INDUS REALTY TRUST, INC. - Annual Report: 2002 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission file number 0-29288

GRIFFIN LAND & NURSERIES, INC.
(Exact name of registrant as specified in its charter)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o    No ý

        Indicate by check mark whether the Registrant is an accelerated filer (as defined under Rule 12b-2 of the Securities Exchange Act of 1934)  Yes o    No ý

        The aggregate market value of the Common Stock held by non-affiliates of the Registrant, was approximately $26,873,000 based on the closing sales price on the Nasdaq National Market on February 26, 2003. Shares of Common Stock held by each executive officer, director, and persons or entities known to the Registrant to be affiliates of the foregoing have been excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other purposes.

        As of February 26, 2003, 4,864,916 shares of common stock were outstanding.

PART 1

ITEM 1. BUSINESS

        Griffin Land & Nurseries, Inc. ("Griffin") and its subsidiaries comprise principally a landscape nursery and a real estate business. Griffin is engaged in two principal lines of business: (1) the landscape nursery products business, comprised of the growing of containerized landscape nursery products for sale principally to retail garden center operators, landscape nursery mass merchandisers and wholesale sales and service centers, whose main customers are landscape contractors; and (2) the real estate business, comprised of (x) the ownership, construction, leasing and management of commercial and industrial properties and (y) the development of residential subdivisions on real estate owned by Griffin in Connecticut and Massachusetts. On January 26, 2001, a portion of the landscape nursery products business which had related to the operation of wholesale sales and service centers (the "SSCs") was sold to Shemin Nurseries, Inc. ("Shemin"). Griffin holds an approximately 14% interest in the equity of Shemin Acquisition Corp. ("Acquisition"), the parent company of Shemin, acquired as part of the sale. The investment in Acquisition is accounted for under the cost method of accounting for investments. Griffin also owns an approximately 35% interest (32% fully diluted) in Centaur Communications, Ltd. ("Centaur"), a United Kingdom magazine and information services publisher which is accounted for under the equity method of accounting, and has a lesser interest in Linguaphone Group plc ("Linguaphone"), a designer and distributor of language teaching materials based in the United Kingdom, which is accounted for under the cost method of accounting for investments.

Landscape Nursery Business

        The landscape nursery operations of Griffin are operated by its wholly-owned subsidiary, Imperial Nurseries, Inc. ("Imperial"). Imperial is a grower and, to a small extent, broker of wholesale landscape nursery stock. The landscape nursery industry is extremely fragmented. Imperial believes that its sales volume places it among the twenty largest landscape nursery growers in the country. On January 26, 2001, Imperial completed the sale of its SSCs, which provided most of Imperial's operating profit in prior years. As a result of the sale, the central overhead of Imperial, which could be reduced only in part, is now borne entirely by the growing operation.

        Imperial's container growing operations are located on land owned by Griffin in Connecticut (approximately 455 acres currently used) and land owned by Imperial in northern Florida (approximately 450 acres currently used). The Florida growing operation is currently completing its planned expansion on adjacent lands owned by Imperial. Upon completion of current plans, the Florida farm will use approximately 490 acres. At that time, substantially all of the useable contiguous lands suitable for the container growing operations in Connecticut and a large portion of such lands in northern Florida will be in use. The Florida farm has also improved and expanded its shipping docks and customer service facilities and is improving its irrigation and water recycling operations. Imperial's inventories consist of container-grown plants on these two farms. The largest products of Imperial are evergreens, flowering shrubs and hollies in Florida and rhododendron, evergreens and flowering shrubs in Connecticut. Other major product categories in Florida include juniper, trees, perennials and crape myrtle. During 2000, a decision was made to reduce materially the number of azalea and juniper to be grown in Florida and to increase the number of larger plants of several varieties in Florida including leyland cypress, some varieties of deciduous shrubs, crape myrtle and trees. In Connecticut, alberta spruce, perennials and trees are other major products. Container-grown product is held principally from one to five years prior to its sale by Imperial. Over the past four years, Imperial substantially increased its production and sales of perennials which have a much shorter growing cycle than most of the rest of Imperial's products. Because many perennials were grown for sale by the SSCs, after the sale of the SSCs, the number of perennials being grown has been reduced starting in 2002. Commencing in 2003, Imperial will be selling some smaller perennials and a number of other products as one of several licensed growers under the "Novalis" trade name, and also in association with P. Allen Smith, an author and garden show host.

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        Imperial is reviewing a variety of approaches to increase the return on assets for its growing operations, including changes in the relative quantities of some products currently grown and proposed to be grown and also possible changes in the potting and growing cycle for some of its containerized production. Some of these programs are also directed at developing faster growing products and improved soil mixes. A substantial portion of the products which are part of the expanded Florida production will be of larger sizes requiring an extended growing cycle. The major investment in nursery growing assets in the current cycle of planned investment in Florida was substantially completed during 2002. Imperial is currently planning to expand its field grown liner program in Connecticut on land owned by Griffin and is also considering some other products and product sizes for both sales in its existing markets and expanding the market area served by the Florida farm. Any such changes, if successful, taking into account the growing cycles of the related plants, will take a substantial period to be reflected in results of operations to any material extent. Imperial's growing operation incurred charges for inventory losses above normal levels of approximately $1.8 million in 2002 and $0.6 million in 2001. These charges were due principally to crop failures and poor results from the propagation of new plants in Florida.

        The growing operations serve a market comprised principally of retail garden center operators, landscape nursery mass merchandisers and wholesale sales and service centers. Shemin, the purchaser of Imperial's SSCs, has a contract to purchase some Imperial grown product during 2003. Imperial's major markets are in the Northeast, Mid-Atlantic, the northern portion of the Southeast and the Midwest. Imperial may seek to expand its distribution in parts of the Southeast. Nursery sales are extremely seasonal, peaking in Spring, and are strongly affected by commercial and residential building activity and are materially affected by weather conditions, particularly in the Spring planting season. Drought conditions in the Mid-Atlantic and Northeast areas adversely affected sales of Imperial in the 2002 season as did excessive rain and cold in the Midwest. Prices and competition in 2003 are expected to be affected by product grown by Imperial and others which was not sold, when expected, last year. Competition may also reflect the weakened financial condition of at least one major grower and by the weakened financial conditions of some customers of Imperial.

        Imperial's sales are made to a large variety of customers. In fiscal 2002, sales to Shemin represented 10.1% of Imperial's total sales. Imperial's supply agreement with Shemin, entered into in conjunction with the sale of the SSCs to Shemin, expires on December 31, 2003. Imperial expects to continue to be a supplier to Shemin, although not necessarily at the same sales level, after the supply agreement terminates. There were no other customers in fiscal 2001 and fiscal 2000 that represented more than 10% of Imperial's annual sales in those years.

        Imperial has increased its containerized growing capacity to meet the potential volume and quality needs of its customers and to capitalize on expected growth in the Mid-Atlantic and Midwest markets. Imperial also expects to seek to expand its sales in the Southeast. Shipping capacity in Florida has also been increased, but may require some additional peaking capacity. In coming years, Imperial expects that a higher portion of its shipping will be made on trucks outfitted with shelves, which will increase shipping expenses. Over the last two years, additional sales support has been provided to the farming operation, and in future years, additional sales support may be required to be provided to mass merchandisers.

        During 2000, Imperial operated seven SSCs which sold a wide range of plant material, including a large portion purchased from growers other than Imperial, and horticultural tools and products to the trade. The largest portion of the sales of the SSCs were to professional landscapers. The SSCs, all of which were owned by Imperial, were located in Windsor, Connecticut; Aston and Pittsburgh, Pennsylvania; Columbus and Cincinnati, Ohio; White Marsh, Maryland; and Manassas, Virginia. During 2000, operating results of the SSCs improved from the prior year. The SSCs had become the principal contributor to the operating profit of Imperial. In January 2001, the SSCs were sold to Shemin for cash and stock in Shemin Acquisition Corporation. Griffin reported a pretax profit of approximately $9.5 million on this transaction. See Note 2 to the consolidated financial statements included in Item 8.

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Real Estate Business

        Griffin's real estate division, Griffin Land, is directly engaged in the real estate development business on portions of its land in Connecticut. Griffin Land develops portions of its properties for industrial, commercial and residential use. Griffin Land may also endeavor to sell some of its non-core land without obtaining development approvals. Additionally, in future years, Griffin Land may seek to acquire and develop on land not presently owned. The headquarters for this operation is in Bloomfield, Connecticut.

        For several years, the real estate market in the Hartford area, particularly that in the northwest quadrant where the majority of Griffin's acreage is located, was depressed by a number of factors, including the decline of employment in the manufacturing and financial services industries. In 2000, there was some recovery in this market, including some recovery in the office portion of this market, which had been particularly weak. During 2001, in the area of Griffin's properties, there was not a significant change in the vacancy rates of office space, but Griffin Land and a joint venture, in which Griffin Land owned a 30% interest, succeeded in leasing 42,000 square feet of office space (a portion with occupancy and rent commencing in 2002) and Griffin Land delivered to tenants approximately 235,000 square feet (net of vacated space) of industrial and flex space. In 2002, an increase in the amount of industrial space leased was partially offset by a reduction in the net amount of office and flex space leased by Griffin Land. There can be no assurance as to the condition of the real estate market in this region in the near future. Current projections, made by analysts, show little growth for this market during 2003, particularly in office space, where lease terms are generally five years or fewer. Despite the employment decline in the manufacturing and financial services industries, the unemployment rate in the area is quite low. Griffin Land's development of its land is also affected by land planning issues, particularly in the town of Simsbury, Connecticut.

Commercial and Industrial Developments

New England Tradeport

        A significant amount of Griffin Land's current commercial and industrial development efforts are focused on a 600 acre tract owned by Griffin Land near Bradley International Airport and Interstate 91 known as the New England Tradeport. To date, approximately 395,000 square feet of warehouse and light manufacturing space has been completed, of which approximately 380,000 (96%) is occupied, and a bottling and distribution plant has been built by the Pepsi Bottling Group ("Pepsi") on land sold to Pepsi by Griffin Land. Leases covering approximately 31.0% of the currently leased space in New England Tradeport expire prior to December 31, 2004. Griffin Land has begun site work for a new approximately 115,000 square foot warehouse which it expects to complete in 2003. The only currently vacant spaces are 10,000 and 5,000 square feet, respectively, in one older industrial building owned by Griffin Land.

        Griffin Land has a state traffic control certificate for the development of 1.3 million square feet in the New England Tradeport. Griffin Land intends to continue to direct its primary efforts in the industrial properties portion of its real estate business toward construction and leasing of light industrial and warehouse facilities at the New England Tradeport. Future development in the New England Tradeport may require investment in off-site infrastructure on behalf of Windsor, Connecticut and improvement of some state or town roads. At present, $13.9 million is invested in buildings at New England Tradeport and $2.7 million is invested in the undeveloped land there. All of Griffin Land's existing buildings at New England Tradeport are currently mortgaged for an aggregate of approximately $15.6 million.

Griffin Center and Griffin Center South

        Griffin's other substantial development is the combination of Griffin Center in Windsor, Connecticut and Griffin Center South in Bloomfield, Connecticut. Together these master planned

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developments comprise approximately 600 acres, approximately 63% of which have been developed with approximately 2,165,000 square feet of office and industrial space.

        Griffin Center currently includes ten corporate office buildings built by Griffin Land. Griffin Land currently owns two office buildings which have an aggregate of 161,000 square feet in the Griffin Center office complex. Through fiscal 2002, those buildings were owned by a joint venture in which Griffin Land held a 30% interest. Griffin Land purchased the remaining 70% interest in December 2002 for approximately $8.8 million. Occupancy in those buildings is approximately 152,000 square feet (94%). During 2001, Griffin Land completed the shell of a light manufacturing building of 165,000 square feet in Griffin Center for JDS Uniphase Corporation ("JDS") which is leased to JDS under a fifteen-year lease. Under the agreement, JDS paid for its interior improvements, which were material to the total cost of the building. At present, JDS has vacated the building which they are seeking to sublease. In 2002, Griffin Land built the shell of a 50,000 square foot single story office building in Griffin Center which is currently ready for tenant work but is unleased. Griffin's aggregate investment in Griffin Center, after acquiring the 70% interest in the two office buildings, is $24.9 million. Including the two office buildings recently acquired, leases covering approximately 18% of the currently leased space in Griffin Center expire prior to December 31, 2004. Mortgages on Griffin Land's buildings in Griffin Center, including a new mortgage on the two offices buildings recently acquired, total $15.9 million

        In Griffin Center South, a 130-acre tract with sixteen buildings of flex and research and development space, Griffin Land has retained for lease 9 buildings. During 2001, Griffin Land accepted the surrender of a 57,500 square foot lease, for a termination fee, from JDS. Approximately 55% of that building has been released with occupancy starting in early 2003. Griffin Land also accepted back from JDS, in 2002, 10,000 square feet in another building which is currently for lease. JDS made a payment for termination of its lease in which it had made material improvements. A third lease of 11,400 square feet was surrendered by another tenant. That space is currently not leased. The Griffin Center South buildings have an aggregate of approximately 220,000 square feet of flex and research and development space and 18,000 square feet of storage space. Leases covering approximately 17% of the currently leased space expire prior to December 31, 2004. Undeveloped land remaining in Griffin Center South is sufficient for an additional approximately 200,000 square feet of space. The aggregate investment in Griffin Center South is $10.6 million.

Other Office and Industrial Subdivisions

        Three additional Griffin Land parcels appropriate for office or industrial uses are currently marketed for development, including 100 acres in the South Windsor Technology Center, 28 acres in the Day Hill Technology Center in Windsor and a 16 acre parcel in Windsor for smaller build-to-suit industrial buildings.

Residential Developments

Simsbury

        In November 1999, Griffin Land filed plans for the creation of a residential community of 640 homes on a 363-acre site in Simsbury. After the conclusion of the original hearings in this matter, Griffin Land reduced the number of proposed homes to 371. One quarter of these homes would be deed restricted affordable housing under Connecticut statutes. The public hearings focused on the density of the proposed development, as well as sewer, wetlands and soil contamination issues arising from prior use of the land for farming, as a result of which certain pesticides remain in the upper portion of the soil. The local commissions rejected the plan which is now before the Connecticut courts in a number of separate but related actions. See "Regulation: Environmental Matters". Griffin Land believes that its development plan for this site includes an appropriate method (which has received support from the Connecticut Department of Environmental Protection) of remediating the soils. The outcome of the pending litigation cannot be predicted. In December 2002, the trial court for two cases

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related to this development held for Griffin. Simsbury is seeking to appeal those decisions. Those decisions would require compliance with conservation and septic decisions which would affect the development. The current book value of the land, including design and development costs to date, for this proposed development is $3.2 million. Griffin Land owns another 500 acres in Simsbury, portions of which are zoned residential and other portions of which are zoned industrial. The industrial land is probably more suited to commercial use. Griffin Land may seek to develop or sell such lands if approvals can be obtained.

Windsor

        In 1988, a subsidiary of Griffin began infrastructure work at Walden Woods, a 153 acre site in Windsor, Connecticut, which was originally planned to contain more than 435 residential units. Through the end of fiscal 2002, 155 homes have been built. In 2000, Griffin entered into an agreement with a developer for the sale of the balance of the development rights at Walden Woods. Completion of this transaction, which is subject to site plan and other approvals by the town, would provide a significant cash flow to Griffin. Griffin's aggregate investment in Walden Woods is $2.7 million.

Suffield

        Griffin is currently seeking to prepare 95 acres of contiguous land in Suffield for residential subdivision, which has received some preliminary favorable consideration.

Other

        In addition, approximately 500 acres in Connecticut are leased for tobacco growing to General Cigar Co., Inc., at annual rentals approximating the land's annual carrying cost. The lease for these properties, which extends through February 2007, may be terminated as to 100 acres annually, on one year's prior notice.

        Griffin is evaluating its other properties for residential development over a period of years. Griffin anticipates that obtaining subdivision approvals in many of the towns where it holds land appropriate for residential subdivision will be an extended process.

Investments

Centaur Communications, Ltd.

        Griffin owns approximately 35% (32% fully diluted) of the outstanding common stock of Centaur, a privately-held publisher of business magazines in the United Kingdom and a compiler and supplier of computerized financial information through a subsidiary, Perfect Information, Ltd. As a result of a repurchase of common stock by Centaur and an additional investment by Griffin in 1998, Griffin's interest in Centaur was increased to its present level. The agreements relating to that transaction contemplate an offering of Centaur stock or sale of Centaur in the next year subject to a number of factors, including market conditions. Results of Centaur were significantly affected by the sale, at a substantial gain, of its Lawtel division in August 2002 and were adversely affected by the write down of goodwill of its engineering division. The British market for business advertising is currently not strong.

Linguaphone Group plc

        Griffin received, in 1997 from Centaur, a 25% interest in Linguaphone. In early 1999, a recapitalization of Linguaphone resulted in Griffin's interest being reduced to approximately 14% (11% fully diluted). Further transactions by Linguaphone have reduced Griffin's ownership interest to approximately 8%. Accordingly, Griffin now accounts for Linguaphone under the cost method of accounting for investments. Griffin's 2001 statement of operations includes a charge of approximately $2.2 million to write down its investment in Linguaphone to less than $100,000 due to Linguaphone's financial results. Griffin invested $145,000 in Linguaphone in fiscal 2002.

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Shemin Acquisition Corporation

        In connection with Imperial's sale of the SSCs, Imperial holds approximately 14% of the outstanding common stock of Shemin Acquisition Corporation, a privately held company that is the parent company of Shemin Nurseries, Inc. Imperial accounts for its investment in Acquisition under the cost method of accounting for investments.

Financial Information Regarding Industry Segments

        See Note 3 to the consolidated financial statements of Griffin included elsewhere herein for certain financial information regarding the landscape nursery business and the real estate business.

Employees

        As of November 30, 2002, Griffin employed 220 persons on a full-time basis, including 16 in its real estate division and 200 in its landscape nursery business. At present, none of Griffin's employees are represented by a union. Griffin believes that its relations with its employees are satisfactory.

Competition

        The landscape nursery business is competitive, and Imperial competes against a number of other companies, including national, regional and local landscape nursery businesses. Some of Imperial's competitors in the landscape nursery industry are larger than Imperial. Growers of landscape nursery products compete on the bases of price, product and service quality and product availability.

        Numerous real estate developers operate in the portion of Connecticut and Massachusetts in which Griffin's holdings are concentrated. Some of such businesses may have greater financial resources than Griffin. Griffin's real estate business competes on the bases of location, price, availability of space, convenience and amenities.

Regulation: Environmental Matters

        Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with contamination. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to remediate properly such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. In connection with the ownership (direct or indirect), operation, management and development of real estate properties, Griffin may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, a well as certain other related costs, including governmental fines and injuries to persons and property. In Simsbury, Connecticut, the value of Griffin's land is affected by the presence of chlordane on a portion of the land which is intended for residential use. Although Griffin believes its proposed method of reducing chlordane contamination to levels below those that would impede residential development of such properties is appropriate and feasible, the acceptance of the method by any town commission has not yet been obtained. In the event that Griffin is unable adequately to remediate this property, its ability to develop such property for its intended purposes would be materially affected.

        Griffin periodically reviews its properties for the purpose of evaluating such properties' compliance with applicable state and federal environmental laws. Griffin does not anticipate experiencing, in the immediate future, material expense in complying with such laws other than in connection with development operations which may require additional clean up expenses.

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ITEM 2. PROPERTIES

Land Holdings

        Griffin is a major landholder in the State of Connecticut, owning approximately 4,100 acres, and also owns approximately 450 acres of land in Massachusetts. In addition, Griffin owns approximately 1,100 acres in northern Florida, most of the useable portion of which is used for Imperial's growing operations or is contiguous to such operations.

        The book value of undeveloped land holdings, including land improvements, owned by Griffin, principally in the Hartford, Connecticut area, is approximately $16 million. Griffin believes the fair market value of such land is substantially in excess of its book value, including land improvements.

        A listing of the locations of Griffin's real estate held for development or sale, a portion of which, principally in Bloomfield, East Granby and Windsor, has been developed, and nursery real estate, is as follows:

Real Estate Held For Development or Sale

Nursery Real Estate

        Griffin also leases approximately 2,100 square feet in New York City for its executive offices.

ITEM 3. LEGAL PROCEEDINGS

        As discussed in Item 1, certain parts of Griffin's property in Simsbury, Connecticut, are affected by the presence of chlordane. Although the various federal, state and local agencies may have an interest in the matter, there are no proceedings known by Griffin to be contemplated by any of these agencies

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in connection with possible chlordane exceedences on such land. Various aspects of Griffin's plans for its proposed residential development in Simsbury are currently being litigated. See discussion of residential development included in the Liquidity and Capital Resources section of Item 7.

        Griffin is involved, as a defendant, in various litigation matters arising in the ordinary course of business. In the opinion of management, based on the advice of legal counsel, the ultimate liability, if any, with respect to these matters will not be material to Griffin's financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

Market Information

        The following are the high and low prices of common shares of Griffin Land & Nurseries, Inc. as traded on the Nasdaq National Market:

        On February 26, 2003, the number of record holders of common stock of Griffin was approximately 507, which does not include beneficial owners whose shares are held of record in the names of brokers or nominees. The closing market price as quoted on the Nasdaq National Market on such date was $10.95 per share. See Item 12 "Security Ownership of Certain Beneficial Owners and Management" for information on our equity compensation plan.

Dividend Policy

        Griffin's current policy is to retain any earnings to finance the operation and expansion of its businesses.

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ITEM 6. SELECTED FINANCIAL DATA

        The following table sets forth selected statement of operations data for fiscal years 1998 through 2002 and balance sheet data as of the end of each fiscal year.

(a)

Loss before equity investment for fiscal 2002 includes an income tax benefit of $1.5 million for the reversal of an accrual for income taxes as a result of the favorable settlement of tax examinations of prior years. See Note 4 to the consolidated financial statements included in Item 8.

(b)

Income before equity investment in fiscal 2001 includes a pretax charge of $2.2 million to write-down the value of Griffin's investment in Linguaphone Group plc.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        The consolidated financial statements of Griffin include the accounts of Griffin's subsidiary in the landscape nursery business, Imperial Nurseries, Inc. ("Imperial"), and Griffin's Connecticut and Massachusetts based real estate business ("Griffin Land"). Griffin also has an equity investment in Centaur Communications, Ltd. ("Centaur"), a magazine publishing business based in the United Kingdom. On January 26, 2001, Imperial completed the sale of its wholesale sales and service centers (the "SSCs") to Shemin Nurseries, Inc. A substantial amount of the operating profit of Imperial in fiscal 2000 was attributable to the SSCs. Imperial remains in the landscape nursery business with its container growing operations in Connecticut and northern Florida. Griffin's statement of operations in fiscal 2000 and through the date of sale of the SSCs in fiscal 2001 includes the results of operations of the SSCs. In 2001, Imperial completed an expansion of its Connecticut growing operation and is currently nearing completion of the expansion of its growing operation in northern Florida.

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        The notes to Griffin's consolidated financial statements included in Item 8 contain a summary of the significant accounting policies and methods used in the preparation of Griffin's consolidated financial statements. However, in the opinion of management, Griffin does not have any individual accounting policy that is critical to the preparation of its consolidated financial statements. This is due principally to the definitive nature of the accounting requirements for the landscape nursery and real estate businesses in which Griffin is engaged. Also, in many cases, Griffin must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America. The following is a review of the more significant accounting policies and methods used by Griffin:

Revenue Recognition—Griffin recognizes revenues for its landscape nursery business upon shipment of products to customers when title and risk of loss pass to the customers. In Griffin's real estate business, rental revenue is recorded in accordance with Statement of Financial Accounting Standard ("SFAS") No. 13, "Accounting for Leases", which requires that rental revenue be recognized on a straight-line basis over the term of the lease. Real estate sales are recorded in accordance with SFAS No. 66, "Accounting for Sales of Real Estate" which establishes standards for recognition of profit on real estate sales. These standards require that profit on a transaction not be recognized until the amount is determinable, collectability of the sales price is reasonably assured and the earnings process is complete.

Depreciation and Amortization—Griffin depreciates its property and equipment and its real estate held for lease using straight-line methods. Griffin amortizes goodwill related to its investment in Centaur on a straight-line method over forty years. Beginning in fiscal 2003, Griffin, as required, will adopt SFAS No. 142. Accordingly, Griffin will no longer amortize the goodwill related to its investment in Centaur, but that goodwill, and any other, will be tested at least annually for impairment (see Note 1 to the consolidated financial statements in Item 8).

Inventories—Griffin's inventories of its landscape nursery business are stated at the lower of cost or market. Cost is determined using the average cost method. Although nursery stock includes certain inventories that will not be sold within one year, it is industry practice to include such inventories in current assets.

Impairment of Long-Lived Assets—Griffin evaluates the carrying value of its long-lived assets in relation to their operating performance and future undiscounted cash flows.

Results of Operations

Fiscal 2002 Compared to Fiscal 2001

        Griffin's consolidated net sales and other revenue were $34.0 million in fiscal 2002 as compared to $32.0 million in fiscal 2001. The increase of $2.0 million reflects an increase in net sales and other revenue of $1.6 million at Imperial and an increase in net sales and other revenue of $0.4 million at Griffin Land. Net sales and other revenue at Griffin Land increased from $8.4 million in fiscal 2001 to $8.8 million in fiscal 2002. The increase of $0.4 million in net sales and other revenue at Griffin Land reflects an increase of $0.6 million of revenue from its leasing operations partially offset by a decrease of $0.2 million on revenue from property sales. The higher net sales and other revenue from Griffin Land's leasing operations was due to (a) an increase of $0.6 million in rental revenue from two buildings that were built and partially leased in fiscal 2001 and leased for the entire year in fiscal 2002; (b) a net increase of $0.5 million in rental revenue from leasing space that was previously vacant, net of previously leased space that was vacated in the current year; and (c) an increase of $0.2 million in rental revenue from the 57,000 square foot building in the New England Tradeport that was completed in fiscal 2002 and leased for a portion of the year; which was partially offset by a decrease of $0.7 million in other revenue in fiscal 2002 as compared to fiscal 2001 due to $0.5 million received in

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fiscal 2001 in connection with an agreement to terminate early a lease and $0.2 million from construction management fees received in fiscal 2001.

        Net sales and other revenue at Imperial increased from $23.6 million in fiscal 2001 to $25.2 million in fiscal 2002. The increase in net sales and other revenue at Imperial of $1.6 million reflects an increase in net sales of Imperial's container grown plants of $3.5 million in fiscal 2002 partially offset by the inclusion in fiscal 2001 of $1.9 million of net sales from the SSCs prior to their sale in January 2001. The increase in net sales of container grown plants reflects an increase in sales of larger sized plants, which have a higher per unit sales price, which more than offset a 2% decline in unit sales volume in fiscal 2002 as compared to fiscal 2001. The increase in sales of larger sized plants reflects changes in Imperial's product mix made over the past several years. Management believes that fiscal 2002 net sales were hampered by unfavorable weather conditions in Imperial's markets during the Spring, its peak selling season. Drought conditions in the Mid-Atlantic area and excessive rain and cold in the Midwest negatively affected sales in those areas.

        Griffin incurred an operating loss of $2.3 million in fiscal 2002 as compared to an operating loss of $3.2 million in fiscal 2001. Griffin's operating loss in fiscal 2001 included an operating loss of $0.8 million from Imperial's SSCs prior to their sale in January 2001. Excluding the operating loss from the SSCs in fiscal 2001, Griffin's overall operating results were substantially unchanged in fiscal 2002 as compared to fiscal 2001.

        Operating profit at Griffin Land increased from $1.0 million in fiscal 2001 to $1.1 million in fiscal 2002. The increase of $0.1 million in operating profit at Griffin Land reflects an increase of $0.3 million in profit from property sales and a decrease of $0.1 million in general and administrative expenses offset by an increase of $0.3 million in depreciation expense. Profit, before depreciation, from Griffin Land's commercial properties was $5.1 million in fiscal 2002 and fiscal 2001. However, fiscal 2001 results included a $0.5 million benefit from a lease termination. Excluding the early lease termination payment received in fiscal 2001, profit, before depreciation, from Griffin Land's commercial properties increased by $0.5 million in fiscal 2002 as compared to fiscal 2001. This reflects an increase in the amount of space leased in fiscal 2002 as compared to fiscal 2001. At November 30, 2002, Griffin Land had 1,013,000 square feet of office, flex and industrial space available for lease (including 50,000 square feet in the office building shell that was recently completed and is now ready for tenant work and the 160,000 square feet of office space in the two buildings owned by the joint venture in which Griffin held a 30% interest as of November 30, 2002), of which 885,000 square feet (87%) was occupied. At December 1, 2001 Griffin had 906,000 square feet of office and industrial space available for lease with 826,000 square feet (91%) occupied at that time. The increase in the amount of square feet available reflects the completion in fiscal 2002 of a 57,000 square foot facility in the New England Tradeport that is fully leased and the completion of the shell of a 50,000 square foot office building that is not yet leased.

        Profit from property sales at Griffin Land increased by $0.3 million in fiscal 2002 as compared to fiscal 2001 despite the decrease in property sales revenue in fiscal 2002 as compared to fiscal 2001. The increased profitability reflects the substantially lower cost basis of the land sold in fiscal 2002 compared to the cost basis of the land sold in the prior year. The increase in depreciation expense in fiscal 2002 as compared to fiscal 2001 reflects a full year of depreciation expense in fiscal 2002, as compared to a partial year of depreciation expense in fiscal 2001, on tenant improvements on two buildings totaling 205,000 square feet placed in service during fiscal 2001 and the start of depreciation on the 57,000 square foot building that was completed in fiscal 2002.

        General and administrative expenses at Griffin Land decreased from $2.2 million in fiscal 2001 to $2.1 million in fiscal 2002. The lower general and administrative expenses reflects a decrease of $0.1 million in donations expense in fiscal 2002 as compared to fiscal 2001 and a decrease of $0.1 million in employee recruitment expenses partially offset by higher insurance expenses.

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        Imperial incurred an operating loss of $1.9 million in both fiscal 2002 and fiscal 2001 (excluding the loss from the SSC operations of $0.8 million before they were sold in January 2001). The increase in gross profit generated from the higher net sales in fiscal 2002 was substantially offset by higher charges for unsaleable inventory, which were $1.8 million in fiscal 2002 as compared to $0.6 million in fiscal 2001. The charges for unsaleable inventory in the current year were caused principally by failures in certain crops, poor results from the propagation of new plants in Florida and failure to sell certain parts of the inventory which then became unsaleable. As a result of these issues, management has made changes in certain horticultural practices and changes of certain personnel. Imperial's gross margin on sales, excluding the charges for unsaleable inventory, was 17% in fiscal 2002 as compared to 15% in fiscal 2001. The higher gross margin on sales was principally due to changes in Imperial's product mix. Imperial's operating expenses in fiscal 2002 were $4.4 million, or 17.5% of net sales, as compared to $4.6 million, or 21.2% of net sales, in fiscal 2001, excluding the effect of the SSCs in fiscal 2001. The lower operating expenses in fiscal 2002 reflect principally lower central overhead expenses at Imperial due to headcount reductions as a result of the sale of the SSCs in fiscal 2001.

        Griffin's interest expense increased from $0.9 million in fiscal 2001 to $1.6 million in fiscal 2002. The higher interest reflects increased borrowings outstanding in fiscal 2002 as compared to fiscal 2001. Borrowings in the current year were used to support the working capital needs at Griffin's businesses, and investment in Griffin Land's real estate operation and capital expenditures at Imperial. Griffin's financing requirements in fiscal 2001 were met using the proceeds from the sale of the SSCs that remained after paying down the balance then outstanding of Griffin's revolving credit agreement. Griffin's average amount of debt outstanding in fiscal 2002 was $23.2 million as compared to $15.0 million in fiscal 2001. In addition, in fiscal 2002 Griffin had capitalized interest of $0.1 million as compared to capitalized interest of $0.4 million in fiscal 2001. The lower amount of capitalized interest in fiscal 2002 reflects the lower amount of construction activity in fiscal 2002 as compared to fiscal 2001.

        Griffin's effective rate of the income tax benefit in fiscal 2002 is 82% as compared to an effective income tax rate of 55% in fiscal 2001. The high effective benefit rate in fiscal 2002 reflects the tax benefit on its pretax loss and the reversal of a liability of $1.5 million for income taxes as a result of a favorable outcome of tax examinations for earlier years. The tax examinations were made on tax returns filed by Culbro Corporation ("Culbro"), Griffin's parent company prior to the distribution (the "Distribution") of Griffin common stock to Culbro's shareholders in 1997. Under a Tax Sharing Agreement, the liability for income taxes was assumed by Griffin from Culbro at the time of the Distribution. The high effective tax rate in fiscal 2001 reflects a basis difference in the writedown of an investment.

        Griffin's equity income from Centaur was $3.6 million in fiscal 2002 as compared to an equity loss of $0.4 million in fiscal 2001. The higher equity income in fiscal 2002 reflects the gain at Centaur from the sale of its Lawtel operation, of which Griffin's allocable share was $8.4 million. There was no cash received by Griffin from the sale because Centaur used the proceeds to pay down its debt. Partially offsetting the gain on the sale of Lawtel was a goodwill impairment charge at Centaur, of which Griffin's allocable share was $5.0 million. Griffin's equity income from Centaur in fiscal 2002 also benefited from the reversal by Centaur of a valuation allowance on certain of its deferred tax assets, of which Griffin's allocable share was $0.7 million. The equity loss in fiscal 2001 included a charge, of which Griffin's allocable share was $0.9 million, for expenses related to a proposed stock offering or sale that did not take place. Excluding the effect of these items, Griffin's equity results from Centaur were lower in fiscal 2002 as compared to fiscal 2001, reflecting a weakened economy in the United Kingdom which has resulted in lower revenue and lower operating results at Centaur.

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Fiscal 2001 Compared to Fiscal 2000

        Griffin's net sales and other revenue were $32.0 million in fiscal 2001 as compared to $74.4 million in fiscal 2000. Net sales and other revenue at Imperial were $23.6 million in fiscal 2001 as compared to $68.6 million in fiscal 2000. The lower net sales at Imperial reflects the effect of the sale of the SSCs in January 2001. Net sales of the SSCs were $48.3 million in fiscal 2000 as compared to $1.9 million in fiscal 2001 through the date the SSCs were sold. Excluding the effect of the sale of the SSCs, net sales at Imperial increased by $1.4 million. The increase in net sales at Imperial principally reflects additional product available for sale as a result of the recent expansion of Imperial's Connecticut and northern Florida growing operations.

        Net sales and other revenue at Griffin Land increased from $5.8 million in fiscal 2000 to $8.4 million in fiscal 2001. This increase of $2.6 million reflects an increase of $2.3 million from higher rental revenue in fiscal 2001 as a result of leases on buildings completed and occupied in fiscal 2001 and new leases on space that was vacant in fiscal 2000 but occupied for most of fiscal 2001. Additionally, revenue in fiscal 2001 included $0.5 million from the agreement to terminate early a lease on one of its buildings. The increase in rental revenue and the revenue from the early termination at Griffin Land substantially offset lower revenue from land sales in fiscal 2001 as compared to fiscal 2000. Revenue from land sales decreased from $1.2 million in fiscal 2000 to $0.8 million in fiscal 2001.

        Griffin incurred an operating loss of $3.2 million in fiscal 2001 as compared to an operating profit of $3.8 million in fiscal 2000. Imperial incurred an operating loss of $2.7 million in fiscal 2001 as compared to an operating profit of $5.3 million in fiscal 2000. The lower operating results at Imperial reflects the effect of the sale of the SSCs in January 2001. Due to the seasonality of the landscape nursery business, the SSCs incurred an operating loss, before Imperial's central overhead expenses, of $0.8 million from the beginning of the 2001 fiscal year through their sale in January 2001. The SSCs generated an operating profit, before Imperial's central overhead expenses, of $6.6 million in fiscal 2000. Imperial's growing operations, including all of Imperial's central overhead expenses, incurred an operating loss of $1.9 million in fiscal 2001 as compared to an operating loss of $1.3 million in fiscal 2000. The effect of higher net sales of container grown plants by Imperial's growing operations was more than offset by higher cost of sales in fiscal 2001, which included a charge for unsaleable inventory of $0.6 million, due principally to horticultural issues, recorded in the 2001 third quarter. Imperial's operating expenses, excluding those expenses directly related to the SSCs, were $4.6 million in fiscal 2001 as compared to $5.4 million in fiscal 2000. As a percentage of net sales, operating expenses were 21.2% in fiscal 2001 as compared to 26.7% in fiscal 2000, excluding operating expenses directly related to the SSCs. The lower operating expenses in fiscal 2001 principally reflects lower central overhead expenses at Imperial due principally to staff reductions as a result of the sale of the SSCs and lower incentive compensation expense in fiscal 2001 as compared to fiscal 2000.

        Operating profit at Griffin Land increased to $1.0 million in fiscal 2001 as compared to $0.2 million in fiscal 2000. The increased operating profit at Griffin Land principally reflects higher profit from commercial properties as a result of the increase in rental revenue in fiscal 2001. Profit before depreciation from Griffin Land's commercial properties, excluding the benefit of the lease termination, was $4.6 million in fiscal 2001 as compared to $2.9 million in fiscal 2000. The increase in profit, before depreciation, from commercial properties was partially offset by lower profit from property sales, higher operating expenses and higher depreciation expense. Profit from property sales declined from $0.5 million in fiscal 2000 to $0.1 million in fiscal 2001 due to the lower property sales revenue and the inclusion of properties with a lower cost basis in fiscal 2000 sales. The higher depreciation expense reflected depreciation on new buildings placed into service in fiscal 2001.

        Griffin's results in fiscal 2001 reflect a write-down of $2.2 million on its investment in Linguaphone Group plc ("Linguaphone"). The write-down reflects the decrease in the value of Linguaphone based on a recent stock offering. Approximately 80% of the carrying value of Griffin's investment in

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Linguaphone resulted from a distribution in 1997 of the common stock of Linguaphone by its former parent company, Centaur. The remaining carrying value of Griffin's investment in Linguaphone, approximately $0.2 million, reflects a recent cash investment by Griffin.

        Griffin's interest expense declined from $1.1 million in fiscal 2000 to $0.9 million in fiscal 2001. Griffin's interest income increased by $0.1 million in fiscal 2001 as compared to fiscal 2000. The lower interest expense and higher interest income reflect repayment of the entire amount outstanding under Griffin's Credit Agreement from the cash proceeds received from the sale of the SSCs in January 2001. The remaining cash received from the sale of the SSCs, after repayment of the amount then outstanding under Griffin's revolving credit agreement was used to finance operations. Additionally, higher interest payments on mortgages, reflecting interest on a new mortgage entered into in March 2001, was more than offset by a higher amount of interest capitalized on new construction projects during fiscal 2001 as compared to fiscal 2000.

        Griffin's effective tax rate in fiscal 2001 is 55% as compared to 39% in fiscal 2000. The higher effective tax rate in 2001 reflects the effect of the tax basis of Griffin's investment in Linguaphone being lower than its book basis, therefore the write-down did not generate the expected tax benefit had the tax basis of that asset been comparable to its book basis.

        Griffin had an equity loss from Centaur in fiscal 2001 of $0.4 million as compared to equity income of $0.6 million in fiscal 2000. Although Centaur's operations were generally more profitable in fiscal 2001, Centaur incurred expenses, of which Griffin's allocable share was $0.9 million, related to a proposed stock offering or sale that did not take place.

Liquidity and Capital Resources

        Net cash used in operating activities was $2.2 million in fiscal 2002 as compared to $6.0 million of net cash used in operating activities in fiscal 2001. The decrease of $3.8 million of net cash used in operating activities was due to several factors, including receiving an income tax refund of $0.2 million in fiscal 2002 as compared to income tax payments of $2.3 million in fiscal 2001. The fiscal 2001 income tax payments principally relate to the gain on sale of the SSCs in that year. Additionally, fiscal 2002 operating results at Griffin Land, before depreciation, increased by $0.4 million, and although Imperial's fiscal 2002 results from its container growing operations were substantially unchanged from fiscal 2001, fiscal 2001 included an operating loss of $0.8 million from Imperial's SSCs before they were sold. These items were partially offset by the effect of higher interest expense and overall unfavorable working capital changes.

        In fiscal 2002, cash used in investing activities was $7.0 million as compared to cash of $5.4 million provided by investing activities in fiscal 2001, which included net proceeds of $18.4 million from the sale of Imperial's SSCs in 2001. Additions to Griffin Land's real estate assets were $3.4 million in fiscal 2002 as compared to $10.2 million in fiscal 2001. The higher amount of additions to real estate assets in fiscal 2001 reflects construction of a 165,000 square foot building in Griffin Center in Windsor, Connecticut, and a 40,000 square foot building in Griffin Center South in Bloomfield, Connecticut, in that year. Both of these buildings were completed in fiscal 2001 and are now leased. In addition, the shell of a 57,000 square foot building, built on speculation was started in fiscal 2001. In fiscal 2002, cash used for additions to Griffin Land's real estate assets included building the shell of a 50,000 square foot office building in Griffin Center and the completion of the shell and build out of the interior of its new 57,000 square foot building in the New England Tradeport in Windsor, Connecticut. The tenant work for that building, started as a result of entering into a lease for the entirety of that building, was completed in the 2002 third quarter. The shell of the new 50,000 square foot office building was completed in the 2002 fourth quarter and is ready for tenant work, although none of this building has been leased yet. Fiscal 2002 investing activities also include a $1 million payment for a

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deposit on Griffin Land's acquisition of a 70% interest in a joint venture that owns two office buildings. The acquisition was completed in December 2002 (see below).

        Capital expenditures of $2.5 million in fiscal 2002 and $2.9 million in fiscal 2001 were principally for the expansion of Imperial's farming operation in northern Florida. Over the past three years, Imperial has expanded and updated its facilities in Connecticut and northern Florida. Total costs of these projects is approximately $7.5 million, with only $0.3 million of work left to complete as of the end of fiscal 2002. The expansion is expected to be completed in fiscal 2003.

        In fiscal 2002, cash provided by financing activities was $9.3 million as compared to cash of $0.5 million used in financing activities in fiscal 2001. Cash provided by financing activities in fiscal 2002 principally reflects borrowings made under Griffin's $19.4 million revolving credit agreement, as amended (the "2002 Credit Agreement"), with Fleet National Bank ("Fleet") which was completed on February 8, 2002 and a new mortgage entered into on September 17, 2002. The 2002 Credit Agreement has a three year term and is collateralized by certain of Griffin Land's real estate assets. The initial borrowing under the 2002 Credit Agreement was used to repay the amount then outstanding under Griffin's bridge loan, to repay a mortgage on one of Griffin's commercial buildings and for certain expenses related to the 2002 Credit Agreement. Subsequent borrowings were used to finance Griffin's seasonal working capital requirements, particularly those at Imperial. There was $4.2 million outstanding on the 2002 Credit Agreement at November 30, 2002.

        On September 17, 2002, a subsidiary of Griffin completed a $7.7 million nonrecourse mortgage of two commercial buildings. The mortgage loan has an interest rate of 7% and a fifteen year term, with payments based on a twenty-five year amortization period. Proceeds of the mortgage were used to reduce amounts outstanding under the 2002 Credit Agreement. One of the properties included in this mortgage was previously included in the collateral for the 2002 Credit Agreement. As a result of removing that property from the collateral of the 2002 Credit Agreement, the commitment under the 2002 Credit Agreement was reduced to $14.1 million. Griffin is currently negotiating with Fleet to increase the amount available under the 2002 Credit Agreement to $21.0 million. The proposed increase in the commitment would be collateralized by certain of Griffin's real estate assets.

        Subsequent to the end of fiscal 2002, Griffin completed the acquisition, for $8.8 million, of a 70% interest in a joint venture that owns two office buildings of approximately 80,000 square feet each in Griffin Center. Griffin previously held the other 30% interest in these buildings. This acquisition was temporarily financed under the 2002 Credit Agreement. Shortly after the acquisition, Griffin completed a $9.7 million nonrecourse mortgage. The mortgage loan has an interest rate of 6.08% and a ten year term with payments based on a twenty-five year amortization period. Proceeds of the mortgage were used to reduce amounts outstanding under the 2002 Credit Agreement.

        In fiscal 2003, Griffin Land is planning to continue to invest in its real estate assets, including plans to build, on speculation, the shell of an approximately 115,000 square foot facility in the New England Tradeport, which is expected to require approximately $4.0 million. Additional amounts will be required to complete the interior of this new building and the interior of the 50,000 square foot office building in Griffin Center that was completed at the end of fiscal 2002. The buildout of the interiors of these buildings will be started when leases are obtained. Improvements to be made in fiscal 2003 to the infrastructure at Griffin Center and the New England Tradeport are expected to be approximately $0.7 million.

        Griffin Land will also continue to seek approval for its proposed residential developments. Early in fiscal 2002, a court ruling upheld the denial, by Simsbury's Inland Wetlands Commission, of Griffin's Land's application for a wetlands activity permit in connection with its proposed residential development. Griffin Land is appealing that decision. On December 27, 2002, the Superior Court ruled that Simsbury's Planning and Zoning Commissions improperly denied Griffin's residential applications and ordered the commissions to reverse their decisions and approve Griffin Land's proposed zone

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change and proposed site plan. The town is requesting permission from the Appellate Court to appeal these decisions. Griffin Land also has an agreement for the sale of the remaining development rights at its Walden Woods residential development in Windsor, Connecticut. The completion of that sale is subject to the purchaser receiving approval from the town's commissions for their development plans and, based on such plans, proceeds from that sale are expected to be approximately $3.0 million. Approvals from the town's commission on wetlands were obtained in fiscal 2002, but a suit was filed challenging that approval. Completion of this transaction is not expected to take place in fiscal 2003. Griffin Land has also applied for approvals for a 55 lot residential subdivision in Suffield, Connecticut. Sales from this project are not expected in fiscal 2003. Griffin Land intends to proceed with its other residential development plans on other of its lands that are also appropriate for that use.

        Griffin's capital spending at Imperial in fiscal 2003 is expected to be less than $1.0 million, substantially lower than it has been the past two years because the expansion of Imperial's northern Florida growing operation is substantially completed.

        Griffin's payments (including principal and interest) under contractual obligations as of November 30, 2002 are as follows:

(a)

Reflects the amount outstanding for the 2002 Credit Agreement as of November 30, 2002. Due to the variable interest rate on this debt, interest for future periods is not included above.

(b)

Includes commitments made as of November 30, 2002 for the purchase of services and materials for the planned construction in fiscal 2003 of an approximately 115,000 square foot building. Subsequent to November 30, 2002, additional purchase commitments aggregating $3.2 million for services and materials for construction were incurred.

        Management believes that in the near term, based on the current level of operations and anticipated growth, borrowings available under the 2002 Credit Agreement, as amended, and cash generated from operations will be sufficient to finance Griffin's working capital requirements, expected capital expenditures of the landscape nursery business and development of its real estate assets. Over the intermediate and long term, additional mortgage placements, construction financing or additional bank credit facilities are expected to be required to fund capital projects.

Forward-Looking Information

        The above information in Management's Discussion and Analysis of Financial Condition and Results of Operations includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although Griffin believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved, particularly with respect to the expansion and improved return on assets of Imperial's operations, construction and leasing of additional facilities in the real estate business, completion of the sale of the development rights of Walden Woods, approval of other proposed residential subdivisions and obtaining an increase in the commitment of the 2002 Credit Agreement. The projected information disclosed herein is based on assumptions and

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estimates that, while considered reasonable by Griffin as of the date hereof, are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, many of which are beyond the control of Griffin.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in earnings and cash flows.

        For fixed rate mortgage debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flows. Griffin does not have an obligation to prepay any fixed rate debt prior to maturity, and therefore, interest rate risk and changes in the fair market value of fixed rate debt should not have a significant impact on earnings or cash flows until such debt is refinanced, if necessary. Griffin's mortgage interest rates and related principal payment requirements are described in Note 5 to the consolidated financial statements in Item 8. For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect future earnings and cash flows. Griffin had $4.2 million of variable rate debt outstanding at November 30, 2002.

        Griffin is exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on market values of Griffin's cash equivalent short-term investments. These investments generally consist of overnight investments that are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned and cash flow from these investments.

        Griffin does not currently have any derivative financial instruments in place to manage interest costs, but that does not mean that Griffin will not use them as a means to manage interest rate risk in the future.

        Griffin does not use foreign currency exchange forward contracts or commodity contracts and does not have foreign currency exposure in operations. Griffin does have equity investments in privately-owned companies based in the United Kingdom. Changes in foreign currency exchange rates could affect the results of an equity investment in Griffin's financial statements. The companies have historically reinvested their earnings for future growth. The ultimate liquidation of those investments and conversion of proceeds into United States currency is subject to future foreign currency exchange rates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GRIFFIN LAND & NURSERIES, INC

Consolidated Statement of Operations

(dollars in thousands, except per share data)

See Notes to Consolidated Financial Statements.

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GRIFFIN LAND & NURSERIES, INC.

Consolidated Balance Sheet

(dollars in thousands, except per share data)

See Notes to Consolidated Financial Statements.

20

GRIFFIN LAND & NURSERIES, INC.

Consolidated Statement of Stockholders' Equity

(dollars in thousands)

See Notes to Consolidated Financial Statements.

21

GRIFFIN LAND & NURSERIES, INC.

Consolidated Statement of Cash Flows

(dollars in thousands)

See Notes to Consolidated Financial Statements.

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GRIFFIN LAND & NURSERIES, INC.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

1.    Summary of Significant Accounting Policies

Basis of Presentation

        The accompanying consolidated financial statements of Griffin Land & Nurseries, Inc. ("Griffin") include the accounts of Griffin's real estate division ("Griffin Land") and Griffin's wholly-owned subsidiary, Imperial Nurseries, Inc. ("Imperial"). All intercompany transactions have been eliminated.

        Griffin accounts for its investments in Centaur Communications, Ltd. ("Centaur") and real estate joint ventures under the equity method. Centaur reports on a June 30 fiscal year in accordance with generally accepted accounting principles in the United Kingdom. Griffin reports its share of equity in Centaur's earnings based upon Griffin's fiscal year. Griffin converts Centaur's financial statements to accounting principles generally accepted in the United States of America and translates balance sheet information at the exchange rate as of the balance sheet date and uses the average exchange rates over the period to translate the statement of operations. Substantially all of Griffin's investment in Centaur represents the excess of the cost of Griffin's investment over the book value of its equity in Centaur (representing publishing rights and goodwill) and is being amortized on a straight-line basis over 30-40 years, which commenced in 1985. Effective in fiscal 2003, Griffin will no longer amortize goodwill related to its investment in Centaur (see below).

Business Segments

        Griffin is engaged in the landscape nursery and real estate businesses. Imperial, Griffin's subsidiary in the landscape nursery segment, is engaged in growing plants in containers which are sold principally to mass merchandisers, garden centers and wholesalers. On January 26, 2001, Imperial completed the sale of its wholesale sales and service centers (see Note 2). Imperial remains in the landscape nursery business with its growing operations in Connecticut and northern Florida.

        Griffin's real estate segment, Griffin Land, builds, leases and manages commercial and industrial properties and develops residential subdivisions on its land in Connecticut and Massachusetts.

Fiscal Year

        Griffin's fiscal year ends on the Saturday nearest November 30. Fiscal 2002 ended November 30, 2002 and contained 52 weeks. Fiscal 2001 ended December 1, 2001 and contained 52 weeks. Fiscal 2000 ended December 2, 2000 and contained 53 weeks. The effect of an additional week in fiscal 2000 as compared to fiscal 2002 and fiscal 2001 was not material to Griffin's results of operations or cash flows.

Inventories

        Griffin's inventories are stated at the lower of cost or market using the average cost method. Nursery stock includes certain inventories which will not be sold or used within one year. It is industry practice to include such inventories in current assets.

Stock-Based Compensation

        Griffin accounts for stock options using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the

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disclosure provisions of SFAS No. 123 which require disclosing the pro forma effect on earnings and earnings per share of the fair value method of accounting for stock-based compensation.

Property and Equipment

        Property and equipment are carried at cost. Depreciation is determined on a straight-line basis over the estimated useful asset lives for financial reporting purposes and principally on accelerated methods for tax purposes.

Real Estate Held for Sale or Lease

        Real estate held for sale or lease is carried at cost. Interest is capitalized during the construction period of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's useful life. Depreciation is determined on a straight-line basis over the estimated useful asset lives for financial reporting purposes and principally on accelerated methods for tax purposes. Repair and maintenance costs are expensed as incurred.

Impairment of Investments in Long-Lived Assets

        Griffin periodically reviews long-lived assets to determine if there are indicators of impairment. When indicators of impairment are present, Griffin evaluates the carrying value of the assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. Griffin adjusts the net book value of the underlying assets if the sum of the expected future cash flows is less than book value.

Revenue and Gain Recognition

        In the landscape nursery business, sales and the related cost of sales are recognized upon shipment of products. Sales returns are not material. In 2000, the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force ("EITF") issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs" which Griffin adopted at the beginning of fiscal 2001. EITF 00-10 stated that all amounts billed to customers for shipping and handling should be included in net sales and the costs of shipping and handling should be included in cost of sales.

        In the real estate business, revenue includes rental revenue from Griffin Land's commercial and industrial properties and proceeds from the sales of real estate. Rental revenue is accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Gains on real estate sales are recognized in accordance with SFAS No. 66, "Accounting for Sales of Real Estate," based on the specific terms of the sale.

Recent Accounting Pronouncements

        In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." Under the provisions of SFAS No. 142, goodwill will no longer be amortized, but will be subject to a periodic test for impairment based upon fair values. Griffin does not anticipate a charge for impairment upon adoption of SFAS No. 142. Griffin's results from its equity investment in Centaur for fiscal 2002, fiscal

24

2001, and fiscal 2000 would have increased approximately $0.5 million annually due to the elimination of goodwill amortization. SFAS No. 142 will be effective for Griffin in fiscal 2003.

        In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." This pronouncement addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 will be effective for Griffin in fiscal 2003. At this time, management believes that this new standard will not have an impact on Griffin's financial statements.

        In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This pronouncement retains the requirements of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flow and measures an impairment loss as the difference between the carrying amount and fair value of the asset. This pronouncement also addresses the accounting for long-lived assets to be disposed of other than by sale and long-lived assets to be disposed of by sale. SFAS No. 144 will be effective for Griffin in fiscal 2003. At this time, management believes that this new standard will not have an impact on Griffin's financial statements.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires gains and losses from certain debt extinguishment as part of a risk management strategy not to be reported as extraordinary items. SFAS No. 145 will be effective for Griffin in fiscal 2003. At this time, management believes that this new standard will not have an impact on Griffin's financial statements.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This new pronouncement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 will be effective for Griffin in fiscal 2003. At this time, management believes that this new standard will not have an impact on Griffin's financial statements.

        In December, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123". This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and requires enhanced disclosure of information on stock-based compensation in annual and interim financial statements. SFAS No. 148 will be effective for Griffin in fiscal 2003. At this time, management does not expect to change its method of accounting for stock-based compensation, but has included the required enhanced disclosure in Note 7.

Environmental Matters

        Environmental expenditures are expensed or capitalized as appropriate, depending upon their future economic benefit. Expenditures that relate to an existing condition caused by past operations, and do not have future economic benefit, are expensed. Expenditures that create future benefit or contribute to future revenue generation are capitalized. Liabilities related to future remediation costs

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are recorded when environmental assessments and/or cleanups are probable, and the costs can be reasonably estimated. There were no liabilities related to environmental assessments as of November 30, 2002 and December 1, 2001.

Fair Value of Financial Instruments

        The amounts included in the financial statements for accounts receivable, accounts payable and accrued liabilities reflect their fair values because of the short-term maturity of these instruments. The fair values of Griffin's other financial instruments are discussed in Note 5.

Earnings Per Share

        Basic net income per common share is calculated by dividing net income by the average number of common shares outstanding during the year. The calculation of diluted net income per common share includes adjusting net income to include the effect of stock options outstanding at Griffin's equity investee, Centaur, and adjusting outstanding shares, assuming conversion of all potentially dilutive Griffin stock options.

Reclassifications

        Certain prior year balances have been reclassified to conform with the current year presentation.

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. The more significant estimates include, among others, the impairment charge for Linguaphone recorded in fiscal 2001, the allowance for doubtful accounts, the inventory reserves, deferred taxes, net realizeable value of real estate held for sale or lease and the assumptions used in determining the accrual for postretirement benefits.

2.    Sale of Sales and Service Centers

        On January 26, 2001, Imperial completed the sale of all of the assets of its seven wholesale sales and service centers (the "SSCs") to Shemin Nurseries, Inc. ("Shemin"). Shemin also assumed certain liabilities related to the SSCs. The SSCs sold a wide variety of plant material and horticultural tools and products to the landscape trade. A portion of the products sold by the SSCs were grown by Imperial's farming operations. Imperial's only continuing involvement in Shemin is an approximately 13.8% ownership interest in Shemin's parent company (see below) and a three year supply agreement pursuant to which Shemin is obligated to purchase Imperial grown product for the SSCs. The supply agreement will terminate on December 31, 2003. The net book value of the assets sold and liabilities assumed by Shemin was $13.5 million. Prior to the sale of the SSCs in fiscal 2001, the net sales of the SSCs were $1.9 million and the SSCs incurred an operating loss, before Imperial's central overhead expenses, of $0.8 million through the date of the sale. For fiscal 2000, net sales of the SSCs were

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$48.3 million and the operating profit of the SSCs, before Imperial's central overhead expenses, was $6.6 million. Imperial continues in the landscape nursery business with its container growing operations in Connecticut and northern Florida.

        The consideration received by Imperial on the sale of the SSCs included cash of $18.4 million after expenses. Cash of $11.2 million from the sale was used to repay all of the amount then outstanding under Griffin's Credit Agreement. The remaining cash was used for general corporate purposes. In addition to the cash payment, Griffin received 20,570 shares of common stock (representing approximately 13.8% of the outstanding common stock) of Shemin Acquisition Corporation ("Acquisition"), the parent company of Shemin. The common stock of Acquisition is valued at $6.1 million and is included in other assets on the accompanying balance sheet. As a result of Griffin retaining a common equity ownership interest in Acquisition, $1.5 million of the gain from the sale of the SSCs has been deferred, and is offset against the investment in Acquisition on Griffin's balance sheet. Imperial accounts for its investment in Acquisition under the cost method of accounting for investments.

        The sale of the SSCs reflected the disposition of the following assets and liabilities by Imperial:

        The following unaudited Pro Forma Condensed Consolidated Statement of Operations for the fiscal years ended December 1, 2001 and December 2, 2000 include pro forma adjustments to reflect the sale of the SSCs as if it had taken place at the beginning of the respective fiscal periods. Such adjustments include the elimination of sales, cost of sales and direct operating expenses of the SSCs, the elimination of salaries and benefits of employees terminated as a result of the sale of the SSCs, the inclusion of sales from Imperial's growing operations to the SSCs acquired by Shemin, the effect of the net cash proceeds on Griffin's interest expense and interest income, and adjustment to Griffin's income tax provision.

        In the opinion of management, all adjustments necessary to fairly present this pro forma information have been made. The pro forma information does not purport to be indicative of the results that would have been reported had this transaction actually occurred on the dates specified, nor is it indicative of Griffin's future results.

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Pro Forma Condensed Consolidated Statement of Operations (Unaudited)

3.    Industry Segment Information

        Griffin's reportable segments are defined by their products and services, and are comprised of the landscape nursery and real estate segments. Management operates and receives reporting based upon these segments. Griffin has no operations outside the United States. Griffin's export sales and transactions between segments are not material.

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        See Note 2 regarding the sale of the SSCs and Note 9 for information on Griffin's equity investment in Centaur.

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4.    Income Taxes

        Griffin's income tax (benefit)/provision and deferred tax assets and liabilities in the accompanying financial statements have been calculated in accordance with SFAS No. 109 "Accounting for Income Taxes." The income tax (benefit)/provisions for fiscal 2002, fiscal 2001 and fiscal 2000 are summarized as follows:

        The reasons for the difference between the United States statutory income tax rate and the effective rates are shown in the following table:

        The reversal of an accrual for income tax liability reflects the favorable settlement of tax examinations of earlier years. The tax examinations were made on tax returns filed by Culbro Corporation ("Culbro"), Griffin's parent company prior to distribution (the "Distribution") of Griffin common stock to Culbro's stockholders in 1997. The accrual for income taxes was assumed by Griffin from Culbro at the time of the Distribution for unresolved tax examinations of earlier years. Under a Tax Sharing Agreement between Griffin and Culbro, Griffin remained liable after the Distribution for tax assessments related to certain items included on Culbro's consolidated income tax returns. The Tax Sharing Agreement provided, among other things, for the allocation between Culbro and Griffin of federal, state, local and foreign tax liabilities for all periods that Griffin was a wholly-owned subsidiary of Culbro. With respect to the consolidated tax returns filed by Culbro, the Tax Sharing Agreement provides that Griffin remained liable for any amounts that Culbro would have been required to pay with respect to any deficiencies assessed through the date of the Distribution, generally as if Griffin had filed separate tax returns.

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        The significant components of Griffin's deferred tax asset and liability are as follows:

5.    Long-Term Debt

        Long-term debt includes:

        On February 8, 2002, Griffin entered into a $19.4 million revolving credit agreement, as amended (the "2002 Credit Agreement") with Fleet National Bank ("Fleet"). The amount available for borrowing under the 2002 Credit Agreement was reduced to $14.1 million as described below. The initial borrowings under the 2002 Credit Agreement were used to repay the amount then outstanding ($4.5 million) under Griffin's bridge loan, to repay a mortgage of $0.4 million on one of Griffin's commercial buildings and for certain expenses related to the 2002 Credit Agreement. The 2002 Credit Agreement is being used to finance working capital requirements at Griffin's landscape nursery and real estate businesses and for investment in Griffin's real estate assets. Borrowings under the 2002 Credit Agreement may be, at Griffin's option, on an overnight basis or for periods of one, two, three or six months. Overnight borrowings bear interest at Fleet's prime rate plus a margin of 0.5% per annum. Borrowings of one month and longer bear interest at the London Interbank Offered Rate ("LIBOR") plus a margin of 2.5% per annum. The amount outstanding at November 30, 2002 under the 2002 Credit Agreement had a weighted average interest rate of 3.97%. The margins can be reduced if Griffin achieves certain debt service coverage ratios (as defined). There are no compensating balance requirements, and Griffin pays a commitment fee of 0.25% per annum on unused borrowing capacity.

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The 2002 Credit Agreement is collateralized by certain of Griffin's real estate assets and includes financial covenants with respect to Griffin's fixed charge coverage (as defined), net worth and leverage. As of August 31, 2002 and November 30, 2002, Griffin was in default under the fixed charge coverage ratio of the 2002 Credit Agreement. The 2002 Credit Agreement was amended to adjust the fixed charge coverage ratio, and after giving effect to the amendments, Griffin is no longer in default.

        On September 17, 2002, Griffin completed a $7.7 million nonrecourse mortgage of two commercial properties. Proceeds of the mortgage were used to reduce the amount outstanding under the 2002 Credit Agreement. The mortgage has an interest rate of 7.0% and a term of fifteen years, with payments based on a twenty-five year amortization period. One of the properties included in this mortgage was previously included as collateral under the 2002 Credit Agreement. As a result of removing that property from the collateral of the 2002 Credit Agreement, the commitment under the 2002 Credit Agreement was reduced to $14.1 million.

        At November 30, 2002, Griffin had three nonrecourse mortgages outstanding. These mortgages had balances of $7,983, $6,172 and $7,656, with fixed interest rates of 8.54%, 8.125% and 7.0%, respectively. The annual principal payment requirements under the terms of the mortgages for the years 2003 through 2007 are $340, $365, $397, $430 and $464, respectively. The book value of buildings under the mortgages was $21.2 million at November 30, 2002.

        At November 30, 2002 and December 1, 2001, the fair value of Griffin's mortgages was $23.9 million and $15.8 million, respectively. Fair value is based on the present value of future cash flows discounted at estimated borrowing rates for comparable risks, maturities and collateral. Management believes that because of their variable interest rates, the amount included on Griffin's balance sheet for the 2002 Credit Agreement at November 30, 2002 and the amount included on Griffin's balance sheet for the Bridge Loan at December 1, 2001 reflect their fair values.

        On December 17, 2002, Griffin completed a $9.75 million nonrecourse mortgage of two commercial properties. Proceeds of the mortgage were used to finance Griffin's $8.8 million acquisition, completed on December 6, 2002, of a 70% interest in those buildings. Griffin previously held a 30% interest in those buildings. The mortgage has a 6.08% rate and a term of ten years, with payments based on a twenty-five year amortization period.

        Future minimum lease payments under capital leases for transportation equipment and the present value of such payments as of November 30, 2002 were:

(a)

Includes current portion of $200 at November 30, 2002.

        At November 30, 2002 and December 1, 2001, machinery and equipment included capital leases amounting to $305 and $411, respectively, which is net of accumulated amortization of $398 and $883, respectively, at November 30, 2002 and December 1, 2001. Amortization expense relating to capital leases in fiscal 2002, fiscal 2001, and fiscal 2000 was $174, $204, and $295, respectively.

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6.    Retirement Benefits

Savings Plan

        Griffin maintains the Griffin Land & Nurseries, Inc. 401(k) Savings Plan (the "Griffin Savings Plan") for its employees, a defined contribution plan whereby Griffin matches 60% of each employee's contribution, up to a maximum of 5% of base salary. Griffin's contributions to the Griffin Savings Plan in fiscal 2002, fiscal 2001 and fiscal 2000 were $152, $156 and $251, respectively.

Deferred Compensation Plan

        In fiscal 1999, Griffin adopted a non-qualified deferred compensation plan (the "Deferred Compensation Plan") for certain employees who, due to Internal Revenue Service guidelines, cannot take full advantage of the Griffin Savings Plan. Contributions to the Deferred Compensation Plan started in fiscal 2000. At November 30, 2002 and December 1, 2001, Griffin's liability under the Deferred Compensation Plan was $243 and $189, respectively. The expense for Griffin's matching contributions to the Deferred Compensation Plan in fiscal 2002, fiscal 2001 and fiscal 2000 was $20, $27 and $19, respectively. The Deferred Compensation Plan is unfunded, with benefits to be paid from Griffin's general assets.

Postretirement Benefits

        Griffin maintains a postretirement benefits program which provides principally health and life insurance benefits to certain of its employees. The liability for postretirement benefits is included in other noncurrent liabilities on the consolidated balance sheet. Because Griffin's obligation for retiree medical benefits is fixed under the terms of Griffin's postretirement benefits program, any increase in the medical cost trend would have no effect on the accumulated postretirement benefit obligation, service cost or interest cost. The components of Griffin's postretirement benefits expense is as follows:

        Griffin's liability for postretirement benefits, as determined by the Plan's actuaries, is shown below. None of these liabilities were funded as of November 30, 2002 and December 1, 2001.

        Discount rates of 6.75% and 7.0% were used to compute the accumulated postretirement benefit obligations at November 30, 2002 and December 1, 2001, respectively.

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7.    Stockholders' Equity

Per Share Results

        Basic and diluted per share results were based on the following:

Griffin Stock Option Plan

        The Griffin Land & Nurseries, Inc. 1997 Stock Option Plan (the "Griffin Stock Option Plan"), adopted in 1997 and subsequently amended, makes available a total of 1,250,000 options to purchase shares of Griffin common stock. Options granted under the Griffin Stock Option Plan may be either incentive stock options or non-qualified stock options issued at market value on the date approved by the Board of Directors of Griffin. None of the options outstanding at November 30, 2002 may be exercised as stock appreciation rights.

        The Griffin Stock Option Plan is administered by the Compensation Committee of the Board of Directors of Griffin. A summary of the activity under the Griffin Stock Option Plan is as follows:

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        Of the options issued in fiscal 2002, 25,000 vest in equal installments on the third, fourth and fifth anniversaries from the date of grant and 7,983 vest on the second anniversary from the date of grant. Of the options issued in fiscal 2001, 40,300 vest in equal installments on the third, fourth and fifth anniversaries from the date of grant and 15,000 vest on the second anniversary from the date of grant. Of the options issued in fiscal 2000, 20,000 options vest in equal installments on the third, fourth and fifth anniversaires from the date of grant, 4,000 options vested during fiscal 2002 and 3,000 were vested on the date of grant. At November 30, 2002, 412,730 options outstanding under the Griffin Stock Option Plan were exerciseable with a weighted average price of $11.64 per share.

Stock-Based Compensation

        Griffin accounts for stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted the disclosure provisions of SFAS No. 123 which require disclosing the pro forma effect on earnings and earnings per share of the fair value method of accounting for stock-based compensation. Griffin's results would have been the following pro forma amounts under the method prescribed by SFAS No. 123.