 100.000% to 105.125%, depending on the redemption date, plus accrued and unpaid interest.       RESTRICTIONS. The indenture pursuant to which the Senior Notes were issued imposes a number of restrictions on Hines Nurseries and our other subsidiaries. Subject to certain exceptions, we may not incur additional indebtedness, make certain restricted payments, make certain asset dispositions, incur additional liens or enter into significant transactions. A breach of material term of the indenture or other material indebtedness that results in acceleration of the indebtedness under the Notes also constitutes an event of default under our Senior Credit Facility.       REPURCHASE ON A CHANGE IN CONTROL. The Senior Notes contain a put option whereby the holders have the right to put the Senior Notes back to us at 101.000% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest if a change of control occurs.  CRITICAL ACCOUNTING POLICIES AND ESTIMATES       The preparation of financial statements in conformity with generally accepted accounting principles requires us 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. We believe that the following areas represent our most critical accounting policies related to actual results that may vary from those estimates.       REVENUE RECOGNITION. We record revenue, net of sales discounts and allowances, when all of the following have occurred: an agreement of sale exists, product delivery and acceptance has occurred and collection is reasonably assured.       Sales with pay by scan arrangements are recognized when the products are sold by the retailers.       SALES RETURNS AND ALLOWANCES. Amounts accrued for sales returns and allowance are maintained at a level believed adequate by management to absorb probable losses in the trade receivable due to sales discounts and allowances. The provision rate is established by management using the following criteria: past sales returns experience, current economic conditions and other relevant factors. The rate is re-evaluated on a quarterly basis. Provisions for sales discounts and allowances charged against income increase the allowance. We record revenue, net of sales discounts and allowances, when the risk of ownership is transferred to the customer. Allowances are provided at the time revenue is recognized in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists."       ALLOWANCE FOR DOUBTFUL ACCOUNTS. The allowance for doubtful accounts is maintained at a level believed by management to adequately reflect the probable losses in the trade receivable due to customer defaults, insolvencies or bankruptcies. The provision is established by management using the following criteria: customer credit history, customer current credit rating and other relevant factors. The provision is re-evaluated on a quarterly basis. Provisions to bad debt expense charged against income increase the allowance. All recoveries on trade receivables previously charged off are credited to the accounts receivable recovery account charged against income, while direct charge-offs of trade receivables are deducted from the allowance.       ACCOUNTING FOR GOODWILL IMPAIRMENT. On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with this standard, goodwill has been classified as indefinite-lived assets no longer subject to amortization. Indefinite-lived assets are subject to impairment testing upon adoption of SFAS No. 142 and at least annually thereafter. We perform our annual impairment test in the fourth quarter of each year. In accordance with SFAS No. 142, this involves a two step process. First, we must determine if the carrying amount of equity exceeds the fair value based upon the quoted market price of our common stock. If we determine that goodwill may be impaired, we compare the "implied fair value" of the goodwill, as defined by SFAS No. 142, to its                                          26   carrying amount to determine the impairment loss, if any. The initial impairment analysis was completed in the fourth quarter of 2002. We recorded a non-cash charge of $55.1 million, net of tax, to reduce the carrying value of our goodwill for the year ended December 31, 2002. We have recognized this impairment charge as a cumulative effect of change in accounting principle. Upon completing the annual impairment analysis in the fourth quarter of fiscal 2005, it was determined that a charge for impairment was not required.       ACCRUED LIABILITIES. Accrued liabilities include amounts accrued for expected claims costs relating to our insurance programs for workers' compensation and auto liabilities. We have large deductibles for these lines of insurance, which means we must pay the portion of each claim that falls below the deductible amount. Our expected claims costs are based on an actuarial analysis that considers our current payroll and automobile profile, recent claims history, insurance industry loss development factors and the deductible amounts. We accrue our expected claims costs for each year on a ratable monthly basis with a corresponding charge against income. Management reviews the adequacy of the accruals at the end of each quarter. The accruals for the expected costs relating to our insurance programs for workers' compensation and auto liabilities are maintained at levels believed by our management to adequately reflect our probable claims obligations.  ACCOUNTING PRONOUNCEMENTS ADOPTED       In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies the term "conditional asset retirement obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations." The adoption of FIN 47 did not have a material impact on our consolidated financial statements.  RECENT ACCOUNTING PRONOUNCEMENTS       In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.       In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under Accounting Principles Board (APB) Opinion No. 25. In March 2005, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) 107, "Share-Based Payment," which expresses views of the SEC Staff about the application of SFAS No. 123(R). SFAS No. 123(R) was to be effective for interim or annual reporting periods beginning on or after June 15, 2005, but in April 2005 the SEC issued a rule that SFAS No. 123(R) will be effective for annual reporting periods beginning on or after June 15, 2005. We are required to adopt SFAS No. 123(R) on January 1, 2006. We anticipate adopting the prospective method and expect the adoption of SFAS No. 123(R) will not have an impact for the year ending December 31, 2006 on our results of operations based upon the outstanding unvested stock options at December 31, 2005. We cannot estimate the impact on our results of operations of any additional stock options that may be granted.       In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-Monetary Assets - An Amendment of ARB Opinion No. 29," which requires non-monetary asset exchanges to be accounted for at fair value. We are required to adopt the provisions of SFAS No. 153 for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.       In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." FASB No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in an accounting principle. This standard applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB Opinion No. 20 previously required that most voluntary changes in an accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This standard requires                                          27   retrospective application to prior periods' financial statements of changes in an accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of this standard to have a material impact on our consolidated financial position, results of operations and cash flows.  EFFECTS OF INFLATION       Management believes the Company's results of operations have not been materially impacted by inflation over the past three years.
As part of our ongoing business, we are exposed to certain market risks, including fluctuations in interest rates, foreign exchange rates and commodity prices. We do not enter into transactions designed to mitigate market risks for trading or speculative purposes.       We have various debt instruments outstanding at December 31, 2005 that are impacted by changes in interest rates. We manage our interest rate risk by balancing the amount of our fixed and variable debt. For fixed-rate debt, interest rate changes affect the fair market value of such debt but do not impact earnings or cash flows. Conversely, for variable-rate debt, interest rate changes generally do not affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. At December 31, 2005 the carrying amount and estimated fair value of our debt was $185.1 million and $181.6 million, respectively. Given the current balance of our variable rate debt, we estimate a change in interest costs of approximately $0.1 million for every one-percentage point change in applicable interest rates.
The consolidated financial statements commence at page F-1 of this report and an index thereto is included in Part IV, Item 15 of this report.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)       The following selected unaudited quarterly 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.                                               FOURTH            THIRD            SECOND            FIRST    2005                                     QUARTER          QUARTER           QUARTER          QUARTER - -----------                              ------------      ------------      ------------     ------------                                                          (IN THOUSANDS, EXCEPT SHARE DATA)      Sales, net                               $     37,659      $     49,371      $    176,893     $     63,990  Gross profit                                   11,527            21,532            89,050           31,224  Net (loss) income                             (10,374)           (5,173)           14,735           (1,746)  Net (loss) income per common share:         Basic & Diluted                  $      (0.47)     $      (0.23)     $       0.67     $      (0.08)                                          ============      ============      ============     ============                                               FOURTH            THIRD            SECOND            FIRST    2004                                     QUARTER          QUARTER           QUARTER          QUARTER - -----------                              ------------      ------------      ------------     ------------                                                          (IN THOUSANDS, EXCEPT SHARE DATA)  Sales, net                               $     41,949      $     51,748      $    181,081     $     60,390  Gross profit                                   17,991            23,528            93,689           29,266  Net (loss) income                              (5,643)           (3,726)           18,678           (1,073)  Net (loss) income per common share:         Basic                            $      (0.26)     $      (0.17)     $       0.85     $      (0.05)                                          ============      ============      ============     ============  Net (loss) income per common share:         Diluted                          $      (0.26)     $      (0.17)     $       0.84     $      (0.05)                                          ============      ============      ============     ============        The other information in response to this item is submitted as a separate section of this Report beginning on page F-1.                                          28
Not applicable.
The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the end of the period covered by this report, in enabling the Company to record, process, summarize and report information required to be included in the Company's periodic SEC filings within the required time period. In connection with such evaluation, no change in our internal control over financial reporting occurred during the last fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.                                       PART III
Except for the information required to be disclosed regarding our code of conduct and ethics under Item 406 of Regulation S-K, Item 10 is incorporated by reference from the Company's 2006 Proxy Statement to be filed with the Securities and Exchange Commission.       The Company has adopted a code of conduct and ethics that applies to all directors, officers and employees. The code of conduct and ethics is posted on the Company's website, the address of which is www.hineshorticulture.com and is available in print to any shareholder upon written request addressed to: Hines Horticulture, Inc., Attention: Investor Relations Department, 12621 Jeffrey Road, Irvine, CA 92620. The Company intends to include on its website any amendments to, or waivers from, a provision of its code of conduct and ethics that applies to the Company's executive officers that relates to any element of the code of conduct and ethics definition enumerated in Item 406(b) of Regulation S-K.
Incorporated by reference from the Company's 2006 Proxy Statement to be filed with the Securities and Exchange Commission.
Incorporated by reference from the Company's 2006 Proxy Statement to be filed with the Securities and Exchange Commission.
Incorporated by reference from the Company's 2006 Proxy Statement to be filed with the Securities and Exchange Commission.
Incorporated by reference from the Company's 2006 Proxy Statement to be filed with the Securities and Exchange Commission.                                          29                                        PART IV
(a) List of documents filed as part of this report:       (1) Financial Statements:          ---------------------                                                                                                               PAGE                                                                                                              ----            Report of Independent Registered Public Accounting Firm..............................................F-1          Consolidated Balance Sheets at December 31, 2005 and 2004............................................F-2          Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003...........F-3          Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss) for the Years               Ended December 31, 2005, 2004 and 2003..........................................................F-4          Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003...........F-5          Notes to Consolidated Financial Statements...........................................................F-6        (2) Financial Statement Schedules:          ------------------------------                All schedules are omitted since the required information is not          present or is not present in amounts sufficient to require submission          of the schedule, or because the information required is included in the          Consolidated Financial Statements and Notes thereto.        (3) List of Exhibits          ----------------                                          30                                   INDEX TO EXHIBITS     EXHIBIT    NUMBER      DESCRIPTION    ------      -----------      2.1       Acquisition Agreement, dated as of March 18, 2002, by and among                Hines Horticulture, Inc., Hines Nurseries, Inc., Sun Gro                Horticulture, Inc., Sun Gro Horticulture Canada Ltd. And Sun Gro                Horticulture Income Fund. (1)      2.2       Asset Purchase Agreement, dated as of March 26, 2002, by and                between Sun Gro Horticulture, Inc. and Sun Gro Horticulture                Canada Ltd. (1)      2.3       Underwriting Agreement, dated as of March 18, 2002, by and among                Hines Horticulture, Inc., Sun Gro Horticulture, Inc. and Sun Gro                Horticulture Income Fund. (1)      3.1       Restated Certificate of Incorporation of Hines Horticulture, Inc.                (3)      3.2       Amended and Restated By-laws of Hines Horticulture, Inc. (3)      4.1       Indenture, dated as of September 30, 2003, between Hines                Nurseries, Inc., Hines Horticulture, Inc., the Subsidiary                Guarantors named therein and the Bank of New York, as Trustee,                relating to Hines Nurseries, Inc.'s $175,000,000 10.25% Senior                Notes due 2011. (4)      4.2       Holdings Guaranty dated September 30, 2003, by Hines                Horticulture, Inc., in favor of and for the benefit of, Deutsche                Bank Trust Company Americas, as Guaranteed Party. (4)      4.3       Form of 144A Senior Note due 2011. (4)      4.4       Form of Senior Note due 2011. (4)      4.5       Form of Regulation S Senior Note due 2011. (4)      4.6       Registration Rights Agreement, dated as of September 30, 2003,                between Hines Nurseries, Inc., Hines Horticulture, Inc., Hines                SGUS Inc., Enviro-Safe Laboratories, Inc. and the Initial                Purchasers named therein. (4)     10.1       Employment Agreement dated as of August 3, 1995 between Hines                Horticulture and Robert A. Ferguson. (8)*     10.2       Employment Agreement dated as of August 4, 1995 between Hines                Horticulture and Claudia M. Pieropan. (2)*     10.3       Amended and Restated 1998 Long-Term Equity Incentive Plan, as                Amended. (+)*     10.4       Form of Incentive Stock Option Agreement. (3)*     10.5       Stock Purchase Agreement dated September 9, 1999 between Hines                Nurseries, Inc. and those individuals whose names are set forth                on the Signature Page to Stock Purchase Agreement. (8)     10.6       Purchase Agreement by and among Hines Nurseries, Inc., Lovell                Farms, Inc., Botanical Farms, Inc., Warren W. Lovell III, Jeffrey                S. Lovell, Jenifer E. Moreno, as Trustee of the Trace Lovell                Family Investment Trust and Enrique A. Yanes, Dated as of March                3, 2000. (5)     10.7       Warrant and Guarantee Agreement, dated November 28, 2000 by and                between Hines Horticulture, Inc., Hines Nurseries, Inc. and                Madison Dearborn Capital Partners, L.P. (6)     10.8       Warrant, dated November 28, 2000, issued by Hines Horticulture,                Inc. to Madison Dearborn Capital Partners, L.P. (6)     10.9       Amended and Restated Promissory Note by Blooming Farm, Inc. in                favor of Hines Nurseries, Inc. dated September 22, 2003. (4)     10.10      Amended and Restated Secured Promissory Note by Blooming Farm,                Inc. in favor of Hines Nurseries, Inc. dated September 22, 2003.                (4)     10.11      Amended and Restated Ground Lease dated September 1, 1996 by and                between The Irvine Company and Hines Horticulture, Inc. (4) **     10.12      Addendum No. 1 to Amended and Restated Ground Lease dated October                29, 1996 by and between The Irvine Company and Hines                Horticulture, Inc. (4)     10.13      Addendum No. 2 to Amended and Restated Ground Lease dated                December 18, 1997 by and between The Irvine Company and Hines                Horticulture, Inc. (4)     10.14      Addendum No. 3 to Amended and Restated Ground Lease dated May 19,                2003 by and between The Irvine Company and Hines Nurseries, Inc.                (4) **     10.15      Letter Agreement dated September 18, 2003 by and between The                Irvine Company and Hines Nurseries, Inc. (4)**     10.16      Credit Agreement dated September 30, 2003 among Hines Nurseries,                Inc., Enviro-Safe Laboratories, Inc., and Hines SGUS Inc., as                Borrowers, the lenders listed therein, Deutsche Bank Trust                Company Americas, as Agent, Fleet Capital Corporation and Lasalle                Business Credit, LLC, as Co-Syndication Agents, and Harris Trust                and Savings Bank and Wells Fargo Bank, N.A., as Co-Documentation                Agents. (4)                                          31       10.17      Security Agreement, dated September 30, 2003, among Hines                Nurseries, Inc., Enviro-Safe Laboratories, Inc. Hines SGUS Inc.,                and Hines Horticulture, Inc., as Grantors, and Deutsche Bank                Trust Company Americas, as agent for and representative of the                beneficiaries named therein. (4)     10.18      Registration Agreement dated as of June 11, 1998 by and between                Hines Holdings, Inc. and MDCP. (3)     10.19      First Amendment to Credit Agreement, effective as of June 30,                2005. (9)     10.20      Waiver Regarding Financial Covenants dated October 13, 2005,                among Hines Nurseries, Inc. and Hines SGUS Inc., as borrowers,                the lenders listed therein, and Deutsche Bank Trust Company                Americas, as agent. (9)     10.21      Second Amendment to Credit Agreement, effective as of February 3                2006. (+)     10.22      Real Property Purchase and Sale Agreement and Escrow                Instructions, dated September 12, 2005, by and between Hines                Nurseries, Inc. and Quantum Ventures, LLC. (10)     10.23      Summary of Oral Amendment to Real Property Purchase and Sale                Agreement and Escrow Instructions, dated September 12, 2005, by                and between Hines Nurseries, Inc. and Quantum Ventures, LLC. (10)     10.24      Lease Agreement dated November 7, 2005, by and between Hines                Nurseries, Inc. and Quantum Ventures, LLC. (10)     10.25      Option Agreement, dated April 30, 2005, by and between Hines                Nurseries, Inc. and Triad Communities, L.P. (+)     10.26      First Amendment to Option Agreement, dated February 28, 2005, by                and between Hines Nurseries, Inc. and Triad Communities, L.P. (+)     10.27      Exercise of Option Agreement, dated March 1, 2006, by and between                Hines Nurseries, Inc. and Triad Communities, L.P. (+)     21.1       Subsidiaries of the Company. (7)     23.1       Consent of independent registered public accounting firm (+)     31.1       Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a),                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of                2002.(+)     31.2       Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a),                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of                2002.(+)     32.1       Certification of Chief Operating Officer Pursuant to 18 U.S.C.                Section 1350, As Adopted Pursuant To Section 906 Of The                Sarbanes-Oxley Act of 2002. (+)(++)     32.2       Certification of Chief Financial Officer Pursuant to 18 U.S.C.                Section 1350, As Adopted Pursuant To Section 906 Of The                Sarbanes-Oxley Act of 2002. (+)(++)  - ---------------- +        Filed herewith. *        Management contract or compensatory arrangement. **       Confidential treatment requested as to certain portions of the exhibit          which have been filed separately with the Securities and Exchange          Commission ++       This certification shall not be deemed "filed" for purposes of Section          18 of the Securities Exchange Act of 1934, or otherwise subject to the          liability of that section, nor shall it be deemed to be incorporated by          reference into any filing under the Securities Act of 1933 or the          Securities Exchange Act of 1934. (1)      Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed          on April 10, 2002. (2)      Incorporated by reference to Hines Holdings, Inc.'s Registration          Statement on Form S-4, File No. 33-99452, filed on November 15, 1995          and amended on December 22, 1995 and January 6, 1996. (3)      Incorporated by reference to Hines Horticulture, Inc.'s Registration          Statement on Form S-1, File No. 333-51943, filed on May 6, 1998 and          amended on May 26 1998 and June 16, 1998. (4)      Incorporated by reference to Hines Horticulture, Inc.'s Quarterly          Report on Form 10-Q for the quarter ended September 30, 2003 (5)      Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed          on March 17, 2000. (6)      Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed          on November 29, 2000. (7)      Incorporated by reference to Hines Horticulture, Inc.'s Annual Report          on Form 10-K for the year ended December 31, 2003. (8)      Incorporated by reference to Hines Horticulture, Inc.'s Annual Report          on Form 10-K for the year ended December 31, 2004. (9)      Incorporated by reference to Hines Horticulture, Inc.'s Quarterly          Report on Form 10-Q for the quarter ended June 30, 2005. (10)     Incorporated by reference to Hines Horticulture, Inc.'s Form 8-K filed          on November 9, 2005.                                          32                                      SIGNATURES        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 2006.                                               HINES HORTICULTURE, INC.                                               By:  /s/ Claudia M. Pieropan                                                   -----------------------------                                                   Claudia M. Pieropan                                                   Chief Financial Officer       Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 28, 2006.   SIGNATURE                               CAPACITY - ---------                               --------  /s/ Robert A. Ferguson                  President, Chief Executive Officer and - ----------------------------------      Director (Principal Executive Officer) Robert A. Ferguson   /s/ Claudia M. Pieropan                 Chief Financial Officer, Secretary and - ----------------------------------      Treasurer (Principal Financial and Claudia M. Pieropan                     Accounting Officer)   /s/ Thomas R. Reusche                   Director and Chairman of the Board - ---------------------- Thomas R. Reusche   /s/ Stan R. Fallis                      Director - ---------------------------------- Stan R. Fallis   /s/ James R. Tennant                    Director - ---------------------------------- James R. Tennant   /s/ G. Ronald Morris                    Director - ---------------------------------- G. Ronald Morris   /s/ Paul R. Wood                        Director - ---------------------------------- Paul R. Wood                                          33                REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    To the Board of Directors and Shareholders of Hines Horticulture, Inc.  In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows present fairly, in all material respects, the financial position of Hines Horticulture, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 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 our opinion.     /s/ PricewaterhouseCoopers LLP  Orange County, California March 24, 2006                                         F-1                                         HINES HORTICULTURE, INC.                                   CONSOLIDATED BALANCE SHEETS                            (Dollars in thousands, except share data)                              ASSETS                                         DECEMBER 31,                            ------                                ------------------------------                                                                      2005              2004                                                                  ------------      ------------ CURRENT ASSETS:         Cash                                                     $         62      $        600         Accounts receivable, net of allowance for            doubtful accounts of $325 and $456                          16,444            19,969         Inventories                                                   183,281           181,133         Consigned inventories                                           1,350                --         Prepaid expenses and other current assets                       2,666             3,072         Assets held for sale                                              484                --                                                                  ------------      ------------                  Total current assets                                  204,287           204,774                                                                  ------------      ------------  FIXED ASSETS, net                                                     122,234           131,536  DEFERRED FINANCING EXPENSES, net of    accumulated amortization of $3,207 and $2,227                        6,207             8,883  DEFERRED INCOME TAXES                                                  11,481             9,210  GOODWILL                                                               43,926            43,926                                                                  ------------      ------------                                                                   $    388,135      $    398,329                                                                  ============      ============            LIABILITIES AND SHAREHOLDERS' EQUITY           ------------------------------------  CURRENT LIABILITIES:         Accounts payable                                         $     12,624      $     12,558         Accrued liabilities                                            11,474             9,820         Accrued payroll and benefits                                    4,453             5,900         Accrued interest                                                4,711             5,194         Interest rate swap agreement, current portion                      --               895         Long-term debt, current portion                                    --             5,719         Borrowings on revolving credit facility                        10,080            23,609         Deferred income taxes                                          66,127            66,445                                                                  ------------      ------------                  Total current liabilities                             109,469           130,140                                                                  ------------      ------------  LONG-TERM DEBT                                                        175,000           203,571  DEFERRED GAIN ON LAND SALE                                             39,880                --  OTHER LIABILITIES                                                       5,378             3,652  COMMITMENT AND CONTINGENCIES (Note 8)  SHAREHOLDERS' EQUITY         Common stock            Authorized - 60,000,000 shares,  $0.01 par value;            Issued and outstanding - 22,072,549            shares at December 31, 2005 and 2004                           221               221          Additional paid-in capital                                    128,781           128,781         Accumulated deficit                                           (70,594)          (68,036)                                                                  ------------      ------------          Total shareholders' equity                                     58,408            60,966                                                                  ------------      ------------                                                                   $    388,135      $    398,329                                                                  ============      ============       The accompanying notes are an integral part of these consolidated financial statements.                                                F-2                                                       HINES HORTICULTURE, INC.                                              CONSOLIDATED STATEMENTS OF OPERATIONS                                            (Dollars in thousands, except share data)                                                                                             YEAR ENDED DECEMBER 31,                                                                             ---------------------------------------------------                                                                                 2005               2004               2003                                                                             -------------      -------------      -------------   Sales, net                                                                  $     327,913      $     335,168      $     341,189 Cost of goods sold                                                                174,580            170,694            170,750                                                                             -------------      -------------      -------------      Gross profit                                                                  153,333            164,474            170,439                                                                             -------------      -------------      -------------  Selling and distribution expenses                                                 108,922            103,011            101,557 General and administrative expenses                                                22,075             22,321             22,592 Other operating expenses                                                            1,602                596              1,635                                                                             -------------      -------------      -------------     Total operating expenses                                                      132,599            125,928            125,784                                                                             -------------      -------------      -------------      Operating income                                                               20,734             38,546             44,655  Other expenses    Interest expense                                                                22,819             27,151             24,927    Interest rate swap agreement income                                               (895)            (4,425)            (2,710)    Amortization of deferred financing expense                                       2,891              1,784              3,771    Loss on debt extinguishment                                                         --                 --              9,235                                                                             -------------      -------------      -------------                                                                                    24,815             24,510             35,223                                                                             -------------      -------------      -------------  (Loss) income before income tax (benefit) provision      and discontinued operations                                                   (4,081)            14,036              9,432  Income tax (benefit) provision                                                     (1,523)             5,800              3,867                                                                             -------------      -------------      -------------  (Loss) income from continuing operations before discontinued operations            (2,558)             8,236              5,565  Income from discontinued operations, net of tax benefit of $2,784                      --                 --              4,148                                                                             -------------      -------------      -------------  Net (loss) income                                                           $      (2,558)     $       8,236      $       9,713                                                                             =============      =============      =============   Basic and diluted (loss) earnings per share:     (Loss) income per common share from continuing operations                $       (0.12)     $        0.37      $        0.25    Income per common share from  discontinued operations                    $          --      $          --      $        0.19                                                                             -------------      -------------      -------------     Net (loss) income per common share                                       $       (0.12)     $        0.37      $        0.44                                                                             =============      =============      =============  Weighted average shares outstanding-Basic                                      22,072,549         22,072,549         22,072,549                                                                             =============      =============      ============= Weighted average shares outstanding-Diluted                                    22,072,549         22,121,182         22,072,549                                                                             =============      =============      =============                       The accompanying notes are an integral part of these consolidated financial statements.                                                                F-3                                                         HINES HORTICULTURE, INC.                           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)                                               (Dollars in thousands, except share data)                                                 COMMON STOCK                                             ACCUMULATED                                      ----------------------------     ADDITIONAL                          OTHER                                        NUMBER OF                       PAID-IN       ACCUMULATED      COMPREHENSIVE    SHAREHOLDERS'                                         SHARES          AMOUNT         CAPITAL         DEFICIT        INCOME (LOSS)       EQUITY                                      ------------    ------------    ------------    ------------     ------------     ------------  BALANCE, December 31, 2002             22,072,549    $        221    $    128,781    $    (85,985)    $     (1,215)    $     41,802    Comprehensive income:    Net income                                  --              --              --           9,713               --            9,713    Interest rate swap, net of tax      benefit of $843                           --              --              --              --            1,215            1,215                                                                                                                        ------------      Total comprehensive income                                                                                              10,928                                       ------------    ------------    ------------    ------------     ------------     ------------ BALANCE, December 31, 2003             22,072,549             221         128,781         (76,272)              --           52,730                                      ------------    ------------    ------------    ------------     ------------     ------------      Net income                                  --              --              --           8,236               --            8,236                                      ------------    ------------    ------------    ------------     ------------     ------------ BALANCE, December 31, 2004             22,072,549             221         128,781         (68,036)              --           60,966                                      ------------    ------------    ------------    ------------     ------------     ------------      Net loss                                    --              --              --          (2,558)              --           (2,558)                                      ------------    ------------    ------------    ------------     ------------     ------------ BALANCE, December 31, 2005             22,072,549    $        221    $    128,781    $    (70,594)    $         --     $     58,408                                      ============    ============    ============    ============     ============     ============                         The accompanying notes are an integral part of these consolidated financial statements.                                                                  F-4                                                     HINES HORTICULTURE, INC.                                            CONSOLIDATED STATEMENTS OF CASH FLOWS                                                    (Dollars in thousands)                                                                                         YEAR ENDED DECEMBER 31,                                                                           -------------------------------------------------                                                                               2005              2004               2003                                                                           ------------      ------------       ------------  CASH FLOWS FROM OPERATING ACTIVITIES    Net (loss) income                                                      $     (2,558)     $      8,236       $      9,713    Income from discontinued operations                                              --                --             (4,148)    Adjustments to reconcile net (loss) income to       net cash provided by operating activities:         Depreciation, depletion and amortization                                11,384            10,681              9,394         Amortization of deferred financing costs                                 2,891             1,784              3,771         Interest rate swap agreement income                                       (895)           (4,425)            (2,710)         Fixed asset impairment                                                     423                --                 --         Loss on extinguishment of debt                                              --                --              9,235         Deferred income taxes                                                   (2,589)            5,739              3,867         (Gain) loss on disposition of fixed assets                                (334)               88                 73  Change in working capital accounts:    Accounts receivable                                                           3,525             3,755              1,790    Inventories                                                                  (3,880)           (8,318)            (3,188)    Prepaid expenses and other current assets                                       115                85             (1,305)    Accounts payable and accrued liabilities                                     (1,008)            1,387             (3,529)                                                                           ------------      ------------       ------------                 Net cash provided by operating activities                        7,074            19,012             22,963                                                                           ------------      ------------       ------------  CASH FLOWS FROM INVESTING ACTIVITIES    Purchase of fixed assets                                                    (10,258)           (5,869)            (5,589)    Proceeds from sale of fixed assets                                              827                --                 --    Proceeds from sale of land                                                   47,854                --                 --    Proceeds from sale of discontinued operations                                    --                --              5,778    Proceeds from land sale option                                                2,000               275                275    Leasehold incentive proceeds                                                     --                --              2,000    Contingent consideration for acquisitions                                        --              (947)                --                                                                           ------------      ------------       ------------                 Net cash provided by (used in) investing activities             40,423            (6,541)             2,464                                                                           ------------      ------------       ------------  CASH FLOWS FROM FINANCING ACTIVITIES    Net repayment on revolving line of credit                                   (13,529)           (6,709)           (42,432)    Proceeds from the issuance of long-term debt                                     --                --            215,000    Repayments of long-term debt                                                (34,290)           (5,786)          (180,555)    Deferred financing costs                                                       (216)              (79)           (11,637)    Redemption premium on early payment of subordinated notes                        --                --             (5,533)                                                                           ------------      ------------       ------------                   Net cash used in financing activities                        (48,035)          (12,574)           (25,157)                                                                           ------------      ------------       ------------   NET CHANGE IN CASH                                                                (538)             (103)               270  CASH, beginning of period                                                          600               703                433                                                                           ------------      ------------       ------------  CASH, end of period                                                       $         62      $        600       $        703                                                                           ============      ============       ============  Supplemental disclosure of cash flow information:     Cash paid for interest                                                 $     22,874      $     26,481       $     25,833     Cash paid for income taxes                                             $         24      $         33       $        457                     The accompanying notes are an integral part of these consolidated financial statements.                                                              F-5                                HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)   1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES      ----------------------------------------------------------------------       DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION      -------------------------------------------------       Hines Horticulture, Inc. ("Hines" or the "Company"), a Delaware corporation, produces and distributes horticultural products through its wholly owned subsidiaries, Hines Nurseries, Inc. ("Hines Nurseries") and Hines Fertilizer, Inc. ("Hines Fertilizer"), formerly known as Enviro-Safe Laboratories, Inc., which no longer actively conducts business. Unless otherwise specified, references to "Hines" or the "Company" refer to Hines Horticulture, Inc. and its subsidiaries.       Hines is a leading national supplier of ornamental shrubs, color plants and container-grown plants with commercial nursery facilities located in Arizona, California, Florida, Georgia, New York, Oregon, Pennsylvania, South Carolina and Texas. Hines markets its products to retail and commercial customers throughout the United States.       As of December 31, 2001, the Company also had a growing media business. The growing media business was conducted through Sun Gro Horticulture, Inc. ("Sun Gro-U.S."), a wholly owned subsidiary of Hines Nurseries, Sun Gro-U.S.'s wholly owned subsidiary, Sun Gro Horticulture Canada Ltd. ("Sun Gro-Canada"), and Sun Gro-Canada's direct and indirect Canadian subsidiaries.       On March 27, 2002, the Company sold the assets of Sun Gro-U.S. and the stock of Sun Gro-Canada, its growing media business, to the Sun Gro Horticulture Income Fund, a newly established Canadian income fund. The assets sold included 14 facilities located across Canada and the United States and control of approximately 50,000 acres of peat bogs in Canada. Hines no longer harvests, produces or sells peat moss or other growing media soil mixes. Hines received net proceeds of approximately $125,000 from the sale, which were used to pay down outstanding bank debt.       In connection with the sale of Sun Gro, the Canadian Customs & Revenue Authority ("CCRA") required that approximately $13,136 Canadian of the gross proceeds from the sale be withheld in an escrow account pending the determination of whether certain aspects of the sale were taxable for Canadian purposes. The proceeds withheld were not included in the initial measurement of the loss on the sale of Sun Gro. In 2002, the Company filed a tax return, submitted a tax payment of $8,219 Canadian from the escrow funds and submitted a claim for refund on the basis that the transaction is exempt from tax for Canadian purposes. The balance of the escrow funds of $4,917 Canadian (US$3,146) was then remitted to us and was recorded in the fourth quarter of 2002 as an adjustment to the loss on the sale of Sun Gro. On September 30, 2003, the CCRA completed its assessment of our tax return in which it determined that the transaction was exempt from tax for Canadian purposes and issued a refund to us of all tax paid, plus accrued interest. We received the refund check of $8,663 Canadian (US $6,278) on October 2, 2003 and recorded it in the third quarter of 2003 as an adjustment to the loss on the sale of Sun Gro.  SIGNIFICANT ACCOUNTING POLICIES - -------------------------------       REVENUE RECOGNITION      -------------------       Hines records revenue, net of sales discounts and allowances, when all of the following have occurred: an agreement of sale exists, product delivery and acceptance has occurred and collection is reasonably assured.       Sales with pay by scan arrangements are recognized when the products are sold by the retailers.       SALES RETURNS AND ALLOWANCES: Amounts accrued for sales returns and allowance are maintained at a level believed adequate by management to absorb probable losses in the trade receivable due to sales discounts and allowances. The provision rate is established by management using the following criteria: past sales returns experience, current economic conditions, and other relevant factors, and are re-evaluated on a quarterly basis. The allowance is increased by provisions for sales discounts and allowances charged against income. The Company records revenue, net of sales discounts and allowances, when the risk of ownership is transferred to the customer. Allowances are provided at the time of revenue is recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists."                                         F-6                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Trade accounts receivable are recorded at the invoiced amount and does not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. The allowance for doubtful accounts is maintained at a level believed adequate by management to reflect the probable losses in the trade receivable due to customer default, insolvency or bankruptcy. The provision is established by management using the following criteria: customer credit history, customer current credit rating and other relevant factors, and is re-evaluated on a quarterly basis. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. The allowance is increased by provisions to bad debt expense charged against income. All recoveries on trade receivables previously charged off are credited to the accounts receivable recovery account charged against income, while direct charge-offs of trade receivables are deducted from the allowance.       Activity with respect to the Company's allowance for doubtful accounts receivable is summarized as follows:                                                       For the Years Ended December 31,                                                     --------------------------------                                                  2005              2004             2003                                             --------------   --------------    --------------          Beginning balance                      $         456    $         601     $       1,997      Adjustment to expense                            112              (88)              163      Amounts written off                             (243)             (57)           (1,559)                                             --------------   --------------    --------------      Ending balance                         $         325    $         456     $         601                                             ==============   ==============    ==============        CONCENTRATION OF CREDIT RISK      ----------------------------       The Company is subject to credit risk primarily through its accounts receivable balances. The Company does not require collateral for its accounts receivable. The Company's largest customer, The Home Depot, accounted for approximately 47%, 45% and 47% of the Company's consolidated net sales in 2005, 2004 and 2003, respectively. The Company's second largest customer, Lowe's Companies, Inc., accounted for approximately 17%, 16% and 14% of its net sales in 2005, 2004 and 2003, respectively. No other customer accounts for more than 10% of net sales. These two customers represented 46% and 56% of accounts receivable before the allowance for doubtful accounts at December 31, 2005 and 2004, respectively. No other customers represented more than 10% of our accounts receivable.       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 of approximately three to seven years. As a result of the Company's refinancing of both the amended and restated Senior Credit Facility and Senior Notes, $11,110 was capitalized as deferred financing fees. For the year ended December 31, 2005, the Company wrote off $1,135 of deferred financing expenses in connection with the pay-off of the Senior Credit Facility term loan and the reduction of the availability of the revolving facility from $145,000 to $120,000. In addition, the Company capitalized $215 of deferred financing expenses in connection with the First Amendment to Credit Facility and Waiver Regarding Financial Covenants in 2005.                                         F-7                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        DEPRECIATION      ------------       Fixed assets are stated at cost less accumulated depreciation. Interest is capitalized for qualifying assets during the assets' acquisition period. The Company capitalized $120 and $36 for the years ended December 31, 2005 and 2004, respectively, and no interest was capitalized for the year ended December 31, 2003. Capitalized interest is recorded as part of the asset to which it relates and is depreciated over the respective asset's estimated useful life. Depreciation has been provided for on the straight-line method over the following estimated economic useful lives:       Buildings                            10 to 40 years      Leasehold improvements               Shorter of 20 years or term of lease      Machinery and equipment              2 to 10 years      Vehicles and trailers                2 to 10 years      Software                             5 to 10 years      Furniture and fixtures               3 to 5 years       IMPAIRMENT OF LONG-LIVED ASSETS      -------------------------------       In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets and intangible assets with determinate lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates potential impairment by comparing the carrying amount of the asset with the estimated undiscounted future cash flows associated with the use of the asset and its eventual disposition. Should the review indicate that the asset is not recoverable, the Company's carrying value of the asset would be reduced to its estimated fair value, which is generally measured by future discounted cash flows.       GOODWILL      --------       In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized, but instead is subject to an annual impairment review. As the Company's operations are comprised of one reporting unit, the Company reviews the recoverability of its goodwill by comparing the Company's fair value to the net book value of its assets. If the book value of the Company's assets exceeds the Company's fair value, the goodwill is written down to its implied fair value. The Company evaluates the carrying value of goodwill in the fourth quarter of each year and when events and circumstances indicate that the assets may be impaired. At December 31, 2005, the Company determined an impairment of goodwill had not occurred.       ENVIRONMENTAL COSTS      -------------------       The Company recognizes environmental liabilities when conditions requiring remediation are identified. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Environmental liabilities are not discounted or reduced for possible recoveries from insurance carriers.       INTERNAL USE SOFTWARE      ---------------------       The Company capitalizes costs of materials, consultants, interest and payroll and payroll-related costs for employees incurred in developing internal-use computer software in accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Computer software costs are being amortized using the straight-line method over an estimated useful life of 5 to 10 years.       INVENTORIES      -----------       Hines' determines the cost of inventory of nursery stock by accumulating costs associated with getting the plant ready for sale. These costs include direct labor, overhead, materials (soil, water, containers, stakes, labels, chemicals) and scrap. Costs are accumulated until the time of harvest, which, for Hines means that they are ready for sale, and are valued at the lower of cost or market. Nursery stock also includes plants that are not yet ready for sale. Hines' ornamental nursery stock has an average growing period of approximately eighteen months. All nursery stock is classified as a current asset based on the Company's' normal operating cycle. Materials and supplies are stated at the lower of cost (first-in, first-out) or market.                                         F-8                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        INCOME TAXES      ------------       Hines' operations are agricultural in nature and the Company derives significant benefits by qualifying to use the cash method of accounting for federal tax purposes. The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is "more likely than not" that some or all of the deferred tax assets will not be realized.       ADVERTISING      -----------       The Company expenses advertising costs at the time the advertising first takes place. Advertising expense was $1,238, $860 and $884 for the years ended December 31, 2005, 2004 and 2003, respectively.       ACCRUED LIABILITIES      -------------------       Accrued liabilities include amounts accrued for expected claims costs relating to our insurance programs for workers' compensation and auto liabilities. The Company has large deductibles for these lines of insurance, which means the Company must pay the portion of each claim that falls below the deductible amount. Expected claims costs are based on an actuarial analysis that considers our current payroll and automobile profile, recent claims history, insurance industry loss development factors and the deductible amounts. Expected claims costs for each year are accrued on a ratable monthly basis with a corresponding charge against income. The adequacy of the accruals is reviewed at the end of each quarter. The accruals for the expected costs relating to the insurance programs for workers' compensation and auto liabilities are maintained at levels believed by the Company's management to adequately reflect its claims obligations.       COMPREHENSIVE INCOME      --------------------       Comprehensive income encompasses all changes in equity other than those arising from transactions with stockholders, and consist of net income, currency translation adjustments and unrealized net gains and losses on cash flow hedges. There are no items in accumulated other comprehensive income at December 31, 2005 and 2004.       USE OF ESTIMATES      ----------------       The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.       EARNINGS PER SHARE ("EPS")      --------------------------       Earnings per share are calculated in accordance with SFAS No. 128, "Earnings per Share," which requires the Company to report both basic earnings per share, based on the weighted-average number of common shares outstanding, and diluted earnings per share, based on the weighted-average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options and warrants. On December 31, 2005, 440,000 warrants                                         F-9                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)   outstanding had expired and therefore had no effect on our diluted earnings per share for the year ended December 31, 2005. For the year ended December 31, 2004, the incremental shares related to 440,000 warrants outstanding increased fully diluted shares by 48,633. For the year ended December 31, 2003, the incremental shares related to the 440,000 warrants outstanding were excluded from the computation of diluted earnings per share because they would have been anti-dilutive. Additionally, for the years ended December 31, 2005, 2004 and 2003, shares related to employee stock options in the amount of 0.9 million, 1.1 million and 1.0 million, respectively, were excluded from the computation of diluted earnings per share because they would have been anti-dilutive.       SHIPPING AND HANDLING FEES AND COSTS      ------------------------------------       In September 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". The EITF concluded that amounts billed to a customer in a sale transaction related to shipping and handling should be classified as revenue. Shipping and handling fees included as revenue totaled $31,927, $28,888 and $30,276 for the years ended December 31, 2005, 2004 and 2003, respectively.       The Company classifies shipping and handling costs as part of selling and distribution expenses. Shipping and handling costs were $75,900, $69,702 and $70,866 for the years ended December 31, 2005, 2004 and 2003, respectively.       DERIVATIVES      -----------       Derivative instruments are accounted in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company's only derivative instrument was an interest rate swap agreement that did not qualify for hedge accounting treatment under SFAS No. 133 and therefore is marked to market (see Note 5). The interest rate swap agreement matured in February 2005.       STOCK-BASED COMPENSATION      ------------------------       SFAS No. 148, "Accounting for Stock-Based-Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123" amends SFAS No. 123, "Accounting for Stock-Based Compensation", and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted under both SFAS No. 123 and SFAS No. 148, the Company continues to follow the intrinsic value method of accounting under Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees."                                                                           Year Ended December 31,                                                                         -----------------------                                                                  2005             2004              2003                                                               -----------      -----------      -----------              Net (loss) income, as reported                       $    (2,558)     $     8,236      $     9,713          Stock option expense, net of tax benefit of $30,               $175 and $338                                           (43)            (252)            (486)                                                               -----------      -----------      -----------          Pro forma net (loss) income                          $    (2,601)     $     7,984      $     9,227                                                               ===========      ===========      ===========          Earnings per share:          Basic and diluted - as reported                      $     (0.12)     $      0.37      $      0.44                                                               ===========      ===========      ===========          Basic and diluted - pro forma                        $     (0.12)     $      0.36      $      0.42                                                               ===========      ===========      ===========                                          F-10                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        The Company estimates the weighted average fair value of each stock option on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:                                                          2005           2004         2003                                                        ----           ----         ----               Dividend Yield                                   0%             0%           0%           Expected volatility                          83.86%         83.86%       74.95%           Risk-free interest rate                       3.48%          3.48%        3.77%           Expected life                            Four years     Four years    Six years        ACCOUNTING PRONOUNCEMENTS ADOPTED      ---------------------------------       In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies the term "conditional asset retirement obligation" used in SFAS No. 143, "Accounting for Asset Retirement Obligations." FIN 47 is effective no later than the end of the fiscal year ending after December 15, 2005. The adoption of FIN 47 did not have an impact on the Company's consolidated financial position, results of operations or cash flows.       NEW ACCOUNTING PRONOUNCEMENTS      -----------------------------       In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations or cash flows.       In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under Accounting Principles Board (APB) Opinion No. 25. In March 2005, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) 107, "Share-Based Payment," which expresses views of the SEC Staff about the application of SFAS No. 123(R). SFAS No. 123(R) was to be effective for interim or annual reporting periods beginning on or after June 15, 2005, but in April 2005 the SEC issued a rule that SFAS No. 123(R) will be effective for annual reporting periods beginning on or after June 15, 2005. The Company is required to adopt SFAS No. 123(R) on January 1, 2006. The Company anticipates adopting the prospective method and expect the adoption of SFAS No. 123(R) will not have an impact for the year ending December 31, 2006 on its results of operations based upon the outstanding unvested stock options at December 31, 2005. The Company cannot estimate the impact on its results of operations any additional stock options that may be granted.       In December 2004, the FASB issued SFAS No. 153, "Exchange of Non-Monetary Assets - An Amendment of ARB Opinion No. 29," which requires non-monetary asset exchanges to be accounted for at fair value. The Company is required to adopt the provisions of SFAS No. 153 for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations or cash flows.       In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." FASB No. 154 replaces APB Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting for and reporting of a change in an accounting principle. This standard applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. APB Opinion No. 20 previously required that most voluntary changes in an accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This standard requires                                         F-11                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)   retrospective application to prior periods' financial statements of changes in an accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial position, results of operations and cash flows.       RECLASSIFICATIONS      -----------------       Certain prior year amounts have been reclassified to conform to current year presentations.  2.   DISPOSITIONS      ------------       On July 25, 2005, Hines Fertilizer and Hines Nurseries entered into an asset purchase agreement with a non-affiliated third party vendor to sell substantially all of the assets of Hines Fertilizer, excluding cash, accounts receivables and intercompany receivables. The purchase price for the assets was approximately $600 and was paid through the issuance of customer credits for past purchases. The gain on sale of assets was approximately $100. In accordance with the asset purchase agreement, the Company entered into a three year non-compete agreement, which restricts our ability to own and manage a competing fertilizer company and restricts our Miami production facility's ability to co-brand and market with competing fertilizer companies, unless directly requested by our customers. Upon a change in control of Hines Horticulture or Hines Nurseries, all non-compete restrictions shall cease and no longer be of any effect.       On November 7, 2005, the Company successfully completed the sale of 122 acres of unimproved property in Miami, Florida ("Miami Land Sale") and received net proceeds of $47,000. In accordance with the amendment to our Senior Credit Facility, the proceeds from the Miami Land Sale have been used to payoff the entire outstanding balance of the term loan; the residual amount having paid down our revolving credit facility. The Company has entered into a two-year lease agreement with the buyer to lease the property while transitioning operations to other locations. The Company will lease the entire property for a one-year period, with a thirty-day extension right, and will then vacate approximately 33 acres. The Company will lease the remaining 89 acres for an additional one-year period, with extension rights for an additional ninety days, and will then vacate the remaining acreage. The Company will pay the buyer rent of five hundred dollars per outstanding acre, annually, during the lease term. For accounting purposes, the entire gain has been deferred due to our continuing involvement, as defined in SFAS No. 98. "Accounting for Leases," in the property.       In April 2003, the Company entered into an option agreement to sell 168-acre nursery property in Vacaville, California. The Company entered into the option agreement because the nursery property is located in an area which the city of Vacaville is planning to develop as a residential project. This agreement was subsequently amended in March 2005 to extend the option term to March 1, 2006 contingent upon payments of $1,800 during the option term. On March 1, 2006, the buyer exercised its option to purchase the property. Total proceeds from the option agreement and sale of the land will be approximately $16,900, with the final payment of $14,300 due no later than April 3, 2006. Under the terms of the option agreement, Hines is able to transition off the land in three phases from 2006 to 2008. The Company is continuing to develop replacement acreage and infrastructure at our 842-acre Winters facility in Northern California.  3.   INVENTORIES      -----------       Inventories consisted of the following:                                                                           December 31,                                                               -------------------------------                                                                    2005             2004                                                               -------------     -------------             Nursery stock                                        $     172,845     $     169,908          Consigned inventory                                          1,350                 -          Materials and supplies                                      10,436            11,225                                                               -------------     -------------                                                               $     184,631     $     181,133                                                               =============     =============                                         F-12                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)   4.   FIXED ASSETS      ------------       Fixed assets consisted of the following:                                                                          December 31,                                                               --------------------------------                                                                    2005              2004                                                               --------------    --------------             Land                                                 $      22,550     $      30,141          Buildings and improvements                                 105,726            97,652          Machinery and equipment                                     38,453            35,824          Software                                                    21,014            19,837          Construction in progress                                     3,512             6,244                                                               --------------    --------------                                                                     191,255           189,698          Less accumulated depreciation                              (69,021)          (58,162)                                                               --------------    --------------                 Fixed assets, net                              $     122,234     $     131,536                                                               ==============    ==============   5.   INTEREST RATE SWAP AGREEMENT      ----------------------------       In May 2000, the Company entered into an interest rate swap agreement to economically hedge $75,000 of debt. This interest rate swap agreement does not qualify for hedge accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and therefore is marked to market. The interest rate swap agreement effectively changes the Company's exposure on its variable-rate interest payments to fixed-rate interest payments (7.13%) based on the 3-month London Inter Bank Offering Rate ("LIBOR") rate in effect at the beginning of each quarterly period. Despite the refinancing of long-term debt, the interest rate swap agreement remained outstanding and matured in February 2005.       Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133, as amended. Adopting the provisions of SFAS No. 133 on January 1, 2001 resulted in a cumulative after-tax charge to accumulated other comprehensive income as of January 1, 2001 of $2,334, representing the fair value of the interest rate swap agreement, net of tax. This amount was being amortized as interest rate swap agreement expense over the term of the debt. At December 31, 2002, accumulated other comprehensive loss had a balance, net of tax, of $(1,215). For the year ended December 31, 2003, $420 was amortized and the balance of $795 was written off as a loss on debt extinguishment due to the refinancing in September 2003. For the year ended December 31, 2005, 2004 and 2003, the Company recognized pre-tax income of $895, $4,425 and $2,710 respectively, reported as interest rate swap agreement income in the consolidated statements of operations. In addition, as a result of the refinancing of long-term debt, the Company recognized the remaining pre-tax unamortized value of the interest rate swap agreement of $1,347 as loss on debt extinguishment in the 2003 statement of operations.  6.   SENIOR CREDIT FACILITY      ----------------------       On September 30, 2003, the Company amended and restated its Senior Credit Facility. Hines Nurseries and its domestic operating subsidiaries are borrowers under the Senior Credit Facility. The Senior Credit Facility currently consists of a revolving facility with availability of up to $120,000 (subject to borrowing base limits). The revolving facility also permits the ability to obtain letters of credit up to a sub-limit.       The Senior Credit Facility was amended by First Amendment to Credit Agreement dated as of June 30, 2005 (the "First Amendment"), then again pursuant to a Waiver Regarding Financial Covenants dated as of October 13, 2005 (the "Waiver"), and by Second Amendment to Credit Facility dated as of February 3, 2006 (the "Second Amendment"). On November 8, 2005, in accordance with the Waiver at the Company's request, the availability of the revolving facility was reduced from $145,000 to $120,000 (subject to borrowing base limits).       GUARANTEES; COLLATERAL. Obligations under the Senior Credit Facility are guaranteed by Hines and any of its domestic subsidiaries that are not borrowers under the Senior Credit Facility. Borrowings under the Senior Credit Facility are collateralized by substantially all of the Company's assets.                                         F-13                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        RESTRICTIONS; COVENANTS. The Senior Credit Facility places various restrictions on Hines Nurseries and its subsidiaries, including, but not limited to, limitations on the Company's ability to incur additional debt, pay dividends or make distributions, sell assets or make investments. The Senior Credit Facility specifically restricts Hines Nurseries and its subsidiaries from making distributions to Hines Horticulture. Distributions to Hines Horticulture are limited to (i) payments covering customary general and administrative expenses, not to exceed $500 in any fiscal year, (ii) payments to discharge any consolidated tax liabilities, (iii) and payments, not to exceed as much as $8,300 in any fiscal year or $9,300 over the term of the Senior Credit Facility, to enable Hines Horticulture to repurchase its own outstanding common stock from holders other than its majority shareholder. Dividends to Hines Horticulture are disallowed under the Senior Credit Facility.       The Senior Credit Facility requires Hines Nurseries and its subsidiaries to meet specific covenants and financial ratios, including a minimum fixed charge coverage test, a maximum leverage test and a maximum capital expenditure test. The new Senior Credit Facility contains customary representations and warranties and customary events of default and other covenants. As of December 31, 2005, the Company was not in compliance with some of its covenants; however, as discussed below, the non-compliance was cured with the Second Amendment.       FIRST AMENDMENT TO SENIOR CREDIT FACILITY. Effective June 30, 2005, Hines Nurseries negotiated and entered into the First Amendment to the Senior Credit Facility. The First Amendment amended the Senior Credit Facility to require that the proceeds from the sale of 122 acres of unimproved property in Miami, Florida on November 7, 2005 ("Miami Land Sale") be used to pay down the term loan. In accordance with the First Amendment, the Company repaid the term loan in its entirety on November 8, 2005 with the completion of the Miami Land Sale. The First Amendment also amended the calculation of the fixed charge coverage ratio and the leverage ratio to allow as an addition to Earnings Before Income Taxes, Depreciation and Amortization ("EBITDA") certain adjustments related to work force reductions and requires Hines to meet less restrictive minimum fixed charge coverage ratio for the last fiscal quarter of 2005, for 2006 and for the first quarter of 2007 and maximum leverage ratios for the last fiscal quarter of 2005, for 2006 and the first and second quarters of 2007.       WAIVER REGARDING FINANCIAL COVENANTS. On October 13, 2005, the Hines Nurseries obtained the Waiver from the financial institutions party to its Senior Credit Facility to waive compliance with the minimum fixed charge coverage ratio and the maximum leverage ratio covenants of the Senior Credit Facility for the third fiscal quarter of 2005. The Waiver was subject to the Miami Land Sale occurring no later than November 30, 2005 and the net asset sale proceeds of the sale being no less than $40,000. These conditions to the Waiver were satisfied on November 7, 2005 when the Company successfully completed the sale. In addition, at the request of the Company, the availability of the revolving facility was reduced from $145,000 to $120,000 (subject to borrowing base limits).       SECOND AMENDMENT TO SENIOR CREDIT FACILITY. In February 2006, Hines Nurseries negotiated and entered into the Second Amendment to the Senior Credit Facility dated as of September 30, 2003. The Second Amendment amends the calculation of the minimum fixed charge coverage ratio for the first quarter of 2006 and thereafter. The Second Amendment also eliminates the maximum leverage ratio which, as a result of, cured the non-compliance as of December 31, 2005.       INTEREST RATE; FEES. The interest rate on the loans under the Senior Credit Facility may be, at the Company's option, Prime rate loans or LIBOR rate loans. Prime rate loans under the revolving loan facility bear interest at the Prime lending rate plus an additional amount that ranges from 0.75% to 1.75%, depending on its consolidated leverage ratio. Currently, the applicable margin for Prime rate loans is 1.75% for the revolving loan facility.       LIBOR rate loans under the revolving loan facility bear interest at the LIBOR rate plus an additional amount that ranges from 1.75% to 2.75%, depending on its consolidated leverage ratio. Currently, the applicable margin for LIBOR rate loans is 2.75% for the revolving loan facility. In addition to paying interest on outstanding principal, the Company is required to pay a commitment fee on the daily average unused portion of the revolving facility which accrues based on the utilization of the revolving facility.       BORROWING BASE. Availability of borrowings under the revolving facility are subject to a borrowing base consisting of the sum of (i) 85% of eligible accounts receivable plus (ii) the lesser of (x) up to 55% of eligible inventory or (y) 85% of the appraised net orderly liquidation value of eligible inventory.                                         F-14                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        The Company must deliver borrowing base certificates and reports at least monthly. The borrowing base also may be subject to certain other adjustments and reserves to be determined by the agent. Eligible accounts receivable of both The Home Depot, the Company's largest customer, and Lowe's Companies, Inc., its second largest customer, may not exceed 30% of total eligible accounts receivable at any time. At December 31, 2005, the Company had $61,606 of available credit.       REPAYMENT. On November 8, 2005, the Company used the proceeds from the Miami Land Sale to payoff the entire outstanding balance of the term loan, which was approximately $30,500. Amounts are no longer available under the $40,000 term loan facility.  7.   LONG-TERM DEBT      --------------                                                                       December 31,    December 31,                                                                         2005            2004                                                                     ------------    ------------     Senior Credit Facility - term loan at the bank's reference rate plus 2.25% or the LIBOR rate plus 3.25%. Interest rates were 5.46% at December 31, 2004 (See Note 6).                            $        --     $    34,285  Senior Notes, interest at 10.25% payable semi-annually on each April 1 and October 1, maturing on October 1, 2011                      175,000         175,000  Other obligations                                                            --               5                                                                     ------------    ------------                                                                         175,000         209,290  Less current portion                                                         --           5,719                                                                     ------------    ------------                  Total long-term debt                               $   175,000     $   203,571                                                                     ============    ============        SENIOR NOTES. On September 30, 2003, Hines Nurseries issued $175,000 of Senior Notes that mature on October 1, 2011. The Senior Notes bear interest at the rate of 10.25% per annum and will be payable semi-annually in arrears on each April 1 and October 1, which commenced on April 1, 2004.           GUARANTEES. Hines Horticulture and each of its domestic subsidiaries, subject to certain exceptions, has, jointly and severally, fully and unconditionally guaranteed, on a senior unsecured basis, the obligations of Hines Nurseries under the Senior Notes.           REDEMPTION. Prior to October 1, 2006, up to 35% of the aggregate principal amount of the Senior Notes may be redeemed with the net cash proceeds from one or more public equity offerings, at the Company's option, at a redemption price of 110.250% of the principal amount thereof plus accrued interest, if any, to the date of redemption. On or after October 1, 2007, the Company is entitled, at its option, to redeem all or a portion of the Senior Notes at redemption prices ranging from 100.000% to 105.125%, depending on the redemption date plus accrued and unpaid interest.           RESTRICTIONS. The indenture pursuant to which the Senior Notes were issued imposes a number of restrictions on Hines Nurseries and its other subsidiaries. Subject to certain exceptions, the Company may not incur additional indebtedness, make certain restricted payments, make certain asset dispositions, incur additional liens or enter into significant transactions. A breach of a material term of the indenture or other material indebtedness that results in acceleration of the indebtedness under the Senior Notes also constitutes an event of default under its Senior Credit Facility.           REPURCHASE ON A CHANGE OF CONTROL. The Senior Notes contain a put option whereby the holders have the right to put the Senior Notes back to Hines at 101.000% of the principal amount thereof on the date of purchase plus accrued and unpaid interest if a change of control occurs.                                         F-15                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        On September 30, 2003, the Company called for redemption its $78,000 in aggregate principal amount of the 12.75% Senior Subordinated Notes at a redemption price of 106% of the aggregate principal amount thereof ($82,680 at September 30, 2003), plus accrued and unpaid interest thereon through the date of redemption. In addition, the Company refinanced all debt outstanding under the previous credit facility. Payment of the redemption premium on the 12.75% Senior Subordinated Notes, the write-off of the unamortized deferred financing expenses and the write-off of the remaining other comprehensive income related to the SFAS No. 133 adoption resulted in a loss on debt extinguishment of $9,235 in the year ended December 31, 2003.  8.   COMMITMENTS AND CONTINGENCIES      ----------------------------- OPERATING LEASES       The Company leases certain land, office, trucks 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. Total rent expense for these operating lease agreements for the years ended December 31, 2005, 2004 and 2003 was $7,050, $7,033 and $7,972, respectively.       The following are the Company's future minimum annual payments under its non-cancelable operating leases for each of the next five years ending December 31 and thereafter:                                      Continuing                                     Operations                                     -----------           2006                       $     4,904          2007                             3,071          2008                             1,853          2009                             1,446          2010                             1,286          Thereafter                       6,644                                     -----------                                     $    19,204                                     ===========       In May 2003, the Company amended the lease for its 479-acre Irvine, California nursery headquarters. Under the amendment, the Company agreed to vacate 254 acres covered by the lease in 2006 in exchange for an extension of the term of the lease on 170 acres that was set to expire beginning in September 2003 to December 2010 and the lease of an additional 63 acres contiguous to its existing facility from July 2003 to December 2010. The landlord also agreed to assist with the costs of developing the new acreage and transition costs of up to $4,000, which include payments of $2,000 and percentage rent credits of up to $2,000. The payment of $2,000 is being amortized over the life of the lease.  LEGAL MATTERS       From time to time, the Company is involved in various disputes and litigation matters, which arise in the ordinary course of business. The litigation process is inherently uncertain and it is possible that the resolution of these disputes and lawsuits may adversely affect the Company. Management believes, however, that the ultimate resolution of such matters will not have a material adverse impact on the Company's consolidated financial position, results of operations or cash flows.  9.   SHAREHOLDERS' EQUITY      --------------------       On June 22, 1998, the Board adopted the 1998 Long-Term Equity Incentive Plan (the "1998 Stock Plan"). The 1998 Stock Plan provides for grants of stock options, stock appreciation rights, restricted stock, performance awards and any combination of the foregoing to certain directors, officers and employees of the Company and its subsidiaries. The purpose of the 1998 Stock Plan is to provide such individuals with incentives to maximize shareholder value and otherwise contribute to the success of the Company and to enable the Company to attract, retain and reward the best available persons for positions of substantial responsibility.                                         F-16                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        On June 1, 2000, the Board of Directors adopted and approved to increase the number of shares of common stock available for issuance under the 1998 Stock Plan by 1.0 million shares. At December 31, 2005, the Company had reserved 3.6 million shares of its common stock for issuance upon exercise of options granted or to be granted under this plan.       On July 9, 2002, the Company offered to exchange all outstanding stock options held by certain employees under the 1998 Stock Plan for new stock options to be granted under the 1998 Stock Plan upon the terms and subject to the conditions described in the offer to exchange. If an employee elected to participate in the exchange, they were required to tender for exchange all of the stock options they held in exchange for a certain number of new stock options. The offer to exchange expired on August 14, 2002 and all stock options properly tendered before the expiration of the offer to exchange were accepted and cancelled on August 15, 2002. A total of 1.8 million stock options were tendered by employees and cancelled pursuant to the terms of the offer to exchange.       On February 18, 2003, the Company granted new stock options to those employees who participated in the exchange program. The exercise price of the new stock options is $5.50 per share. A total of 0.8 million new options were granted pursuant to this exchange program. There was no additional compensation expense associated with the exchange program.       The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" in 1998. As permitted by SFAS No. 123, the Company measures compensation cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, but provides pro forma disclosures of net income and earnings per share as if the fair value method (as defined in SFAS No. 123) had been applied. Had compensation cost been determined using the fair value method prescribed by SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 2005 and 2004 as noted in Note 1.                                         F-17                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        A summary of the status of the Company's stock option plan as of December 31 is presented below:                                                 2005                            2004                             2003                                -------------------------------   ------------------------------   ------------------------------                                                Weighted Average                 Weighted Average                 Weighted Average                                    Shares      Exercise Price       Shares      Exercise Price      Shares       Exercise Price                                --------------  ---------------   -------------  ---------------   -------------  ---------------        Outstanding -beginning of year     1,067,923         $ 6.15           989,723         $ 6.22           271,078         $ 8.33 Granted                                   --             --           100,000           5.50         1,303,633           5.50 Exercised                                 --             --                --             --                --             -- Cancelled                           (198,813)          5.82           (21,800)          6.00          (584,988)          5.60                                --------------                    -------------                    ------------- Outstanding -end of year             869,110         $ 6.22         1,067,923         $ 6.15           989,723         $ 6.22                                ==============                    =============                    =============  Exercisable                          869,110         $ 6.22         1,006,237         $ 6.20           933,834         $ 6.29                                ==============                    =============                    =============  Weighted average fair value   of options granted during period                   $   --                           $ 5.18                           $ 3.62        The weighted average remaining contractual life was six years at December 31, 2005. As of December 31, 2005, expiration dates ranged from June 22, 2008 to February 18, 2013                                                  OUTSTANDING                                 EXERCISABLE                             ----------------------------------------------------   ----------------------------                                                  Average           Weighted                         Weighted                                Number of        Remaining         Average of       Number of      Average of Range of exercise price         Options       Contract Life     Exercise Price       Options     Exercise Price - --------------------------  ---------------  ---------------  ------------------   -----------   -------------- $3.32 to $5.00                      81,000        5.56             $     4.53          81,000      $   4.53 $5.50                              632,910        6.40                   5.50         632,910          5.50 $6.00 to $8.00                      34,200        3.82                   6.71          34,200          6.71 $11.00                             121,000        2.58                  11.00         121,000         11.00                             ---------------                                        -----------  Total                              869,110        5.70             $     6.22         869,110      $   6.22                             ===============                                        ===========    10.  INCOME TAXES      ------------       The components of (loss) income before income tax (benefit) provision and the income tax (benefit) provision consisted of the following:                                                       For the Years Ended December 31,                                              ---------------------------------------------                                                  2005             2004             2003                                              -----------      -----------      -----------     (Loss) income from continuing operations     $    (4,081)     $    14,036      $     9,432 Income from discontinued operations                   --               --            1,364                                              -----------      -----------      -----------                                              $    (4,081)     $    14,036      $    10,796                                              ===========      ===========      ===========  Current income tax provision: Federal                                      $       637      $        --      $        -- State                                                429               61               --                                              -----------      -----------      -----------                                              $     1,066      $        61      $        --                                              -----------      -----------      ----------- Deferred (benefit) provision: Federal                                      $    (2,294)     $     5,085              959 State                                               (295)             654              124                                              -----------      -----------      -----------                                                   (2,589)     $     5,739            1,083                                              -----------      -----------      -----------      Income tax (benefit) provision          $    (1,523)     $     5,800      $     1,083                                              ===========      ===========      ===========                                          F-18                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        The reported (benefit from) provision for income taxes differs from the amount computed by applying the statutory federal income tax rate of 35 percent to income before (benefit) provision for income taxes as follows:                                                                                 For the Years Ended December 31,                                                                         --------------------------------------------                                                                             2005             2004            2003                                                                         -----------      -----------     -----------     (Benefit) provision computed at statutory rate                          $    (1,428)     $     4,913     $     3,779 Increase (decrease) resulting from: State tax, net of federal benefit                                              (184)             632             506 Canada withholding tax                                                           --               --          (3,344) Meals and entertainment                                                          82               89              80 Other                                                                             7              166              62                                                                         -----------      -----------     -----------                                                                         $    (1,523)     $     5,800     $     1,083                                                                         ===========      ===========     ===========  (Benefit from) provision for income taxes for continuing operations     $    (1,523)     $     5,800     $     3,867 Benefit from income taxes for discontinued operations                            --               --          (2,784)                                                                         -----------      -----------     -----------                                                                          $    (1,523)     $     5,800     $     1,083                                                                         ===========      ===========     ===========    Deferred tax assets:                                2005              2004                                                 ------------      ------------  Net operating loss carryforwards                $      1,275      $     11,728 Book/tax difference in debt                               --               354 Intangible asset basis differences                    10,623            13,287 Tax credits                                              768               129 Other                                                    251                --                                                 ------------      ------------      Gross deferred tax assets                        12,917            25,498                                                 ------------      ------------  Deferred tax liabilities: Accrual to cash adjustment                           (66,127)          (66,445) Fixed asset basis differences                         (1,436)          (16,288)                                                 ------------      ------------      Gross deferred tax liabilities                  (67,563)          (82,733)                                                 ------------      ------------  Net deferred tax liability                      $    (54,646)     $    (57,235)                                                 ============      ============  Deferred income tax liability, current          $    (66,127)     $    (66,445) Deferred income tax asset, non-current                11,481             9,210                                                 ------------      ------------                                                 $    (54,646)     $    (57,235)                                                 ============      ============       The Company derives significant benefits by qualifying to use the cash method of accounting for federal and state income tax purposes. Under the cash method, sales are included in taxable income when payments are received and expenses are deducted as they are paid. The primary benefit the Company receives is the ability to deduct the cost of inventory as it is incurred. The net benefit realized by the Company thus far is represented by the "Accrual to Cash Adjustment" item above. Because the items to which this "Accrual to Cash Adjustment" relate to are comprised of current assets and current liabilities in the consolidated balance sheets (such as inventory, accounts receivable, accounts payable, etc.), this deferred tax item is also characterized as current.       At December 31, 2005, the Company had approximately $2,637 in net operating loss carryforwards for federal income tax reporting purposes. The Company's federal net operating losses begin to expire in 2024. In addition, the Company had approximately $6,923 in net operating loss carryforwards for state income tax reporting purposes. The Company's state net operating losses in certain states begin to expire in 2008.                                         F-19                               HINES HORTICULTURE, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                     (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)        The Company records a liability for potential tax assessments based on its estimate of the potential exposure. New laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent the Company's estimates differ from actual payments or assessments, income tax expense is adjusted. Management believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations.  11.  EMPLOYEE BENEFIT PLANS      ----------------------       As of January 1, 2001, Hines Nurseries established a 401(k) Retirement Savings Plan (the "Plan") for salaried and permanent hourly employees. As of January 1, 2003, pursuant to Internal Revenue Service ("IRS") rules, participants may now make voluntary contributions to the plan up to a maximum of twelve thousand dollars not to exceed 20 percent of their annual compensation (as defined). In addition to this, employees over age 50 may now contribute an additional two thousand dollars. Hines' matching contribution to the Plan is equal to 100 percent of the first 3 percent of a participant's voluntary deferral of salary, and 50 percent of the next 2 percent of a participant's voluntary deferral of salary per calendar year. As of May 16, 2003, Hines discontinued its matching contributions. As of January 1, 2004, pursuant to IRS rules, participants may make voluntary contributions to the plan up to a maximum of fourteen thousand dollars not to exceed 50 percent of their annual compensation (as defined). In addition to this, employees over age 50 may now contribute an additional four thousand dollars.       The total expense related to the Hines plan was $0, $0 and $632 for the years ended December 31, 2005, 2004 and 2003, respectively.  12.  FAIR VALUES OF FINANCIAL INSTRUMENTS      ------------------------------------       The fair value of the Senior Notes is based on the closing price of the debt securities at December 31, 2005 and 2004. The carrying amount of the Company's other long-term debt approximates its fair value based upon borrowing rates currently available to the Company. The carrying amount of the short-term debt approximates the fair value based on the short-term maturity of the instrument.       The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2005 and 2004 are as follows:                                                                                 December 31,                                                    ----------------------------------------------------------------                                                                 2005                               2004                                                    ------------------------------     -----------------------------                                                      Carrying         Estimated         Carrying        Estimated                                                       Amount          Fair Value         Amount         Fair Value                                                    -------------     ------------     ------------     ------------           Revolving line of credit                       $     10,080     $     10,080     $     23,609     $     23,609      Long-term debt (including current portion)     $    175,000     $    171,500     $    209,290     $    225,478    13.  GUARANTOR/NON-GUARANTOR DISCLOSURES      -----------------------------------       The Senior Notes issued by Hines Nurseries (the "issuer") have been guaranteed by the Company (the "parent guarantor") and by both Hines SGUS and Hines Fertilizer, (collectively, Hines SGUS and Hines Fertilizer are the "subsidiary guarantors"). The issuer is a 100% owned subsidiary of the parent guarantor. The subsidiary guarantors are 100% owned subsidiaries of the issuer. The parent and subsidiary guaranties are full, unconditional and joint and several. The parent guarantor has no independent assets, liabilities or operations and subsidiary guarantors are minor with no material assets, liabilities or operations. In addition, under the Senior Notes, the parent guarantor is unable to obtain dividends or loans from the issuer or subsidiary guarantors. As a result of the foregoing, separate financial statements of Hines Nurseries, Hines SGUS and Hines Fertilizer are not presented.                                         F-20    EX-10.3 2 hines_10kex10-3.txt                      AMENDED AND RESTATED HINES HORTICULTURE, INC.                       1998 LONG-TERM EQUITY INCENTIVE PLAN,                                    AS AMENDED 1                                                                      Exhibit 10.3   1. Purpose.           This plan shall be known as the Hines Horticulture, Inc. Amended and Restated 1998 Long-Term Equity Incentive Plan, as amended (the "Plan"). The purpose of the Plan shall be to promote the long-term growth and profitability of Hines Horticulture, Inc. (the "Company") and its Subsidiaries by (i) providing certain directors, officers and employees of the Company and its Subsidiaries with incentives to maximize stockholder value and otherwise contribute to the success of the Company and (ii) enabling the Company to attract, retain and reward the best available persons for positions of responsibility. Grants of incentive or nonqualified stock options, stock appreciation rights ("SARs"), either alone or in tandem with options, restricted stock, performance awards, or any combination of the foregoing may be made under the Plan.  2. Definitions.           (a) "Board of Directors" and "Board" mean the board of directors of Hines Horticulture, Inc.           (b) "Cause" means the occurrence of one of the following events:                    (i) a felony involving the property of the Company or a          Subsidiary; or                    (ii) Conduct that has caused demonstrable and serious injury          to the Company or a Subsidiary, monetary or otherwise; or                    (iii) Willful refusal to perform or substantial disregard of          duties properly assigned, as determined by the Company; or                    (iv) Breach of duty of loyalty to the Company or a Subsidiary          or other act of fraud or dishonesty with respect to the Company or a          Subsidiary.           (c) "Change in Control" means the occurrence of one of the following events:                                          1                     (i) if any "person" or "group" as those terms are used in          Sections 13(d) and 14(d) of the Exchange Act, other than an Exempt          Person, is or becomes the "beneficial owner" (as defined in Rule 13d-3          under the Exchange Act), directly or indirectly, of securities of the          Company representing 50% or more of the combined voting power of the          Company's then outstanding securities; or                    (ii) during any period of two consecutive years, individuals          who at the beginning of such period constitute the Board and any new          directors whose election by the Board or nomination for election by the          Company's stockholders was approved by at least two-thirds of the          directors then still in office who either were directors at the          beginning of the period or whose election was previously so approved,          cease for any reason to constitute a majority thereof; or                    (iii) the stockholders of the Company approve a merger or          consolidation of the Company with any other corporation, other than a          merger or consolidation (A) which would result in all or a portion of          the voting securities of the Company outstanding immediately prior          thereto continuing to represent (either by remaining outstanding or by          being converted into voting securities of the surviving entity) more          than 50% of the combined voting power of the voting securities of the          Company or such surviving entity outstanding immediately after such          merger or consolidation or (B) by which the corporate existence of the          Company is not affected and following which the Company's chief          executive officer and directors retain their positions with the Company          (and constitute at least a majority of the Board); or                    (iv) the stockholders of the Company approve a plan of          complete liquidation of the Company or an agreement for the sale or          disposition by the Company of all or substantially all the Company's          assets, other than a sale to an Exempt Person.           (d) "Code" means the Internal Revenue Code of 1986, as amended.           (e) "Committee" means the Compensation Committee of the Board. The membership of the Committee shall be constituted so as to comply at all times with the applicable requirements of Rule 16b-3 under the Exchange Act.           (f) "Common Stock" means the Common Stock, par value $.01 per share, of the Company, and any other shares into which such stock may be changed by reason of a recapitalization, reorganization, merger, consolidation or any other change in the corporate structure or capital stock of the Company.                                          2            (g) "Competition" is deemed to occur if a person whose employment with the Company or its Subsidiaries has terminated obtains a position as a full-time or part-time employee of, as a member of the board of directors of, or as a consultant or advisor with or to, or acquires an ownership interest in excess of 5% of, a corporation, partnership, firm or other entity that engages in any of the businesses of the Company or any Subsidiary with which the person was involved in a management role at any time during his or her last five years of employment with or other service for the Company or any Subsidiaries.           (h) "Disability" means a disability that would entitle an eligible participant to payment of monthly disability payments under any Company disability plan or as otherwise determined by the Committee.           (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.           (j) "Exempt Person" means (i) Madison Dearborn Capital Partners, L.P., (ii) any person, entity or group under the control of any party included in clause (i), or (iii) any employee benefit plan of the Company or a trustee or other administrator or fiduciary holding securities under an employee benefit plan of the Company.           (k) "Fair Market Value" of a share of Common Stock of the Company means, as of the date in question, the officially-quoted closing selling price of the stock on the principal securities exchange on which the Common Stock is then listed for trading (including for this purpose the Nasdaq National Market) (the "Market") on the immediately preceding trading day or, if the Common Stock is not then listed or quoted in the Market, the Fair Market Value shall be the fair value of the Common Stock determined in good faith by the Board; provided, however, that when shares received upon exercise of an option are immediately sold in the open market, the net sale price received may be used to determine the Fair Market Value of any shares used to pay the exercise price or withholding taxes and to compute the withholding taxes.           (l) "Incentive Stock Option" means an option conforming to the requirements of Section 422 of the Code and any successor thereto.           (m) "Non-Employee Director" has the meaning given to such term in Rule 16b-3 under the Exchange Act.           (n) "Nonqualified Stock Option" means any stock option other than an Incentive Stock Option.                                          3            (o) "Other Company Securities" mean securities of the Company other than Common Stock, which may include, without limitation, unbundled stock units or components thereof, debentures, preferred stock, warrants and securities convertible into or exchangeable for Common Stock or other property.           (p) "Retirement" means retirement as defined under any Company pension plan or retirement program or termination of one's employment on retirement with the approval of the Committee.           (q) "Subsidiary" means a corporation or other entity of which outstanding shares or ownership interests representing 50% or more of the combined voting power of such corporation or other entity entitled to elect the management thereof, or such lesser percentage as may be approved by the Committee, are owned directly or indirectly by the Company.  3. Administration.          The Plan shall be administered by the Committee; provided that the Board may, in its discretion, at any time and from time to time, resolve to administer the Plan, in which case the term "Committee" shall be deemed to mean the Board for all purposes herein. The Committee shall consist of at least two directors. Subject to the provisions. of the Plan, the Committee shall be authorized to (i) select persons to participate in the Plan, (ii) determine the form and substance of grants made under the Plan to each participant, and the conditions and restrictions, if any, subject to which such grants will be made, (iii) modify the terms of grants made under the Plan, (iv) interpret the Plan and grants made thereunder, (v) make any adjustments necessary or desirable in connection with grants made under-the Plan to eligible participants located outside the United States and (vi) adopt, amend, or rescind such rules and regulations, and make such other determinations, for carrying out the Plan as it may deem appropriate. Decisions of the Committee on all matters relating to the Plan shall be in the Committee's sole discretion and shall be conclusive and binding on all parties. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with applicable federal and state laws and rules and regulations promulgated pursuant thereto. No member of the Committee and no officer of the Company shall be liable for any action taken or omitted to be taken by such member, by any other member of the Committee or by any officer of the Company in connection with the performance of duties under the Plan, except for such person's own willful misconduct or as expressly provided by statute.                                          4            The expenses of the Plan shall be borne by the Company. The Plan shall not be required to establish any special or separate fund or make any other segregation of assets to assume the payment of any award under the Plan, and rights to the payment of such awards shall be no greater than the rights of the Company's general creditors.  4. Shares Available for the Plan.           Subject to adjustments as provided in Section 15, an aggregate of 3,589,210 shares of Common Stock (the "Shares") may be issued pursuant to the Plan. Such Shares may be in whole or in part authorized and unissued, or shares which are held by the Company as treasury shares. If any grant under the Plan expires or terminates unexercised, becomes unexercisable or is forfeited as to any Shares, such unpurchased or forfeited Shares shall thereafter be available for further grants under the Plan unless, in the case of options granted under the Plan, related SARs are exercised.           Without limiting the generality of the foregoing provisions of this Section 4 or the generality of the provisions of Sections 3, 6 or 17 or any other section of this Plan, the Committee may, at any time or from time to time, and on such terms and conditions (that are consistent with and not in contravention of the other provisions of this Plan) as the Committee may, in its sole discretion, determine, enter into agreements (or take other actions with respect to the options) for new options containing terms (including exercise prices) more (or less) favorable than the outstanding options.  5. Participation.           Participation in the Plan shall be limited to those directors (including Non-Employee Directors), officers (including non-employee officers) and employees of the Company and its Subsidiaries selected by the Committee (including participants located outside the United States). Nothing in the Plan or in any grant thereunder shall confer any right on a participant to continue in the employ of or the performance of services for the Company or shall interfere in any way with the right of the Company to terminate the employment or performance of services of a participant at any time. By accepting any award under the Plan, each participant and each person claiming under or through him or her shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee.                                          5            Incentive Stock Options or Nonqualified Stock Options, SARs, alone or in tandem with options, restricted stock awards, performance awards, or any combination thereof, may be granted to such persons and for such number of Shares as the Committee shall determine (such individuals to whom grants are made being sometimes herein called "optionees" or "grantees," as the case may be). Determinations made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such individuals are similarly situated. A grant of any type made hereunder in any one year to an eligible participant shall neither guarantee nor preclude a further grant of that or any other type to such participant in that year or subsequent years.  6. Incentive and Nonqualified Options.           The Committee may from time to time grant to eligible participants Incentive Stock Options, Nonqualified Stock Options, or any combination thereof, provided that the Committee may grant Incentive Stock Options only to eligible employees of the Company or its subsidiaries (as defined for this purpose in Section 424(f) of the Code). In any one calendar year, the Committee shall not grant to any one participant, options or SARs to purchase a number of shares of Common Stock in excess of 20% of the shares authorized under the Plan. The options granted shall take such form as the Committee shall determine, subject to the following terms and conditions.           It is the Company's intent that Nonqualified Stock Options granted under the Plan not be classified as Incentive Stock Options, that Incentive Stock Options be consistent with and contain or be deemed to contain all provisions required under Section 422 of the Code and any successor thereto, and that any ambiguities in construction be interpreted in order to effectuate such intent. If an Incentive Stock Option granted under the Plan does not qualify as such for any reason, then to the extent of such nonqualification, the stock option represented thereby shall be regarded as a Nonqualified Stock Option duly granted under the Plan, provided that such stock option otherwise meets the Plan's requirements for Nonqualified Stock Options.           (a) Price. The price per Share deliverable upon the exercise of each option ("exercise price") shall be established by the Committee, except that the exercise price of any option may not be less than 100% of the Fair Market Value of a share of Common Stock as of the date of grant of the option, and in the case of the grant of any Incentive Stock Option to an employee who, at the time of the grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the exercise price may not be less that 110% of the Fair Market Value of a share of Common Stock as of the date of grant of the option, in each case unless otherwise permitted by Section 422 of the Code.                                          6            (b) Payment. Options may be exercised, in whole or in part, upon payment of the exercise price of the Shares to be acquired. Unless otherwise determined by the Committee, payment shall be made (i) in cash (including check, bank draft or money order), (ii) by delivery of outstanding shares of Common Stock with a Fair Market Value on the date of exercise equal to the aggregate exercise price payable with respect to the options' exercise, (iii) by simultaneous sale through a broker reasonably acceptable to the Committee of Shares acquired on exercise, as permitted under Regulation T of the Federal Reserve Board, (iv) by authorizing the Company to withhold from issuance a number of Shares issuable upon exercise of the options which, when multiplied by the Fair Market Value of a share of Common Stock on the date of exercise is equal to the aggregate exercise price payable with respect to the options so exercised or (v) by any combination of the foregoing. Options may also be exercised upon payment of the exercise price of the Shares to be acquired by delivery of the optionee's promissory note, but only to the extent specifically approved by and in accordance with the policies of the Committee.           In the event a grantee elects to pay the exercise price payable with respect to an option pursuant to clause (ii) above, (A) only a whole number of share(s) of Common Stock (and not fractional shares of Common Stock) may be tendered in payment, (B) such grantee must present evidence acceptable to the Company that he or she has owned any such shares of Common Stock tendered in payment of the exercise price (and that such tendered shares of Common Stock have not been subject to any substantial risk of forfeiture) for at least six months prior to the date of exercise, and (C) Common Stock must be delivered to the Company. Delivery for this purpose may, at the election of the grantee, be made either by (A) physical delivery of the certificate(s) for all such shares of Common Stock tendered in payment of the price, accompanied by duly executed instruments of transfer in a form acceptable to the Company, or (B) direction to the grantee's broker to transfer, by book entry, such shares of Common Stock from a brokerage account of the grantee to a brokerage account specified by the Company. When payment of the exercise price is made by delivery of Common Stock, the difference, if any, between the aggregate exercise price payable with respect to the option being exercised and the Fair Market Value of the share(s) of Common Stock tendered in payment (plus any applicable taxes) shall be paid in cash. No grantee may tender shares of Common Stock having a Fair Market Value exceeding the aggregate exercise price payable with respect to the option being exercised (plus any applicable taxes).                                          7            In the event a grantee elects to pay the exercise price payable with respect to an option pursuant to clause (iv) above, (A) only a whole number of Share(s) (and not fractional Shares) may be withheld in payment and (B) such grantee must present evidence acceptable to the Company that he or she has owned a number of shares of Common Stock at least equal to the number of Shares to be withheld in payment of the exercise price (and that such owned shares of Common Stock have not been subject to any substantial risk of forfeiture) for at least six months prior to the date of exercise. When payment of the exercise price is made by withholding of Shares, the difference, if any, between the aggregate exercise price payable with respect to the option being exercised and the Fair Market Value of the Share(s) withheld in payment (plus any applicable taxes) shall be paid in cash. No grantee may authorize the withholding of Shares having a Fair Market Value exceeding the aggregate exercise price payable with respect to the option being exercised (plus any applicable taxes). Any withheld Shares shall no longer be issuable under such option.           (c) Terms of Options. The term during which each option may be exercised shall be determined by the Committee, but, except as otherwise provided herein, in no event shall an option be exercisable in whole or in part, in the case of a Nonqualified Stock Option or an Incentive Stock Option (other than as described below), more than ten years from the date it is granted or, in the case of an Incentive Stock Option granted to an employee who at the time of the grant owns more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, if required by the Code, more than five years from the date it is granted. All rights to purchase Shares pursuant to an option shall, unless sooner terminated, expire at the date designated. by the Committee. The Committee shall determine the date on which each option shall become exercisable and may provide that an option shall become exercisable in installments. The Shares constituting each installment may be purchased in whole or in part at any time after such installment becomes exercisable, subject to such minimum exercise requirements as may be designated by the Committee. Unless otherwise provided herein or in the terms of the related grant, an optionee may exercise an option only if he or she is, and has continuously since the date the option was granted, been a director, officer or employee of the Company or a Subsidiary. Prior to the exercise of an option and delivery of the Shares represented thereby, the optionee shall have no rights as a stockholder with respect to any Shares covered by such outstanding option (including any dividend or voting rights).           (d) Limitations on Grants. If required by the Code, the aggregate Fair Market Value (determined as of the grant date) of Shares for which an Incentive Stock Option is exercisable for the first time during any calendar year under all equity incentive plans of the Company and its subsidiaries (as defined in Section 422 of the Code) may not exceed $100,000.                                          8            (e) Termination; Change in Control.                    (i) If a participant ceases to be a director, officer or          employee of the Company or any Subsidiary due to death or Disability,          all of the participant's options and SARs shall become fully vested and          exercisable and shall remain so for a period of one year from the date          of such death or Disability, but in no event after the expiration date          of the options or SARs. Notwithstanding the foregoing, if the          Disability giving rise to the termination of employment is not a          disability within the meaning of Section 22(e)(3) of the Code,          Incentive Stock Options not exercised by such participant within 90          days after the date of termination of employment will cease to qualify          as Incentive Stock Options and will be treated as Nonqualified Stock          Options under the Plan if required to be so treated under the Code.                    (ii) If a participant ceases to be a director, officer or          employee of the Company or any Subsidiary upon the occurrence of his or          her Retirement, (A) all of the participant's options and SARs that were          exercisable on the date of Retirement shall remain exercisable for, and          shall otherwise terminate at the end of, a period of up to three years          after the date of Retirement, but in no event after the expiration date          of the options or SARs ; provided that the participant does not engage          in Competition during such three-year period unless he or she receives          written consent to do so from the Board or the Committee, and (B) all          of the participant's options and SARs that were not exercisable on the          date of Retirement shall be forfeited immediately upon such Retirement,          provided, however, that such options may become fully vested and          exercisable in the discretion of the Committee. Notwithstanding the          foregoing, Incentive Stock Options not exercised by such participant          within 90 days after Retirement will cease to qualify as Incentive          Stock Options and will be treated as Nonqualified Stock Options under          the Plan if required to be so treated under the Code.                    (iii) If a participant ceases to be a director, officer or          employee of the Company or a Subsidiary due to Cause, all of the          participant's options and SARs shall be forfeited immediately upon such          cessation, whether or not then exercisable.                    (iv) Unless otherwise determined by the Committee, if a          participant ceases to be a director, officer or employee of the Company          or a Subsidiary for any reason other than death, Disability, Retirement          or Cause, (A) all of the participant's options and SARs that were          exercisable on the date of such cessation shall remain exercisable for,                                          9            and shall otherwise terminate at the end of, a period of 90 days after          the date of such cessation, but in no event after the expiration date          of the options or SARs; provided that the participant does not engage          in Competition during such 90-day period unless he or she receives          written consent to do so from the Board or the Committee, and (B) all          of the participant's options and SARs that were not exercisable on the          date of such cessation shall be forfeited immediately upon such          cessation.                    (v) If there is a Change in Control of the Company and a          grantee is terminated from being a director, officer or employee of the          Company or its Subsidiaries within one year thereafter, all of the          participant's options and SARs shall become fully vested and          exercisable immediately prior to such termination and shall remain so          for one year after the date of termination. In addition, the Committee          shall have the authority to grant options that become fully vested and          exercisable automatically upon a Change in Control, whether or not the          grantee is subsequently terminated thereafter.           (f) Grant of Reload Options. The Committee may provide (either at the time of grant or exercise of an option), in its discretion, for the grant to a grantee who exercises all or any portion of an option ("Exercised Options") and who pays all or part of such exercise price with shares of Common Stock, of an additional option (a "Reload Option") for a number of shares of Common Stock equal to the sum (the "Reload Number") of the number of shares of Common Stock tendered or withheld in payment of such exercise price for the Exercised Options plus, if so provided by the Committee, the number of shares of Common Stock, if any, tendered or withheld by the grantee or withheld by the Company in connection with the exercise of the Exercised Options to satisfy any federal, state or local tax withholding requirements. The terms of each Reload Option, including the date of its expiration and the terms and conditions of its exercisability and transferability, shall be the same as the terms of the Exercised Option to which it relates, except that (i) the grant date for each Reload Option shall be the date of exercise of the Exercised Option to which it relates and (ii) the exercise price for each Reload Option shall be the Fair Market Value of the Common Stock on the grant date of the Reload Option.  7. Stock Appreciation Rights.           The Committee shall have the authority to grant SARs under this Plan, either alone or to any optionee in tandem with options (either at the time of grant of the related option or thereafter by amendment to an outstanding option). SARs shall be subject to such terms and conditions as the Committee may specify.                                          10            No SAR may be exercised unless the Fair Market Value of a share of Common Stock of the Company on the date of exercise exceeds the exercise price of the SAR or, in the case of SARs granted in tandem with options, the exercise price of any options to which the SARs correspond. Prior to the exercise of the SAR and delivery of the cash and/or Shares represented thereby, the participant shall have no rights as a stockholder with respect to Shares covered by such outstanding SAR (including any dividend or voting rights).           SARs granted in tandem with options shall be exercisable only when, to the extent and on the conditions that any related option is exercisable. The exercise of an option shall result in an immediate forfeiture of any related SAR to the extent the option is exercised, and the exercise of an SAR shall cause an immediate forfeiture of any related option to the extent the SAR is exercised.           Upon the exercise of an SAR, the participant shall be entitled to a distribution in an amount equal to the difference between the Fair Market Value of a share of Common Stock on the date of exercise and the exercise price of the SAR or, in the case of SARs granted in tandem with options, the exercise price of any option to which the SAR is related, multiplied by the number of Shares as to which the SAR is exercised. The Committee shall decide whether such distribution shall be in cash, in Shares having a Fair Market Value equal to such amount, in Other Company Securities having a Fair Market Value equal to such amount or in a combination thereof.           All SARs will be exercised automatically on the last day prior to the expiration date of the SAR or, in the case of SARs granted in tandem with options, the expiration date of any related option, so long as the Fair Market Value of a share of Common Stock on that date exceeds the exercise price of the SAR or any related option, as applicable. An SAR granted in tandem with options shall expire at the same time as any related option expires and shall be transferable only when, and under the same conditions as, any related option is transferable.  8. Restricted Stock.           The Committee may at any time and from time to time grant Shares of restricted stock under the Plan to such participants and in such amounts as it determines. Each grant of restricted stock shall specify the applicable restrictions on such Shares, the duration of such restrictions (which shall be at least six months except as otherwise provided in the third paragraph of this Section 8), and the time or times at which such restrictions shall lapse with respect to all or a specified number of Shares that are part of the grant.                                          11            The participant will be required to pay the Company the aggregate par value of any Shares of restricted stock (or such larger amount as the Board may determine to constitute capital under Section 154 of the Delaware General Corporation Law, as amended) within ten days of the date of grant, unless such Shares of restricted stock are treasury shares. Unless otherwise determined by the Committee, certificates representing Shares of restricted stock granted under the Plan will be held in escrow by the Company on the participant's behalf during any period of restriction thereon and will bear an appropriate legend specifying the applicable restrictions thereon, and the participant will be required to execute a blank stock power therefor. Except as otherwise provided by the Committee, during such period of restriction the participant shall have all of the rights of a holder of Common Stock, including but not limited to the rights to receive dividends and to vote, and any stock or other securities received as a distribution with respect to such participant's restricted stock shall be subject to the same restrictions as then in effect for the restricted stock.           Except as otherwise provided by the Committee, all restrictions on a grantee's restricted stock will lapse at such time as the grantee ceases to be a director, officer or employee of the Company or a Subsidiary, if such cessation occurs due to a termination within one year after a Change in Control or due to death, Disability or (in the discretion of the Committee) Retirement. At such time as a participant ceases to be a director, officer or employee of the Company or its Subsidiaries for any other reason, all Shares of restricted stock granted to such participant on which the restrictions have not lapsed shall be immediately forfeited to the Company.  9. Performance Awards.           Performance awards may be granted to participants at any time and from time to time as determined by the Committee. The Committee shall have complete discretion in determining the size and composition of performance awards so granted to a participant and the appropriate period over which performance is to be measured (a "performance cycle"). Performance awards may include (i) specific dollar-value target awards (ii) performance units, the value of each such unit being determined by the Committee at the time of issuance, and/or (iii) performance Shares, the value of each such Share being equal to the Fair Market Value of a share of Common Stock.           The value of each performance award may be fixed or it may be permitted to fluctuate based on a performance factor (e.g., return on equity) selected by the Committee.                                          12            The Committee shall establish performance goals and objectives for each performance cycle on the basis of such criteria and objectives as the Committee may select from time to time, including, without limitation, the performance of the participant, the Company, one or more of its Subsidiaries or divisions or any combination of the foregoing. During any performance cycle, the Committee shall have the authority to adjust the performance goals and objectives for such cycle for such reasons as it deems equitable.           The Committee shall determine the portion of each performance award that is earned by a participant on the basis of the Company's performance over the performance cycle in relation to the performance goals for such cycle. The earned portion of a performance award may be paid out in Shares, cash, Other Company Securities, or any combination thereof, as the Committee may determine.           A participant must be a director, officer or employee of the Company or its Subsidiaries at the end of the performance cycle in order to be entitled to payment of a performance award issued in respect of such cycle; provided, however, that, except as otherwise determined by the Committee, if a participant ceases to be a director, officer or employee of the Company and its Subsidiaries prior to the end of the performance cycle and if such cessation occurs due to termination within one year after a Change in Control or due to death, Disability or Retirement, the participant shall earn a proportionate portion of the performance award based upon the elapsed portion of the performance cycle and the Company's performance over that portion of such cycle.  10. Withholding Taxes.           (a) Participant Election. Unless otherwise determined by the Committee, a participant may elect to deliver shares of Common Stock (or have the Company withhold shares acquired upon exercise of an option or SAR or deliverable upon grant or vesting of restricted stock, as the case may be) to satisfy, in whole or in part, the amount the Company is required to withhold for taxes in connection with the exercise of an option or SAR or the delivery of restricted stock upon grant or vesting, as the case may be. Such election must be made on or before the date the amount of tax to be withheld is determined. Once made, the election shall be irrevocable. The fair market value of the shares to be withheld or delivered will be the Fair Market Value as of the date the amount of tax to be withheld is determined. In the event a participant elects to deliver shares of Common Stock pursuant to this Section 10(a), such delivery must be made subject to the conditions and pursuant to the procedures set forth in Section 6(b) with respect to the delivery of Common Stock in payment of the exercise price of options.                                          13            (b) Company Requirement. The Company may require, as a condition to any grant or exercise under the Plan or to the delivery of certificates for Shares issued hereunder, that the grantee make provision for the payment to the Company, either pursuant to Section 10(a) or this Section 10(b), of any foreign, federal, state or local taxes of any kind required by law to be withheld with respect to any grant or any delivery of Shares. The Company, to the extent permitted or required by law, shall have the right to deduct from any payment of any kind (including salary or bonus) otherwise due to a grantee, an amount equal to any foreign, federal, state or local taxes of any kind required by law to be withheld with respect to any grant or to the delivery of Shares under the Plan, or to retain or sell without notice a sufficient number of the Shares to be issued to such grantee to cover any such taxes, the payment of which has not otherwise been provided for in accordance with the terms of the Plan, provided that the Company shall not sell any such Shares if such sale would be considered a sale by such grantee for purposes of Section 16 of the Exchange Act that is not exempt from matching thereunder.  11. Written Agreement; Vesting.           Each employee to whom a grant is made under the Plan shall enter into a written agreement with the Company that shall contain such provisions, including, without limitation, vesting requirements, consistent with the provisions of the Plan, as may be approved by the Committee. Unless the Committee determines otherwise and except as otherwise provided in Sections 6, 7, 8 and 9 in connection with a Change in Control or certain occurrences of termination, no grant under this Plan may be exercised, and no restrictions relating thereto may lapse, within six months of the date such grant is made.  12. Transferability.           Unless the Committee determines otherwise, no option, SAR, performance award, or restricted stock granted under the Plan shall be transferable by a participant otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code. Unless the Committee determines otherwise, an option, SAR or performance award may be exercised only by the optionee or grantee thereof or his guardian or legal representative; provided that Incentive Stock Options may be exercised by such guardian or legal representative only if permitted by the Code and any regulations promulgated thereunder.                                          14   13. Listing, Registration and Qualification.           If the Committee determines that the listing, registration or qualification upon any securities exchange or under any law of Shares subject to any option, SAR, performance award or restricted stock grant is necessary or desirable as a condition of, or in connection with, the granting of same or the issue or purchase of Shares thereunder, no such option or SAR may be exercised in whole or in part, no such performance award may be paid out and no Shares may be issued unless such listing, registration or qualification is effected free of any conditions not acceptable to the Committee.           It is the intent of the Company that awards made hereunder comply in all respects with Rule 16b-3 under the Exchange Act, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention.  14. Transfer of Employee.           The transfer of an employee from the Company to a Subsidiary, from a Subsidiary to the Company, or from one Subsidiary to another shall not be considered a termination of employment; nor shall it be considered a termination of employment if an employee is placed on military or sick leave or such other leave of absence which is considered by the Committee as continuing intact the employment relationship.  15. Adjustments.           In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustment as it deems appropriate in the number and kind of Shares or other property reserved for issuance under the Plan, in the number and kind of Shares or other property covered by grants previously made under the Plan, and in the exercise price of outstanding options and SARs. Any such adjustment shall be final, conclusive and binding for all purposes of the Plan. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation or in which a Change in Control is to occur, all of the Company's obligations regarding options, SARs performance awards and restricted stock that were granted hereunder and that are outstanding on the date of such event shall, on such terms as may be approved by the Committee prior to such event, be assumed by the surviving or continuing corporation or canceled in exchange for property (including cash).                                          15            Without limitation of the foregoing, in connection with any transaction of the type specified by clause (iii) of the definition of a Change in Control in Section 2(c), the Committee may, in its discretion, (i) cancel any or all outstanding options under the Plan in consideration for payment to the holders thereof of an amount equal to the portion of the consideration that would have been payable to such holders pursuant to such transaction if their options had been fully exercised immediately prior to such transaction, less the aggregate exercise price that would have been payable therefor, or (ii) if the amount that would have been payable to the option holders pursuant to such transaction if their options had been fully exercised immediately prior thereto would be less than the aggregate exercise price that would have been payable therefor, cancel any or all such options for no consideration or payment of any kind. Payment of any amount payable pursuant to the preceding sentence may be made in cash or, in the event that the consideration to be received in such transaction includes securities or other property, in cash and/or securities or other property in the Committee's discretion.  16. Termination and Modification of the Plan.           The Board of Directors or the Committee, without approval of the stockholders, may modify or terminate the Plan, except that no modification shall become effective without prior approval of the stockholders of the Company if stockholder approval would be required for any listing requirement of the principal stock exchange on which the Common Stock is then listed.  17. Amendment or Substitution of Awards under the Plan.           The terms of any outstanding award under the Plan may be amended from time to time by the Committee in its discretion in any manner that it deems appropriate (including, but not limited to, acceleration of the date of exercise of any award and/or payments thereunder or of the date of lapse of restrictions on Shares); provided that, except as otherwise provided in Section 15, no such amendment shall adversely affect in a material manner any right of a participant under the award without his or her written consent. The Committee may, in its discretion, permit holders of awards under the Plan to surrender outstanding awards in order to exercise or realize rights under other awards, or in exchange for the grant of new awards, or require holders of awards to surrender outstanding awards as a condition precedent to the grant of new awards under the Plan.                                          16   18. Commencement Date; Termination Date.           The date of commencement of the Plan shall be June 22, 1998, subject to approval by the shareholders of the Company. Unless previously terminated upon the adoption of a resolution of the Board terminating the Plan, the Plan shall terminate at the close of business on June 22, 2008; provided that the Board may, prior to such termination, extend the term of the Plan for up to five years for the grant of awards other than Incentive Stock Options. No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person, without his or her consent, under any grant of options or other incentives theretofore granted under the Plan.  19. Governing Law.           The Plan shall be governed by the corporate laws of the State of Delaware without giving effect to any choice of law provisions.                                          17    EX-10.21 3 hines_10kex10-21.txt                                                                       EXHIBIT 10.21                                 HINES NURSERIES, INC.                       SECOND AMENDMENT TO CREDIT AGREEMENT                     This SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of February 3, 2006 and entered into by and among HINES NURSERIES, INC., a California corporation ("COMPANY"), and HINES SGUS INC., a Nevada corporation ("HINES SGUS" and, together with Company, individually a "BORROWER" and collectively the "BORROWERS"), the financial institutions party hereto, and DEUTSCHE BANK TRUST COMPANY AMERICAS, as administrative agent for Lenders (in such capacity, "AGENT"), and, for purposes of Section 4 hereof, the Credit Support Parties (as defined in Section 4 hereof), and is made with reference to that certain Credit Agreement dated as of September 30, 2003, as amended to the date hereof (the "CREDIT AGREEMENT"), by and among Borrowers, the financial institutions party thereto (each individually referred to herein as a "LENDER" and collectively as "LENDERS") and the Agent. Capitalized terms used herein without definition shall have the same meanings herein as set forth in the Credit Agreement.                                                       RECITALS                    WHEREAS, the Borrowers have requested that the Credit Agreement be amended as provided herein;                    WHEREAS, the Agent and the Lenders party hereto have agreed to amend the Credit Agreement on the terms and conditions hereinafter set forth;                    NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows:  SECTION 1.        AMENDMENTS TO THE CREDIT AGREEMENT           1.1      AMENDMENTS TO SECTION 1.1:  GENERAL DEFINITIONS.                    A. Subsection 1.1 of the Credit Agreement is hereby amended by adding the following definition thereto in appropriate alphabetical order:           "`WINTERS SOUTH RELOCATION EXPENDITURES' means up to $10,000,000.00 in          aggregate Capital Expenditures related to the relocation of certain          operations of the Borrowers in California from Irvine to Winters          South."                    B. Subsection 1.1 of the Credit Agreement is hereby further amended by deleting the definition of "Fixed Charge Coverage Ratio" therefrom in its entirety and by substituting therefor the following:           "`FIXED CHARGE COVERAGE RATIO' shall mean, for any period, the ratio of          (i) EBITDA MINUS Capital Expenditures other than the Winters South          Relocation Expenditures MINUS income and franchise taxes paid in cash          other than taxes payable as a result of the Farm A Sale and the sale of          Borrowers' Lagoon Valley Property, in each case for such period, to          (ii) Fixed Charges for such period."             1.2      AMENDMENTS TO SECTION 8:  NEGATIVE COVENANTS.                    A. Subsection 8.1(a) of the Credit Agreement shall be amended by deleting all text commencing with and including the line "1st Fiscal Quarter, Fiscal Year 2006" from the table set forth therein through to the end of such table in its entirety and substituting therefor the following:                                                          MINIMUM FIXED CHARGE "FISCAL QUARTER                                            COVERAGE RATIO - ---------------                                            --------------  1st Fiscal Quarter, Fiscal Year 2006                         0.90:1.00 2nd Fiscal Quarter, Fiscal Year 2006                         0.55:1.00 3rd Fiscal Quarter, Fiscal Year 2006                         0.55:1.00 4th Fiscal Quarter, Fiscal Year 2006                         1.00:1.00  1st Fiscal Quarter, Fiscal Year 2007 and each Fiscal Quarter thereafter                                    1.10:1.00"                    B. Subsection 8.1(b) of the Credit Agreement shall be amended by deleting it in its entirety and substituting therefor "Intentionally Omitted."  SECTION 2.        CONDITIONS TO EFFECTIVENESS                    Section 1 of this Amendment shall become effective as of February 3, 2006 (the "AMENDMENT EFFECTIVE DATE") only upon the satisfaction of all of the following conditions precedent:                    A. BORROWER DOCUMENTS. Borrowers shall deliver to Lenders on or before the Amendment Effective Date the following, each, unless otherwise noted, dated as of the Amendment Effective Date:                    1. Signature and incumbency certificates of their officers          executing this Amendment; and                    2. Copies of this Amendment executed by Borrowers and the          Credit Support Parties.                    B. EXECUTION OF AMENDMENT BY LENDERS. Majority Lenders shall have executed and delivered copies of this Amendment to Agent.                    C. FEES. Borrowers shall pay to each Lender which executes and delivers this Amendment to Agent on or before 5:00 PM New York City time on the Amendment Effective Date an amendment fee in an amount equal to 0.125% of the aggregate amount of such Lender's Revolving Exposure under the Credit Agreement (as in effect immediately prior to this Amendment).                                          2                     D. OTHER PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Agent, acting on behalf of Lenders, shall be reasonably satisfactory in form and substance to Agent, and Agent shall have received all such counterpart originals or certified copies of such documents as Agent may reasonably request.  SECTION 3.        BORROWERS' REPRESENTATIONS AND WARRANTIES                    In order to induce Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, Borrowers represent and warrant to each Lender that the following statements are true, correct and complete:                    A. CORPORATE POWER AND AUTHORITY. Each Borrower has all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Credit Agreement as amended by this Amendment (the "Amended Agreement").                    B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action on the part of each Borrower.                    C. NO CONFLICT. The execution and delivery by Borrowers of this Amendment and the performance by each Borrower of the Amended Agreement do not and will not: (i) violate any provision of any law or any governmental rule or regulation applicable to any Borrower or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of any Borrower or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on any Borrower or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Material Contract of any Borrower or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of any Borrower or any of its Subsidiaries (other than Liens created under any of the Credit Documents in favor of Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Material Contract of any Borrower or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Amendment Effective Date and disclosed in writing to Lenders.                    D. GOVERNMENTAL CONSENTS. The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of this Amendment do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body (other than filings or recordings required by the transactions contemplated hereunder).                    E. BINDING OBLIGATION. This Amendment has been duly executed and delivered by each Borrower and is the legally valid and binding obligations of each Borrower, enforceable against each Borrower in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability.                                          3                     F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT AGREEMENT. The representations and warranties contained in Section 6 of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Amendment Effective Date and on and as of the date of the execution of this Amendment by Borrowers to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date.                    G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default or a Potential Event of Default.  SECTION 4.        ACKNOWLEDGEMENT AND CONSENT                    Each of the Borrowers, Hines Horticulture, Inc. and Hines Fertilizer, Inc. (collectively, the "CREDIT SUPPORT PARTIES") is a party to certain Guaranties and Collateral Documents, in each case as amended through the Amendment Effective Date, pursuant to which such Credit Support Party has guarantied the Obligations and created Liens in favor of Agent on certain Collateral to secure the obligations of such Credit Support Party under the Credit Agreement, the Collateral Documents and the Guaranties to which such Credit Support Party is a party. The Guaranties and Collateral Documents referred to above are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS".                    Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement and the other Credit Documents effected pursuant to this Amendment. Each Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guaranty or secure, as the case may be, to the fullest extent possible the payment and performance of all "Obligations," "Guarantied Obligations" and "Secured Obligations," as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation the payment and performance of all such "Obligations," "Guarantied Obligations" or "Secured Obligations," as the case may be, in respect of the Obligations of Company now or hereafter existing under or in respect of the Amended Agreement.                    Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the Amended Agreement and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date.                                          4                     Each Credit Support Party (other than Company) acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement.  SECTION 5.        MISCELLANEOUS                    A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER CREDIT DOCUMENTS.                    (i) On and after the Amendment Effective Date, each reference          in the Credit Agreement to "this Agreement", "hereunder", "hereof",          "herein" or words of like import referring to the Credit Agreement, and          each reference in the other Credit Documents to the "Credit Agreement",          "thereunder", "thereof" or words of like import referring to the Credit          Agreement shall mean and be a reference to the Amended Agreement.                    (ii) Except as specifically amended by this Amendment, the          Credit Agreement and the other Credit Documents shall remain in full          force and effect and are hereby ratified and confirmed.                    (iii) The execution, delivery and performance of this          Amendment shall not, except as expressly provided herein, constitute a          waiver of any provision of, or operate as a waiver of any right, power          or remedy of Agent or any Lender under, the Credit Agreement or any of          the other Credit Documents.                    B. FEES AND EXPENSES. Each Borrower acknowledges that all reasonable costs, fees and expenses incurred by Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of Borrowers.                    C. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect.                    D. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.                    E. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document.                                          5                     F. FURTHER ASSURANCES. Each Borrower agrees that from time to time, at the expense of Borrowers, each Borrower will promptly execute and deliver any additional amendments and related documents that Agent may reasonably request, in order to effectuate this Amendment and the transactions contemplated hereunder.                                          6                     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.                                BORROWERS:                                HINES NURSERIES, INC.,                               as Borrower, Credit Support Party and                               Funds Administrator                                 By:      /S/ CLAUDIA PIEROPAN                                        ----------------------------------------                               Name:    Claudia Pieropan                               Title:   Chief Financial Officer                                 HINES SGUS INC.,                               as Borrower and Credit Support Party                                 By:      /S/ CLAUDIA PIEROPAN                                        ----------------------------------------                               Name:    Claudia Pieropan                               Title:   Chief Financial Officer                                         S-1                                 ADDITIONAL CREDIT SUPPORT PARTIES:                                HINES HORTICULTURE, INC.                                 By:      /S/ CLAUDIA PIEROPAN                                        ----------------------------------------                               Name     Claudia Pieropan                               Title:   Chief Financial Officer                                 HINES FERTILIZER INC.                                By:      /S/ CLAUDIA PIEROPAN                                        ----------------------------------------                               Name:    Claudia Pieropan                               Title:   Chief Financial Officer                                         S-2                                 LENDERS:                                 DEUTSCHE BANK TRUST COMPANY AMERICAS,                               as Agent and Lender                                 By:      /S/ SUSAN LEFEVRE                                        ----------------------------------------                               Name:    SUSAN LEFEVRE                               Title:   DIRECTOR                                 By:      /S/ LANA GIFAS                                        ----------------------------------------                               Name:    LANA GIFAS                               Title:   VICE PRESIDENT                                         S-3                                    COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK                                  B.A. "RABOBANK INTERNATIONAL" NEW YORK BRANCH,                                  as Lender                                   By:      /S/ BRENTON SELLERS                                           --------------------------------------                                  Name:    BRENTON SELLERS                                  Title:   VICE PRESIDENT                                          S-4                                    BANK OF AMERICA, N.A., as Lender                                   By:      /S/ JASON RILEY                                           --------------------------------------                                  Name:    JASON RILEY                                  Title:   VICE PRESIDENT                                         S-5                                    NATIONAL CITY BANK, as Lender                                   By:      /S/ TOM GURBACH                                           --------------------------------------                                  Name:    TOM GURBACH                                  Title:   VICE PRESIDENT                                         S-6                                    THE CIT GROUP/BUSINESS CREDIT, INC., as Lender                                   By:      /S/ MARK J. LONG                                           --------------------------------------                                  Name:    MARK J. LONG                                  Title:   VICE PRESIDENT                                         S-7                                    HARRIS N.A., as Lender                                   By:      /S/ ROBERT H. WOLOHAN                                           --------------------------------------                                  Name:    ROBERT H. WOLOHAN                                  Title:   VICE PRESIDENT                                         S-8                                    WEBSTER BUSINESS CREDIT CORP, as Lender                                   By:      /S/ CHRISTOPHER HILL                                           --------------------------------------                                  Name:    CHRISTOPHER HILL                                  Title:   VICE PRESIDENT                                         S-9                                    WELLS FARGO BANK, N.A., as Lender                                   By:      /S/ DAVID G. JAMES                                           --------------------------------------                                  Name:    DAVID G. JAMES                                  Title:   SENIOR VICE PRESIDENT                                         S-10                                    LASALLE BUSINESS CREDIT, LLC, as Lender                                   By:      /S/ MITCHELL J. TARVID                                           --------------------------------------                                  Name:    MITCHELL J. TARVID                                  Title:   FIRST VICE PRESIDENT                                         S-11                                    PNC BANK, NATIONAL ACCOCIATION, as Lender                                   By:      /S/ GREGORY J. HALL                                           --------------------------------------                                  Name:    GREGORY J. HALL                                  Title:   VICE PRESIDENT                                         S-12                                    GMAC COMMERCIAL FINANCE LLC, as Lender                                   By:      /S/ DAVID GRABOSKY                                           --------------------------------------                                  Name:    DAVID GRABOSKY                                  Title:   VICE PRESIDENT                                         S-13    EX-10.25 4 hines_10kex10-25.txt                                                                       Exhibit 10.25                                   OPTION AGREEMENT                                 ----------------           This Option Agreement ("Agreement"), dated for reference purposes as of April 30, 2003, is entered into by and between HINES NURSERIES, INC., a California corporation ("Optionor"), and TRIAD COMMUNITIES, L.P., a California limited partnership ("Optionee").                                      RECITALS                                     --------           A. Optionor is the owner of certain real property ("Property"), consisting of approximately one hundred sixty-eight (168) gross acres, located in the City of Vacaville ("City"), Solano County ("County"), California, also known as Assessor's Parcel Number 0128-050-070-01, and more particularly described in Exhibit "A" and generally depicted on the Site Plan attached hereto as EXHIBIT "B". The term "Property" as used in this Agreement shall include all rights, entitlements, governmental approvals, privileges, easements and appurtenances owned by Optionor and benefiting such real property, including, without limitation, all mineral and water rights, development rights and all easements, rights-of-way and other appurtenances owned by Optionor used in or connected with the beneficial use of such real property, but excluding any licenses, permits and/or approvals relating to the right to operate a nursery facility on the Property.           B. Optionee desires to obtain an option to purchase the Property from Optionor, and Optionor is willing to grant an option to Optionee to purchase the Property pursuant to the provisions of this Agreement.           NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree as follows:                                      AGREEMENT                                     ---------           1. OPTION. Optionor hereby grants to Optionee and Optionee shall have the right and option, but not the obligation, to purchase the Property from Optionor upon the terms and subject to the conditions set forth in this Agreement ("Option") during the Option Term (as hereinafter defined). For the purposes of this Agreement, the date on which the last party executes this Agreement and delivers it to the other party shall hereinafter be referred to as the "Commencement Date."           2. OPTION TERM. The Option created by this Agreement shall commence on the date both parties execute this Agreement, and shall continue until MARCH 1, 2005, expiring at 5:00 p.m. on such date ("Option Term"), or earlier if this Option is terminated or deemed to have expired pursuant to the provisions set forth in this Agreement. Optionee's right to acquire the Property following the exercise of the Option is subject to the terms and conditions contained herein, including, without limitation Section 13(b)(i).             3. OPTION CONSIDERATION. As consideration for the granting of this Option by Optionor, Optionee shall pay Optionor the following sums:                    (a) Upon the opening of Escrow (as hereinafter defined), Optionee shall deliver the amount of One Thousand Dollars ($1,000.00) as non-refundable option consideration in immediately available funds, directly to Optionor.                    (b) As additional option consideration, Optionee shall deliver directly to Optionor to following sums at the times specified below:  - ----------------------------------------- --------------------------------------               Time for Payment                 Additional Option Consideration              ----------------                 ------------------------------- - ----------------------------------------- --------------------------------------  June 10, 2003                                            $ 50,000 - ----------------------------------------- --------------------------------------  September 1, 2003                                        $100,000 - ----------------------------------------- --------------------------------------  December 1, 2003                                         $125,000 - ----------------------------------------- --------------------------------------  July 1, 2004                                             $125,000 - ----------------------------------------- --------------------------------------  October 1, 2004                                          $150,000 - ----------------------------------------- --------------------------------------  January 3, 2005                                          $200,000 - ----------------------------------------- --------------------------------------           All monetary sums paid to Optionor by Optionee pursuant to this Section 3 shall be collectively referred to as the "Option Consideration" under this Agreement and shall be consideration for the granting of this Option and for Optionor's forbearance in keeping the Property off the market as long as the Option is in effect. Except as expressly provided in this Agreement, the Option Consideration shall be the sole and absolute property of Optionor when due and shall not be refunded in the event Optionee does not exercise this Option or this Option terminates as provided in this Agreement. Delivery of the Option Consideration shall require actual delivery of immediately available funds to Optionor, at its address for notices, as provided in this Agreement, on or before 5:00 p.m. on the date that the applicable payment of Option Consideration is due (subject to Section 24 below). In the event Optionee exercises the Option as provided by this Agreement, the Option Consideration shall be credited against the Purchase Price. Optionee's obligation to pay Option Consideration shall immediately terminate as to any future installments of Option Consideration upon Close of Escrow, termination of the Option, or expiration of the Option Term.           4. EXERCISE OF OPTION. Optionee may exercise this Option only by delivering to Optionor and Escrow Holder written notice of its irrevocable exercise of the Option ("Option Notice") at any time prior to the expiration of the Option Term.           5. TERMINATION OF OPTION. The Option shall terminate upon the occurrence of any one or more of the following events:                                         -2-                     (a) Failure of Optionee to timely exercise the Option in accordance with the terms and conditions of this Agreement;                    (b) Except as provided in subsection (c) below, upon Optionee's failure to comply with any of the terms and conditions of this Agreement within ten (10) business days following Optionee's receipt of written notice (as provided in Section 28 below) from Optionor;                    (c) Upon Optionee's failure to pay any payment of Option Consideration within five (5) business days following Optionee's receipt of written notice (as provided in Section 28 below) from Optionor;                    (d) Upon any event set forth in this Agreement which provides for the termination and/or cancellation of Optionee's right to purchase the Property after Optionee exercises the Option; or                    (e) The expiration of the Option Term.  Upon termination of the Option, the Escrow Holder shall automatically record the Quitclaim Deed in the Solano County Recorder's Office in accordance with Section 25 below without further instructions from the parties.           6. PURCHASE PRICE. The purchase price ("Purchase Price") for the Property shall be Fifteen Million One Hundred Thousand Dollars ($15,100,000.00).           7. PAYMENT OF PURCHASE PRICE. On or before the Close of Escrow (as hereinafter defined), Optionee shall deposit with Escrow Holder, in immediately available funds, monies equal to the Purchase Price which shall be paid to Optionor at Close of Escrow plus Optionor's share of closing costs as set forth in this Agreement. At the Close of Escrow, the Option Consideration shall be credited to the Purchase Price.           8. ESCROW. Within five (5) business days after the Commencement Date, Optionee shall open an escrow ("Escrow") with First American Title Insurance Company, 1355 Willow Way, Suite 100, Concord, California, 94520, ("Escrow Holder"), and shall deposit with Escrow Holder an original of this Agreement. Optionee and Optionor agree to execute and deliver to Escrow Holder, in a timely manner, all escrow instructions necessary to consummate the transaction contemplated by this Agreement. Any such instructions shall not conflict with, amend or supersede any portion of this Agreement. This Agreement shall be a part of such escrow instructions. If there is any inconsistency between such instructions and this Agreement, this Agreement shall control.           9. DETERMINING BOUNDARIES OF PHASES. The Property shall be designated into three (3) separate phases as set forth below. The maximum amount of acreage contained within the Phase I Property shall be twenty (24) acres. Optionee shall designate the boundaries of the Phase I Property from the acreage set forth on the Site Plan attached hereto as EXHIBIT "C" (the "Potential Phase I Property"). Optionee shall designate the actual Phase I Property by giving Optionor written notice on or before MARCH 1, 2004, and such designated property shall become the Phase I Property on the License Agreement attached hereto as EXHIBIT "E" ("License Agreement"). All of the real property within the Potential Phase I Property which is not included within the actual Phase I Property shall be                                         -3-   combined with that portion of the Phase II Property described on EXHIBIT "C-1" attached hereto, and when combined, shall constitute the Phase II Property and depicted in the License Agreement. All of the remaining real property shall be designated as the Phase III Property on the License Agreement.           10. CLOSE OF ESCROW. For the purpose of this Agreement, "Close of Escrow" shall be defined as the date that the Grant Deed (as hereinafter defined) is recorded in the Official Records of the County. The Close of Escrow shall occur on APRIL 1, 2005. Following the Close of Escrow, Seller shall retain possession of the Property subject to the terms, conditions and obligations in the License Agreement.           11. CONDITIONS OF TITLE. At the Close of Escrow, the Property shall be conveyed to Optionee by a standard California grant deed ("Grant Deed") in the form customarily used by First American Title Company ("Title Company") and Title Company shall be irrevocably committed to issue its standard form American Land Title Association ("ALTA") Policy of Title Insurance ("Title Policy") to Optionee showing fee title to the Property vested in Optionee subject only to (a) a lien to secure payment of real estate taxes, bonds and assessments, not delinquent; (b) the lien of supplemental taxes, not delinquent; and (c) exceptions to title created by Optionee and/or approved and/or accepted by Optionee prior to the expiration of the Option Term, and (d) all applicable laws, ordinances, rules and governmental regulations (including, but not limited to those relative to building, zoning and land use) affecting the development, use, occupancy or enjoyment of the Property (collectively, "Approved Conditions of Title"). The Title Policy shall be issued with liability in an amount equal to the Purchase Price. Optionor shall pay for the expense of the Title Policy, other than any endorsements requested by Optionee, and other than the incremental increase in premium of the ALTA policy over a CLTA Owner's Policy of Title Insurance and any survey costs.           12. OPTIONEE'S DUE DILIGENCE.                    (a) TITLE. Prior to the expiration of the Option Term Optionee shall have the right in its sole and absolute discretion to approve any and all matters of and exceptions to title of the Property, including the legal description, as disclosed by the following documents and instruments (collectively, "Title Documents"): (A) a preliminary report ("Preliminary Report") issued by Escrow Holder with respect to the Property and all matters referenced therein; and (B) legible copies of all documents, referred to in such Preliminary Report. Optionor shall cause Escrow Holder to deliver the Title Documents to Optionee within fifteen (15) calendar days following the Commencement Date.                    (b) INSPECTIONS AND STUDIES. Until expiration of the Option Term Optionee shall have the right to review and approve in its sole and absolute discretion the (A) Documents and Materials (as hereinafter defined), and (B) conduct any and all inspections, investigations, tests and studies (including, without limitation, investigations with regard to zoning, general plan, the political development climate, market research for the Property, building codes and other governmental regulations, architectural inspections, municipal service (all utilities), engineering tests, economic feasibility studies, soils, seismic and geologic reports and environmental testing) with respect to the Property as Optionee may elect to make or maintain, provided that Optionee does not materially interfere with the nursery operations on the                                         -4-   Property. Optionee shall give Optionor at least seventy-two (72) hours notice prior to any entry onto the Property and the general purpose of such entry. Such notice may be verbal and shall be directed to the general manager at the Property. The cost of any such inspections, tests and/or studies shall be solely borne by Optionee.                    Until expiration of the Option Term, Optionee, its agents, contractors and subcontractors shall have the right to enter upon the Property at reasonable times during ordinary business hours to make any and all inspections and tests as may be necessary or desirable in Optionee's sole judgment and discretion, provided that (A) Optionee does not materially interfere with the nursery operations on the Property; (B) Optionee returns the Property to substantially its original condition; and (C) Optionee complies with all applicable laws, statutes, and ordinances in entering the Property and performing the investigations. Optionee shall indemnify, defend and hold Optionor and the Property harmless from any and all damage arising out of, connected with or incidental to the work or activities conducted on the Property by Optionee, its agents, contractors and/or subcontractors, including any injuries to persons (including death) or property (real or personal), or mechanics', workers' or other liens on the Property, but excepting liability which results from the release of pre-existing toxic or Hazardous Materials on or about the Property resulting from normal environmental testing procedures (unless such release is solely the result of Optionee's gross negligence or willful misconduct). This obligation shall survive the Close of Escrow or termination of this Agreement.                    Prior to any entry on to the Property by Optionee or its agents, contractors, subcontractors or employees, Optionee shall deliver to Optionor an endorsement to Optionee's commercial general liability insurance policy which evidences that Optionee is carrying a commercial general liability insurance policy with a financially responsible insurance company acceptable to Optionor, covering (i) the activities of Optionee, and Optionee's agents, contractors, subcontractors and employees on or upon the Property, and (ii) Optionee's indemnity obligations set forth in this Agreement. Such endorsement shall evidence that such insurance policy shall have a per occurrence limit of at least Two Million and No/100ths Dollars ($2,000,000.00) and an aggregate limit of at least Three Million and No/100ths Dollars ($3,000,000.00), shall have a deductible of not more than $500,000.00 (which shall be paid for by Optionee), shall name Optionor as an additional insured, shall be primary and non-contributing with any other insurance available to Optionor and shall contain a full waiver of subrogation clause. Optionee and all of its agents and consultants prior to entry shall also be obligated to obtain customary and adequate worker's compensation insurance as required by law and deliver proof of same to Optionor.                    If Optionee does not timely exercise the Option, Optionee shall deliver to Optionor, upon request of Optionor, true and complete copies of copies of any and all environmental assessment reports and other environmental reports, soils reports, seismic and geologic reports, drainage studies and copies of all other studies, reports or tests related to the physical development of the Property Optionee caused to be performed pursuant to its inspection rights set forth in this section (the "Physical Studies"). Optionee shall deliver such documents without representation or warranty as to accuracy or correctness. The Physical Studies shall specifically exclude any studies, tests or simulations related to Optionee's approach to the research, development and marketing of residential communities (the "Proprietary Studies"), and Optionee shall have no obligation to provide copies of such Proprietary Studies                                         -5-   to Optionor. Optionee shall retain ownership of the Physical Studies and the Proprietary Studies. Optionor is hereby authorized to contact each consultant who has prepared any of the Physical Studies for the purpose of obtaining permission from such consultant to rely upon the substance of the Physical Studies, and Optionee agrees to cooperate with Optionor in obtaining such permission, at no cost to Optionee.                    (c) ENTITLEMENTS. Prior to expiration of the Option Term, Optionee shall use commercially reasonable efforts to seek entitlements to develop the Property as a residential community, containing approximately 377 or more single-family units. At all times following the Commencement Date, and continuing to the Close of Escrow or other termination of this Agreement, Optionee shall have the right, at Optionee's sole cost and expense, to apply with all appropriate governmental and quasi-governmental entities for approvals of Optionee's development plans for the Property. Such right shall include the ability to take all reasonable steps necessary to obtain the requisite approvals, including, but not limited to, obtaining all permits, licenses or other governmental or quasi-governmental approvals which Optionee deems desirable and appropriate in connection with Optionee's proposed development of the Property, as well as obtaining infrastructure agreements with adjoining landowners (hereinafter collectively referred to as the "Entitlements"). As an element of the Entitlements, Optionee shall obtain written assurances from the City that Optionor will be allowed to continue its nursery operations on the Property during the term of the License Agreement as a legal nonconforming use. Optionee shall not seek any Entitlements that would materially interfere with Optionor's right to under the License Agreement. Optionor agrees to cooperate with Optionee in the processing and obtaining the requisite Entitlements at no material cost to Optionor, and subject to the provisions of this section, shall execute, upon request of Optionee, any and all applications, maps (including, without limitation, any large lot tentative map), documents and agreements which are reasonably necessary to accomplish such purposes, including the appointment of Optionee as agent for Optionor for the purpose of development of the Property. Optionee shall notify Optionor in writing of all public hearings which concern issues which could directly or indirectly affect the Property. Nothing herein shall obligate Optionee to pursue Entitlements for the Property in the event Optionee elects not to exercise the Option or the Option terminates.           In no event shall any of the Entitlements sought by Optionee, other than a large lot final subdivision map, vesting tentative map, rezoning, amendment of the existing community plan, and a development agreement (provided that Optionor shall be given the right in any development agreement to cancel same if Optionee does not acquire title to the Property), be effective or binding against the Property until the Close of Escrow.           The parties acknowledge that Optionee and/or affiliates of Optionee have or may acquire interests in or obtain purchase or option rights with respect to certain property adjacent to the Property, which adjacent property is described on EXHIBIT "D" attached hereto (the "Adjoining Property"). Optionee hereby covenants and agrees for itself and its affiliates that neither Optionee nor any affiliate will pursue, process or obtain any Entitlements with respect to the Adjoining Property unless the Property is also entitled as part of an integrated plan for the development of both the Property and the Adjoining Property. Any such integrated plan of development for the Property and the Adjoining Property shall provide that the owner of the Property shall be entitled to develop a number of single-family residential units no less than the                                         -6-   greater of (i) 377 or (ii) the sum of 377 plus 33.3% of the total number of single-family residential units which may be developed on both the Property and the Adjoining Property in excess of 1,277.           13. CONDITIONS TO CLOSE OF ESCROW.                    (a) CONDITIONS TO OPTIONEE'S OBLIGATIONS. After Optionee's timely exercise of the Option, the Close of Escrow and Optionee's obligations to consummate the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions (or Optionee's written waiver thereof) which are for Optionee's sole benefit, on or prior to the dates designated below for the satisfaction of such conditions, or the Close of Escrow in absence of a specified date:                             (i) TITLE INSURANCE. As of the Close of Escrow, Title Company shall have issued or shall have irrevocably committed to issue the Title Policy to Optionee and Optionor.                             (ii) OPTIONOR'S OBLIGATIONS. As of the Close of Escrow, Optionor shall have timely performed all of the material obligations required to be performed by Optionor under this Agreement.                             (iii) OPTIONOR'S REPRESENTATIONS. All representations and warranties made by Optionor to Optionee in this Agreement shall be materially true and correct in all material respects as of the Close of Escrow.                    (b) CONDITIONS TO OPTIONOR'S OBLIGATIONS. The Close of Escrow and Optionor's obligations to consummate the transaction contemplated by this Agreement are subject to the satisfaction of the following conditions (or Optionor's written waiver thereof) which are for Optionor's sole benefit, on or prior to the dates designated below for the satisfaction of such conditions, or the Close of Escrow in absence of a specified date:                             (i) OPTIONEE'S OBLIGATIONS. As of the Close of Escrow, Optionee shall have timely performed all of the material obligations required to be performed by Optionee under this Agreement.                             (ii) OPTIONEE'S REPRESENTATIONS. All representations and warranties made by Optionee to Optionor in this Agreement shall materially be true and correct as of the Close of Escrow.                             (iii) CLOSING DATE. The Close of Escrow shall occur on or before the Closing Date.                             (iv) FUNDS. Escrow Holder holds and will deliver to Seller the documents and funds accruing to Seller pursuant to the terms of this Agreement.                    (c) FAILURE OF CONDITION TO CLOSE OF ESCROW. In the event any of the conditions set forth in Sections 13(a) or 13(b) are not timely satisfied or waived by the appropriate benefited party, for reasons other than the material default of Optionee or Optionor, this Agreement shall terminate, and the party shall have no further obligations hereunder except as specifically set forth in this Agreement.                                         -7-            14. DEPOSITS BY OPTIONOR. Unless otherwise provided in this Section, at least one (1) business day prior to the Close of Escrow for the Property, Optionor shall deposit with Escrow Holder the following documents:                    (a) GRANT DEED. The Grant Deed, duly executed and acknowledged in recordable form by Optionor, conveying fee title to the Property to Optionee subject only to the Approved Conditions of Title.                    (b) GENERAL ASSIGNMENT. The General Assignment of Contracts, Agreements, Plans, Permits Licenses and Approval, duly executed in the form attached hereto as EXHIBIT "F".                    (c) LICENSE AGREEMENT. The License Agreement, duly executed in the form attached hereto as EXHIBIT "E" ("License Agreement").                    (d) FIRPTA CERTIFICATE. A certification, acceptable to Escrow Holder and duly executed by Optionor under penalty of perjury setting forth Optionor's address and federal tax identification number in accordance with and/or for the purpose of the provisions of Sections 7701 and 1445, as may be amended, of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder ("FIRPTA Certificate").                    (e) CALIFORNIA FRANCHISE TAX WITHHOLDING. Evidence satisfactory to Optionee and Escrow Holder that Optionor is exempt from the provisions of Section 18805 and 26131 of the California Revenue and Taxation Code, as amended, and that neither Optionee nor Escrow Holder is required to withhold any amounts from the Purchase Price pursuant to such provisions.                    (f) PROOF OF AUTHORITY. Subject to Section 36(l) below, at such times as are requested by Escrow Holder, such proof of Optionor's authority and authorization to enter into this Agreement and consummate the transaction contemplated hereby, and such proof of the power and authority of the individual(s) executing and/or delivering any instruments, documents or certificates on behalf of Optionor as may be reasonably required by Escrow Holder and/or Optionee.                    (g) LIEN AFFIDAVITS. Any lien affidavits that there are no parties in possession and/or a mechanic's lien indemnification as may be required by Escrow Holder in order to issue the Title Policy, excluding any liens which were not caused by or under work contracted for by Optionor.           15. DEPOSITS BY OPTIONEE. Optionee shall deposit or cause to be deposited with Escrow Holder no later than 9:00 a.m. on the Closing Date (a) the funds which are to be applied towards the payment of the Purchase Price (as adjusted by the prorations and credits hereinafter provided); (b) the executed License Agreement; and (c) the executed General Assignment. Notwithstanding anything herein to the contrary, after Optionee makes the option consideration payment on September 1, 2003 in accordance with Section 3(b) above, Optionee shall be entitled to give Optionor written demand to deposit all documents with Escrow Holder which are necessary for the Close of Escrow to occur as required                                         -8-   under the Option Agreement. Such documents executed by Optionor shall only be used by Escrow Holder in accordance with the terms of this Agreement, such that Optionor has fully performed all obligations under this Agreement and all future performance is unilateral with respect to the Optionee.           16. COSTS AND EXPENSES. Except as otherwise specified in this Agreement, Optionor and Optionee shall equally divide all escrow and title costs, including: (a) documentary transfer tax; (b) all escrow fees and costs; and (c) any document recording charges. Notwithstanding the foregoing, Optionor shall pay all fees and costs associated with the removal of any liens or deeds of trust encumbering the Property, excluding non-delinquent real property taxes and assessments. Optionee and Optionor shall each pay all legal and professional fees and fees of other consultants incurred by Optionee and Optionor, respectively.           17. CANCELLATION FEES. If the Escrow fails to close by reason of the default of either Optionee or Optionor, the defaulting party shall pay the Escrow Holder's fees and charges. If the Escrow fails to close for any reason other than Optionee's or Optionor's default hereunder, Optionee shall pay the Escrow Holder's and Title Company's fees and cancellation charges.           18. PRORATIONS.                    (a) TAXES/ASSESSMENTS. All non-delinquent real estate taxes and non-delinquent assessments on the Property shall be prorated as of 11:59 p.m. on the day prior to the Close of Escrow based on the actual current tax bill, but if such tax bill has not yet been received by Optionor by the Close of Escrow, then the current year's taxes shall be deemed to be one hundred two percent (102%) of the amount of the previous year's tax bill for the Property. All delinquent taxes and all delinquent assessments, if any, on the Property shall be paid at the Close of Escrow from funds accruing to Optionor. All supplemental taxes billed after the Close of Escrow for periods prior to the Close of Escrow shall be paid promptly by Optionor to Optionee in immediately available funds.                    (b) OTHER EXPENSES. All other expenses for the Property shall be prorated as of 11:59 p.m. on the day prior to the Close of Escrow between the parties based upon the latest available information.                    (c) CORRECTIONS. If any errors or omissions are made regarding adjustments and prorations as set forth herein, the parties shall make the appropriate corrections promptly upon discovery thereof. If any estimates are made at the Close of Escrow regarding adjustments or prorations, the party shall make the appropriate correction promptly when accurate information becomes available. Any corrected adjustment or proration shall be paid in cash to the party entitled thereto.           19. REVIEW OF DOCUMENTS AND MATERIALS. Within fifteen (15) calendar days following the Commencement Date, Optionor shall deliver to Optionee, at Optionor's sole cost and expense, copies of the following documents and materials (collectively, "Documents and Materials") which are in the possession of Optionor (except subparagraph (b)). Optionor shall also use Optionor's reasonable efforts to obtain and deliver to Optionee during such fifteen (15) day period any Documents and Materials in the possession of Optionor's agents. All Documents and Materials delivered to Optionee shall be returned to Optionor if Optionee fails to acquire the Property pursuant to this Agreement.                                         -9-                     (a) LICENSES. Any and all licenses, permits and agreements affecting or relating to the ownership, subdivision, possession or development of the Property.                    (b) GOVERNMENTAL CORRESPONDENCE. Copies of all applications and correspondence or other written communications to or from any governmental or quasi-governmental entity, department or agency for the past three (3) years relating to the Property shall be available for inspection by Optionee at the Property during regular business hours upon at least twenty-four (24) hours notice.                    (c) SURVEYS. Copies of the most recent survey(s), if any, pertaining to the Property or any portion thereof.                    (d) MAPS. Any and all tentative, parcel and/or final maps, development plans, site plans, building permits, certificates of occupancy, specifications or any other governmental approvals or processed documents relating to the subdivision or development of the Property.                    (e) REPORTS. Any and all reports, projections, studies or other documents or written information pertaining to the Property.                    (f) TAX STATEMENTS. Any and all property tax statements pertaining to the Property for the past three (3) years.                    (g) STUDIES. Any and all soils reports, engineering data, environmental reports and any other data or studies pertaining to the Property or any portion thereof.                    (h) OTHER DOCUMENTS. Any other documents or materials relating, directly or indirectly, to the Property which Optionee reasonably requests.  Any information provided or to be provided by Optionor or Optionor's agents with respect to the Property is solely for Optionee's convenience and was or will be obtained from a variety of sources and may have been prepared by third parties and may not be the work product of Optionor. Optionor has not made any independent investigation or verification of such information and makes no representations as to the accuracy or completeness of such information provided, however, as set forth in Section 22(h) below, to Optionor's actual knowledge all documents delivered to Optionee by Optionor are true and correct copies of such documents.           20. CONDITION AND INSPECTION OF PROPERTY. Except as otherwise expressly set forth in this Agreement, neither Optionor nor any of its employees, agents, principals, officers, directors, members, partners, attorneys or consultants has made any representations, guaranties, promises, statements, assurances or warranties, express or implied, as to the suitability for any purpose or the profitability of owning and operating the Property, the physical or environmental condition thereof, the rentals, income or expenses thereof, the actual acreage of the Property, the zoning thereof, the existence, necessity or satisfaction of any local, state or federal approvals or permits for the development or use thereof, the existence or status of entitlements relating                                         -10-   thereto, or any other past, present or future matter whatsoever. Optionee acknowledges that, except as otherwise expressly set forth in this Agreement, no representations or warranties have been made by Optionor, and that with the aid of such independent expert advice as Optionee deems appropriate, Optionee has and/or will have inspected and/or satisfied itself as to the condition of, and performed whatever due diligence it deems necessary with respect to, the Property, and with the exception of such express representations and warranties of Optionor, the Property is being purchased "AS-IS"/"WHERE-IS" with all faults, without representation or warranty, express or implied, regarding the condition of the Property.           Optionee, from and after the Close of Escrow, hereby waives, releases, remises, acquits and forever discharges Optionor, its members, directors, officers, shareholders, employees, and agents, and their respective shareholders, officers, directors, heirs, successors, personal representatives and assigns, of and from any and all environmental claims, liability, expenses, fees, costs or penalties and from any and all actions, suits, legal or administrative orders or proceedings, demands, actual damages, punitive damages, loss, costs, liabilities and expenses, which concern or in any way relate to the physical or environmental conditions of the Property, any other aspect of the Property, the existence of any Hazardous Substance thereon, the release or threatened release of Hazardous Substances therefrom or from any other conditions, actions or injuries on or about the Property, whether existing or occurring prior to, at or after the Close of Escrow. It is the intention of the parties pursuant to this release that any and all responsibilities and obligations of Optionor, and any and all rights, claims, rights of action, causes of action, demands or legal rights of any kind of Optionee, its successors, assigns or any affiliated entity of Optionee, arising by virtue of the physical or environmental condition of the Property, any other aspect of the Property, the existence of any Hazardous Substance thereon, any release or threatened release of Hazardous Substances therefrom, or from any other conditions, actions or injuries on or about the Property, whether existing or occurring prior to, at or after the Close of Escrow, are by this release provision waived and declared null and void and of no present or future force and effect as to the parties. Optionee expressly agrees to waive any and all rights which said party may have under Section 1542 of the California Civil Code which provides as follows:                    "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE                   CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE                   TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE                   MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."                                      ___________________                                     OPTIONEE'S INITIALS  Notwithstanding the foregoing, the provisions of the previous paragraph shall not apply to the representations and warranties of Optionor made pursuant to Section 22 below, or to any contamination of the Property arising from the activities of Optionor upon the Property after the Close of Escrow pursuant to the terms of the License Agreement.                                         -11-            21. ENVIRONMENTAL INSURANCE POLICY. Subject to the terms and condition set forth below, Optionor and Optionee shall use commercially reasonable efforts to obtain a commitment for an environmental insurance policy from AIG with coverage, endorsements and terms acceptable to the parties (the "Environmental Policy"). The Environmental Policy shall be for coverage of not less than Five Million Dollars ($5,000,000.00) and the term of the coverage shall be for a minimum period of ten (10) years. Optionee shall be solely responsible for paying (i) any deductible under the Environmental Policy; provided, however, in no event shall the deductible when combined with any co-payment amounts exceed Two Hundred Fifty Thousand Dollars ($250,000.00); and (ii) all costs to name another entity as an additional named insured to the Environmental Policy in the future. The Environmental Policy shall name Optionee as an additional insured or a co-insured, and shall include coverage for liability arising from sales to homebuyers. The parties shall equally split the premium charges for the Environmental Policy; provided, however, in no event shall the premium for the Environmental Policy exceed Two Hundred Thousand Dollars ($200,000.00), unless Optionee elects to pay for the additional premium over such amount at its sole cost. Optionee acknowledges that its contractors shall be required purchase professional liability insurance with a minimum limit of Five Million Dollars ($5,000,000.00) each claim and annual aggregate. Such insurance coverage should include Optionee's interest in joint ventures, if applicable, punitive damages coverage (where not prohibited by law), limited contractual liability, retroactive date prior to work, and extended reporting period of thirty-six (36) months. If the parties agree on the form and content of the Environmental Policy, they shall purchase the policy on or before AUGUST 1, 2003 and each party shall be responsible for paying one-half (1/2) of the premium for the Environmental Policy at such time.           22. OPTIONOR'S REPRESENTATIONS AND WARRANTIES.                    (a) SCOPE OF REPRESENTATIONS. In consideration of Optionee entering into this Agreement and as an inducement to Optionee to purchase the Property, Optionor makes the following representations and warranties which are being relied on by Optionee, but are subject to the following restrictions and limitations. Each of the representations and warranties are being made to the best of Optionor's actual knowledge as of the date of this Agreement without any investigation or duty to investigate, and based upon the laws, statues and regulations in effect on the date of this Agreement. Optionor shall have no duty to update its representations or warranties with respect to any modification to existing laws or any adoption of new laws. The use of the term "actual knowledge of Optionor" or any variation thereof in this Agreement shall mean and is limited to the actual knowledge of DAVE FUJINO, JEFF NULL, and GERALD TAYLOR and shall not include any notice or knowledge that may be imputed or constructively attributed to Optionor, nor shall the use of such phrase imply that any special inquiry or investigation has been undertaken by Optionor with respect to the subject matter of the representation qualified by such phrase. DAVE FUJINO, JEFF NULL, and GERALD TAYLOR shall have no personal liability with respect to any liability or obligation of Optionor. Optionor represents and warrants that DAVE FUJINO and JEFF NULL are the individuals most knowledgeable about the matters which are the subject of the representations and warranties set forth in this Agreement. A representation or warranty shall only be deemed material to Optionee in the event that any information which differs from the applicable representation hereunder would have a substantial adverse impact, financial or otherwise, on Optionee's proposed use of the Property for development as residential for sale housing. If any information relating to a representation is                                         -12-   not material to Optionee, then (i) Optionee cannot rely on such representation or warranty; (ii) Optionor shall not be in breach of the applicable representation or warranty; and (iii) Optionor shall have no liability for any inaccuracy. All representations and warranties hereunder shall automatically expire on the later of two (2) years following the Close of Escrow or for each respective parcel of the Property (as described in the License Agreement) eighteen (18) months following the date that Buyer obtains possession of each parcel of the Property pursuant to the various phases described in the License Agreement; provided however, nothing herein shall modify Optionor's obligations to use the Property in accordance with the terms of the License Agreement following the Close of Escrow.                             (i) AUTHORITY. Subject to Section 36(l) below, Optionor has the legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance of this Agreement have been duly authorized and no other action by Optionor is requisite to the valid and binding execution, delivery and performance of this Agreement.                             (ii) PROCEEDINGS. Except as otherwise disclosed in writing to Optionee, including without limitation, the delivery of any document to Optionee, to Optionor's actual knowledge, there are no actions, suits, proceedings or governmental investigations pending or threatened against or affecting the Property, in law or equity. In addition, there are no pending, or to Optionor's actual knowledge, threatened, suits, actions, proceedings, orders or judgments affecting Optionor which would materially affect Optionor's ability to perform its obligations under this Agreement or the documents executed in connection herewith.                             (iii) COMPLIANCE WITH LAWS. Except as otherwise disclosed in writing to Optionee, including without limitation, the delivery of any document to Optionee, the Optionor has received no written notice, and to the Optionor's actual knowledge there are no violations of any applicable law, ordinance, rule, regulation or requirement of any governmental agency, body or subdivision affecting or relating to the Property, including, without limitation, any subdivision, building, use or environmental law, ordinance, rule, requirement or regulation.                             (iv) CONDEMNATION. To Optionor's actual knowledge, there are no pending or threatened proceedings in eminent domain or otherwise related to the acquisition of all or a portion of the Property by a governmental or quasi-governmental agency which would affect the Property or any portion thereof. In the event that there is a subsequent condemnation action commenced against the Property (as to which Optionor did not have actual knowledge at the time this Agreement was executed), the provisions of Section 27 shall govern, and not the provisions of this Section 22.                             (v) NO PRIOR TRANSFERS. Optionor has not previously sold, transferred or conveyed the Property and Optionor has not entered into any executory contracts for the sale of the Property (other than this Agreement), nor do there exist any rights of first refusal or options to purchase the Property which have been consented to or created by Optionor.                             (vi) BINDING. This Agreement, and all documents to be executed by Optionor hereunder shall, subject to the operation of any applicable bankruptcy or similar laws, be the legal, valid and binding obligations of Optionor, and at the Close of Escrow shall not materially violate any provisions of any agreement, order or decree to which Optionor is a party or is subject.                                         -13-                              (vii) HAZARDOUS SUBSTANCES. As part of Optionor's nursery operations, Optionor uses the Hazardous Substances set forth in EXHIBIT "G" attached hereto, and shall be entitled to use all other agricultural pesticides, herbicides, fertilizers and agricultural chemicals typically used in a nursery operation at, on, under and about the Property in compliance with all laws, statutes, ordinances, and regulations. Optionor has not received written notice that there are any underground storage tanks located under the Property. Optionor has not received written notice that the Property is in violation, nor has been or is currently under investigation for violation of any federal, state or local law, ordinance or regulation relating to industrial hygiene, working health and safety, or to the environmental conditions in, at, on, under or about the Property including, but not limited to, soil and groundwater conditions. For purposes of this Agreement, the term "Hazardous Substance" shall mean any substance defined as "hazardous material" in the Comprehensive Environmental Response, Compensation & Liability Act of 1980, as amended, 42 U.S.C. Section 9601 ET SEQ., or at California Health & Safety Code Section 25316 or at Section 25281; as "hazardous waste" in the Resource Conservation & Recovery Act of 1976, as amended, 42 U.S.C. Section 690, ET SEQ., or at California Health & Safety Code Section 25117; as "hazardous material" in the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET SEQ.; or the regulations adopted or publications promulgated pursuant to such laws.                             (viii) DOCUMENTS. To Optionor's actual knowledge, all documents delivered to Optionee by Optionor pursuant to this Agreement are true and correct copies of the document in Optionor's possession.                             (ix) AGREEMENTS. Except as otherwise disclosed in writing to Optionee pursuant to this Agreement, including without limitation, the delivery of any document to Optionee, to Optionor's actual knowledge, there are no agreements between Optionor and any governmental, quasi-governmental, or private entity affecting any portion of the Property.                             (x) WILLIAMSON ACT. Optionor has not entered into and to Optionor's actual knowledge the Property is not subject to any agreement entered into pursuant to the California Land Conservation Act of 1965, as amended (California Government Code Sections 51200-51205).                    (b) WAIVER OF BREACH OF REPRESENTATIONS. Each party shall promptly notify the other party in writing of any fact or occurrence which becomes known to either party after the date of this Agreement and prior to Close of Escrow that would make any of the above representations materially misleading or inaccurate. In the event that Optionee fails to notify Optionor of any fact, circumstance or act which would render materially incorrect or misleading, in whole or in part, any material representation or warranty made by Optionor under this Agreement, and Optionee had actual knowledge that the representation or warranty was inaccurate prior to the Close of Escrow, all representations and warranties by Optionor shall automatically be deemed modified to the extent necessary to eliminate such inconsistency, and Optionor shall not be in default for breach of the representations and warranties in such circumstance and Optionee shall be deemed to waive all rights and remedies                                         -14-   relating thereto. Furthermore, to the extent the copies of the Documents and Materials furnished to or otherwise obtained by Optionee prior to the Close of Escrow contain provisions or information inconsistent with the foregoing representations and warranties, Optionee shall be deemed to have knowledge of such facts and, if Optionee proceeds to Closing Optionor shall not be deemed in breach of any representation or warranty and Optionee shall be deemed to waive all rights and remedies relating thereto.                    (c) REMEDIES FOR DISCOVERY OF NEW INFORMATION. In the event that following the execution of this Agreement, Optionor obtains actual knowledge of facts prior to the Close of Escrow that cause a representation or warranty to no longer be materially correct, and such facts were unknown to Optionor when this Agreement was executed, Optionor shall notify Optionee of such fact and in such circumstance Optionor shall not be in breach of any representation or warranty. Provided that Optionor did not affirmatively cause the applicable representation or warranty to become materially untrue, Optionee shall have no rights or remedies based upon the disclosure of such new information. Optionor shall have no duty to update its representations or warranties with respect to any modification to existing laws or any adoption of new laws.                    (d) REMEDIES FOR BREACH OF REPRESENTATION. If any of Optionor's representations and warranties were not materially correct on the date of this Agreement and Optionor had actual knowledge of such inaccuracy when the representation or warranty was made; and/or Optionor, subsequent to the date of this Agreement, caused by an affirmative act or omission a representation or warranty to become materially untrue, then if it is possible for Optionor to reasonably undertake action to make such representation materially correct again, then Optionor shall have the right, but not the obligation, by giving written notice to Optionee, to promptly undertake the necessary actions to cause such representation or warranty to once again be materially accurate, on the condition that Optionor diligently pursues such cure and provided that in no event shall such cure right be extended beyond the later of (i) the date which is one (1) year following the date that Optionor has actual knowledge that representation or warranty has become materially untrue; or (ii) the date which Optionee is entitled to possession of the affected portions of the Property under the terms of the License Agreement. If Optionor elects to exercise its cure rights set forth above, Optionee shall be entitled to Close Escrow (and the cure shall be completed during the term of the License Agreement), or delay the Close of Escrow until the cure is completed by giving Optionor written notice of such election no later than twenty (20) days following written notice of Optionor's election to cure. If Optionor does not elect to exercise its cure rights in this Paragraph, then Optionee as its sole remedies may either: (i) terminate this Agreement, in which event Optionor shall be responsible for (A) promptly returning all Option Consideration paid to Optionor by Optionee; (B) reimbursing Optionor for all actual out-of-pocket third party costs incurred by Optionee relating to Optionee's due diligence, financing and entitlement processing; provided, however, in no event shall Optionor be obligated to reimburse Optionee for more than One Million Dollars ($1,000,000.00) in out-of-pocket third party costs; and (C) Optionee may pursue any other available remedies at law or in equity; provided, however, in no event shall Optionor be liable for any damages (including without limitation consequential damages) for breach of a representation or warranty in excess of Five Hundred Thousand Dollars ($500,000.00); or (ii) waive the default under this paragraph and proceed to close Escrow, in which event Seller shall have no liability with respect to any such inaccuracy. Regardless of any representation or warranty made by Optionor hereunder as to any matter relating to the Property or operation thereof, in no event shall Optionor be released from any liability as                                         -15-   a result of any fraud or intentional misrepresentation committed by Optionor nor shall any remedies available to Optionee for fraud or intentional misrepresentation at law or in equity be limited.           23. OPTIONEE'S REPRESENTATIONS AND WARRANTIES. In consideration of Optionor entering into this Agreement and as an inducement to Optionor to sell the Property to Optionee, Optionee makes the following representations and warranties, each of which is material and is being relied upon by Optionor (the continued truth and accuracy of which constitutes a condition precedent to Optionor's obligation hereunder):                    (a) AUTHORITY. Optionee has the legal right, power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and the execution, delivery and performance of this Agreement have been duly authorized and no other action by Optionee is requisite to the valid and binding execution, delivery and performance of this Agreement; and                    (b) TRUTHFULNESS AT CLOSE OF ESCROW. The representations and warranties of Optionee set forth in this Agreement shall be true on and as of the Close of Escrow as if those representations and warranties were made on and as of such time.           24. REMEDIES.                    (a) Notwithstanding any provision of this Agreement to the contrary, in the event any Option Consideration is not timely paid within five (5) business days after written notice from Optionor, or in the event Optionee fails to cure any default, other than payment of Option Consideration, within ten (10) business days after written notice from Optionor, then (i) this Agreement shall automatically and immediately terminate; (ii) all Option Consideration received by Optionor shall be retained by Optionor; (iii) all Documents and Materials delivered to Optionee shall be returned to Optionor; (iv) Optionee shall deliver to Optionor copies of each of the Physical Studies; and (v) in accordance with Section 25 below, Escrow Holder shall record the Quitclaim Deed in the Solano County Recorder's Office without further instruction from the parties.                    (B) IN THE EVENT OPTIONEE HAS EXERCISED THE OPTION GRANTED HEREIN, AND THEREAFTER CLOSE OF ESCROW DOES NOT OCCUR AS HEREIN PROVIDED BY REASON OF ANY DEFAULT OF OPTIONEE, OPTIONEE AND OPTIONOR AGREE THAT IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO ESTIMATE THE DAMAGES SUFFERED BY OPTIONOR AS A RESULT OF OPTIONEE'S FAILURE TO COMPLETE THE PURCHASE OF THE PROPERTY PURSUANT TO THIS OPTION AGREEMENT, AND THAT UNDER THE CIRCUMSTANCES EXISTING AS OF THE DATE OF THIS OPTION AGREEMENT, THE LIQUIDATED DAMAGES PROVIDED FOR IN THIS SECTION REPRESENT A REASONABLE ESTIMATE OF THE DAMAGES WHICH OPTIONOR WILL INCUR AS A RESULT OF SUCH FAILURE. THEREFORE, OPTIONEE AND OPTIONOR DO HEREBY AGREE THAT A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT THAT OPTIONOR WOULD SUFFER IN THE EVENT THAT OPTIONEE DEFAULTS AND FAILS TO COMPLETE THE PURCHASE OF                                         -16-   THE PROPERTY IS THE OPTION CONSIDERATION PAID TO OPTIONOR BY OPTIONEE PURSUANT TO SECTION 3 OF THIS OPTION AGREEMENT. OPTIONOR AGREES THAT THESE LIQUIDATED DAMAGES, NAMELY THE RETENTION BY OPTIONOR OF THE OPTION CONSIDERATION, SHALL BE IN LIEU OF ANY OTHER MONETARY RELIEF, OR SPECIFIC PERFORMANCE, TO WHICH OPTIONOR MIGHT OTHERWISE BE ENTITLED UNDER THIS OPTION AGREEMENT FOR OPTIONEE'S FAILURE TO PURCHASE THE OPTION PROPERTY, AND SHALL BE OPTIONOR'S SOLE AND EXCLUSIVE RIGHT AND REMEDY UNDER THIS OPTION AGREEMENT FOR OPTIONEE'S FAILURE TO PURCHASE THE OPTION PROPERTY. NOTHING CONTAINED HEREIN SHALL IN ANY MANNER LIMIT: (A) THE AMOUNT OF DAMAGES (INCLUDING ATTORNEYS' FEES) OBTAINABLE PURSUANT TO AN ACTION UNDER ANY HOLD HARMLESS OR INDEMNIFICATION PROVISION HEREOF; (B) OPTIONOR'S RIGHT TO RECEIVE REIMBURSEMENT FOR ATTORNEYS' FEES PURSUANT TO THIS OPTION AGREEMENT; (C) OPTIONEE'S OBLIGATIONS TO RETURN TO OPTIONOR DOCUMENTS, REPORTS OR OTHER INFORMATION PROVIDED TO OPTIONEE UNDER APPLICABLE PROVISIONS OF THIS OPTION AGREEMENT; (D) OPTIONEE'S OBLIGATIONS TO RESTORE THE PROPERTY TO SUBSTANTIALLY ITS ORIGINAL CONDITION; OR (E) ANY FAILURE TO EXECUTE CANCELLATION INSTRUCTIONS TO THE ESCROW HOLDER UPON EXPIRATION OR EARLIER TERMINATION OF THIS OPTION AGREEMENT.           Optionee's Initials:  __________       Optionor's Initials:  __________           In the event that arbitration or litigation is instituted between the parties to this Agreement, each party agrees that a copy of this Agreement may be offered in evidence and submitted to the court or arbitrator as the binding and irrevocable stipulation of each party that the consideration for the Option is just, fair and reasonable as of the Commencement Date.           25. QUITCLAIM DEED. As a condition to recordation of the Memorandum of Option in accordance with Section 26 below, Optionee shall deliver to Escrow Holder an executed and acknowledged quitclaim deed or memorandum of termination of option, in a form acceptable to Optionor ("Quitclaim Deed"), which relinquishes any and all rights of Optionee in the Property. In the event that (i) the Option is terminated or expires pursuant to the provisions of the Agreement, and/or (ii) Optionee does not elect to purchase the Property prior to the expiration of the Option Term, the parties hereto irrevocably instruct Escrow Holder to record the Quitclaim Deed in the Solano Recorder's Office upon the expiration of not less than two (2) business days after Optionor sends facsimile notice to both Optionee and Escrow Holder stating that the Option has either terminated or expired. In the event Optionee wrongfully instructs Escrow Holder to refrain from recording the Quitclaim Deed, Optionee agrees to defend, indemnify and hold Optionor harmless from and against any and all claims, demands, liabilities, cost, reasonable attorneys' fees resulting therefrom, losses and/or expenses resulting from Optionee's failure to perform its obligations under this Section 25. The provisions of this Section shall survive the termination and/or the cancellation of the Option.                                         -17-            26. RECORDATION OF MEMORANDUM. Following the Commencement Date Optionor and Optionee agree to execute, acknowledge and deliver to Escrow Holder a Memorandum of Option, which shall be in the form attached herein as EXHIBIT "H", with instructions directing Escrow Holder to immediately record such Memorandum against the Property in the Official Records of the County.           27. DAMAGE OR CONDEMNATION PRIOR TO CLOSING. Optionor shall promptly notify Optionee of any casualty to the Property or any condemnation proceeding commenced prior to the Close of Escrow. If any such damage or proceeding relates to or may result in the loss of any material portion of the Property, Optionee may, at its option, elect either to (i) terminate this Agreement by giving written notice to Optionor within ten (10) days following receipt of Optionor's notice of condemnation, in which event all funds deposited into Escrow by Optionee which are held by Escrow or have been released from Escrow shall be returned to Optionee and neither party shall have any further rights or obligations hereunder, or (ii) continue the Agreement in effect, in which event upon the Close of Escrow, Optionee shall be entitled to any compensation, award, or other payments or relief resulting from such casualty or condemnation proceedings; provided, however, Optionor shall be entitled to claim any damages with the condemnation authority relating to damages to Optionor's ongoing operations.           28. NOTICES. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or sent by electronic facsimile and shall be deemed received upon the earlier of (i) if personally delivered, the date of delivery to the address of the person to receive such notice, (ii) if mailed, on the date of posting by the United States Post Office, or (iii) if given by electronic facsimile, when received by the other party.           TO OPTIONEE:                    Triad Communities, L.P.                                          1095 Hiddenbrooke Parkway                                          Vallejo, CA  94591                                          Attn:  Fred Grimm                                          Telephone:  (707) 557-1184                                          Facsimile:  (707) 557-1187                                           Triad Communities, L.P.                                          2801 Alaskan Way, Suite 107                                          Seattle, WA  98121                                          Telephone:  (206) 374-0414                                          Facsimile:  (206) 374-0415           With copy to:                   Michael Kuntz, Esq.                                          Fosler Pepper & Shefelman PLLC                                          1111 Third Avenue, Suite 3400                                          Seattle, WA  98101-3299                                          Telephone:  (204) 447-8959                                          Facsimile:  (204) 749-1976                                         -18-            TO OPTIONOR:                    Hines Nurseries, Inc.                                          12621 Jeffrey Road                                          Irvine, California 92620-2101                                          Attention:  Claudia Pieropan                                          Telephone:  (949) 559-4444                                          Facsimile: (949) 786-0968           With a copy to:                 Rutan & Tucker, LLP                                          611 Anton Boulevard, Suite 1400                                          Costa Mesa, California 92626-1931                                          Attention:  Randall M. Babbush, Esq.                                                      Joseph L. Maga, Esq.                                          Telephone:  (714) 641-3456                                          Facsimile:  (714) 546-9035           TO ESCROW HOLDER:               First American Title Company                                          1355 Willow Way, Suite 100                                          Concord, California  94520                                          Attention:  Molly Baier, Escrow Officer                                          Telephone:  (925) 356-7000                                          Facsimile:  (925) 356-7039           Notice of change of address shall be given by written notice in the manner described in this Section.           29. REAL ESTATE COMMISSION. Other than Eric Gregg and Simon Kechloian who is the Optionee's broker each party represents and warrants to the other that it has neither engaged nor employed any broker or finder in connection with the transactions contemplated by this Agreement, and each party hereby indemnifies and agrees to hold the other party harmless from and against any loss, cost, damage or expense (including reasonable attorneys' fees) by reason of the incorrectness of such representation and warranty. Optionee shall be solely responsible for payment of any fee, commission or compensation to Eric Gregg and Simon Kechloian pursuant to the terms of a separate written agreement. This provision shall survive the Close of Escrow.           30. REAL PROPERTY TAXES AND ASSESSMENTS. So long as this Agreement is in full force and effect, Optionor agrees to pay before default or delinquency, the real property taxes on the Property. Should Optionor fail to pay said taxes, Optionee may, upon twenty (20) days written notice to Optionor, pay the same. Optionor may contest the validity or amount of any real property taxes or assessments provided Optionor shall notify Optionee of the contest and Optionor shall pay all costs in connection therewith and all resulting taxes, interest and penalties. In the event Optionee pays any real property taxes hereunder after receipt of notice of contest, Optionee shall reserve the right of Optionor to contest the tax. The full amount of any such taxes (including penalties) paid by Optionee shall be deducted from the Purchase Price.           31. ASSIGNMENT. Optionee may not assign, transfer or convey its rights or obligations under this Agreement without the prior written consent of Optionor, which may be withheld in Optionor's discretion; provided, however, Optionee may assign its rights and obligations under this Agreement, without                                         -19-   Optionor's consent, to any entity that is owned or is controlled by (a) Optionee or (b) Fred Grimm or John Goodman. Any attempted assignment requiring Optionor's prior written consent that is made without such consent shall be void and Optionee shall be deemed in default hereunder. Any permitted assignment shall not relieve the assigning party from its liability under this Agreement.           32. EXCHANGE. The parties to this Agreement acknowledge that either party may desire to structure the sale of the purchase of the Property as an exchange for like kind property pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, in order to defer recognition of income on the disposition of the Property and/or other properties. The parties agree to reasonably cooperate with each other to accomplish such exchange(s) and each party hereby agrees that any and all costs associated with said exchange shall be borne solely by the exchanging party and shall in no way be attributable to the non-exchanging party. In no event shall the non-exchanging party be required to take title to the exchanged property(ies) to effectuate the tax deferred exchange contemplated by this Section, nor shall either party be required to delay the Close of Escrow to accommodate such exchange(s).           33. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of Optionee's and Optionor's warranties, indemnities, representations, covenants, obligations, undertakings and agreements contained in this Agreement shall survive the Close of Escrow and the execution and delivery of this Agreement and of any and all documents or instruments delivered in connection herewith, and shall expire two (2) years from expiration or earlier termination of the License Agreement. No warranty, indemnity, representation, covenant, obligations, undertaking or agreement herein shall be deemed to merge with the Grant Deed.           34. RAW WATER RIGHTS. Optionor is currently entitled to receive raw water from SID in accordance with that certain Master Water Agreement dated May 25, 1995 ("Raw Water Agreement"). Optionor shall perform all of its obligations under the Raw Water Agreement prior to Close of Escrow and shall formally assign, to the extent assignable, at Optionor's sole cost, its rights under the Raw Water Agreement to Optionee at the Close of Escrow. Except as otherwise provided in the License Agreement, Optionee shall be solely responsible for performance of Optionor's obligations under the Raw Water Agreement that accrue after the Close of Escrow. Optionor makes no representations or warranties regarding the assignability of the Raw Water Agreement or Optionee's rights to obtain water from SID. Optionee shall be solely responsible for verifying that it will be entitled to receive a water service from SID following Close of Escrow and whether Optionee shall be required to obtain water from the City or another source in connection with its proposed use of the Property.           35. CONFIDENTIALITY. Unless otherwise agreed to in writing by Optionor and Optionee, each party will keep confidential, the terms and conditions of this Agreement and any other information provided by one party to the other that is not public as of the Commencement Date, until such information is made public by the parties, and will not disclose any confidential term or condition to any person other than (i) lenders, investors, employees and agents of Optionor or Optionee, (ii) those who are actively and directly participating in the evaluation of the Property and the negotiation and execution of this Agreement, and (iii) the City, County or other governmental, administrative, regulatory or judicial authorities in the investigation of the compliance of the Property with applicable legal requirements or in connection with the processing of the                                         -20-   Entitlements. However, Optionee expressly covenants and agrees that it will not disclose any code compliance, environmental or other regulatory matters to governmental or other authorities without the express prior written approval by Optionor, which approval may be withheld in Optionor's reasonable discretion, unless such information is required by law to be disclosed by Optionee or is required in connection with processing Entitlements for the Property. Optionee agrees to give Optionor written notice prior to contacting any of the following governmental agencies if the purpose of such contact is to discuss possible environmental contamination issues: (i) the Regional Water quality Control Board; (ii) the Solano County Department of Environmental Management; (iii) the United States Department of Fish and Game; (iv) the Solano County Irrigation District; and/or (v) the Environmental Protection Agency. Notwithstanding anything herein to the contrary, Optionor shall be entitled to publicly disclose the terms of this Agreement if required by law, which determination shall be made in the sole and absolute discretion of Optionor's auditors. Optionor shall have the right but not the obligation to have a representative present at any such meetings if the purpose of such meeting is to discuss possible environmental contamination issues.           36. MISCELLANEOUS.                    (a) PARTIAL INVALIDITY. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each such term and provision of this Agreement shall be valid, and shall be enforced to the fullest extent permitted by law.                    (b) WAIVERS. No waiver of any breach of any covenant or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of time for performance of any other obligation or act except those of the waiving party, which shall be extended by a period of time equal to the period of the delay.                    (c) SUCCESSORS AND ASSIGNS. Subject to Section 31 above, this Agreement shall be binding upon and shall inure to the benefit of the permitted successors and assigns of the parties hereto.                    (d) PROFESSIONAL FEES. In the event of the bringing of any action or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this Agreement, then in that event the prevailing party shall be entitled to have and recover of and from the other party all costs and expenses of the action or suit, including reasonable attorneys' fees, accounting and engineering fees, and any other professional fees resulting therefrom.                    (e) ENTIRE AGREEMENT. This Agreement (including all Exhibits attached hereto, which are incorporated herein by reference) is the final expression of, and contains the entire agreement between, the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented,                                         -21-   superseded, canceled or terminated, nor may any obligations hereunder be waived, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. The parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto and lawful assignees.                    (f) TIME OF ESSENCE. Optionor and Optionee hereby acknowledge and agree that time is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that failure to timely perform any of the terms, conditions, obligations or provisions hereof by either party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform.                    (g) RELATIONSHIP OF PARTIES. Nothing contained in this Agreement shall be deemed or construed by the parties to create the relationship of principal and agent, a partnership, joint venture or any other association between Optionee and Optionor.                    (h) CONSTRUCTION. Headings at the beginning of each paragraph and subparagraph are solely for the convenience of the parties and are not a part of the Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to paragraphs, sections, subparagraphs and subsections are to this Agreement. All exhibits referred to in this Agreement are attached and incorporated by this reference.                    (i) GOVERNING LAW. The parties hereto acknowledge that this Agreement has been negotiated and entered into in the State of California. The parties hereto expressly agree that this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California.                    (j) COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same instrument.                    (k) DAYS OF WEEK. If any date for performance herein falls on a Saturday, Sunday or holiday, as defined in Section 6700 of the California Government Code, the time for such performance shall be extended to 5:00 p.m. on the next business day. In no event shall the Close of Escrow fall on a Friday unless the sales proceeds are received by Optionor on the same day.                    (l) OPTIONOR APPROVAL. Optionor shall seven (7) days following execution of this Agreement to obtain the approval of its Board of Directors to the terms and conditions of this Agreement. In the event that Board approval is not obtained for this Agreement for any reason whatsoever, Optionor may elect to terminate this Agreement in its sole and absolute discretion, and Optionee shall not be entitled to reimbursement for any fees, costs or expenses incurred in connection with any due diligence or otherwise. Optionor makes no representation or warranty as to whether the Board approval of the terms and conditions of this Agreement will be obtained.                                         -22-            IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the dates set forth below.                                     HINES NURSERIES, INC.,                                    a California corporation                                      By: /S/ CLAUDIA PIEROPAN                                        -----------------------------------------                                        Claudia Pieropan                                        Its:  Chief Financial Officer                                     Date:       MAY 12, 2003                                         ----------------------------------------                                                                           "Hines"                                      TRIAD COMMUNITIES, L.P.,                                    a California limited partnership                                      By: /S/ FREDERICK W. GRIMM                                        -----------------------------------------                                        Its:Manager of Triad Sky Valley LLC G.P.                                     Date:       MAY 12, 2003                                         ----------------------------------------                                                                        "Optionee"                                         -23-                                     EXHIBIT LIST                                   ------------   Exhibit "A"       Legal Description  Exhibit "B"       Plot Plan  Exhibit "C"       Site Plan Depicting Potential Phase I Property  Exhibit "C-1"     Depiction of Portion of Property That Must Be Part of the                   Phase II Property  Exhibit "D"       Legal Description of Adjoining Property  Exhibit "E"       License Agreement  Exhibit "F"       General Assignment of Contracts, Agreements, Plans, Permits,                   Licenses, and Approvals  Exhibit "G"       List of Hazardous Materials  Exhibit "H"       Memorandum of Option                                       EXHIBIT "A"                                    -----------                                  LEGAL DESCRIPTION                                 -----------------            All that certain property situated in the State of California, County of Solano, City of Vacaville, described as follows:                         [To be attached prior to execution.]                                      EXHIBIT "A"                                    -----------                                TO OPTION AGREEMENT                                      EXHIBIT "B"                                    -----------                                      PLOT PLAN                                     ---------                         [To be attached prior to execution.]                                       EXHIBIT "B"                                    -----------                                TO OPTION AGREEMENT                                      EXHIBIT "C"                                    -----------                   SITE PLAN DEPICTING POTENTIAL PHASE I PROPERTY                  ----------------------------------------------                         [To be attached prior to execution.]                                       EXHIBIT "C"                                    -----------                                TO OPTION AGREEMENT                                     EXHIBIT "C-1"                                   -------------                          DEPICTION OF PORTION OF PROPERTY                         --------------------------------                    THAT MUST BE PART OF THE PHASE II PROPERTY                    ------------------------------------------                         [To be attached prior to execution.]                                      EXHIBIT "C-1"                                   -------------                                TO OPTION AGREEMENT                                      EXHIBIT "D"                                    -----------                       LEGAL DESCRIPTION OF ADJOINING PROPERTY                      ---------------------------------------                          [TO BE ATTACHED PRIOR TO EXECUTION]                          [DOES NOT INCLUDE BRENNAN PROPERTY]                                       EXHIBIT "D"                                    -----------                                TO OPTION AGREEMENT                                      EXHIBIT "E"                                    -----------                                  LICENSE AGREEMENT                                 -----------------            THIS LICENSE AGREEMENT, dated for reference purposes as of April 1, 2005, is entered into by and between TRIAD COMMUNITIES, L.P., a California limited partnership ("Licensor"), and HINES NURSERIES, INC., a California corporation ("Hines").                                   R E C I T A L S                                  ---------------           A. Licensor and Hines entered into that certain Option Agreement, dated for reference purposes as of April 24, 2003 ("Option Agreement"), whereby Hines agreed to sell and Licensor agreed to purchase certain real property described in the Option Agreement as the "Property."           B. Immediately prior to execution of this License Agreement, Hines was the fee owner of, and conducted a plant nursery operation on, the entire Property.           C. Hines is in the process of transferring its existing nursery operation from the Property to property located in the County of Solano (referred to herein as the "New Site") and desires to continue to use a portion of the Property for nursery purposes to facilitate this transfer of operations to the New Site.           D. Licensor intends to develop the Property primarily as a single-family residential subdivision, commencing with development of the portion of the Property identified as the Phase I Parcel, as defined below.           E. Licensor is willing to provide to Hines a non-exclusive license over a portion of the Property to allow for the transfer of existing nursery operations to the New Site, while still providing for the orderly development of the Property in accordance with Licensor's development plans, all on the terms and conditions set forth herein.           NOW THEREFORE, in consideration of the foregoing recitals and the covenants set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:           1. NON-EXCLUSIVE LICENSE. Licensor hereby grants to Hines, and its subsidiaries and parent corporation, a non-exclusive license to occupy and use those portions of the Property identified as the "Phase I Parcel", "Phase II Parcel" and "Phase III Parcel" as generally depicted on the site plan attached hereto as EXHIBIT "1" ("Site Plan"), to continue to operate and conduct its plant nursery activities and to locate and maintain its equipment and other improvements currently used in connection therewith, all as set forth in greater detail in Section 2 below. The license granted herein to Hines shall be a personal, non-possessory interest in the Phase I Parcel, the Phase II Parcel and the Phase III Parcel (individually, a "License Parcel" and collectively, the "License Parcels"), and Licensor shall at all times during the term hereof retain the right to possession of the Property (including the License Parcels),                                      EXHIBIT "E"                                    -----------                                TO OPTION AGREEMENT   subject to the terms and conditions of this License Agreement, and have the right to use and occupy the Property for its own purposes, provided the same do not unreasonably interfere with Hines' activities thereon. Licensor shall give Hines seventy-two (72) hours notice prior to any entry onto the Property and the general purpose of such entry. Such notice may be verbal and shall be directed to the general manager at the Property. Licensor agrees not to revoke or cancel the license granted herein during the term hereof except pursuant to Section 15.01 below.           2. USE OF LICENSE PARCELS.                    2.01 PERMITTED USE. The License Parcels shall at all times during the term hereof be used by Hines for purposes of operating and conducting its existing plant nursery activities and all activities reasonably related thereto, and for no other purposes. In connection therewith, Hines may retain on the License Parcels the equipment and improvements currently located on the License Parcels. Additional improvements or equipment affixed to or a part of the Property shall not be brought onto the License Parcels without Licensor's consent, which consent shall not be unreasonably withheld, only upon the condition that Hines agrees to pay for all costs of removing such additional improvements or equipment. Hines shall be entitled to bring additional equipment onto the Property which is of a temporary nature without the prior consent of Licensor. Such uses and equipment shall at all times and in all manners be strictly confined to the area within the License Parcels and shall not in any manner or event be placed on or affect the other portions of the Property.                    2.02 PROHIBITED USES. Hines shall not use, or permit its employees or agents to use, the License Parcels in a manner which would constitute a nuisance; result in waste; result in the cancellation of any insurance being maintained by Licensor with respect to the Property or by Hines hereunder with respect to its activities or in the increase in the premiums for any such insurance maintained by Licensor where such cancellation or increase is the result of a use not permitted by this License Agreement; violate any laws (including any Laws or Permits) applicable to the Property or Hines' use or operation of the License Parcels; constitute a default under the terms of this License Agreement; or except as otherwise expressly provided herein, (i) result in the use of or impact on any portion of the Property other than the License Parcels or (ii) interfere with Licensor's development of the Property. The parties agree that continuation of Hines' current operations shall not be deemed to constitute a nuisance or deemed interference with Licensor's development of the Property as long as Hines uses the Property in accordance with the terms of this Agreement.           3. LICENSE TERM.                    3.01 INITIAL TERMS. The initial term of this License Agreement shall commence on the Close of Escrow, as defined in the Option Agreement, and expire (subject to the extension rights set forth below) on the following dates: (i) JULY 1, 2005, as to the Phase I Parcel ("Phase I Term"), (ii) JULY 1, 2006, as to the Phase II Parcel ("Phase II Term"), and (iii) JULY 1, 2007, as to the Phase III Parcel ("Phase III Term"), unless sooner terminated pursuant to the terms and provisions contained herein.                    3.02 EXTENSION OF INITIAL TERMS. Hines is hereby granted three (3) separate one (1) year options to extend both the Phase II Term and the Phase III Term, exercisable in Hines' sole and absolute discretion. In order to                                         -2-   exercise each of the three extension options, Hines shall give Licensor written notice at least six (6) months prior to expiration of the applicable Phase II Term (i.e., January 1, 2006 for the first extension) and Phase III Term (i.e., January 1, 2007 for the first extension). For example, Hines has the right to extend the Phase II Term until JULY 1, 2009 and the Phase III Term until JULY 1, 2010 if it exercises all of the extension rights. Notwithstanding the foregoing, in the event that Hines secures all final non-appealable governmental and quasi-governmental approvals required in connection with the transition of its current nursery operations to a replacement facility ("New Facility") on land owned by Hines in the County of Solano ("Approvals"), including without limitation, approvals from the U.S. Army Corps of Engineers, United States Fish and Wildlife Service, and the Solano Irrigation District, the Phase II Term shall then expire on July 1 of the following calendar year, provided, that such date is at least one (1) full year following the date Hines receives the Approvals, and if such date is not at least one full calendar year following the date Hines receives the Approvals, then the Phase II Term shall expire on July 1 of the next following calendar year. The Phase III Term shall expire one (1) year after expiration of the Phase II Term. By way of example only, if the Approvals were received on October 24, 2006, the Phase II Term would expire on July 1, 2008 and the Phase III Term would expire on July 1, 2009. Notwithstanding the date that Hines may acquire Approvals for the New Facility, in no event shall the term of the License Agreement expire prior to the initial terms set forth in Section 3.01 above.                    3.03 EXPIRATION/TERMINATION. Upon the expiration of the Phase I Term or earlier termination of this License Agreement, (i) Hines shall immediately cease its operations on the Phase I Parcel, (ii) Hines shall vacate the Phase I Parcel, (iii) Hines shall remove, at Hines' sole cost and expense, all of the Removal Property, as defined in Section 8.02 below, located on the Phase I Parcel, and (iv) Hines' rights and obligations hereunder relating to the Phase I Parcel shall terminate and cease except for any indemnification or other obligations undertaken herein which are expressly stated hereunder to survive such expiration or termination. Upon the expiration of the Phase II Term or earlier termination of this License Agreement, (i) Hines shall immediately cease its operations on the Phase II Parcel, (ii) Hines shall vacate the Phase II Parcel, (iii) Hines shall remove, at Hines' sole cost and expense, all of the Removal Property, as defined in Section 8.02 below, located on the Phase II Parcel, and (iv) Hines' rights and obligations hereunder relating to the Phase II Parcel shall terminate and cease except for any indemnification or other obligations undertaken herein which are expressly stated hereunder to survive such expiration or termination. Upon the expiration of the Phase III Term or earlier termination of this License Agreement, (i) Hines shall immediately cease its operations on the Phase III Parcel, (ii) Hines shall vacate the Phase III Parcel, (iii) Hines shall remove, at Hines' sole cost and expense, all of the Removal Property located on the Phase III Parcel as defined in Section 8.02 below, and (iv) Hines' rights and obligations hereunder relating to the Phase III Parcel shall terminate and cease except for any indemnification or other obligations undertaken herein which are expressly stated hereunder to survive such expiration or termination.           4. DEVELOPMENT OF PROPERTY BY LICENSOR.                    4.01 ACCESS TO AND DEVELOPMENT OF LICENSE PARCELS; RESTRICTIONS ON RELOCATION OF Utilities. Hines acknowledges that it will be necessary for Licensor to install improvements, including without limitation, utilities, in, on, over and under the License Parcels to provide for the development of the Property, including the License Parcels, as a cohesive                                         -3-   residential development project. Therefore, Licensor shall be entitled to enter upon the License Parcels for the purpose of performing engineering activities and making physical improvements to the License Parcels, including but not limited to relocation of existing utility improvements located on the Property (including the License Parcels) subject to the terms and conditions in this License Agreement. In performing such work, Licensor acknowledges and agrees that it shall take all reasonable steps to avoid any material impact to the ongoing plant nursery operation. If it is necessary to relocate any portion of the ongoing plant nursery operation, Licensor shall perform such relocation at Licensor's sole cost and in accordance with the terms and conditions set forth below. Without limiting the foregoing, Licensor acknowledges that all loading, shipping, and deliveries to the nursery shall continue without the imposition of any restrictions thereon, and the water supply, power supply, utilities, pumping station, recycling, sewage disposal and access shall remain in continuous operation at current levels, subject to temporary interruptions. In the event that Licensor needs to cause a temporary interruption of power or water supply to the nursery operations as a result of Licensor's grading or construction activities, Licensor shall coordinate any interruption with Hines, including without limitation the date, time and length of the proposed interruption. Licensor shall provide to Hines a minimum of seventy-two (72) hours prior written notice of any temporary interruption. Notwithstanding the foregoing, at no time shall the nursery operations be without alternative water or power supply. Licensor acknowledges that Hines' back-up water supply capacity of the nursery is approximately 3-4 hours, and that Hines has no back-up power supply. Licensor shall be responsible, at its sole cost, for providing alternative water and power supply sources as may be reasonably necessary to avoid any material interruption in water or power supply, taking into consideration the Hines' current back-up capacity. If Licensor's grading or construction activities on any portion of the Property requires that the existing Solano Irrigation District water line ("Water Line") running through the Property be relocated, Licensor shall give Hines sixty (60) days prior written notice of its intent to relocate the Water Line. Licensor shall relocate the Water Line at its sole cost. On or before the expiration of the Phase II Term, Hines shall be responsible, at its sole cost, for relocating the pump facilities located on the Phase II Parcel to the Phase III Property.                    4.02 DRAINAGE. In no event shall Licensor's grading or construction activities on any portion of the Property cause any significant additional drainage or water flow onto any portion of the License Parcels. Without limiting the foregoing, no storm water or other runoff from Licensor's development shall be discharged into or otherwise become part of Hines' reclamation pond or recycling system. All water runoff and discharge from Licensor's construction activities and/or from any portion of the Property other than the License Parcels, shall be diverted from the License Parcels.                    4.03 DUST CONTROL. In conducting any grading or other construction activities on any portion of the Property, Licensor shall strictly comply with all dust control mitigation measures imposed as a condition to development of the Property by the appropriate governmental agencies.                    4.04 REDUCTION OF NOISE/ODORS. At such time as Licensor commences its home sales activities on the Phase I Parcel, Hines agrees to use commercially reasonable efforts to minimize odors and noise from the nursery operations; provided, however, Hines shall not be required to incur additional costs, or risk material damage to any of the plants in the nursery operation.                                         -4-                     4.05 RESTRICTIONS ON SALES OF RESIDENCES LOCATED ON PHASE I PARCEL. Prior to JULY 1, 2005, Licensor shall not be entitled to convey fee title to any home constructed on the Phase I Parcel that is located within 150 feet of the Phase II Parcel boundary. In the event that Licensor breaches or threatens to breach this restriction, Hines shall be expressly entitled to seek and obtain an injunction preventing such conveyance, recognizing that Hines cannot be adequately compensated by an award of damages for such breach. The right to injunctive relief shall not limit Hines' right to pursue any other remedies available at law or in equity.                    4.06 DISCLOSURES TO HOME PURCHASERS. Licensor acknowledges that construction of residences adjacent to a nursery operation may raise concerns with homeowners, including without limitation concerns over noise, lighting, odors and other disturbances. Subject to Hines' obligations pursuant to Section 4.04 above and Section 6 below, Hines shall be entitled to continue its current irrigation methods, fertilization, pesticides and spraying techniques, without any interference or objection from Licensor. So long as Hines conducts any operations on any portion of the Property, Licensor shall require each home purchaser, concurrently with execution of a purchase agreement for a home which is located within the Property, to execute: (i) an acknowledgement, in the form attached hereto as EXHIBIT "2", confirming receipt of a disclosure regarding the temporary existence of the adjacent nursery operation and the potential effects on the home purchaser arising from the nursery operation, including, without limitation, the use of tractors, trucks and loading facilities in connection with a typical nursery operation, and (ii) an agreement expressly waiving any nuisance claim against Hines and making a covenant not to object, directly or indirectly, to the nursery operation.                    4.07 OBLIGATIONS OF PARTIES UPON EXPIRATION OF PHASE I TERM, PHASE II TERM AND PHASE III TERM. The parties hereby agree to perform their respective obligations specified in EXHIBIT "3", attached hereto, upon the expiration or earlier termination of the Phase I Term, the expiration or earlier termination of the Phase II Term and upon the expiration or earlier termination of the Phase III Term.                    4.08 DEVELOPMENT MEETINGS. Hines and Licensor agree to hold periodic meetings to discuss and attempt to address any issues related to the development of the Property and the ongoing operation of the nursery facilities until termination or expiration of the Phase II Term.           5. OPERATION. Hines shall operate its plant nursery facilities and engage in its plant nursery activities on the License Parcels at all times during the term hereof in accordance with all applicable laws, statutes, ordinances and governmental rules and regulations.           6. COMPLIANCE WITH LAWS. Hines shall not use or occupy the License Parcels or permit anything to be done in, on or about the License Parcels by persons acting under Hines which will in any manner violate any laws, statutes, ordinances or governmental rules or regulations now in effect or which may hereafter be enacted or promulgated in connection with the occupation of the License Parcels and the operation of Hines's plant nursery activities thereon, including without limitation, any Environmental Laws (collectively, the "Laws").                                         -5-   Additionally, Hines shall, at Hines' sole cost and expense, continue to maintain all permits, licenses, authorizations and any other consents or approvals of any local, state or federal agency necessary for the conduct of its activities as contemplated by this License Agreement (collectively, the "Permits"). At all times during the term of this License Agreement, Hines' occupancy of the License Parcels and/or the conduct of its business thereon shall be in compliance with all Laws and Permits, including, without limitation, any health and safety laws, building codes, subdivision laws or Environmental Laws.           7. HAZARDOUS MATERIALS. During the term of this License Agreement, Hines shall not produce, store, release, transport or otherwise handle any "Hazardous Materials" or engage in any "Environmental Activity" in, on, under, to, or from the License Parcels, or permit or suffer its employees, invitees or agents to do so, except as expressly provided in Section 6 above. As used herein, "Hazardous Materials" means any chemical, material, or substance defined as or included in the definition of "Hazardous Substances", "Hazardous Material", "Hazardous Waste", "Restricted Hazardous Waste", "Extremely Hazardous Waste", "Proposition 65 Listed Chemicals" or "Toxic Substances" or words of similar import under any applicable local, state or federal law currently, or at any time during the term hereof enacted, or under any of the regulations adopted or publications promulgated pursuant thereto (collectively, the "Environmental Laws") and any other material or substance which is regulated by any such Environmental Law or governmental authority. The term "Environmental Activity" as used herein means any storage, existence, release, threatened release, generation, abatement, removal, disposal, handling or transportation of any Hazardous Material at, on, to, from, under or onto the License Parcels. In the event any Environmental Activity shall occur on the License Parcels during the term hereof which is the direct or indirect result of Hines' activities thereon, Hines shall immediately notify Licensor of the same in writing and shall take all such remediation or other action to remove, clean up or otherwise correct the same as may be required by any Environmental Law and/or any governmental agency having jurisdiction thereof, all at Hines' sole cost and expense. The obligations of Hines hereunder shall be absolute and unconditional and shall survive the expiration or sooner termination of this License Agreement.           Notwithstanding the immediately preceding paragraph, Hines may use at the License Parcels such materials as Hines reasonably deems necessary for operation of its plant nursery activities at the License Parcels and to maintain the machinery used in connection therewith; provided, however, any and all use, storage, transport and/or disposal of all such materials by Hines shall fully comply with all Laws and Permits, and Hines must first notify Licensor (but Licensor shall have no approval rights) in writing of Hines' intent to use any materials which constitute Hazardous Materials, which notice shall identify such materials. Licensor acknowledges that it has already received a list of Hazardous Materials pursuant to Section 22(g) of the Option Agreement, and Hines shall only be responsible for notifying Licensor of any additional Hazardous Materials to be used on the License Parcels.           8. IMPROVEMENTS; MAINTENANCE OF IMPROVEMENTS.                    8.01 IMPROVEMENTS BY HINES. Hines does not contemplate building or locating any additional improvements on the License Parcels during the term of this License Agreement. Except as set forth in Section 2.01 above, Hines may not, at any time during the term of this License Agreement, build or locate any additional improvements, structures, equipment or other property                                         -6-   (collectively, "Personal Property") on any portion of the License Parcels without the prior written consent of Licensor. In connection with such consent, Licensor may require such plans, specifications, and such other written documents setting forth the proposed nature and location of such Personal Property for its review and approval within ten (10) days following Hines' submission of plans. Licensor in its reasonable discretion shall also have the right to approve the location of any improvements on the License Parcels. Licensor shall be entitled to post notices of non-responsibility on the License Parcels. Hines shall indemnify and defend Licensor and the Property against liability for mechanics' and materialmen's liens and to insure completion of the intended work. Such approval by Licensor relates only to the acceptability of such matters to Licensor and shall not be deemed an approval by Licensor for purposes of architectural or engineering design or safety. By approving the same, Licensor assumes no liability or responsibility for any defect in any such Personal Property constructed or located on the License Parcels by Hines, or the use, operation or maintenance thereof. Such Personal Property shall be constructed, placed and maintained only by licensed California professionals, except for Personal Property of a temporary nature typically used by nursery personnel. All such Personal Property shall be maintained in accordance with all applicable Laws and Permits.                    8.02 REMOVAL OF IMPROVEMENTS. On the expiration or earlier termination hereof, Hines shall at its sole cost and expense remove that portion of the Personal Property described in EXHIBIT "3" to this License Agreement ("Removal Property"). If any Removal Property still remains on the Phase I Parcel after expiration or earlier termination of the Phase I Term, still remains on the Phase II Parcel after expiration or earlier termination of the Phase II Term or still remains on the Phase III Parcel after expiration or earlier termination of the Phase III Term, Licensor may remove and dispose of such Removal Property, without any obligation to account to Hines for the value of such Removal Property, and Licensor shall be entitled to reimbursement from Hines for all costs incurred in removing and disposing of such Removal Property. On the expiration or earlier termination hereof, Hines may, but shall not be obligated to remove all other improvements, machinery and equipment located on the License Parcels (collectively, the "Remaining Property"). Any Remaining Property that is not removed by Hines from the Phase I Parcel on or before expiration or earlier termination of the Phase I Term, from the Phase II Parcel on or before expiration or earlier termination of the Phase II Term, or from the Phase III Parcel on or before expiration or earlier termination of the Phase III Term shall be deemed abandoned by Hines, and Licensor may remove and dispose of the Remaining Property in Licensor's sole discretion, without any obligation to account to Hines for the value of such Remaining Property. Licensor shall not be entitled to any reimbursement from Hines for any costs incurred in removing and disposing of such Remaining Property. Hines expressly waives any claims against Licensor arising directly or indirectly from Licensor's removal and disposition of any Personal Property in accordance with the provisions of this License Agreement.                    8.03 MAINTENANCE. At all times during the term of this License Agreement, Hines shall operate and maintain all Personal Property located on the License Parcels used by Hines in connection with its activities in accordance with all applicable Laws and Permits.           9. LIENS. Hines shall at all times keep the License Parcels free from any liens arising out of any and all work performed, materials, services or equipment furnished, or obligations incurred by or on behalf of Hines. Hines hereby agrees to indemnify, defend and hold Licensor and the Property free and                                         -7-   harmless from any and all liens, claims, damages or judgments arising out of any such work performed, materials, labor or equipment furnished, or obligations incurred by or on behalf of Hines in connection with its operations on the License Parcels. The indemnification obligations of Hines hereunder shall be absolute and unconditional and shall survive the expiration or sooner termination of this License Agreement. If Hines contracts for work which results in the imposition of any materialmens' or mechanics' liens for which either a payment bond does not exist, or neither the bonding company nor Hines voluntarily pay within ninety (90) days after receipt of written notice by Licensor, then Licensor shall have an unconditional right (but not an obligation) to extinguish any such encumbrances and to receive reimbursement from Hines for all costs incurred in extinguishing such encumbrances immediately upon written demand by Licensor.           10. UTILITIES. Hines shall arrange to have all utilities servicing Hines' operations separately metered or billed to Hines, and Hines shall be responsible directly to the companies or persons providing the same. In the event such utilities are not separately billed, Hines shall pay its proportional share thereof on a monthly basis in amounts to be reasonably determined by Licensor and approved by Hines. Hines' allocated portion thereof shall be paid by Hines to Licensor within fifteen (15) business days after written demand therefor by Licensor.           11. INSURANCE. At all times during the term hereof, Hines shall maintain, at its sole cost and expense, (i) customary and adequate worker's compensation insurance, and (ii) comprehensive general liability insurance insuring against any liability arising out of or in connection with the use, occupancy or maintenance of the License Parcels and the Personal Property located thereon by Hines. Such liability insurance shall have a single combined liability limit of not less than One Million Dollars ($1,000,000) for damage to property and a single combined liability limit of not less than Three Million Dollars ($3,000,000) for injury or death to persons; provided, that any umbrella coverage obtained by Hines shall be applicable to such minimum coverage limits. If Hines fails to obtain or maintain such insurance, Licensor, at Hines's cost and expense, shall have the right, but not the obligation, to obtain and/or maintain such insurance on behalf of Hines. Should Licensor obtain and/or maintain such insurance and should Hines fail to pay for the costs and expenses therefore, Licensor shall be entitled to receive reimbursement from Hines for all costs incurred in obtaining and/or maintaining such insurance immediately upon written demand by Licensor. The limit of any insurance referenced herein shall not limit the liability of Hines hereunder. Licensor and its lender shall be named as additional insured in all such policies (except the workers' compensation insurance) and the public liability insurance and property damage insurance shall insure performance by Hines of any indemnities provided for herein. All such insurance policies shall be obtained from reputable insurance companies properly licensed and accredited by the State of California with a rating of not less than B, Class VII in the most recent edition of Best's Insurance Guide and shall provide that Licensor shall be given thirty (30) days prior written notice by the applicable insurer in the event that either the insurers or Hines desires to cancel or modify such policies of insurance or such portions thereof. Hines shall provide Licensor with (i) written proof of such insurance prior to the effectiveness of this License Agreement, and (ii) written proof of renewal of all insurance required hereunder no later than five (5) days prior to expiration.           12. RENT. Except as set forth in this Section 12 below, Hines shall not be responsible for paying Licensor any compensation, fees, costs, expenses or monies for the License.                                         -8-                     12.01 PAYMENT OF COMPENSATION DURING EXTENSION TERMS. For purposes of this Section the Purchase Price for the Property under the Option Agreement shall be allocated between the Phase I Parcel, Phase II Parcel and the Phase III Parcel on a prorated basis allocated based upon the respective acreage contained in each Parcel.                    (a) In the event that Hines elects to extend the Phase II Term pursuant to Section 3.02 above, Hines shall pay Licensor compensation for such extension in accordance with the terms of this subparagraph (a). If Hines occupies the Phase II Parcel after JULY 1, 2007, it shall pay as compensation to Licensor one-half (1/2) of the current taxes and assessments attributable to the Phase II Parcel from and after JULY 1, 2007 until the Phase II Term expires, as equitably prorated. Notwithstanding anything herein to the contrary, any assessments made by a special assessment district that are first imposed on the Property at or after the Close of Escrow shall be the sole responsibility of Licensor. Hines shall pay Licensor for its share of taxes and assessments no later than twenty (20) days prior to such taxes and assessments becoming delinquent. In addition, Hines shall pay Licensor a sum equal to the interest which could be earned on the amount of the Purchase Price allocated to the Phase II Parcel, at an interest rate equal to WALL STREET JOURNAL prime MINUS one percent (1%) with such interest commencing on JULY 1, 2006 through expiration of the Phase II Term. The interest payment hereunder shall paid by Hines to Licensor no later than the fifth (5th) day of each month in advance.                    (b) In the event that Hines elects to extend the Phase III Term pursuant to Section 3.02 above, Hines shall pay Licensor compensation for such extension in accordance with the terms of this subparagraph (b). If Hines occupies the Phase III Parcel after JULY 1, 2008, it shall pay as compensation to Licensor one-half (1/2) of the current taxes and assessments attributable to the Phase III Parcel from and after JULY 1, 2008 until the Phase III Term expires, as equitably prorated. Notwithstanding anything herein to the contrary, any assessments made by a special assessment district that are first imposed on the Property at or after the Close of Escrow shall be the sole responsibility of Licensor. Hines shall pay Licensor for its share of taxes and assessments no later than twenty (20) days prior to such taxes and assessments becoming delinquent. In addition, Hines shall pay Licensor a sum equal to the interest which could be earned on the amount of the Purchase Price allocated to the Phase III Parcel, at an interest rate equal to WALL STREET JOURNAL prime MINUS one percent (1%) with such interest commencing JULY 1, 2007 through expiration of the Phase III Term. The interest payment hereunder shall paid by Hines to Licensor no later than the fifth (5th) day of each month in advance                    12.02 PERSONAL PROPERTY TAXES. During the term of this License Agreement, Hines shall cause all taxes, assessments and other charges levied or imposed upon any of Personal Property. Hines shall at all times during the term hereof pay all such personal property taxes prior to delinquency.                    12.03 LICENSOR PAYMENT OF TAXES. From and after the Close of Escrow under the Option Agreement Licensor shall be responsible for the payment of all real property taxes and assessments against the Property (subject to the right to receive partial payments from Hines as set for in Section 12.01 above. Should Licensor fail to pay said taxes and assessments prior to delinquency, Hines may pay such taxes and assessment and Hines shall be entitled to reimbursement for such payments (less Hines' share pursuant to Section 12.01                                         -9-   above) from Licensor within fifteen (15) days following written demand. In the event that Licensor does not reimburse Hines for such costs, Hines shall have the right to offset such amounts from any payments owing to Licensor hereunder in addition to pursuing any other remedies available at law or in equity.           13. ASSIGNMENT/TRANSFER. During the term of this License Agreement Hines shall not voluntarily, involuntarily or by operation of law, directly or indirectly, assign, transfer, mortgage, pledge, hypothecate or encumber this License Agreement or any of its interest or right herein, and shall not let any person occupy or use the License Parcels or any portion thereof for any purposes whatsoever. In connection therewith, Hines hereby acknowledges the personal nature of the rights and privileges granted hereunder; provided, however, Hines may assign its interest to any subsidiary or parent of Hines without the prior consent of Licensor. In the event of any permitted assignment, Hines shall not be released from liability hereunder.           14. MUTUAL INDEMNIFICATION.                    (a) Hines hereby agrees to indemnify, defend and hold Licensor and its employees, agents, successors and assigns (collectively, "Licensor Indemnitees") harmless from and against any and all payments, expenditures, losses, damages, environmental clean up costs or claims (including remediation costs and contribution claims), liabilities, claims, causes of action, judgments, court costs, legal or other expenses (including reasonable attorneys' fees) of whatever kind or nature, whether direct or indirect, contingent or non-contingent, incurred or suffered by, or actually made against, any Indemnitee resulting from or arising out of or by reason of (i) Hines's use or occupancy of the License Parcels during the term of this License Agreement and/or the conduct and operation of Hines's plant nursery activities thereon or other things done, permitted or suffered by Hines in, on or about the License Parcels; or (ii) any breach, default or failure by Hines to fully perform in a timely fashion any of the covenants, obligations, agreements or other undertakings of Hines to be performed under the terms of this License Agreement. Hines's indemnification obligations shall not apply to matters arising from the negligence or willful misconduct of Licensor or any breach of this License Agreement by Licensor, nor shall this indemnification constitute a waiver of the release provisions in the Option Agreement. The indemnification obligations of Hines hereunder shall be absolute and unconditional, and shall survive the expiration or sooner termination of this License Agreement.                    (b) Licensor hereby agrees to indemnify, defend and hold Hines and its employees, agents, successors and assigns (collectively, "Hines Indemnitees") harmless from and against any and all payments, expenditures, losses, damages, environmental clean up costs or claims (including remediation costs and contribution claims), liabilities, claims, causes of action, judgments, court costs, legal or other expenses (including reasonable attorneys' fees) of whatever kind or nature, whether direct or indirect, contingent or non-contingent, incurred or suffered by, or actually made against, any Indemnitee resulting from or arising out of or by reason of (i) Licensor's use or occupancy of the Property during the term of this License Agreement and/or the conduct and operation of Licensor's development activities thereon; or (ii) any breach, default or failure by Licensor to fully perform in a timely fashion any of the covenants, obligations, agreements or other undertakings of Licensor to be performed under the terms of this License Agreement. Licensor's indemnification obligations shall not apply to matters arising from the negligence or willful misconduct of Hines, or any breach of this License                                         -10-   Agreement by Hines. The indemnification obligations of Licensor hereunder shall be absolute and unconditional, and shall survive the expiration or sooner termination of this License Agreement.           15. DEFAULTS.                    15.01 BY HINES. In the event Hines fails to fully perform or satisfy any of Hines's covenants, agreements or undertakings contained herein in accordance with the terms hereof, and such failure is not cured within a period of ten (10) calendar days after written notice thereof is delivered to Hines, or in the event any such failure cannot be reasonably cured within such 10-day period, Hines fails to commence such cure within such 10-day period and diligently prosecute the same, Hines shall be in default hereunder. In the event of any such default, Licensor shall be entitled to: (i) terminate this License Agreement (subject to the provisions below), in which event Hines shall immediately cease its operations, vacate the License Parcels, and all rights and obligations of the parties under this License Agreement shall terminate except for any indemnification or other obligations expressly stated herein as surviving, which obligations shall survive and continue in full force and effect; (ii) cure such default and Hines shall be required to reimburse Licensor for the cost of remedying the default within ten (10) days following written demand, and all unpaid sums shall bear interest at the rate of ten percent (10%) per annum, and/or (iii) exercise any other remedies available to Licensor under this License Agreement, at law, or in equity. In the event that a default by Hines does not involve the payment of monies or possession of the Property beyond the expiration of the Phase II or Phase III Terms, as a condition to Licensor exercising its termination remedy, the parties agree to meet within ten (10) days following written notice of default from Licensor and use good faith efforts to attempt to agree upon a reasonable cure for such default. In the event that the parties cannot agree upon a cure process for such default, the parties shall submit the matter to arbitration in accordance with Section 16 below and the arbitrator shall determine the appropriate cure for such default. After the arbitrator's determination of the appropriate cure process, then the time period for curing defaults under this Section shall commence.                    15.02 BY LICENSOR. In the event Licensor fails to fully perform or satisfy any of Licensor's covenants, agreements or undertakings contained herein in accordance with the terms hereof, and such failure is not cured after a period of ten (10) calendar days after written notice thereof is delivered to Licensor, or in the event any such failure cannot be reasonably cured within such 10-day period, Licensor fails to commence such cure within such 10-day period and diligently prosecute the same, Licensor shall be in default hereunder. In the event of any such default, Hines shall cure such default and Licensor shall be required to reimburse Hines for the cost of remedying the default within ten (10) days following written demand, and all unpaid sums shall bear interest at the rate of ten percent (10%) per annum. In addition, Hines shall be entitled to exercise any remedies available to Hines under this License Agreement, at law, or in equity. Nothing herein shall modify the release in the Option Agreement.           16. ARBITRATION OF DISPUTES. ANY CONTROVERSY BETWEEN THE PARTIES HERETO SHALL BE SUBMITTED TO ARBITRATION IN SOLANO COUNTY, CALIFORNIA, ON THE REQUEST OF EITHER PARTY. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES, SHALL BE DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF                                         -11-   THE AMERICAN ARBITRATION ASSOCIATION ("AAA"), AND WRITTEN NOTICE THEREOF SHALL BE GIVEN TO THE OTHER PARTY. ALL STATUTES OF LIMITATIONS WHICH WOULD OTHERWISE BE APPLICABLE SHALL APPLY TO ANY ARBITRATION PROCEEDING UNDER THIS PARAGRAPH. JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT HAVING JURISDICTION AND SHALL BE FINAL AND BINDING.           NO PROVISION OF, NOR THE EXERCISE OF ANY RIGHTS UNDER THIS SECTION 16 SHALL LIMIT THE RIGHT OF ANY PARTY TO OBTAIN PROVISIONAL OR ANCILLARY REMEDIES SUCH AS INJUNCTIVE RELIEF, FROM A COURT HAVING JURISDICTION BEFORE, DURING, OR AFTER THE PENDENCY OF ANY ARBITRATION. THE INSTITUTION AND MAINTENANCE OF AN ACTION FOR JUDICIAL RELIEF OR PURSUIT OF PROVISIONAL OR ANCILLARY REMEDIES SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE DISPUTE TO ARBITRATION.           WHENEVER AN ARBITRATION IS REQUIRED, THE ARBITRATOR OR REFEREE SHALL BE SELECTED IN ACCORDANCE WITH THIS SECTION. WITHIN FIVE (5) DAYS AFTER WRITTEN NOTICE OF ANY DISPUTE IS GIVEN TO THE OTHER PARTY, THE PARTIES' SHALL ATTEMPT TO AGREE ON A MUTUALLY ACCEPTABLE ARBITRATOR. IN THE EVENT THE PARTIES ARE UNABLE TO SO AGREE WITHIN SUCH FIVE (5) DAY PERIOD, THE ARBITRATOR OR REFEREE SHALL BE SELECTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. THE DISPUTED MATTER SHALL BE HEARD BY THE ARBITRATOR OR REFEREE SO APPOINTED NO LATER THAN TWENTY (20) DAYS AFTER SUCH APPOINTMENT. ARBITRATORS SHALL APPLY CALIFORNIA LAW AND BE BOUND BY PRECEDENT AND STATUTORY RULES AS THOUGH THEY WERE JUDGES SITTING IN A CALIFORNIA COURT. STATEMENTS OF ARBITRATION AWARDS SHALL BE IN WRITING. THE PARTIES SHALL BE ENTITLED IN ANY ARBITRATION HEREUNDER, TO SUCH RIGHTS OF DISCOVERY AS DETERMINED BY THE ARBITRATOR.           IN THE EVENT OF ANY DISPUTE GOVERNED BY THIS SECTION, EACH OF THE PARTIES SHALL PAY ALL OF ITS OWN EXPENSES, AND, SUBJECT TO THE AWARD OF THE ARBITRATOR, SHALL PAY AN EQUAL SHARE OF THE ARBITRATORS' OR REFEREES' FEES. THE ARBITRATOR SHALL HAVE THE POWER TO AWARD RECOVERY OF ALL COSTS AND FEES (INCLUDING ATTORNEYS' FEES, ADMINISTRATIVE FEES, ARBITRATORS' FEES, AND COURT COSTS) TO THE PREVAILING PARTY.           NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A                                         -12-   COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARILY.           WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.                    ___________________                _______________                   Licensor's Initials                Hines' Initials           17.      MISCELLANEOUS.                    17.01 GOVERNING LAW. This License Agreement has been executed in Vacaville, California, and shall be governed by and construed in accordance with the laws of the State of California.                    17.02 ATTORNEYS' FEES. In the event either party shall commence legal proceedings for the purpose of enforcing any provision or condition hereof, or interpreting their rights hereunder, or by reason of any breach arising under the provisions hereof, then the successful party in such proceedings shall be entitled to reasonable attorneys' fees to be determined by the Court.                    17.03 INTEGRATION. Except as expressly stated herein, this License Agreement contains the entire agreement of the parties hereto, and supersedes any prior written or oral agreements between them concerning the subject matter contained herein. Except as expressly stated herein, there are no representations, agreements, arrangements, or understandings, oral or written, relating to the subject matter which are not fully expressed herein. This License Agreement may be modified only by a writing signed by the party against whom it is sought to be enforced.                    17.04 COUNTERPARTS. This License Agreement may be executed in counterparts and shall be fully effective and binding on all parties hereto, as if one or more copies thereof had been executed by all of the parties hereto, when all of the parties have executed counterparts hereof, even though no single counterpart has been executed by all of the parties hereto.                    17.05 NOTICE. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or sent by electronic facsimile and shall be deemed received upon the earlier of (i) if personally delivered, the date of delivery to the address of the person to receive such notice, (ii) if mailed, on the date of posting by the United States Post Office, or (iii) if given by electronic facsimile, when received by the other party.                                         -13-            TO LICENSOR:                       Triad Communities, L.P.                                             1095 Hiddenbrooke Parkway                                             Vallejo, CA  94591                                             Attn:  Fred Grimm                                             Telephone:  (707) 557-1184                                             Facsimile:  (707) 557-1187                                              Triad Communities, L.P.                                             2801 Alaskan Way, Suite 107                                             Seattle, WA  98121                                             Telephone:  (206) 374-0414                                             Facsimile:  (206) 374-0415           With copy to:                      Foster Pepper & Shefelman, PLLC                                             1111 Third Avenue, Suite 3400                                             Seattle, WA  98101-3299                                             Attention:  Michael Kuntz, Esq.                                             Telephone:  (204) 447-8959                                             Facsimile:  (204) 749-1976           TO HINES:                          Hines Nurseries, Inc.                                             12621 Jeffrey Road                                             Irvine, California  92620-2101                                             Attention:  Claudia Pieropan                                             Telephone:  (949) 559-4444                                             Facsimile:  (949) 786-0968           With a copy to:                    Rutan & Tucker, LLP                                             611 Anton Boulevard, Suite 1400                                             Costa Mesa, California  92626-1931                                             Attention:  Randall M. Babbush, Esq.                                                         Joseph L. Maga, Esq.                                             Telephone:  (714) 641-3456                                             Facsimile:  (714) 546-9035           Notice of change of address shall be given by written notice in the manner described in this Section.                    17.06 UNPAID AMOUNTS. In the event any reimbursement amounts due from one party to the other are not paid within ten (10) calendar days after written demand for payment, such amounts shall bear interest at the rate of ten percent (10%) per annum from the eleventh (11th) day after the date of written demand until paid.                    17.07 WAIVER. Waiver by one party of the performance of any covenant, condition or promise shall not invalidate this License Agreement, nor shall it be considered to be a waiver by such party of any other covenant, condition, or promise hereunder. The waiver by either or both parties of the time for performing any act shall not constitute a waiver of the time for                                         -14-   performing any other act or an identical act required to be performed at a later time. The exercise of any remedy provided by law or equity and the provisions of this License Agreement for any remedy shall not exclude other remedies unless they are expressly excluded.                    17.08 CONSTRUCTION. As used in this License Agreement, the masculine, feminine, or neuter gender and the singular or plural numbers shall each be deemed to include the other whenever the context so indicates. This License Agreement shall be construed as a whole, the captions being for the convenience of the parties only and not intended to describe or define the provisions in the portions of the License Agreement to which they pertain.                    17.09 FORCE MAJEURE. Neither Hines nor Licensor shall be liable to the other for failing to perform their respective obligations under this License Agreement if such performance is prevented by strikes, labor disputes, acts of God, governmental restrictions, governmental regulations, governmental controls, enemy or hostile governmental action, civil commotion, fire or other casualty, or by other similar causes or events beyond the reasonable control of the prevented party, if the prevented party notifies the other party of the existence of the cause or event within seventy-two (72) hours of its commencement, and if the prevented party thereafter uses reasonable diligence and good faith to overcome such cause or event to be able to resume performance.                    17.10 NO RECORDATION. Neither this License Agreement nor any memorandum hereof shall be recorded without the prior written consent of Licensor, which consent may be withheld in its sole and absolute discretion.                    17.11 SEVERABILITY. If any term, covenant, condition, or provision of this License Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated.                    17.12 SUBORDINATION AND NON-DISTURBANCE. Hines agrees to subordinate this Agreement to any deed of trust or mortgage now or hereafter placed upon the Property and to all amendment, modifications and replacements thereof, on the condition that Hines' rights under this Agreement are not disturbed in any way. Upon ten (10) days prior written request of Licensor, Hines shall evidence in writing the subordination of its rights under this Agreement to the lien of any mortgage now or hereafter in force, upon receipt of a commercially reasonable non-disturbance agreement from such mortgagee. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage, or delivery of a deed-in-lieu of foreclosure Hines shall recognize such purchaser on the conditions set forth herein.                    17.13 ESTOPPEL. Each party shall at any time within ten (10) days of written request of the other party, execute and deliver to the requesting party and their proposed lender or purchaser, a written certificate (a) stating that to their actual knowledge this Agreement is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Agreement as so modified is in full force and effect); (b) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of either party hereto, or specifying such defaults if any are claimed or known; (c) the responding party has no known offsets or                                         -15-   claims against the enforcement of any of the provisions of this Agreement, or specifying any contrary claims; (d) acknowledging that the certificate is made to induce the proposed purchaser or a lender to consummate a transaction and that such purchaser and/or lender shall rely upon the truth of the statements made therein; and (e) confirming that the person executing the certificate is the duly authorized signatory for or on behalf of the responding party.                    17.14 SUCCESSORS. Subject to Section 13 above, this License Agreement shall be binding on the successors and assigns of the parties hereto.                    17.15 EXHIBITS. All Exhibits attached hereto shall be deemed a part of this License Agreement and are hereby incorporated herein by reference in full.           IN WITNESS WHEREOF, the parties have duly executed this License Agreement as of the day and year first above written.                                       HINES NURSERIES, INC.,                                      a California corporation                                        By:                                         ----------------------------------------                                            Claudia Pieropan                                            Chief Financial Officer                                       TRIAD COMMUNITIES, L.P.,                                      a California limited partnership                                        By:                                         ----------------------------------------                                            Its:                                                ---------------------------------                                         -16-                                      EXHIBIT "1"                                    -----------          SITE PLAN DEPICTING THE PHASE I, PHASE II AND PHASE III PROPERTY         ----------------------------------------------------------------                          (To be inserted prior to execution)                                       EXHIBIT "1"                                    -----------                               TO LICENSE AGREEMENT                                      EXHIBIT "2"                                    -----------                              DISCLOSURE TO HOME BUYERS                             -------------------------            The undersigned ("Buyer") has entered into that certain Purchase Agreement with ____________________________________ ("Seller") to buy Lot/Unit ________ of Tract No. __________ located in the City of Vacaville, County of Solano, State of California (the "Lot"). This Addendum shall supplement the terms of the Purchase Agreement.           1. ADJACENT NURSERY OPERATIONS. Buyer acknowledges that its Lot is adjacent to or near an active nursery business, currently operated by Hines Nurseries, Inc. ("Hines"). Buyer agrees that construction of its residence near a nursery operation may result in nuisances, annoyances, and disturbances to Buyer, including without limitation, increased noise, high lighting levels, use of fertilizers and pesticides, and offensive odors. Buyer acknowledges that Hines shall be entitled to continue its current use of tractors, trucks, loading facilities, irrigation methods, fertilization, pesticides and spraying, without any interference, objection or liability to Buyer.           2. BUYER INVESTIGATION. Before acquiring fee title to a Lot Buyer is advised to visit their Lot during operation hours for the nursery and during differing times of the day to personally determine whether the nuisances and disturbances from the nursery operations are acceptable to Buyer.           3. RELEASE AND COVENANT NOT TO SUE. Buyer, by acceptance of a deed to a Lot, represents that they have considered the potential negative impacts of the nursery operations to persons and property and accepts all such potential negative impacts. In connection therewith, Buyer for themselves and on behalf of their family, guests, tenants, invitees and licensees (collectively, the "Releasing Parties") hereby agree to:                    3.1 Forever waive, release and hold Seller and Hines and their respective successors and assigns (collectively, the "Released Parties") harmless from and against any impact, claim, cost, expenses, action, damage, liability, loss, nuisance, annoyance, disturbance or detriment to the Releasing Parties or the Lot that may in any way arise, now or in the future, as a result of such nursery operations;                    3.2 Hold the Released Parties harmless from any claims, actions, lawsuits, or proceedings, by the guests, tenants, invitees or licensees of Buyer against any of the Released Parties arising in any way form the nursery operations;                    3.3 Not oppose or object to in any way (verbal or written), directly or indirectly, to the continuation of such nursery operations and as material consideration, waives any right Buyer may have to oppose or object to the nursery operations; and                    3.4 Not to bring any action, claim or proceeding of any kind to alter, modify, reduce, terminate or cease the nursery operations before any federal, state or local court, tribunal, governmental agency, entity or board or administrative agency.                                      EXHIBIT "2"                                    -----------                               TO LICENSE AGREEMENT            Buyer hereby expressly agrees that the foregoing waiver and relinquishment of rights and claims, known or unknown, suspected or unsuspected at the time of this signing, is given by the undersigned with full knowledge of the provisions of California Civil Code Section 1542 and with the intention that such waiver and relinquishment is intended to and shall extend to waive the benefits of the provisions of Section 1542, which reads as follows:                    "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE                   CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE                   TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE                   MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."                                              ________________                                             BUYER'S INITIALS           4. THIRD PARTY BENEFICIARY. Each of the parties hereto agrees that Hines shall be a third party beneficiary of rights and releases in this Addendum and shall have the right to enforce the terms and conditions of this Addendum in the event of any breach.           5. SUCCESSORS AND ASSIGNS. Each and all of the terms, covenants, conditions and releases herein shall run with the Lot and shall inure to the benefit of and shall be enforceable by Hines and be binding upon the Lot, Buyer and all persons or entities having any interest in all or any portion of the Lot, together with their grantees, successors, assigns, lessees and mortgagees. Each party acknowledges that at the request of Hines, the terms of this Addendum may be required to be included in the grant deed conveying the Lot to Buyer.           6. INTERPRETATION OF LEGAL DOCUMENTS. Sales representatives of Seller are not authorized to explain, interpret or modify any of the legal documents covering or pertaining to the purchase of the Lot including, without limitation, this Addendum.           7. NO REPRESENTATION. No salesman, employee or agent has the authority to make any representation or warranty to Buyer which contradict the matters contained in this Addendum. Buyer acknowledges that no representation or warranty has been made on which Buyer has relied in connection with the purchase of the Lot.           8. INCONSISTENCY WITH PURCHASE AGREEMENT. In the event of any inconsistency between this Addendum and the Purchase Agreement, the terms of this Addendum shall control.\           9. COUNTERPARTS. This Addendum may be executed in several counterparts, and all so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all parties are not signatories to the original or the same counterpart.                                         -2-            BY SIGNING BELOW, THE UNDERSIGNED BUYER ACKNOWLEDGES HAVING READ AND UNDERSTOOD THE FOREGOING DISCLOSURE AND RELEASE, AND AGREES TO BE BOUND BY ITS TERMS.  BUYER(S):                                      SELLER:                                                 ---------------------------------                                                a - --------------------------------------           ------------------------------- Buyer                            Date                                                By:                                                   ------------------------------                                                   Its: - -------------------------------------- Buyer                            Date                                                By:                                                   ------------------------------                                                                             Date                                                Its:                                                    -----------------------------                                         -3-                                      EXHIBIT "3"                                    -----------                     LIST OF THE PARTIES' RESPECTIVE OBLIGATIONS                    -------------------------------------------                              REMOVAL FOR EACH PHASE                              ----------------------                     (MAP DATED JULY 25, 2002 to be inserted prior                      to execution of the Option Agreement)                               MAP DATED JULY 25, 2002                                       EXHIBIT "3"                                    -----------                               TO LICENSE AGREEMENT                                      EXHIBIT "F"                                    -----------                    GENERAL ASSIGNMENT OF CONTRACTS, AGREEMENTS,                   --------------------------------------------                      PLANS, PERMITS, LICENSES, AND APPROVALS                      ---------------------------------------            THIS GENERAL ASSIGNMENT OF CONTRACTS, AGREEMENTS, PLANS, PERMITS, LICENSES, AND APPROVALS ("Assignment") is made and entered into as of April 1, 2003, by and between HINES NURSERIES, INC., a California corporation ("Assignor"), and TRIAD COMMUNITIES, L.P., a California limited partnership ("Assignee").                                   R E C I T A L S                                  ---------------           A. Pursuant to that certain Option Agreement for Purchase and Sale of Real Property and Escrow Instructions dated as of April __, 2003 ("Option Agreement"), Assignee will acquire title to that certain real property in an unincorporated area of the County of Solano, California, legally described on the attached EXHIBIT "A" (the "Property").           B. Assignor has agreed in connection with the conveyance of the Property to assign its interest in any contracts, agreements, warranties, guaranties, indemnities, entitlements, plans, permits, licenses, operating contracts, surveys, plans and specifications, governmental approvals, entitlements, authorizations, agreements with any utility companies, and all management, service, supply and maintenance contracts and agreements, contract rights and benefits, documents, insurance policies, and any other agreements, permits or other contractual arrangements of any nature whatsoever, whether written or verbal, now or hereafter obtained or entered into by Assignor with respect to the development, entitlement, ownership, operation, maintenance or administration of the Property, including, without limitation, all warranties and guaranties covering any equipment, fixtures or improvements now or hereafter located on or placed upon the Property and approvals to the extent assignable and which Assignor may have or control in connection with the Property, (collectively "Property Rights"). Nothing herein shall constitute an assignment of Assignors rights to continue to operate the nursery on the Property in accordance with the terms of the License Agreement.           C. Assignor desires to assign to Assignee all of its right, title and interest in and to the Property Rights. Any initially capitalized terms not separately defined herein shall have the meaning set forth in the Option Agreement.           NOW, THEREFORE, in consideration of the foregoing, the parties agree as follows:  1. ASSIGNMENT OF PROPERTY RIGHTS.           1.1 ASSIGNMENT. As of the Effective Date, Assignor hereby assigns to Assignee (to the extent assignable), without representation or warranty, all of Assignor's right, title and interest in and to the Property Rights relating to the Property which Assignor may hold, if any. Assignor makes no representation or warranty as to the assignability, existence, effectiveness, or validity of any Property Rights. Assignee and Assignor shall reasonably cooperate to attempt to obtain any consents necessary to transfer and/or assign the contracts,                                      EXHIBIT "F"                                    -----------                                TO OPTION AGREEMENT   agreements, plans, permits, entitlements, licenses and approvals described in this Assignment. However, Assignor shall not be required to incur any material out-of-pocket costs in connection with same.           1.2 INDEMNITY . Assignee agrees to indemnify, defend, and hold Assignor harmless from and against any claims, actions, proceedings, penalties, damages, defaults, breaches, liabilities or obligations, including attorneys' fees, arising from or relating to the Property Rights accruing after the Effective Date. Assignee's indemnity and defense obligations hereunder shall become effective on the Effective Date regardless of the date that any or all of the necessary consents and approvals to the assignments and transfers hereunder is obtained. Assignor agrees to indemnify, defend, and hold Assignee harmless from and against any claims, actions, proceedings, penalties, damages, defaults, breaches, liabilities or obligations, including attorneys' fees, arising from or relating to the Property Rights accruing prior to the Effective Date.           1.3 AS-IS. Assignor makes the foregoing assignments, conveyances and transfers on an "AS-IS" basis, without representation or warranty of any kind, except as set forth in the Option Agreement, either express or implied, with respect to any such rights or property, the effectiveness or validity thereof, or Assignee's rights to utilize and rely upon the Property Rights. Assignor shall, at no cost or liability to Assignor, execute such other instruments as Assignee may hereafter reasonably request in order to confirm the foregoing assignments.           1.4 EFFECTIVE DATE. The "Effective Date" of this Assignment shall be the date of recordation of a grant deed conveying to Assignee fee simple interest in and to the Property described in EXHIBIT "A".           1.5 LICENSE AGREEMENT. Nothing herein shall in any way limit Assignor's rights under the License Agreement by and between the parties hereto dated concurrently herewith.  2.       MISCELLANEOUS           2.1 ATTORNEYS' FEES. In any action or proceeding between the parties hereto concerning or arising out of this Agreement, the prevailing party in such action shall be entitled to have and to recover from the other party its reasonable attorneys' fees, expert witness fees, consultant fees and other reasonable expenses incurred in connection with such action or proceeding, in addition to its recoverable court costs, at trial and on any appeal.           2.2 INUREMENT. This Assignment shall inure to the benefit of Assignor and Assignee and their respective heirs, assigns and successors in interest.           2.3 GOVERNING LAW. This Assignment shall be governed by and construed in accordance with the laws of the State of California.           2.4 COUNTERPARTS. This Assignment and any documents required to be executed by the parties hereunder may be executed in several counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.           2.5 INCONSISTENCIES. In the event of any inconsistencies between this Assignment and the Option Agreement, the terms of this Assignment shall control.                                         -2-            IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above written.                                        HINES NURSERIES, INC.,                                       a California corporation                                         By:                                          ---------------------------------------                                            Claudia Pieropan,                                            Chief Financial Officer                                                                        "Assignor"                                         TRIAD COMMUNITIES, L.P.,                                       a California limited partnership                                         By:                                          ---------------------------------------                                             Its:                                                 --------------------------------                                                                        "Assignee"                                         -3-                                      EXHIBIT "A"                                    -----------                                  LEGAL DESCRIPTION                                 -----------------            That certain real property situated in the County of Solano, State of California described as follows:                                       EXHIBIT "A"                                    -----------                        TO GENERAL ASSIGNMENT OF CONTRACTS,                       AGREEMENTS, PLANS, PERMITS, LICENSES                                   AND APPROVALS                                      EXHIBIT "G"                                    -----------                             LIST OF HAZARDOUS MATERIALS                            ---------------------------   AGRI-MYCIN 17                                         PYRENONE ALIETTE WDG                                           REGAL RONSTAR AVIDO.15                                              ROUNDUP PRO BANNER MAXX                                           ROUT BARRICADE 65 WDG                                      SCYTHE BARRICADE 4FL                                         SNAPSHOT 2.5 BOND                                                  STIRRUP-M CHAMP 2FLO                                            STRIKE CHIPCO 26 GT                                          SUBDUE MAXX CHIPCO 26019                                          SURFLAN A/S CLEARY 3336                                           SYLGARD 309 CORRAL 2.68                                           SYSTEC 1998 DACONIL W.STK                                         SYSTHANE WSP DEADLINE MPS                                          TALSTAR T/O DEADLINE T&O                                          TALSTAR CA DEVRINOL 50 DF                                        TEMPO 20 WP DEVRINOL 50 DF (AG)                                   TERRACOLOR 75 DIAZINON AG600 WBC                                    TURCAM DIPEL2X                                               ULTRA FINE OIL DITRAK CAKE                                           ZEROTOL DURSBAN 50W DURSBAN TNP                                           APEX FERTILIZER FLORAMITE                                             ALUMINUM SULFATE FORE T/O RAIN.                                        OSMOCOTE FERTILIZER GALLERY 75 DF GNATROL GOAL 2XL HERITAGE HEXYGON MALATHION 55 MAVRIK A/F MEASUROL 75 W METHALDEHIDE 7.5 NO FOAM B OH-2 ORTHENE T/O 97 PCNB 75% \ PENDULUM WDG PENTAC A/F PHYTON 27 PRE-PAIR                                       EXHIBIT "A"                                    -----------                        TO GENERAL ASSIGNMENT OF CONTRACTS,                       AGREEMENTS, PLANS, PERMITS, LICENSES                                   AND APPROVALS                                      EXHIBIT "H"                                    -----------                                MEMORANDUM OF OPTION                               --------------------  RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO:  Triad Communities, L.P.  - ------------------------------------  - ------------------------------------ Attn:        -----------------------------  ================================================================================                                                 (Space Above For Recorder's Use)                                 MEMORANDUM OF OPTION                               --------------------            This Memorandum of Option ("Memorandum") is executed in connection with that certain Option contained in that certain Option Agreement dated as of _________, 2003 ("Agreement"), by and between TRIAD COMMUNITIES, L.P., a California limited partnership ("Optionee") and HINES NURSERIES, INC., a California corporation ("Optionor"), relating to certain real property, described as the "Property" in the Agreement, which is more particularly described in EXHIBIT "A" attached hereto and incorporated herein by this reference.           For good and valuable consideration, Optionor grants to Optionee an option to purchase the Property at a price and under the terms and conditions specifically set forth in the Agreement. Unless terminated earlier in accordance with the terms and conditions of the Agreement, Optionor must exercise its Option on or before MARCH 1, 2005, in accordance with the provisions of the Agreement.                                     HINES NURSERIES, INC.,                                    a California corporation                                      By:                                       ------------------------------------------                                          Claudia Pieropan                                          Its:  Chief Financial Officer                                     Date:                                         ----------------------------------------                                                                        "Optionor"                          [Signatures continued on next page]                                      EXHIBIT "H"                                    -----------                                TO OPTION AGREEMENT                      [Signatures continued from preceding page]                                       TRIAD COMMUNITIES, L.P.,                                     a California limited partnership                                       By:                                        -----------------------------------------                                           Its:                                               ----------------------------------                                      Date:                                          ---------------------------------------                                                                        "Optionee"                                         -2-                                      EXHIBIT "A"                                    -----------                                   OPTION PROPERTY                                  ---------------                        [To be attached prior to recordation.]                                       EXHIBIT "A"                                    -----------                              TO MEMORANDUM OF OPTION    EX-10.26 5 hines_10kex10-26.txt                                                                       Exhibit 10.26                          FIRST AMENDMENT TO OPTION AGREEMENT                        -----------------------------------            This First Amendment to Option Agreement ("Amendment"), is dated for reference purposes as of February 28, 2005, is entered into by and between HINES NURSERIES, INC., a California corporation ("Optionor"), and TRIAD COMMUNITIES, L.P., a California limited partnership ("Optionee").                                      RECITALS                                     --------           A. Optionor and Optionee entered into that certain Option Agreement dated April 30, 2003 ("Option Agreement") whereby Optionor granted to Optionee an option to purchase that certain real property located in the City of Vacaville, County of Solano, State of California, as more particularly described in the Option Agreement ("Property").           B. The parties have agreed to amend the Option Agreement on the terms and conditions set forth in this Agreement. Any initial capitalized terms not separately defined in this Amendment shall have the meaning set forth in the Option Agreement.           NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree as follows:                                      AGREEMENT                                     ---------  1. INITIAL EXTENSION OF OPTION TERM. The Option Term as defined in Section 2 of the Option Agreement shall be extended to SEPTEMBER 1, 2005 upon Optionee's delivery of the Extension Funds to Optionor. Within one (1) business day following the execution of this Amendment the Optionee shall deliver to Optionor the sum of Nine Hundred Thousand Dollars ($900,000.00) (the "Extension Funds") representing separate and independent consideration to Optionor for entering into this Amendment. Delivery of the Extension Funds shall require actual delivery of immediately available funds to Optionor, at its address for notices, as provided in the Option Agreement. The Extension Funds shall be the sole and absolute property of Optionor and shall not be refunded in the event Optionee does not exercise this Option or this Option terminates or expires. Furthermore, the Extension Funds shall not be applicable to the Purchase Price at the Close of Escrow. The Option shall automatically terminate without further notice in the event that Optionee fails to timely and properly deliver the Extension Funds.           2. ADDITIONAL EXTENSION OF OPTION TERM. If on or before expiration of the Option Term set forth in Section 1 above, the Option has not terminated or expired, the Optionor hereby agrees to grant to Optionee the right to extend the Option Term to MARCH 1, 2006 (the "Additional Extension") upon satisfaction of the terms and conditions set forth below. Optionee's right to extend the Option Term shall be exercised by Optionee by delivering to Optionor written notice (in accordance with the Option Agreement) irrevocably exercising said Additional Extension on or before 5:00 p.m. California time on the date of expiration of the Option Term concurrently with delivery to Optionor of the Additional    Extension Funds. As separate and independent consideration for the Additional Extension, the Optionee shall deliver to Optionor the sum of Nine Hundred Thousand Dollars ($900,000.00) (the "Additional Extension Funds"). Delivery of the Additional Extension Funds shall require actual delivery of immediately available funds to Optionor, at its address for notices, as provided in the Option Agreement. The Additional Extension Funds shall be the sole and absolute property of Optionor and shall not be refunded in the event Optionee does not exercise this Option or this Option terminates or expires. Furthermore, the Additional Extension Funds shall not be applicable to the Purchase Price at the Close of Escrow. The Option shall automatically terminate without further notice in the event that Optionee fails to timely and properly deliver the notice exercising the Additional Extension and/or deliver the Additional Extension Funds.           3. CLOSE OF ESCROW. In the event that Optionee timely and properly exercises the Option, the "Close of Escrow" as defined in Section 10 of the Option Agreement shall be thirty (30) calendar days following the date that Optionee exercises the Option.           4. OPTION MONIES. As of the date of this Amendment, the parties agree that the Optionee has made all previously required option deposits under the Option Agreement, and the Option Consideration as defined therein is absolutely non-refundable to Optionor as set forth in Section 3 of the Option Agreement.           5. TITLE REVIEW. Section 12(a) of the Option Agreement is hereby deleted and replaced with the following:                    "On or before APRIL 29, 2005, Optionee shall have the right in          its sole and absolute discretion to approve any and all matters of and          exceptions to title of the Property, including the legal description,          as disclosed by the following documents and instruments (collectively,          "Title Documents"): (A) a preliminary report ("Preliminary Report")          issued by Escrow Holder with respect to the Property and all matters          referenced therein; and (B) legible copies of all documents, referred          to in such Preliminary Report."           6. LICENSE AGREEMENT. The License Agreement attached as EXHIBIT "E" to the Option Agreement is hereby replaced in its entirety by the form of the License Agreement set forth on EXHIBIT "1" attached hereto. The attached License Agreement shall be effective upon the Close of Escrow.           7. DETERMINING BOUNDARIES OF PHASES. In accordance with Section 9 of the Option Agreement the parties have determined the boundaries of the Phase I Property, Phase II Property, and the Phase III Property under the License Agreement.           8. MEMORANDUM OF OPTION. Within two (2) days of the execution of this Amendment the parties shall execute that certain First Amendment to Memorandum of Option Agreement set forth on EXHIBIT "2" attached hereto.           9. ENVIRONMENTAL INSURANCE POLICY. The parties agree that Optionor has obtained the Environmental Policy required by Section 21 of the Option Agreement, and that each party has paid their share of the premium for the Environmental Policy.                                          2            10. TIME OF THE ESSENCE. Time is of the essence in each and every term of this Agreement.           11. FULL FORCE AND EFFECT. Except as specifically set forth in this Amendment, the Option Agreement shall remain unmodified and in full force and effect.           12. COUNTERPARTS. This Amendment may be executed in several counterparts, and all so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all parties are not signatories to the original or the same counterpart.           13. INCONSISTENCIES. In the event of any inconsistency between the terms of this Amendment and the Option Agreement, the terms of this Amendment shall control.           IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the dates set forth below.                                         HINES NURSERIES, INC.,                                        a California corporation                                          By: /S/ CLAUDIA PIEROPAN                                            -------------------------------------                                            Claudia Pieropan                                            Its:  Chief Financial Officer                                          TRIAD COMMUNITIES, L.P.,                                        a California limited partnership                                          By: /S/ FREDERICK W. GRIMM                                            -------------------------------------                                            Frederick W. Grimm                                            Its:  Manager of Triad Sky Valley LLC                                                  General Partner                                          3                                      EXHIBIT "1"                                    -----------                                  LICENSE AGREEMENT                                 -----------------            THIS LICENSE AGREEMENT, dated for reference purposes as of _________, 2006 [INSERT CLOSING DATE], is entered into by and between TRIAD COMMUNITIES, L.P., a California limited partnership ("Licensor"), and HINES NURSERIES, INC., a California corporation ("Hines").                                   R E C I T A L S                                  ---------------           A. Licensor and Hines entered into that certain Option Agreement, dated for reference purposes as of April 30, 2003 as amended by that certain First Amendment to Option Agreement dated February 28, 2005 ("Option Agreement"), whereby Hines agreed to sell and Licensor agreed to purchase certain real property described in the Option Agreement as the "Property."           B. Immediately prior to execution of this License Agreement, Hines was the fee owner of, and conducted a plant nursery operation on, the entire Property.           C. Hines is in the process of transferring its existing nursery operation from the Property to property located in the County of Solano (referred to herein as the "New Site") and desires to continue to use a portion of the Property for nursery purposes to facilitate this transfer of operations to the New Site.           D. Licensor intends to develop the Property primarily as a single-family residential subdivision, commencing with development of the portion of the Property identified as the Phase I Parcel, as defined below.           E. Licensor is willing to provide to Hines a non-exclusive license over a portion of the Property to allow for the transfer of existing nursery operations to the New Site, while still providing for the orderly development of the Property in accordance with Licensor's development plans, all on the terms and conditions set forth herein.           NOW THEREFORE, in consideration of the foregoing recitals and the covenants set forth below, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:           1. NON-EXCLUSIVE LICENSE. Licensor hereby grants to Hines, and its subsidiaries and parent corporation, a non-exclusive license to occupy and use those portions of the Property identified as the "Phase I Parcel", "Phase II Parcel" and "Phase III Parcel" as generally depicted on the site plan attached hereto as SCHEDULE "1" ("Site Plan"), to continue to operate and conduct its plant nursery activities and to locate and maintain its equipment and other improvements currently used in connection therewith, all as set forth in greater detail in Section 2 below. The license granted herein to Hines shall be a personal, non-possessory interest in the Phase I Parcel, the Phase II Parcel and the Phase III Parcel (individually, a "License Parcel" and collectively, the "License Parcels"), and Licensor shall at all times during the term hereof                                      EXHIBIT "1"                                    -----------                      TO FIRST AMENDMENT TO OPTION AGREEMENT   retain the right to possession of the Property (including the License Parcels), subject to the terms and conditions of this License Agreement, and have the right to use and occupy the Property for its own purposes, provided the same do not unreasonably interfere with Hines' activities thereon. Licensor shall give Hines seventy-two (72) hours notice prior to any entry onto the Property and the general purpose of such entry. Such notice may be verbal and shall be directed to the general manager at the Property. Licensor agrees not to revoke or cancel the license granted herein during the term hereof except pursuant to Section 15.1 below.           2. USE OF LICENSE PARCELS.                    2.1 PERMITTED USE. The License Parcels shall at all times during the term hereof be used by Hines for purposes of operating and conducting its existing plant nursery activities and all activities reasonably related thereto, and for no other purposes. In connection therewith, Hines may retain on the License Parcels the equipment and improvements currently located on the License Parcels. Additional improvements or equipment affixed to or a part of the Property shall not be brought onto the License Parcels without Licensor's consent, which consent shall not be unreasonably withheld, only upon the condition that Hines agrees to pay for all costs of removing such additional improvements or equipment. Hines shall be entitled to bring additional equipment onto the Property which is of a temporary nature without the prior consent of Licensor. Such uses and equipment shall at all times and in all manners be strictly confined to the area within the License Parcels and shall not in any manner or event be placed on or affect the other portions of the Property.                    2.2 PROHIBITED USES. Hines shall not use, or permit its employees or agents to use, the License Parcels in a manner which would constitute a nuisance; result in waste; result in the cancellation of any insurance being maintained by Licensor with respect to the Property or by Hines hereunder with respect to its activities or in the increase in the premiums for any such insurance maintained by Licensor where such cancellation or increase is the result of a use not permitted by this License Agreement; violate any laws (including any Laws or Permits) applicable to the Property or Hines' use or operation of the License Parcels; constitute a default under the terms of this License Agreement; or except as otherwise expressly provided herein, (i) result in the use of or impact on any portion of the Property other than the License Parcels or (ii) interfere with Licensor's development of the Property. The parties agree that continuation of Hines' current operations shall not be deemed to constitute a nuisance or deemed interference with Licensor's development of the Property as long as Hines uses the Property in accordance with the terms of this Agreement.           3. LICENSE TERM.                    3.1 INITIAL TERMS. The initial term of this License Agreement shall commence on the Close of Escrow, as defined in the Option Agreement, and expire (subject to the extension rights set forth below) on the following dates: (i) JULY 1, 2006, as to the Phase I Parcel ("Phase I Term"), (ii) JULY 1, 2007, as to the Phase II Parcel ("Phase II Term"), and (iii) JULY 1, 2008, as to the Phase III Parcel ("Phase III Term"), unless sooner terminated pursuant to the terms and provisions contained herein.                                         -2-                     3.2 EXPIRATION/TERMINATION. Upon the expiration of the Phase I Term or earlier termination of this License Agreement, (i) Hines shall immediately cease its operations on the Phase I Parcel, (ii) Hines shall vacate the Phase I Parcel, (iii) Hines shall remove, at Hines' sole cost and expense, all of the Removal Property, as defined in Section 8.2 below, located on the Phase I Parcel, and (iv) Hines' rights and obligations hereunder relating to the Phase I Parcel shall terminate and cease except for any indemnification or other obligations undertaken herein which are expressly stated hereunder to survive such expiration or termination. Upon the expiration of the Phase II Term or earlier termination of this License Agreement, (i) Hines shall immediately cease its operations on the Phase II Parcel, (ii) Hines shall vacate the Phase II Parcel, (iii) Hines shall remove, at Hines' sole cost and expense, all of the Removal Property, as defined in Section 8.2 below, located on the Phase II Parcel, and (iv) Hines' rights and obligations hereunder relating to the Phase II Parcel shall terminate and cease except for any indemnification or other obligations undertaken herein which are expressly stated hereunder to survive such expiration or termination. Upon the expiration of the Phase III Term or earlier termination of this License Agreement, (i) Hines shall immediately cease its operations on the Phase III Parcel, (ii) Hines shall vacate the Phase III Parcel, (iii) Hines shall remove, at Hines' sole cost and expense, all of the Removal Property located on the Phase III Parcel as defined in Section 8.2 below, and (iv) Hines' rights and obligations hereunder relating to the Phase III Parcel shall terminate and cease except for any indemnification or other obligations undertaken herein which are expressly stated hereunder to survive such expiration or termination.           4. DEVELOPMENT OF PROPERTY BY LICENSOR.                    4.1 ACCESS TO AND DEVELOPMENT OF LICENSE PARCELS; RESTRICTIONS ON RELOCATION OF UTILITIES. Hines acknowledges that it will be necessary for Licensor to install improvements, including without limitation, utilities, in, on, over and under the License Parcels to provide for the development of the Property, including the License Parcels, as a cohesive residential development project. Therefore, Licensor shall be entitled to enter upon the License Parcels for the purpose of performing engineering activities and making physical improvements to the License Parcels, including but not limited to relocation of existing utility improvements located on the Property (including the License Parcels) subject to the terms and conditions in this License Agreement. In performing such work, Licensor acknowledges and agrees that it shall take all reasonable steps to avoid any material impact to the ongoing plant nursery operation. If it is necessary to relocate any portion of the ongoing plant nursery operation, Licensor shall perform such relocation at Licensor's sole cost and in accordance with the terms and conditions set forth below. Without limiting the foregoing, Licensor acknowledges that all loading, shipping, and deliveries to the nursery shall continue without the imposition of any restrictions thereon, and the water supply, power supply, utilities, pumping station, recycling, sewage disposal and access shall remain in continuous operation at current levels, subject to temporary interruptions. In the event that Licensor needs to cause a temporary interruption of power or water supply to the nursery operations as a result of Licensor's grading or construction activities, Licensor shall coordinate any interruption with Hines, including without limitation the date, time and length of the proposed interruption. Licensor shall provide to Hines a minimum of seventy-two (72) hours prior written notice of any temporary interruption. Notwithstanding the foregoing, at no time shall the nursery operations be without alternative water or power supply. Licensor acknowledges that Hines' back-up water supply capacity of the nursery is approximately 3-4 hours, and that Hines has no back-up power supply.                                         -3-   Licensor shall be responsible, at its sole cost, for providing alternative water and power supply sources as may be reasonably necessary to avoid any material interruption in water or power supply, taking into consideration the Hines' current back-up capacity. If Licensor's grading or construction activities on any portion of the Property requires that the existing Solano Irrigation District water line ("Water Line") running through the Property be relocated, Licensor shall give Hines sixty (60) days prior written notice of its intent to relocate the Water Line. Licensor shall relocate the Water Line at its sole cost. On or before the expiration of the Phase II Term, Hines shall be responsible, at its sole cost, for relocating the pump facilities located on the Phase II Parcel to the Phase III Property.                    4.2 DRAINAGE. In no event shall Licensor's grading or construction activities on any portion of the Property cause any significant additional drainage or water flow onto any portion of the License Parcels. Without limiting the foregoing, no storm water or other runoff from Licensor's development shall be discharged into or otherwise become part of Hines' reclamation pond or recycling system. All water runoff and discharge from Licensor's construction activities and/or from any portion of the Property other than the License Parcels, shall be diverted from the License Parcels.                    4.3 DUST CONTROL. In conducting any grading or other construction activities on any portion of the Property, Licensor shall strictly comply with all dust control mitigation measures imposed as a condition to development of the Property by the appropriate governmental agencies.                    4.4 REDUCTION OF NOISE/ODORS. At such time as Licensor commences its home sales activities on the Phase I Parcel, Hines agrees to use commercially reasonable efforts to minimize odors and noise from the nursery operations; provided, however, Hines shall not be required to incur additional costs, or risk material damage to any of the plants in the nursery operation.                    4.5 RESTRICTIONS ON SALES OF RESIDENCES LOCATED ON PHASE I PARCEL. Prior to JULY 1, 2007, Licensor shall not be entitled to convey fee title to any home constructed on the Phase I Parcel that is located within 150 feet of the Phase II Parcel boundary. In the event that Licensor breaches or threatens to breach this restriction, Hines shall be expressly entitled to seek and obtain an injunction preventing such conveyance, recognizing that Hines cannot be adequately compensated by an award of damages for such breach. The right to injunctive relief shall not limit Hines' right to pursue any other remedies available at law or in equity.                    4.6 DISCLOSURES TO HOME PURCHASERS. Licensor acknowledges that construction of residences adjacent to a nursery operation may raise concerns with homeowners, including without limitation concerns over noise, lighting, odors and other disturbances. Subject to Hines' obligations pursuant to Section 4.4 above and Section 6 below, Hines shall be entitled to continue its current irrigation methods, fertilization, pesticides and spraying techniques, without any interference or objection from Licensor. So long as Hines conducts any operations on any portion of the Property, Licensor shall require each home purchaser, concurrently with execution of a purchase agreement for a home which is located within the Property, to execute: (i) an acknowledgement, in the form attached hereto as SCHEDULE "2", confirming receipt of a disclosure regarding the temporary existence of the adjacent nursery operation and the potential                                         -4-   effects on the home purchaser arising from the nursery operation, including, without limitation, the use of tractors, trucks and loading facilities in connection with a typical nursery operation, and (ii) an agreement expressly waiving any nuisance claim against Hines and making a covenant not to object, directly or indirectly, to the nursery operation.                    4.7 OBLIGATIONS OF PARTIES UPON EXPIRATION OF PHASE I TERM, PHASE II TERM AND PHASE III Term. The parties hereby agree to perform their respective obligations specified in SCHEDULE "3", attached hereto, upon the expiration or earlier termination of the Phase I Term, the expiration or earlier termination of the Phase II Term and upon the expiration or earlier termination of the Phase III Term.                    4.8 DEVELOPMENT MEETINGS. Hines and Licensor agree to hold periodic meetings to discuss and attempt to address any issues related to the development of the Property and the ongoing operation of the nursery facilities until termination or expiration of the Phase II Term.           5. OPERATION. Hines shall operate its plant nursery facilities and engage in its plant nursery activities on the License Parcels at all times during the term hereof in accordance with all applicable laws, statutes, ordinances and governmental rules and regulations.           6. COMPLIANCE WITH LAWS. Hines shall not use or occupy the License Parcels or permit anything to be done in, on or about the License Parcels by persons acting under Hines which will in any manner violate any laws, statutes, ordinances or governmental rules or regulations now in effect or which may hereafter be enacted or promulgated in connection with the occupation of the License Parcels and the operation of Hines' plant nursery activities thereon, including without limitation, any Environmental Laws (collectively, the "Laws"). Additionally, Hines shall, at Hines' sole cost and expense, continue to maintain all permits, licenses, authorizations and any other consents or approvals of any local, state or federal agency necessary for the conduct of its activities as contemplated by this License Agreement (collectively, the "Permits"). At all times during the term of this License Agreement, Hines' occupancy of the License Parcels and/or the conduct of its business thereon shall be in compliance with all Laws and Permits, including, without limitation, any health and safety laws, building codes, subdivision laws or Environmental Laws.           7. HAZARDOUS MATERIALS. During the term of this License Agreement, Hines shall not produce, store, release, transport or otherwise handle any "Hazardous Materials" or engage in any "Environmental Activity" in, on, under, to, or from the License Parcels, or permit or suffer its employees, invitees or agents to do so, except as expressly provided in Section 6 above. As used herein, "Hazardous Materials" means any chemical, material, or substance defined as or included in the definition of "Hazardous Substances", "Hazardous Material", "Hazardous Waste", "Restricted Hazardous Waste", "Extremely Hazardous Waste", "Proposition 65 Listed Chemicals" or "Toxic Substances" or words of similar import under any applicable local, state or federal law currently, or at any time during the term hereof enacted, or under any of the regulations adopted or publications promulgated pursuant thereto (collectively, the "Environmental Laws") and any other material or substance which is regulated by any such Environmental Law or governmental authority. The term "Environmental Activity" as used herein means any storage, existence, release, threatened release, generation, abatement, removal, disposal, handling or transportation of any                                         -5-   Hazardous Material at, on, to, from, under or onto the License Parcels. In the event any Environmental Activity shall occur on the License Parcels during the term hereof which is the direct or indirect result of Hines' activities thereon, Hines shall immediately notify Licensor of the same in writing and shall take all such remediation or other action to remove, clean up or otherwise correct the same as may be required by any Environmental Law and/or any governmental agency having jurisdiction thereof, all at Hines' sole cost and expense. The obligations of Hines hereunder shall be absolute and unconditional and shall survive the expiration or sooner termination of this License Agreement.           Notwithstanding the immediately preceding paragraph, Hines may use at the License Parcels such materials as Hines reasonably deems necessary for operation of its plant nursery activities at the License Parcels and to maintain the machinery used in connection therewith; provided, however, any and all use, storage, transport and/or disposal of all such materials by Hines shall fully comply with all Laws and Permits, and Hines must first notify Licensor (but Licensor shall have no approval rights) in writing of Hines' intent to use any materials which constitute Hazardous Materials, which notice shall identify such materials. Licensor acknowledges that it has already received a list of Hazardous Materials pursuant to Section 22(g) of the Option Agreement, and Hines shall only be responsible for notifying Licensor of any additional Hazardous Materials to be used on the License Parcels.           8. IMPROVEMENTS; MAINTENANCE OF IMPROVEMENTS.                    8.1 IMPROVEMENTS BY HINES. Hines does not contemplate building or locating any additional improvements on the License Parcels during the term of this License Agreement. Except as set forth in Section 2.1 above, Hines may not, at any time during the term of this License Agreement, build or locate any additional improvements, structures, equipment or other property (collectively, "Personal Property") on any portion of the License Parcels without the prior written consent of Licensor. In connection with such consent, Licensor may require such plans, specifications, and such other written documents setting forth the proposed nature and location of such Personal Property for its review and approval within ten (10) days following Hines' submission of plans. Licensor in its reasonable discretion shall also have the right to approve the location of any improvements on the License Parcels. Licensor shall be entitled to post notices of non-responsibility on the License Parcels. Hines shall indemnify and defend Licensor and the Property against liability for mechanics' and materialmen's liens and to insure completion of the intended work. Such approval by Licensor relates only to the acceptability of such matters to Licensor and shall not be deemed an approval by Licensor for purposes of architectural or engineering design or safety. By approving the same, Licensor assumes no liability or responsibility for any defect in any such Personal Property constructed or located on the License Parcels by Hines, or the use, operation or maintenance thereof. Such Personal Property shall be constructed, placed and maintained only by licensed California professionals, except for Personal Property of a temporary nature typically used by nursery personnel. All such Personal Property shall be maintained in accordance with all applicable Laws and Permits.                    8.2 REMOVAL OF IMPROVEMENTS. On the expiration or earlier termination hereof, Hines shall at its sole cost and expense remove that portion of the Personal Property described in SCHEDULE "3" to this License Agreement ("Removal Property"). If any Removal Property still remains on the Phase I Parcel after expiration or earlier termination of the Phase I Term, still                                         -6-   remains on the Phase II Parcel after expiration or earlier termination of the Phase II Term or still remains on the Phase III Parcel after expiration or earlier termination of the Phase III Term, Licensor may remove and dispose of such Removal Property, without any obligation to account to Hines for the value of such Removal Property, and Licensor shall be entitled to reimbursement from Hines for all costs incurred in removing and disposing of such Removal Property. On the expiration or earlier termination hereof, Hines may, but shall not be obligated to remove all other improvements, machinery and equipment located on the License Parcels (collectively, the "Remaining Property"). Any Remaining Property that is not removed by Hines from the Phase I Parcel on or before expiration or earlier termination of the Phase I Term, from the Phase II Parcel on or before expiration or earlier termination of the Phase II Term, or from the Phase III Parcel on or before expiration or earlier termination of the Phase III Term shall be deemed abandoned by Hines, and Licensor may remove and dispose of the Remaining Property in Licensor's sole discretion, without any obligation to account to Hines for the value of such Remaining Property. Licensor shall not be entitled to any reimbursement from Hines for any costs incurred in removing and disposing of such Remaining Property. Hines expressly waives any claims against Licensor arising directly or indirectly from Licensor's removal and disposition of any Personal Property in accordance with the provisions of this License Agreement.                    8.3 MAINTENANCE. At all times during the term of this License Agreement, Hines shall operate and maintain all Personal Property located on the License Parcels used by Hines in connection with its activities in accordance with all applicable Laws and Permits.           9. LIENS. Hines shall at all times keep the License Parcels free from any liens arising out of any and all work performed, materials, services or equipment furnished, or obligations incurred by or on behalf of Hines. Hines hereby agrees to indemnify, defend and hold Licensor and the Property free and harmless from any and all liens, claims, damages or judgments arising out of any such work performed, materials, labor or equipment furnished, or obligations incurred by or on behalf of Hines in connection with its operations on the License Parcels. The indemnification obligations of Hines hereunder shall be absolute and unconditional and shall survive the expiration or sooner termination of this License Agreement. If Hines contracts for work which results in the imposition of any materialmens' or mechanics' liens for which either a payment bond does not exist, or neither the bonding company nor Hines voluntarily pay within ninety (90) days after receipt of written notice by Licensor, then Licensor shall have an unconditional right (but not an obligation) to extinguish any such encumbrances and to receive reimbursement from Hines for all costs incurred in extinguishing such encumbrances immediately upon written demand by Licensor.           10. UTILITIES. Hines shall arrange to have all utilities servicing Hines' operations separately metered or billed to Hines, and Hines shall be responsible directly to the companies or persons providing the same. In the event such utilities are not separately billed, Hines shall pay its proportional share thereof on a monthly basis in amounts to be reasonably determined by Licensor and approved by Hines. Hines' allocated portion thereof shall be paid by Hines to Licensor within fifteen (15) business days after written demand therefor by Licensor.           11. INSURANCE. At all times during the term hereof, Hines shall maintain, at its sole cost and expense, (i) customary and adequate worker's compensation insurance, and (ii) comprehensive general liability insurance                                         -7-   insuring against any liability arising out of or in connection with the use, occupancy or maintenance of the License Parcels and the Personal Property located thereon by Hines. Such liability insurance shall have a single combined liability limit of not less than One Million Dollars ($1,000,000) for damage to property and a single combined liability limit of not less than Three Million Dollars ($3,000,000) for injury or death to persons; provided, that any umbrella coverage obtained by Hines shall be applicable to such minimum coverage limits. If Hines fails to obtain or maintain such insurance, Licensor, at Hines' cost and expense, shall have the right, but not the obligation, to obtain and/or maintain such insurance on behalf of Hines. Should Licensor obtain and/or maintain such insurance and should Hines fail to pay for the costs and expenses therefore, Licensor shall be entitled to receive reimbursement from Hines for all costs incurred in obtaining and/or maintaining such insurance immediately upon written demand by Licensor. The limit of any insurance referenced herein shall not limit the liability of Hines hereunder. Licensor and its lender shall be named as additional insured in all such policies (except the workers' compensation insurance) and the public liability insurance and property damage insurance shall insure performance by Hines of any indemnities provided for herein. All such insurance policies shall be obtained from reputable insurance companies properly licensed and accredited by the State of California with a rating of not less than B, Class VII in the most recent edition of Best's Insurance Guide and shall provide that Licensor shall be given thirty (30) days prior written notice by the applicable insurer in the event that either the insurers or Hines desires to cancel or modify such policies of insurance or such portions thereof. Hines shall provide Licensor with (i) written proof of such insurance prior to the effectiveness of this License Agreement, and (ii) written proof of renewal of all insurance required hereunder no later than five (5) days prior to expiration.           12. RENT. Hines shall not be responsible for paying Licensor any compensation, fees, costs, expenses or monies for the License.                    12.1 PERSONAL PROPERTY TAXES. During the term of this License Agreement, Hines shall cause all taxes, assessments and other charges levied or imposed upon any of Personal Property. Hines shall at all times during the term hereof pay all such personal property taxes prior to delinquency.                    12.2 LICENSOR PAYMENT OF TAXES. From and after the Close of Escrow under the Option Agreement Licensor shall be responsible for the payment of all real property taxes and assessments against the Property. Should Licensor fail to pay said taxes and assessments prior to delinquency, Hines may pay such taxes and assessment and Hines shall be entitled to reimbursement for such payments from Licensor within fifteen (15) days following written demand. In the event that Licensor does not reimburse Hines for such costs, Hines shall have the right to offset such amounts from any payments owing to Licensor hereunder in addition to pursuing any other remedies available at law or in equity.           13. ASSIGNMENT/TRANSFER. During the term of this License Agreement Hines shall not voluntarily, involuntarily or by operation of law, directly or indirectly, assign, transfer, mortgage, pledge, hypothecate or encumber this License Agreement or any of its interest or right herein, and shall not let any person occupy or use the License Parcels or any portion thereof for any purposes whatsoever. In connection therewith, Hines hereby acknowledges the personal nature of the rights and privileges granted hereunder; provided, however, Hines may assign its interest to any subsidiary or parent of Hines without the prior consent of Licensor. In the event of any permitted assignment, Hines shall not be released from liability hereunder.                                         -8-            14. MUTUAL INDEMNIFICATION.                    (a) Hines hereby agrees to indemnify, defend and hold Licensor and its employees, agents, successors and assigns (collectively, "Licensor Indemnitees") harmless from and against any and all payments, expenditures, losses, damages, environmental clean up costs or claims (including remediation costs and contribution claims), liabilities, claims, causes of action, judgments, court costs, legal or other expenses (including reasonable attorneys' fees) of whatever kind or nature, whether direct or indirect, contingent or non-contingent, incurred or suffered by, or actually made against, any Indemnitee resulting from or arising out of or by reason of (i) Hines' use or occupancy of the License Parcels during the term of this License Agreement and/or the conduct and operation of Hines' plant nursery activities thereon or other things done, permitted or suffered by Hines in, on or about the License Parcels; or (ii) any breach, default or failure by Hines to fully perform in a timely fashion any of the covenants, obligations, agreements or other undertakings of Hines to be performed under the terms of this License Agreement. Hines' indemnification obligations shall not apply to matters arising from the negligence or willful misconduct of Licensor or any breach of this License Agreement by Licensor, nor shall this indemnification constitute a waiver of the release provisions in the Option Agreement. The indemnification obligations of Hines hereunder shall be absolute and unconditional, and shall survive the expiration or sooner termination of this License Agreement.                    (b) Licensor hereby agrees to indemnify, defend and hold Hines and its employees, agents, successors and assigns (collectively, "Hines Indemnitees") harmless from and against any and all payments, expenditures, losses, damages, environmental clean up costs or claims (including remediation costs and contribution claims), liabilities, claims, causes of action, judgments, court costs, legal or other expenses (including reasonable attorneys' fees) of whatever kind or nature, whether direct or indirect, contingent or non-contingent, incurred or suffered by, or actually made against, any Indemnitee resulting from or arising out of or by reason of (i) Licensor's use or occupancy of the Property during the term of this License Agreement and/or the conduct and operation of Licensor's development activities thereon; or (ii) any breach, default or failure by Licensor to fully perform in a timely fashion any of the covenants, obligations, agreements or other undertakings of Licensor to be performed under the terms of this License Agreement. Licensor's indemnification obligations shall not apply to matters arising from the negligence or willful misconduct of Hines, or any breach of this License Agreement by Hines. The indemnification obligations of Licensor hereunder shall be absolute and unconditional, and shall survive the expiration or sooner termination of this License Agreement.           15. DEFAULTS.                    15.1 BY HINES. In the event Hines fails to fully perform or satisfy any of Hines' covenants, agreements or undertakings contained herein in accordance with the terms hereof, and such failure is not cured within a period of ten (10) calendar days after written notice thereof is delivered to Hines, or in the event any such failure cannot be reasonably cured within such 10-day period, Hines fails to commence such cure within such 10-day period and                                         -9-   diligently prosecute the same, Hines shall be in default hereunder. In the event of any such default, Licensor shall be entitled to: (i) terminate this License Agreement (subject to the provisions below), in which event Hines shall immediately cease its operations, vacate the License Parcels, and all rights and obligations of the parties under this License Agreement shall terminate except for any indemnification or other obligations expressly stated herein as surviving, which obligations shall survive and continue in full force and effect; (ii) cure such default and Hines shall be required to reimburse Licensor for the cost of remedying the default within ten (10) days following written demand, and all unpaid sums shall bear interest at the rate of ten percent (10%) per annum, and/or (iii) exercise any other remedies available to Licensor under this License Agreement, at law, or in equity. In the event that a default by Hines does not involve the payment of monies or possession of the Property beyond the expiration of the Phase II or Phase III Terms, as a condition to Licensor exercising its termination remedy, the parties agree to meet within ten (10) days following written notice of default from Licensor and use good faith efforts to attempt to agree upon a reasonable cure for such default. In the event that the parties cannot agree upon a cure process for such default, the parties shall submit the matter to arbitration in accordance with Section 16 below and the arbitrator shall determine the appropriate cure for such default. After the arbitrator's determination of the appropriate cure process, then the time period for curing defaults under this Section shall commence.                    15.2 BY LICENSOR. In the event Licensor fails to fully perform or satisfy any of Licensor's covenants, agreements or undertakings contained herein in accordance with the terms hereof, and such failure is not cured after a period of ten (10) calendar days after written notice thereof is delivered to Licensor, or in the event any such failure cannot be reasonably cured within such 10-day period, Licensor fails to commence such cure within such 10-day period and diligently prosecute the same, Licensor shall be in default hereunder. In the event of any such default, Hines shall cure such default and Licensor shall be required to reimburse Hines for the cost of remedying the default within ten (10) days following written demand, and all unpaid sums shall bear interest at the rate of ten percent (10%) per annum. In addition, Hines shall be entitled to exercise any remedies available to Hines under this License Agreement, at law, or in equity. Nothing herein shall modify the release in the Option Agreement.           16. ARBITRATION OF DISPUTES. ANY CONTROVERSY BETWEEN THE PARTIES HERETO SHALL BE SUBMITTED TO ARBITRATION IN SOLANO COUNTY, CALIFORNIA, ON THE REQUEST OF EITHER PARTY. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES, SHALL BE DETERMINED BY ARBITRATION IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION ("AAA"), AND WRITTEN NOTICE THEREOF SHALL BE GIVEN TO THE OTHER PARTY. ALL STATUTES OF LIMITATIONS WHICH WOULD OTHERWISE BE APPLICABLE SHALL APPLY TO ANY ARBITRATION PROCEEDING UNDER THIS PARAGRAPH. JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT HAVING JURISDICTION AND SHALL BE FINAL AND BINDING.           NO PROVISION OF, NOR THE EXERCISE OF ANY RIGHTS UNDER THIS SECTION 16 SHALL LIMIT THE RIGHT OF ANY PARTY TO OBTAIN PROVISIONAL OR ANCILLARY REMEDIES SUCH AS INJUNCTIVE RELIEF, FROM A COURT HAVING JURISDICTION BEFORE, DURING, OR                                         -10-   AFTER THE PENDENCY OF ANY ARBITRATION. THE INSTITUTION AND MAINTENANCE OF AN ACTION FOR JUDICIAL RELIEF OR PURSUIT OF PROVISIONAL OR ANCILLARY REMEDIES SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO SUBMIT THE DISPUTE TO ARBITRATION.           WHENEVER AN ARBITRATION IS REQUIRED, THE ARBITRATOR OR REFEREE SHALL BE SELECTED IN ACCORDANCE WITH THIS SECTION. WITHIN FIVE (5) DAYS AFTER WRITTEN NOTICE OF ANY DISPUTE IS GIVEN TO THE OTHER PARTY, THE PARTIES' SHALL ATTEMPT TO AGREE ON A MUTUALLY ACCEPTABLE ARBITRATOR. IN THE EVENT THE PARTIES ARE UNABLE TO SO AGREE WITHIN SUCH FIVE (5) DAY PERIOD, THE ARBITRATOR OR REFEREE SHALL BE SELECTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. THE DISPUTED MATTER SHALL BE HEARD BY THE ARBITRATOR OR REFEREE SO APPOINTED NO LATER THAN TWENTY (20) DAYS AFTER SUCH APPOINTMENT. ARBITRATORS SHALL APPLY CALIFORNIA LAW AND BE BOUND BY PRECEDENT AND STATUTORY RULES AS THOUGH THEY WERE JUDGES SITTING IN A CALIFORNIA COURT. STATEMENTS OF ARBITRATION AWARDS SHALL BE IN WRITING. THE PARTIES SHALL BE ENTITLED IN ANY ARBITRATION HEREUNDER, TO SUCH RIGHTS OF DISCOVERY AS DETERMINED BY THE ARBITRATOR.           IN THE EVENT OF ANY DISPUTE GOVERNED BY THIS SECTION, EACH OF THE PARTIES SHALL PAY ALL OF ITS OWN EXPENSES, AND, SUBJECT TO THE AWARD OF THE ARBITRATOR, SHALL PAY AN EQUAL SHARE OF THE ARBITRATORS' OR REFEREES' FEES. THE ARBITRATOR SHALL HAVE THE POWER TO AWARD RECOVERY OF ALL COSTS AND FEES (INCLUDING ATTORNEYS' FEES, ADMINISTRATIVE FEES, ARBITRATORS' FEES, AND COURT COSTS) TO THE PREVAILING PARTY.           NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARILY.                                        -11-            WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.                    ___________________                   ___________________                   Licensor's Initials                   Hines' Initials           17.      MISCELLANEOUS.                    17.1 GOVERNING LAW. This License Agreement has been executed in Vacaville, California, and shall be governed by and construed in accordance with the laws of the State of California.                    17.2 ATTORNEYS' FEES. In the event either party shall commence legal proceedings for the purpose of enforcing any provision or condition hereof, or interpreting their rights hereunder, or by reason of any breach arising under the provisions hereof, then the successful party in such proceedings shall be entitled to reasonable attorneys' fees to be determined by the Court.                    17.3 INTEGRATION. Except as expressly stated herein, this License Agreement contains the entire agreement of the parties hereto, and supersedes any prior written or oral agreements between them concerning the subject matter contained herein. Except as expressly stated herein, there are no representations, agreements, arrangements, or understandings, oral or written, relating to the subject matter which are not fully expressed herein. This License Agreement may be modified only by a writing signed by the party against whom it is sought to be enforced.                    17.4 COUNTERPARTS. This License Agreement may be executed in counterparts and shall be fully effective and binding on all parties hereto, as if one or more copies thereof had been executed by all of the parties hereto, when all of the parties have executed counterparts hereof, even though no single counterpart has been executed by all of the parties hereto.                    17.5 NOTICE. All notices or other communications required or permitted hereunder shall be in writing, and shall be personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or sent by electronic facsimile and shall be deemed received upon the earlier of (i) if personally delivered, the date of delivery to the address of the person to receive such notice, (ii) if mailed, on the date of posting by the United States Post Office, or (iii) if given by electronic facsimile, when received by the other party.           TO LICENSOR:                       Triad Communities, L.P.                                             1095 Hiddenbrooke Parkway                                             Vallejo, CA  94591                                             Attn:  Fred Grimm                                             Telephone:  (707) 557-1184                                             Facsimile:  (707) 557-1187                                         -12-                                               Triad Communities, L.P.                                             2801 Alaskan Way, Suite 107                                             Seattle, WA  98121                                             Telephone:  (206) 374-0414                                             Facsimile:  (206) 374-0415           With copy to:                      Foster Pepper & Shefelman, PLLC                                             1111 Third Avenue, Suite 3400                                             Seattle, WA  98101-3299                                             Attention:  Michael Kuntz, Esq.                                             Telephone:  (204) 447-8959                                             Facsimile:  (204) 749-1976           TO HINES:                          Hines Nurseries, Inc.                                             12621 Jeffrey Road                                             Irvine, California  92620-2101                                             Attention:  Claudia Pieropan                                             Telephone:  (949) 559-4444                                             Facsimile:  (949) 786-0968           With a copy to:                    Rutan & Tucker, LLP                                             611 Anton Boulevard, Suite 1400                                             Costa Mesa, California  92626-1931                                             Attention:  Randall M. Babbush, Esq.                                                         Joseph L. Maga, Esq.                                             Telephone:  (714) 641-3456                                             Facsimile:  (714) 546-9035           Notice of change of address shall be given by written notice in the manner described in this Section.                    17.6 UNPAID AMOUNTS. In the event any reimbursement amounts due from one party to the other are not paid within ten (10) calendar days after written demand for payment, such amounts shall bear interest at the rate of ten percent (10%) per annum from the eleventh (11th) day after the date of written demand until paid.                    17.7 WAIVER. Waiver by one party of the performance of any covenant, condition or promise shall not invalidate this License Agreement, nor shall it be considered to be a waiver by such party of any other covenant, condition, or promise hereunder. The waiver by either or both parties of the time for performing any act shall not constitute a waiver of the time for performing any other act or an identical act required to be performed at a later time. The exercise of any remedy provided by law or equity and the provisions of this License Agreement for any remedy shall not exclude other remedies unless they are expressly excluded.                    17.8 CONSTRUCTION. As used in this License Agreement, the masculine, feminine, or neuter gender and the singular or plural numbers shall each be deemed to include the other whenever the context so indicates. This License Agreement shall be construed as a whole, the captions being for the convenience of the parties only and not intended to describe or define the provisions in the portions of the License Agreement to which they pertain.                                         -13-                     17.9 FORCE MAJEURE. Neither Hines nor Licensor shall be liable to the other for failing to perform their respective obligations under this License Agreement if such performance is prevented by strikes, labor disputes, acts of God, governmental restrictions, governmental regulations, governmental controls, enemy or hostile governmental action, civil commotion, fire or other casualty, or by other similar causes or events beyond the reasonable control of the prevented party, if the prevented party notifies the other party of the existence of the cause or event within seventy-two (72) hours of its commencement, and if the prevented party thereafter uses reasonable diligence and good faith to overcome such cause or event to be able to resume performance.                    17.10 NO RECORDATION. Neither this License Agreement nor any memorandum hereof shall be recorded without the prior written consent of Licensor, which consent may be withheld in its sole and absolute discretion.                    17.11 SEVERABILITY. If any term, covenant, condition, or provision of this License Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated.                    17.12 SUBORDINATION AND NON-DISTURBANCE. Hines agrees to subordinate this Agreement to any deed of trust or mortgage now or hereafter placed upon the Property and to all amendment, modifications and replacements thereof, on the condition that Hines' rights under this Agreement are not disturbed in any way. Upon ten (10) days prior written request of Licensor, Hines shall evidence in writing the subordination of its rights under this Agreement to the lien of any mortgage now or hereafter in force, upon receipt of a commercially reasonable non-disturbance agreement from such mortgagee. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage, or delivery of a deed-in-lieu of foreclosure Hines shall recognize such purchaser on the conditions set forth herein.                    17.13 ESTOPPEL. Each party shall at any time within ten (10) days of written request of the other party, execute and deliver to the requesting party and their proposed lender or purchaser, a written certificate (a) stating that to their actual knowledge this Agreement is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Agreement as so modified is in full force and effect); (b) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of either party hereto, or specifying such defaults if any are claimed or known; (c) the responding party has no known offsets or claims against the enforcement of any of the provisions of this Agreement, or specifying any contrary claims; (d) acknowledging that the certificate is made to induce the proposed purchaser or a lender to consummate a transaction and that such purchaser and/or lender shall rely upon the truth of the statements made therein; and (e) confirming that the person executing the certificate is the duly authorized signatory for or on behalf of the responding party.                                         -14-                     17.14 SUCCESSORS. Subject to Section 13 above, this License Agreement shall be binding on the successors and assigns of the parties hereto.                    17.15 EXHIBITS. All Exhibits attached hereto shall be deemed a part of this License Agreement and are hereby incorporated herein by reference in full.           IN WITNESS WHEREOF, the parties have duly executed this License Agreement as of the day and year first above written.                                       HINES NURSERIES, INC.,                                      a California corporation                                        By:                                         ---------------------------------------                                         Claudia Pieropan                                         Chief Financial Officer                                        TRIAD COMMUNITIES, L.P.,                                      a California limited partnership                                        By:                                         ---------------------------------------                                         Its:                                             -----------------------------------                                         -15-                                     SCHEDULE "1"                                   ------------          SITE PLAN DEPICTING THE PHASE I, PHASE II AND PHASE III PROPERTY         ----------------------------------------------------------------                          (To be inserted prior to execution)                                      SCHEDULE "1"                                   ------------                               TO LICENSE AGREEMENT                                      SCHEDULE "2"                                   ------------                              DISCLOSURE TO HOME BUYERS                             -------------------------            The undersigned ("Buyer") has entered into that certain Purchase Agreement with ____________________________________ ("Seller") to buy Lot/Unit ________ of Tract No. __________ located in the City of Vacaville, County of Solano, State of California (the "Lot"). This Addendum shall supplement the terms of the Purchase Agreement.           1. ADJACENT NURSERY OPERATIONS. Buyer acknowledges that its Lot is adjacent to or near an active nursery business, currently operated by Hines Nurseries, Inc. ("Hines"). Buyer agrees that construction of its residence near a nursery operation may result in nuisances, annoyances, and disturbances to Buyer, including without limitation, increased noise, high lighting levels, use of fertilizers and pesticides, and offensive odors. Buyer acknowledges that Hines shall be entitled to continue its current use of tractors, trucks, loading facilities, irrigation methods, fertilization, pesticides and spraying, without any interference, objection or liability to Buyer.           2. BUYER INVESTIGATION. Before acquiring fee title to a Lot Buyer is advised to visit their Lot during operation hours for the nursery and during differing times of the day to personally determine whether the nuisances and disturbances from the nursery operations are acceptable to Buyer.           3. RELEASE AND COVENANT NOT TO SUE. Buyer, by acceptance of a deed to a Lot, represents that they have considered the potential negative impacts of the nursery operations to persons and property and accepts all such potential negative impacts. In connection therewith, Buyer for themselves and on behalf of their family, guests, tenants, invitees and licensees (collectively, the "Releasing Parties") hereby agree to:                    3.1 Forever waive, release and hold Seller and Hines and their respective successors and assigns (collectively, the "Released Parties") harmless from and against any impact, claim, cost, expenses, action, damage, liability, loss, nuisance, annoyance, disturbance or detriment to the Releasing Parties or the Lot that may in any way arise, now or in the future, as a result of such nursery operations;                    3.2 Hold the Released Parties harmless from any claims, actions, lawsuits, or proceedings, by the guests, tenants, invitees or licensees of Buyer against any of the Released Parties arising in any way form the nursery operations;                    3.3 Not oppose or object to in any way (verbal or written), directly or indirectly, to the continuation of such nursery operations and as material consideration, waives any right Buyer may have to oppose or object to the nursery operations; and                    3.4 Not to bring any action, claim or proceeding of any kind to alter, modify, reduce, terminate or cease the nursery operations before any federal, state or local court, tribunal, governmental agency, entity or board or administrative agency.                                     SCHEDULE "2"                                   ------------                               TO LICENSE AGREEMENT            Buyer hereby expressly agrees that the foregoing waiver and relinquishment of rights and claims, known or unknown, suspected or unsuspected at the time of this signing, is given by the undersigned with full knowledge of the provisions of California Civil Code Section 1542 and with the intention that such waiver and relinquishment is intended to and shall extend to waive the benefits of the provisions of Section 1542, which reads as follows:                    "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE                   CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE                   TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE                   MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."                                              ________________                                             BUYER'S INITIALS           4. THIRD PARTY BENEFICIARY. Each of the parties hereto agrees that Hines shall be a third party beneficiary of rights and releases in this Addendum and shall have the right to enforce the terms and conditions of this Addendum in the event of any breach.           5. SUCCESSORS AND ASSIGNS. Each and all of the terms, covenants, conditions and releases herein shall run with the Lot and shall inure to the benefit of and shall be enforceable by Hines and be binding upon the Lot, Buyer and all persons or entities having any interest in all or any portion of the Lot, together with their grantees, successors, assigns, lessees and mortgagees. Each party acknowledges that at the request of Hines, the terms of this Addendum may be required to be included in the grant deed conveying the Lot to Buyer.           6. INTERPRETATION OF LEGAL DOCUMENTS. Sales representatives of Seller are not authorized to explain, interpret or modify any of the legal documents covering or pertaining to the purchase of the Lot including, without limitation, this Addendum.           7. NO REPRESENTATION. No salesman, employee or agent has the authority to make any representation or warranty to Buyer which contradict the matters contained in this Addendum. Buyer acknowledges that no representation or warranty has been made on which Buyer has relied in connection with the purchase of the Lot.           8. INCONSISTENCY WITH PURCHASE AGREEMENT. In the event of any inconsistency between this Addendum and the Purchase Agreement, the terms of this Addendum shall control.\           9. COUNTERPARTS. This Addendum may be executed in several counterparts, and all so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all parties are not signatories to the original or the same counterpart.                                         -2-            BY SIGNING BELOW, THE UNDERSIGNED BUYER ACKNOWLEDGES HAVING READ AND UNDERSTOOD THE FOREGOING DISCLOSURE AND RELEASE, AND AGREES TO BE BOUND BY ITS TERMS.  BUYER(S):                                      SELLER:                                                 ---------------------------------                                                a - --------------------------------------           ------------------------------- Buyer                            Date                                                By:                                                   ------------------------------                                                   Its: - -------------------------------------- Buyer                            Date                                                By:                                                   ------------------------------                                                                             Date                                                Its:                                                    -----------------------------                                         -3-                                     SCHEDULE "3"                                   ------------                     LIST OF THE PARTIES' RESPECTIVE OBLIGATIONS                    -------------------------------------------                              REMOVAL FOR EACH PHASE                              ----------------------             (MAP DATED JULY 25, 2002 to be inserted prior to execution                             of the Option Agreement)                               MAP DATED JULY 25, 2002                                      SCHEDULE "3"                                   ------------                               TO LICENSE AGREEMENT                                      EXHIBIT "2"                                    -----------  RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO:  - ------------------------------------  - ------------------------------------  - ------------------------------------ Attn:        -----------------------------  ================================================================================                                                 (Space Above For Recorder's Use)                        FIRST AMENDMENT TO MEMORANDUM OF OPTION                      ---------------------------------------           The parties recorded that certain Memorandum of Option on __________, 2003 as Instrument No. 2003-______ in the Solano County Recorder's Office ("Option Agreement"). This First Amendment to Memorandum of Option ("Memorandum") is executed in connection with that certain First Amendment to Option Agreement dated as of February 28, 2005 ("Amendment"), by and between TRIAD COMMUNITIES, L.P., a California limited partnership ("Optionee") and HINES NURSERIES, INC., a California corporation ("Optionor").           For good and valuable consideration, the Optionor has granted Optionee an option to purchase the Property at a price and under the terms and conditions specifically set forth in the Option Agreement as modified by the Amendment. Unless earlier terminated, Optionor must exercise its Option on or before SEPTEMBER 1, 2005 ("Extended Option Date"), or elect to further extend the Extended Option Date by strictly complying with the provisions of the Option Agreement as modified by the Amendment. If properly and timely extended the date for exercising the Option shall be extended to MARCH 1, 2006.                                       HINES NURSERIES, INC.,                                     a California corporation                                       By:                                        ----------------------------------------                                           Claudia Pieropan                                           Its:  Chief Financial Officer                                      Date:                                          --------------------------------------                                                                        "Optionor"                          [Signatures continued on next page]                                      EXHIBIT "2"                                    -----------                      TO FIRST AMENDMENT TO OPTION AGREEMENT                      [Signatures continued from preceding page]                                       TRIAD COMMUNITIES, L.P.,                                     a California limited partnership                                       By:                                        ----------------------------------------                                           Its:                                               ---------------------------------                                      Date:                                          --------------------------------------                                                                        "Optionee"                                          -2-    EX-10.27 6 hines_10kex10-27.txt                                                                       EXHIBIT 10.27                         TRIAD Communities, L.P. Letterhead                                                                           PIER 70                                                      2801 ALASKAN WAY, SUITE 107                                                                SEATTLE, WA 98121                                                (206) 374-0414 (206) 374-0415 FAX                                    March 1, 2006  VIA FACSIMILE AND - ----------------- CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED - ---------------------------------------------------------  HINES NURSERIES, INC.                          RUTAN & TUCKER, LLP 12621 Jeffrey Road                             611 Anton Boulevard, Suite 1400 Irvine, California 92620-2101                  Costa Mesa, California 92626-1931 Attn:    Claudia Pieropan                      Attn:    Randall M. Babbush, Esq.          Robert Ferguson                                Joseph L. Maga, Esq. Facsiimile: (949) 786-0986                     Facsimile: (714) 546-9035  FIRST AMERICAN TITLE COMPANY 1355 Willow Way, Suite 100 Concord, California 94520 Attn: Molly Baier, Escrow Officer Facsimile: (925) 356-7039           Re: Option Agreement, dated April 30, 2003, by and between Hines Nurseries, Inc. ("OPTIONOR") and Triad Communities, L.P. ("OPTIONEE") (as amended, the "OPTION AGREEMENT")           This letter is Optionee's written notice of Optionee's irrevocable exercise of the Option and shall constitute the Option Notice under Section 4 of the Option Agreement.           Pet the terms of Option Agreement, the "Close of Escrow" shall be thirty (30) calendar days following the date of this Option Notice.                                              Sincerely,                                              TRIAD COMMUNITIES, L.P.                                              By:      Triad Sky Valley LLC,                                                      Its General Partner                                                       By: /s/ John A. Goodman                                                      Name: John A. Goodman                                                      Its:     Manager     EX-23.1 7 hines_10kex23-1.txt                                                                        EXHIBIT 23.1               CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-58561) of Hines Horticulture, Inc. of our report dated March 24, 2006 relating to the financial statements, which appears in this Form 10-K.    PRICEWATERHOUSECOOPERS LLP  Orange County, California March 28, 2006     EX-31.1 8 hines_10kex31-1.txt                                                                        EXHIBIT 31.1       Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  I, Robert A. Ferguson, certify that:  1.       I have reviewed this annual report on Form 10-K of Hines Horticulture,          Inc.;  2.       Based on my knowledge, this report does not contain any untrue          statement of a material fact or omit to state a material fact necessary          to make the statements made, in light of the circumstances under which          such statements were made, not misleading with respect to the period          covered by this report;  3.       Based on my knowledge, the financial statements, and other financial          information included in this report, fairly present in all material          respects the financial condition, results of operations and cash flows          of the registrant as of, and for, the periods presented in this report;  4.       The registrant's other certifying officers and I are responsible for          establishing and maintaining disclosure controls and procedures (as          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the          registrant and have:           a)       Designed such disclosure controls and procedures, or caused                   such disclosure controls and procedures to be designed under                   our supervision, to ensure that material information relating                   to the registrant, including its consolidated subsidiaries, is                   made known to us by others within those entities, particularly                   during the period in which this report is being prepared;           b)       [Omitted per SEC Releases 33-8238 and 33-8392]           c)       Evaluated the effectiveness of the registrant's disclosure                   controls and procedures and presented in this report our                   conclusions about the effectiveness of the disclosure controls                   and procedures, as of the end of the period covered by this                   report based on such evaluation; and           d)       Disclosed in this report any change in the registrant's                   internal control over financial reporting that occurred during                   the registrant's most recent fiscal quarter (the registrant's                   fourth fiscal quarter in the case of an annual report) that                   has materially affected, or is reasonably likely to materially                   affect, the registrant's internal control over financial                   reporting; and  5.       The registrant's other certifying officers and I have disclosed, based          on our most recent evaluation of internal control over financial          reporting, to the registrant's auditors and the audit committee of the          registrant's board of directors (or persons performing the equivalent          function):           a)       All significant deficiencies and material weaknesses in the                   design or operation of internal control over financial                   reporting which are reasonably likely to adversely affect the                   registrant's ability to record, process, summarize and report                   financial information; and           b)       Any fraud, whether or not material, that involves management                   or other employees who have a significant role in the                   registrant's internal control over financial reporting.   Date: March 28, 2006         By: /S/ ROBERT A. FERGUSON                                  -----------------------------------------------                                  Robert A. Ferguson                                  President, Chief Executive Officer and Director                                  (Principal Executive Officer)     EX-31.2 9 hines_10kex31-2.txt                                                                        EXHIBIT 31.2   I, Claudia M. Pieropan, certify that:  1.       I have reviewed this annual report on Form 10-K of Hines Horticulture,          Inc.;  2.       Based on my knowledge, this report does not contain any untrue          statement of a material fact or omit to state a material fact necessary          to make the statements made, in light of the circumstances under which          such statements were made, not misleading with respect to the period          covered by this report;  3.       Based on my knowledge, the financial statements, and other financial          information included in this report, fairly present in all material          respects the financial condition, results of operations and cash flows          of the registrant as of, and for, the periods presented in this report;  4.       The registrant's other certifying officers and I are responsible for          establishing and maintaining disclosure controls and procedures (as          defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the          registrant and have:           a)       Designed such disclosure controls and procedures, or caused                   such disclosure controls and procedures to be designed under                   our supervision, to ensure that material information relating                   to the registrant, including its consolidated subsidiaries, is                   made known to us by others within those entities, particularly                   during the period in which this report is being prepared;           b)       [Omitted per SEC Releases 33-8238 and 33-8392]           c)       Evaluated the effectiveness of the registrant's disclosure                   controls and procedures and presented in this report our                   conclusions about the effectiveness of the disclosure controls                   and procedures, as of the end of the period covered by this                   report based on such evaluation; and           d)       Disclosed in this report any change in the registrant's                   internal control over financial reporting that occurred during                   the registrant's most recent fiscal quarter (the registrant's                   fourth fiscal quarter in the case of an annual report) that                   has materially affected, or is reasonably likely to materially                   affect, the registrant's internal control over financial                   reporting; and  5.       The registrant's other certifying officers and I have disclosed, based          on our most recent evaluation of internal control over financial          reporting, to the registrant's auditors and the audit committee of the          registrant's board of directors (or persons performing the equivalent          function):           a)       All significant deficiencies and material weaknesses in the                   design or operation of internal control over financial                   reporting which are reasonably likely to adversely affect the                   registrant's ability to record, process, summarize and report                   financial information; and           b)       Any fraud, whether or not material, that involves management                   or other employees who have a significant role in the                   registrant's internal control over financial reporting.   Date: March 28, 2006        By: /S/ CLAUDIA M. PIEROPAN                                 ------------------------------------------------                                 Claudia M. Pieropan                                 Chief Financial Officer, Secretary and Treasurer                                 (Principal Financial and Accounting Officer)     EX-32.1 10 hines_10kex32-1.txt                                                                        EXHIBIT 32.1                      CERTIFICATION OF PERIODIC FINANCIAL REPORT                        PURSUANT TO 18 U.S.C. SECTION 1350   The undersigned officer of Hines Horticulture, Inc. (the "Company") hereby certifies that the Company's annual report on Form 10-K for the year ended December 31, 2004 to which this certification is being furnished as an exhibit (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K ("Item 601(b)(32)") promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.   Date: March 28, 2006      /s/ ROBERT A. FERGUSON                           ------------------------------------------------------                           Name: Robert A. Ferguson                           Title: President, Chief Executive Officer and Director                           (Principal Executive Officer)     EX-32.2 11 hines_10kex32-2.txt                                                                        EXHIBIT 32.2                      CERTIFICATION OF PERIODIC FINANCIAL REPORT                        PURSUANT TO 18 U.S.C. SECTION 1350   The undersigned officer of Hines Horticulture, Inc. (the "Company") hereby certifies that the Company's annual report on Form 10-K for the year ended December 31, 2004 to which this certification is being furnished as an exhibit (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K ("Item 601(b)(32)") promulgated under the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.   Date: March 28, 2006     /s/ CLAUDIA M. PIEROPAN                          -------------------------------------------------------                          Name: Claudia M. Pieropan                          Title: Chief Financial Officer, Secretary and Treasurer                          (Principal Financial and Accounting Officer)     -----END PRIVACY-ENHANCED MESSAGE-----