INDUS REALTY TRUST, INC. - Annual Report: 2005 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

Commission file number 1-12879

GRIFFIN LAND & NURSERIES, INC.

(Exact name of registrant as specified in its charter)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes  o    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o    No  x

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  x    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  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o    No  x

The aggregate market value of the Common Stock held by non-affiliates of the registrant, was approximately $63,354,000 based on the closing sales price on the Nasdaq National Market on May 27, 2005, the last business day of the registrant’s most recently completed second quarter. 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 21, 2006, 5,095,609 shares of common stock were outstanding.

PART I

ITEM 1.                BUSINESS

Griffin Land & Nurseries, Inc. (“Griffin”) and its subsidiaries comprise principally a real estate business and a landscape nursery business. Griffin is engaged in two lines of business: (1) the real estate business comprised of (a) the ownership, construction, leasing and management of commercial and industrial properties and (b) the development of residential subdivisions on real estate owned by Griffin in Connecticut and Massachusetts and (2) the landscape nursery products business comprised of the growing of containerized landscape nursery products for sale principally to retail garden centers, wholesale sales and service centers, whose main customers are landscape contractors, and mass merchandisers.

Griffin also owns an approximately 4% interest in Centaur Holdings, plc (“Centaur Holdings”), a publicly held magazine and information services publisher based in the United Kingdom. Griffin received the stock in Centaur Holdings as part of the consideration from the March 2004 sale of its equity investment in Centaur Communications, Ltd. (“Centaur”).

Griffin also owns an approximately 14% interest in Shemin Nurseries Holding Corp. (“Shemin Nurseries”), a private company that operates a landscape nursery distribution business through its subsidiary, Shemin Nurseries, Inc. Prior to May 31, 2005, Griffin owned an approximately 14% interest in Shemin Acquisition Corp. (“Shemin Acquisition”), which Griffin received as part of the consideration from the 2001 sale to Shemin Acquisition of the portion of Imperial’s business that operated wholesale sales and service centers (the “SSCs”). On May 31, 2005, Griffin exchanged a portion of its stock in Shemin Acquisition for the stock in Shemin Nurseries that it currently owns and then completed the sale of its remaining stock of Shemin Acquisition.

Griffin was incorporated as Culbro Realty and Development Corporation in 1970 and was a wholly-owned subsidiary of Culbro Corporation (“Culbro”) through July 3, 1997. On July 3, 1997 Culbro distributed (the “Distribution”) to its shareholders the common stock of Griffin in a tax-free distribution.  Prior to the Distribution in 1997, the company’s name was changed to Griffin Land & Nurseries, Inc.

Real Estate Business

Griffin’s real estate division, Griffin Land, is directly engaged in the real estate development business on parts of its land in Connecticut. Griffin Land develops portions of its properties for industrial, commercial and residential use and may also endeavor to sell some of its non-core land holdings either before or after obtaining development approvals. Griffin Land may seek to acquire and develop properties not presently owned and may seek to acquire existing buildings. The headquarters for this operation is in Bloomfield, Connecticut.

Several years ago, the real estate market in the Hartford area, particularly that in the northwest quadrant where the majority of Griffin Land’s acreage is located, was depressed by a number of factors, including the decline of employment in manufacturing and financial services. More recently, there has been some recovery in this market, particularly in the industrial market. The strongest part of the industrial market has been that for warehousing and light manufacturing space. The office market, which had been particularly weak, has been effectively flat over the last few years. In 2003, Griffin Land succeeded in extending leases of 189,426 square feet (principally industrial space), leased 31,287 square feet of previously vacant industrial space and leased 21,800 square feet of industrial space that was vacated by an early lease termination. In 2004, Griffin Land leased 78,055 square feet of additional space (net of vacated space) and leases aggregating 77,988 square feet were extended. In 2005, Griffin Land leased 56,015 square feet of additional space (net of vacated space) and leases aggregating 89,640 square feet were extended. In addition, in 2005 Griffin Land entered into new leases for approximately 69,000 square feet of industrial space in a 137,000 square foot building that was under construction during 2005 and completed

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at the beginning of fiscal 2006. These new leases became effective in the fiscal 2006 first quarter. In the latter part of 2004 through mid 2005, there were a substantial number of requests for proposals for space in both industrial and office buildings. However, market activity softened in the second half of fiscal 2005, as evidenced by a decline in inquiries from prospective tenants. There can be no assurance as to the direction of the real estate market in this region in the near future. Griffin intends to start construction on a new industrial building in 2006. Griffin Land’s development of its land is affected by land planning issues, particularly in the town of Simsbury, Connecticut. Subdivision and other development issues may also be affected by the potential adoption of initiatives meant to limit or concentrate residential growth.

Commercial and Industrial Developments

New England Tradeport

A significant amount of Griffin Land’s current commercial and industrial development effort is focused on a 600 acre tract of land owned by Griffin Land near Bradley International Airport and Interstate 91 known as the New England Tradeport (“Tradeport”), located in Windsor and East Granby, Connecticut. As of December 3, 2005, the Tradeport contained approximately 649,000 square feet of warehouse and light manufacturing space built by Griffin Land (excluding a new facility completed at the beginning of fiscal 2006, see below), of which approximately 83% was leased, and a bottling and distribution plant was built by the Pepsi Bottling Group (“Pepsi”) on land sold to Pepsi by Griffin Land in the early 1990s. In June 2005, Griffin Land completed construction of a 137,000 square foot warehouse and light manufacturing building and started construction of another 137,000 square foot warehouse and light manufacturing facility. This latter building became ready for new tenants in the fiscal 2006 first quarter. As of December 3, 2005, $34.3 million was invested (net book value) in buildings owned by Griffin Land that are located in the Tradeport (including the building completed in the fiscal 2006 first quarter), and $3.1 million was invested (net book value) by Griffin Land in the undeveloped land there. As of December 3, 2005, all of Griffin Land’s existing buildings at Tradeport, other than the building just completed, were mortgaged for an aggregate of approximately $29.0 million.

In 2005, Griffin Land extended leases in the Tradeport covering 76,126 square feet and completed leases for 133,298 square feet of previously vacant space, with 29,733 square feet of space becoming vacant after leases either expired or were terminated. In addition, leases for approximately 69,000 square feet of the 137,000 square foot building recently completed have been executed with tenants taking occupancy in the fiscal 2006 first quarter. In addition to the balance of the building just completed, the only other vacant spaces in the Tradeport are a total of 46,233 square feet in two of Griffin Land’s older industrial buildings and 66,600 square feet of the 137,000 square foot building completed mid year in 2005. Leases scheduled to terminate over the next three years are as follows:

 

Griffin Land currently has a state traffic control certificate, which requires annual renewal, for the development of an aggregate of approximately  1.1 million square feet in the portion of Tradeport located in Windsor, Connecticut (approximately 586 acres). In connection with a proposed land sale (see below) an application has been made to the Connecticut State Traffic Commission for a revised certificate that would permit an aggregate of 2.9 million square feet of space in the portion of Tradeport located in Windsor.

On February 3, 2006 Griffin Land executed a purchase and sale agreement for the sale of approximately 130 acres of undeveloped land in the Tradeport to Walgreen Co. (“Walgreen”). The purchase price is $13 million, before transaction expenses, to be paid in cash at closing. Completion of this

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transaction is contingent on several factors, including; (i) obtaining all required approvals from governmental authorities for Walgreen’s proposed construction of a distribution facility on the land to be sold; (ii) obtaining a certificate from the Connecticut State Traffic Commission (the “STC Certificate”) approving both the construction of Walgreen’s proposed facility and the construction of additional buildings by Griffin Land having more than an additional one million square feet of light industrial and warehouse space; and (iii) Griffin Land receiving satisfactory site plan approval for the additional square footage to be built under the STC Certificate. Griffin Land’s buildings, if built, would be built over time, based on anticipated demand, on other Tradeport land currently held by Griffin Land. Griffin Land has no presently identified tenants for this additional space. The completion of this transaction is also subject to Walgreen’s satisfactory completion of due diligence on the land to be sold. Obtaining the required approvals and due diligence on this transaction are expected to require a number of months with a closing expected to take place in mid 2006 if all conditions are satisfied. If completed under its present terms, Griffin Land expects to record a substantial pretax gain from this proposed transaction. There is no assurance that this proposed transaction will be completed under its present terms, or at all.

Griffin Land intends to continue to direct its primary efforts in the industrial properties portion of its real estate business with construction and leasing of light industrial and warehouse facilities at the New England Tradeport.

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 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 office buildings, a light manufacturing building and a small restaurant building built by Griffin Land. Griffin Land currently owns two multi-story office buildings which have an aggregate of 161,000 square feet, a single story 48,346 square foot office building, a light manufacturing building and the small restaurant building. Through fiscal 2002, the two multi-story office buildings were owned by a joint venture in which Griffin Land held a 30% interest. Griffin Land purchased a controlling interest in December 2002 for approximately $8.7 million. As of December 3, 2005, $21.2 million was invested (net book value) in Griffin Land’s buildings in Griffin Center and $1.5 million was invested by Griffin Land in the undeveloped land there. Three of Griffin Land’s existing buildings in Griffin Center are mortgaged for an aggregate of approximately $14.9 million.

As of December 3, 2005, 311,747 square feet in Griffin Center was leased, comprising approximately 82% of Griffin Land’s total space in Griffin Center. In 2005, a tenant that occupied 43,988 square feet in one of Griffin Land’s multi-story office buildings relocated into 32,344 square feet in Griffin Land’s 48,346 square foot single story office building, which resulted in the single story office building becoming fully leased. The space vacated by that tenant is currently vacant. Leases for office space in Griffin Center scheduled to terminate over the next three years are as follows:

 

During 2001, Griffin Land completed a light manufacturing building of 165,000 square feet in Griffin Center for JDS Uniphase Corporation (“JDS”) that was leased to JDS under a fifteen-year lease. Effective in early fiscal 2005, a new tenant replaced JDS on the lease, which was amended to extend its term, terminate certain options and provide the new tenant an option to purchase the building at the higher of $11.5 million or fair market value in 2021. Lease rates under the amended lease are unchanged from the

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original lease with JDS for the term of the lease with JDS. This transaction resulted in a charge in the 2005 first quarter of approximately $0.2 million for the write-off of certain capitalized costs related to the original lease with JDS. During 2005, the restaurant building in Griffin Center became vacant. Griffin Land is considering various possible redesign and repositioning options for the restaurant facility, which is 7,199 square feet.

Griffin Center South is a 130-acre tract with sixteen buildings of single story office, flex and storage space. Griffin Land currently owns nine buildings with an aggregate of 235,000 square feet, which contain approximately 217,000 square feet of single story office and flex space and 18,000 square feet of storage space. At December 3, 2005, Griffin Land’s aggregate investment (net book value) in its buildings in Griffin Center South was $9.1 million. None of Griffin Land’s properties in Griffin Center South are mortgaged. Undeveloped land remaining in Griffin Center South is sufficient to build at least two additional buildings aggregating approximately 175,000 square feet.

As of December 3, 2005, 141,076 square feet of space in the Griffin Center South buildings owned by Griffin Land was leased, comprising 60% of Griffin Land’s total space in Griffin Center South. In 2005, Griffin Land extended a lease for 11,474 square feet and agreed to the early termination of a lease with a tenant who had leased 22,500 square feet in one of Griffin Land’s buildings in Griffin Center South. The lease that was terminated early was scheduled to run through January 2008, and Griffin Land received $0.3 million in connection with the early termination of that lease. Also in 2005, Griffin terminated a lease for 16,116 square feet in another of Griffin Land’s buildings in Griffin Center South due to the nonpayment of rent by the tenant. Subsequent to the end of fiscal 2005, Griffin received $0.2 million from the guarantor of that lease related to the lease termination. The spaces related to these early terminations are presently vacant. In February 2006, a tenant that leases an aggregate of 33,501 square feet in two Griffin Center South buildings filed for bankruptcy under Chapter 11. The lease agreements run through June 2007 (22,364 square feet) and March 2009 (11,137 square feet), but are expected to be terminated early as a result of the bankruptcy filing. Leases in Griffin Center South scheduled to terminate over the next three years are as follows (before giving effect to the bankruptcy filing):

 

Other Office and Industrial Subdivisions

Two additional parcels appropriate for office or industrial uses are currently marketed for development, including approximately 105 acres in the South Windsor Technology Center and 28 acres in the Day Hill Technology Center in Windsor. On January 20, 2006, Griffin Land entered into a letter of intent with a prospective buyer to sell the undeveloped land in the South Windsor Technology Center. Based on the terms of the letter of intent, Griffin Land’s proceeds from the sale would be approximately $2.7 million, before expenses. Completion of this transaction is subject to several contingencies, including completion of a definitive agreement and the buyer receiving governmental approvals for its proposed development on this site. In addition, on January 30, 2006, Griffin Land entered into a letter of intent with a prospective buyer for the sale of 8 acres in the Day Hill Technology Park. Based on the terms of the letter of intent, Griffin Land’s proceeds from this proposed transaction would be approximately $0.5 million. Completion of this transaction is dependent on several factors, including completion of a definitive agreement. There is no assurance that these transactions will be completed under their current terms, or at all.

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Residential Developments

Simsbury

In November 1999, Griffin Land filed plans for the creation of a residential community of 640 homes, called Meadowood, on a 363 acre site in Simsbury, Connecticut. One quarter of these homes were to be deed restricted under Connecticut statutes for affordable housing. The public hearings before the town’s land use commissions on this proposed residential development 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. After the conclusion of the public hearings, Griffin Land amended its plan and reduced the number of proposed homes to 371. The town’s land use commissions rejected the amended plan, and Griffin Land filed several separate but related actions appealing the denials of the land use commissions. At the time the original application for Meadowood was filed with the town, Griffin Land’s proposal included a method (which has received support from the Connecticut Department of Environmental Protection) of remediating the soils of the residual pesticides. However, recent soil testing conducted by Griffin Land indicates that the residual pesticides that remain in the soil on much of the Meadowood site are below levels that would require remediation. In December 2002, the trial court for two cases related to Meadowood ruled in favor of Griffin Land. Simsbury appealed those decisions, one of which was affirmed and the other, relating to planning, was reversed in part, due to the failure to have obtained a sewer connection approval for Meadowood, which has now been obtained. Those decisions could require compliance with other court decisions on wetlands conservation and placement of septic systems within the sewer district that could affect the proposed development. Griffin Land appealed an adverse decision on wetlands issues to the Connecticut Supreme Court, which reversed the decision and remanded the case to the trial level court for further consideration. In November 2003, Griffin Land filed a second amendment to its plans for Meadowood, which reduced the density to 298 homes, with certain land reserved for future development, and eliminated most activities in the wetlands and wetland upland areas. The town’s Conservation and Inland Wetlands Commission, which has jurisdiction of wetland issues, denied that application. That denial has been appealed. The litigation regarding the proposed Meadowood residential development remains before the Connecticut courts (see Item 3 Legal Proceedings). As of December 3, 2005, the book value of the land for this proposed development, including design, development and legal costs, was $4.4 million. Management believes that the development costs for Meadowood that have been expended to date will be recovered.

Griffin Land owns another approximately 500 acres in Simsbury, portions of which are zoned residential and other portions of which are zoned industrial. Not all of such land is developable. 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 Land began infrastructure work at Walden Woods, a 153 acre site in Windsor, Connecticut, which was originally planned to contain approximately 435 residential units. In 2004, Griffin Land completed the sale of the remaining development rights for Walden Woods, and recorded a loss of approximately $0.2 million on that sale. Subsequent to the sale of the remaining development rights, Griffin Land held one remaining Walden Woods residential lot, which was sold in early 2005.

Suffield

In 2003, Griffin Land received approval from the Planning and Zoning Commission of Suffield, Connecticut for the subdivision of 97 acres of contiguous land in Suffield into a development of 50 homes

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called Stratton Farms. A suit was brought by an adjoining landowner challenging that approval, and Griffin Land was subsequently informed that the required notices posted by the town were not in accordance with applicable requirements. The subdivision plans were resubmitted to the town’s Planning and Zoning Commission in January 2004, were reapproved and were again contested by the adjoining landowner. In September 2005, the Superior Court of Hartford, Connecticut ruled against the appeal by the adjoining landowner. Subsequent to that decision, the adjoining landowner filed a motion for the court to reconsider its decision, but that motion was denied by the court. The land owner then filed a petition for certification of an appeal to the court’s decision, but the court has denied the landowner’s petition.  After the final required permit was received by Griffin Land in the 2005 fourth quarter, Griffin Land started site clearing and construction of the infrastructure for this residential development. Griffin Land expects to begin offerings for sales of residential lots in Stratton Farms in 2006.

Other

Griffin Land leases approximately 500 acres in Connecticut to General Cigar Co., Inc. (“General Cigar”) for tobacco growing at annual rents approximating the land’s annual carrying cost (the “Agricultural Lease”). At the time the Agricultural Lease was executed, both Griffin and General Cigar were wholly-owned subsidiaries of Culbro. The Agricultural Lease, which extends through February 2007, may be terminated by Griffin Land with respect to 100 acres annually, on one year’s prior notice.  The Agricultural Lease may be extended for additional periods.

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

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, and 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 sales and service centers, 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 445 acres currently used) and land owned by Imperial in northern Florida (approximately 490 acres currently used). Currently, substantially all of the useable contiguous lands suitable for the container-growing operations in Connecticut and a large portion of such land in northern Florida are prepared for container growing operations, however not all available space is being utilized. In fiscal 2004, Imperial completed an expansion of its northern Florida facility, which included improved and expanded shipping capacity, customer service facilities and irrigation and water recycling operations. The expansion of the northern Florida facility was in connection with an increase in production at that facility that was implemented several years ago. A substantial portion of the products that were part of the increased Florida production were of larger sizes, requiring extended growing cycles. Imperial also uses approximately 45 acres of land in Connecticut owned by Griffin to grow liners for transplantation into containers. In the future, that land may be used for real estate development. Imperial has evaluated other land held by Griffin for this use. Some capital expenditures would be required to convert other land for liner growing by Imperial.

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Imperial’s growing operations serve a market comprised principally of retail garden centers, wholesale sales and service centers, whose main customers are landscape contractors, and mass merchandisers. Imperial’s major markets are in the Northeast, Mid-Atlantic, the northern portion of the Southeast and the Midwest. Imperial is attempting to expand its distribution to additional parts of the Southeast. Nursery sales are extremely seasonal, peaking in spring, and are strongly affected by commercial and residential building activity and are also materially affected by weather conditions, particularly in the spring planting season. Imperial’s sales are made to a large variety of customers, none of which represented more than 10% of Imperial’s total sales in fiscal 2005 and fiscal 2004. However, aggregate net sales to Imperial’s ten largest customers, including several large mass merchandisers, accounted for 43% of Imperial’s total net sales in fiscal 2005, which was down from 48% of total net sales to Imperial’s ten largest customers in fiscal 2004. Imperial’s supply agreement with Shemin Nurseries, Inc., entered into in conjunction with the sale of the SSCs in 2001, expired on January 26, 2004. Imperial continues to be a supplier to Shemin Nurseries, Inc., although at a lower sales level than when the sales contract was in effect.

Imperial’s inventories consist principally of container-grown plants on its two farms. The largest volume products of Imperial are evergreens, including leyland cypress, many varieties of hollies and flowering shrubs in Florida and rhododendron, evergreens and flowering shrubs in Connecticut. Other major product categories in Florida include nandina, trees, perennials and crepe myrtle. In Connecticut, alberta spruce, perennials and trees are other major products. Container-grown product is held principally from one to five years before it is sold by Imperial. Prior to 2002, Imperial substantially increased its production and sales of perennials that 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 grown was reduced starting in 2002. In 2003, Imperial began selling some smaller perennials and a number of other products as one of several licensed growers under the “Novalis” trade name. Imperial has entered into additional licensing agreements which enable it to grow and sell certain varieties available only to certain growers. These programs are directed toward increasing Imperial’s sales to retail garden centers.

Imperial is planning to reduce production at its Florida farm, starting in 2006, which will result in a reduction of the space utilized for growing plants at that facility. The reduction in the space utilized for growing is expected to start in the second half of fiscal 2006 as the number of new plants potted and the step-up of smaller sized plants to larger sizes will be less than they have been over the past several years. This planned reduction in inventory is intended to better match production with expected sales. In Connecticut, although future production may reflect increases and decreases to the numbers of plants grown in current varieties and sizes, overall future utilization at the facility is expected to remain consistent with current utilization.

Imperial is reviewing a variety of approaches to improve its operating results, 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 cycles for some of its containerized production. The planned reduction in product to be grown in Florida in order to better align its production with expected sales is part of this effort. In addition, Imperial has sought to increase the percentage of its product sold to retail garden centers. Sales to garden centers generally have more favorable gross margins as compared to sales to mass merchandisers or wholesalers. Also, efforts are being directed at expanding sales in the Southeast which is closer to the Florida farm and would help reduce delivery costs on product shipped into that area from Florida. The field grown liner program in Connecticut is another program directed at reducing plant costs. 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.

In fiscal 2005, Imperial’s cost of goods sold includes $3.1 million for inventory losses. The inventory losses reflect a higher than normal level of disposals for unsaleable product, increases to inventory reserves because the carrying costs of certain inventories exceed their net realizeable values and the writeoff of

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certain inventories that will no longer be sold due to changes in product mix at Imperial’s northern Florida operation. The higher charges for unsaleable inventories and net realizeable value issues in fiscal 2005 reflect horticultural problems for certain inventories and the lack of full sell through of certain products which then became unsaleable. In fiscal 2004 and fiscal 2003, inventory charges included in cost of goods sold were $1.1 million and $0.4 million, respectively.

Shipping capacity and shipping expense are major cost concerns. Shipping capacity in Florida has been increased, but may require some additional peaking capacity. Costs of shipping from Florida have been increasing because of higher fuel costs, the need to arrange for the return of some empty trucks to assure that portable shelving units were available for subsequent shipments and that there is an adequate supply of trucks during the peak spring shipping season. In 2004, shipping costs also increased due to new Federal Department of Transportation regulations requiring more off duty hours for truck drivers and making shipments with multiple stops more costly. In 2005, Imperial purchased additional portable shelving units and planned its shipping in ways that reduced the need for returning trucks empty which did save on these costs. 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.

Investments

Centaur Holdings, plc

The proceeds Griffin received from the March 2004 sale of Centaur included 6,477,150 shares of common stock of Centaur Holdings, approximately 4% of the outstanding common stock of Centaur Holdings at the time of the transaction. Centaur Holdings is a publicly traded company and is listed on the London Stock Exchange. Griffin accounts for its investment in Centaur Holdings as an available-for-sale security. Accordingly, changes in the market value of Griffin’s investment in Centaur Holdings, including both changes in the stock price and changes in the foreign currency exchange rate, are not included in Griffin’s net income but are included in Griffin’s other comprehensive income.

Shemin Acquisition Corporation

The proceeds Griffin received from the 2001 sale of Imperial’s SSCs included approximately 14% of the outstanding common stock of Shemin Acquisition, a privately held company that operated a landscape nursery distribution business and an irrigation supply business through its subsidiaries. In January 2004, Griffin invested an additional $143,000 in Shemin Acquisition and maintained its approximate 14% interest. Imperial accounted for its investment in Shemin Acquisition under the cost method of accounting for investments. On May 31, 2005, Griffin exchanged a portion of its holdings in Shemin Acquisition for common stock in Shemin Nurseries Holding Corp. (“Shemin Nurseries”), which operates a landscape nursery distribution business through its subsidiary that previously was a wholly-owned subsidiary of Shemin Acquisition and then completed the sale of its remaining stock in Shemin Acquisition. Griffin received initial cash proceeds of $5.9 million from that sale. On June 29, 2005, Griffin received a cash distribution of $1.5 million from Shemin Nurseries. Subsequent to these transactions, Shemin Nurseries paid $0.2 million to the buyer of Shemin Acquisition, on behalf of Griffin, for Griffin’s share of the purchase price adjustment related to the determination of Shemin Acquisition’s working capital as of the closing date. Griffin continues to hold its investment in Shemin Nurseries and accounts for this investment under the cost method of accounting for investments.

Linguaphone Group Ltd.

In 1997, Griffin received a 25% equity interest in Linguaphone Group Ltd. (“Linguaphone”) from Centaur. Previously, Linguaphone was a subsidiary of Centaur. In early 1999, a recapitalization of Linguaphone resulted in Griffin’s equity interest being reduced to approximately 14% (11% fully diluted).

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Further transactions by Linguaphone reduced Griffin’s equity interest to approximately 3%. Accordingly, Griffin accounted for Linguaphone under the cost method of accounting for investments. In fiscal 2001, Griffin recorded a charge to write down its investment in Linguaphone. In September 2005, Griffin sold all of its equity interest in Linguaphone for nominal consideration.

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 December 3, 2005, Griffin employed 223 persons on a full-time basis, including 17 in its real estate business and 202 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 Land 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, as well as certain other related costs, including governmental fines and injuries to persons and property. The value of Griffin’s land may be affected by the presence of chlordane and dieldrin, arising from the prior use of the land for farming on a portion of the land which is intended for residential use. In the event that Griffin Land is unable to adequately remediate any of its land intended for residential use, Griffin Land’s ability to develop such property for its intended purposes would be materially affected.

Griffin Land periodically reviews its properties for the purpose of evaluating such properties’ compliance with applicable state and federal environmental laws. At this time, Griffin Land does not anticipate experiencing, in the next twelve months, material expense in complying with such laws. However, Griffin Land may incur certain remediation costs in the future in connection with its development operations. Such costs are not expected to be significant as compared to expected proceeds of development projects.

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ITEM 1A.        RISK FACTORS

Griffin’s real estate and landscape nursery businesses have a number of risk factors. The risk factors discussed below are the ones that management deems to be material, but they may not be the only risks facing Griffin’s businesses. Additional risks not currently known or currently deemed not to be material may also impact Griffin’s businesses.

Risks Associated with Concentration of Real Estate Holdings

Griffin Land’s real estate operations are concentrated in the Hartford, Connecticut area. Adverse changes in the local economy or real estate market could impact Griffin Land’s real estate operations, including the market’s ability to absorb newly constructed space and Griffin Land’s ability to retenant vacant space.

Potential Environmental Liability

Griffin Land has extensive land holdings in Connecticut and Massachusetts. Under federal, state and local environmental laws, ordinances and regulations, Griffin Land may be required to investigate and clean up the effects of releases of hazardous substances or petroleum products at its properties because of its current or past ownership or operation of the real estate. If previously unidentified environmental problems arise, Griffin Land may have to make substantial payments, which could adversely affect its cash flow. As an owner or operator of properties, Griffin Land may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination. The law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination.

Insurance Coverage Does Not Include All Potential Losses in the Real Estate Business

Griffin Land carries comprehensive insurance coverage, including property, fire, terrorism and loss of rental revenue. The insurance coverage contains policy specifications and insured limits. Griffin Land believes its properties are adequately insured. However, there are certain losses that are not generally insured against or that are not fully insured against. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of Griffin Land’s properties, Griffin Land could experience a significant loss of capital invested and potential revenue from the properties affected. Other risks related to Griffin Land’s real estate operations include competition from other available properties in Griffin Land’s area of operation and governmental regulations that affect real estate development, such as local zoning ordinances.

Risks of Agricultural and Environmental Factors

Imperial’s production of plants may be adversely affected by agricultural and environmental factors beyond its control such as a hurricane at its northern Florida location or severe drought conditions. A hurricane at its northern Florida facility could damage Imperial’s facilities and result in a loss of inventory (see Risks of Loss in Landscape Nursery Business Not Covered by Insurance). Imperial’s production facilities could be adversely affected by severe drought conditions. While management believes that Imperial’s Connecticut and northern Florida operations have sufficient water supplies available, a severe drought could impact Imperial’s ability to adequately maintain its inventory. In addition, a severe drought in Imperial’s main sales markets could substantially impact Imperial’s sales.

Other agricultural or environmental factors which could materially impact Imperial’s growing operations are adverse weather conditions, such as freezing conditions (particularly at the northern Florida facility), plant diseases, pests and the improper use of herbicides and pesticides. The occurrence of any one

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of these factors could materially affect Imperial’s growing operations, and result in a portion of Imperial’s inventory becoming unsalable.

Concentration of Customers

Although no single customer of Imperial accounts for more than 10% of Imperial’s total net sales, Imperial’s ten largest customers, including several mass merchandisers, accounted for 43% of Imperial’s total net sales in fiscal 2005. Management expects that a small number of customers will continue to account for a significant portion of Imperial’s net sales over the next several years. Imperial does not have any material sales contracts with any of its customers. The loss of one of Imperial’s larger customers or the inability to collect accounts receivable from one of Imperial’s larger customers could have an adverse effect on Imperial.

Regulatory Risks

Imperial’s operations are subject to various laws and environmental regulations. The factors to comply with such laws and environmental regulations could result in liabilities being incurred for Imperial’s actions. Recently, there has been an increase in legislation regarding the sale and transportation of plant varieties considered to be “invasive” by state governments. The continuation of such legislation could adversely impact Imperial’s operations by reducing the area where inventories of plants considered to be invasive may be sold or transported.

Risks Associated with the Cost of Raw Materials and Energy Costs

Imperial’s operations could be adversely affected by increases in the cost of growing plants, the costs of certain materials and energy costs. Prices of certain petroleum based materials, such as containers and plastics used in protecting inventory during the winter, have increased as overall petroleum prices have increased. In addition, increases in energy costs and the lack of availability of energy could also adversely impact Imperial’s operations, particularly at Imperial’s Connecticut facility, which uses heat generated from natural gas and propane to maintain certain parts of its inventory during the winter.

Availability of Labor

Labor costs comprise a substantial portion of Imperial’s production costs. Imperial is subject to the Fair Labor Standards Act as well as various federal, state and local regulations that govern matters such as minimum wage requirements, working conditions and worker regulations. As a significant amount of Imperial’s seasonal employees are paid at slightly above minimum wage rates, any increases in such minimum wage rates could adversely impact Imperial’s results. In addition, Imperial depends on a significant amount of seasonal labor, particularly during its peak shipping period in the spring. The lack of the ability to procure such seasonal labor could adversely affect Imperial’s operations.

Availability of Transportation Vendors to Deliver Product

Substantially all of Imperial’s sales are delivered to customers locations using independent contractors for trucking services. The ability to ship products timely, especially during the peak spring shipping season, could be adversely impacted by shortages in available trucking capacity. Significant increases in transportation costs could have a material adverse effect on Imperial’s business, as customers may choose to purchase product from local growers or Imperial may not be able to pass along such increases to customers. The risks regarding transportation, while significant to Imperial’s entire operation, are more acute at its northern Florida facility, because that facility is, on average, more distant from its customers than Imperial’s Connecticut facility.

Risks of Loss in the Landscape Nursery Business Not Covered by Insurance

Imperial carries comprehensive insurance coverage, including property, liability, fire and terrorism on its production facilities and its inventories. The insurance contains policy specifications and insured limits,

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and does not cover all possible losses that Imperial could incur. For example, Imperial’s insurance that covers its inventory at its northern Florida facility is limited for losses that may occur from wind, such as from a hurricane or tornado.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Land Holdings

Griffin is a major landholder in the State of Connecticut, owning approximately 3,900 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.

At December 3, 2005, the book value of undeveloped land holdings, including land improvements, owned by Griffin, principally in the Hartford, Connecticut area, was approximately $13.8 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, Connecticut has been developed, and nursery real estate, is as follows:

Real Estate Held For Development or Sale

 

Nursery Real Estate

 

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

As with many companies engaged in real estate investment and development, Griffin holds its real estate portfolio subject to mortgage debt. See Note 5 to Griffin’s consolidated financial statements included in Item 8 for information concerning the mortgage debt associated with Griffin’s properties.

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 in connection with possible chlordane exceedences on such land.

In 1999, Griffin Land filed land use applications with the land use commissions of Simsbury, Connecticut for Meadowood, a proposed residential development on approximately 363 acres of land. In 2000, Simsbury’s land use commissions issued denials of Griffin Land’s Meadowood application. As a result of those denials, Griffin Land brought several separate, but related, suits appealing those decisions. In 2002, the trial court upheld two of Griffin Land’s appeals and ordered the town’s Planning and Zoning Commissions to approve the Meadowood application. The town appealed those decisions. In 2004, the Connecticut Supreme Court ordered the Zoning Commission to approve the zoning regulations proposed by Griffin Land for Meadowood. The Connecticut Supreme Court also ruled that the denial of the Meadowood application by the Planning Commission can be upheld because Griffin Land had not obtained the required sewer usage permits at the time the application was made to the Planning Commission. The required sewer usage permits for Meadowood have been subsequently obtained. Also in 2004, the Connecticut Supreme Court reversed a lower court decision that had denied Griffin Land a wetlands permit, and remanded the case to Superior Court for further proceedings to determine if a wetlands permit must be issued. On June 6, 2005, the Superior Court ruled that Griffin Land must again apply to the town’s Conservation and Inland Wetlands Commission for a wetlands permit for its proposed Meadowood development. However, the wetlands case has been accepted for review by the Connecticut Appellate Court, and is currently pending there.

In 2004, the Planning and Zoning Commission of Suffield, Connecticut approved Griffin Land’s proposed residential development known as Stratton Farms. An owner of certain land adjacent to Stratton Farms then filed an appeal of the approval issued by the town’s land use commission. On September 26, 2005, the Superior Court of Hartford, Connecticut denied the appeal by the adjoining landowner. On November 1, 2005, the Superior Court denied the adjoining landowner’s motion for reconsideration. The adjoining landowner filed a petition for certification of an appeal to the Connecticut Appellate Court on November 18, 2005. Griffin Land filed an objection on November 23, 2005. On February 8, 2006, the Appellate Court denied the landowner’s petition.

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.

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PART II

ITEM 5.                MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 1, 2006, the number of record holders of common stock of Griffin was approximately 437, 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 $29.00 per share.

Dividend Policy

From the Distribution in 1997 through fiscal 2005, Griffin has not paid any dividends. Griffin’s current policy is to retain any earnings to finance the operation and expansion of its businesses.

Securities Authorized For Issuance Under Equity Compensation Plans

Note:   There are no equity compensation plans that were not approved by security holders.

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ITEM 6.                SELECTED FINANCIAL DATA

The following table sets forth selected statement of operations data for fiscal years 2001 through 2005 and balance sheet data as of the end of each fiscal year. The selected financial data for fiscal 2003, fiscal 2004 and fiscal 2005 are derived from the audited consolidated financial statements included in Item 8 of this report. The selected financial data for fiscal 2002 were derived from the audited consolidated financial statements for that year. The selected financial data for fiscal 2001 were derived from unaudited restated consolidated financial statements. The restatement of the consolidated financial statements for fiscal 2001 was done in conjunction with a restatement of the consolidated financial statements for fiscal years 2000 through 2004, which was completed in fiscal 2005.

(a)           Loss before equity investment in 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.

(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 Ltd. That investment was sold in fiscal 2005 for nominal proceeds.

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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 Connecticut and Massachusetts based real estate business (“Griffin Land”) and Griffin’s subsidiary in the landscape nursery business, Imperial Nurseries, Inc. (“Imperial”). Through March 9, 2004, Griffin had an equity investment in Centaur Communications, Ltd. (“Centaur”), a privately held magazine publishing business based in the United Kingdom. On March 10, 2004, Griffin completed the sale of its investment in Centaur and recorded a substantial gain. The proceeds from that sale included cash and stock in the acquiring company, Centaur Holdings, plc (“Centaur Holdings”). Griffin continues to hold its investment in Centaur Holdings and accounts for that investment as an available-for-sale security.

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, because of the relative magnitude of Griffin’s inventories and real estate assets, accounting methods and estimates related to those assets are critical to the preparation of Griffin’s consolidated financial statements. In many other cases, however, 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 estimates and methods used by Griffin:

Investments: Griffin classifies its investments in debt and equity securities that have readily determinable fair values based upon management’s intent regarding each security. If there is a decline in fair value of available-for-sale securities, Griffin evaluates whether such decline is other than temporary.

Accounts receivable: Management estimates future recoverability of its accounts receivable based on an account’s aging, payment history and financial condition.

Inventories: In applying the principle of the lower of cost or market using the average cost method for nursery stock, management must estimate the future recoverability of certain parts of the inventory that have not matured as planned. Such estimates are based on the physical characteristics of the nursery stock in question and potential sales outlets.

Deferred tax assets: In applying SFAS No. 109 “Accounting for Income Taxes,” management estimates future taxable income from operations, the sale of appreciated assets and tax planning strategies in determining if it is more likely than not that Griffin will realize the benefits of its deferred tax assets.

Impairment of Long-Lived Assets: Griffin evaluates the carrying value of its long-lived assets in relation to their fair values, operating performance and future undiscounted cash flows. In connection with Griffin’s real estate business, development costs that have been capitalized are reviewed periodically for future recoverability.

Summary

In fiscal 2005, Griffin incurred a net loss of $1.4 million, as compared to net income of $31.0 million in fiscal 2004. Fiscal 2004 net income included a $52.2 million pretax gain from the sale of Centaur and a related foreign currency exchange gain. Fiscal 2005 included a $3.2 million pretax gain from the sale of Shemin Acquisition Corp.

In fiscal 2005, Griffin incurred a consolidated operating loss of $4.8 million as compared to a consolidated operating loss of $4.0 million in fiscal 2004. Operating profit at Griffin Land increased in

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fiscal 2005 as compared to fiscal 2004, principally due to gains from property sales in fiscal 2005. The increase in operating profit at Griffin Land was more than offset by an increase in Imperial’s operating loss and higher general corporate expense. Imperial’s operating loss for fiscal 2005 increased over its fiscal 2004 operating loss principally due to higher cost of goods sold in fiscal 2005, reflecting higher inventory charges related to unsaleable inventories and the writedown of certain inventories to their net realizable values. Higher general corporate expense in fiscal 2005 reflects costs incurred in preparing to comply with Section 404 of the Sarbanes-Oxley Act and costs incurred for the restatement of prior years’ financial statements, which was completed in the fiscal 2005 fourth quarter. Consolidated interest expense was lower in fiscal 2005 as compared to fiscal 2004 due to the paydown in fiscal 2004 of the amount outstanding under Griffin’s credit agreement with a portion of the cash proceeds received from the sale of Centaur.

Results of Operations

Fiscal 2005 Compared to Fiscal 2004

Griffin’s consolidated total revenue increased from $41.3 million in fiscal 2004 to $41.9 million in fiscal 2005, reflecting increases of approximately $0.4 million at Griffin Land and approximately $0.2 million at Imperial.

Revenue at Griffin Land increased from $13.8 million in fiscal 2004 to $14.2 million in fiscal 2005. The increase of approximately $0.4 million reflects an increase of $1.1 million in revenue from leasing operations partially offset by a decrease of approximately $0.7 million in property sales revenue, which decreased from $3.0 million in fiscal 2004 to $2.6 million in fiscal 2005. Property sales revenue in fiscal 2004 included $3.1 million from the sale of the remaining development rights at Walden Woods. Property sales revenue in fiscal 2005 included a sale of undeveloped commercial land and several sales of undeveloped residential land.

Griffin Land’s revenue from leasing operations increased from $10.6 million in fiscal 2004 to $11.7 million in fiscal 2005. The $1.1 million increase principally reflects $0.6 million from new leases in fiscal 2005, $0.6 million from leases that were in place for the entire year in fiscal 2005 as compared to being effective for only a portion of fiscal 2004 and $0.3 million from a tenant in connection with an early termination of a lease, partially offset by a $0.4 million decrease in rental revenue as a result of vacancies in fiscal 2005. At the end of fiscal 2005, Griffin Land owned 1,266,000 square feet of industrial, flex and office space, with 989,000 square feet (78%) leased, as compared to 933,000 square feet (83%) leased of Griffin Land’s 1,129,000 square feet at the end of fiscal 2004. The increase in total space in fiscal 2005 as compared to fiscal 2004 reflects a 137,000 square foot industrial building that was completed and came on line in mid 2005. The increase in space leased principally reflects leasing approximately 50% of that new 137,000 square foot industrial building. Market activity, based on inquiries from potential tenants, in the area where Griffin’s properties are located increased in the early part of fiscal 2005 as compared to the previous year, especially for industrial space. However, market activity softened in the second half of fiscal 2005, as evidenced by a decline in inquiries from prospective tenants.

Total revenue at Imperial increased from $27.4 million in fiscal 2004 to $27.7 million in fiscal 2005. Although there was a slight increase in revenue in fiscal 2005 as compared to fiscal 2004, unit sales volume was 7% lower in fiscal 2005 as compared to fiscal 2004. The effect of the decline in unit sales volume was more than offset by selling, on average, larger size material in fiscal 2005, overall improved pricing and increased delivery charges. The improved pricing reflects, in part, increased sales to Imperial’s independent garden center customer segment, which has more favorable pricing than Imperial’s mass merchant and wholesaler and landscaper customer segments.

Griffin incurred a consolidated operating loss of $4.8 million in fiscal 2005, as compared to a consolidated operating loss of $4.0 million in fiscal 2004. The lower operating results reflect an approximately $1.5 million increase in Imperial’s operating loss and an increase of approximately $0.7

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million in general corporate expense, partially offset by an increase of approximately $1.5 million in operating profit at Griffin Land.

Operating profit at Griffin Land increased from $0.8 million in fiscal 2004 to $2.3 million in fiscal 2005, reflecting the following:

(a)           The costs related to rental revenue excluding depreciation and amortization expense, the profit from leasing activities before general and administrative expenses and before depreciation and amortization expense and general and administrative expenses excluding depreciation and amortization expense are disclosures not in conformity with generally accepted accounting principles. They are presented because Griffin believes they are useful financial indicators for measuring the results in its real estate business segment. However, they should not be considered as an alternative to operating profit as a measure of operating results in accordance with generally accepted accounting principles.

Griffin Land’s profit from leasing activities before general and administrative expenses and before depreciation and amortization expense increased from $6.6 million in fiscal 2004 to $7.0 million in fiscal 2005. The $1.1 million increase in rental revenue was partially offset by an increase of $0.7 million in building operating expenses, principally reflecting a $0.2 million increase in snow removal expenses, a $0.1 million increase in utility expenses and charge of $0.2 million to write-off capitalized costs related to a lease that was terminated in the first quarter of the current year. The lease termination was related to a new longer-term lease with a new tenant for that building with lease rates that are equal to the rental rates that Griffin Land would have received over the remaining term of the terminated lease.

Griffin Land’s gain from property sales was $1.9 million in fiscal 2005 as compared to a loss of approximately $0.2 million in fiscal 2004. The gain on property sales in fiscal 2005 reflected sales of undeveloped commercial and residential land that had low cost bases. Fiscal 2004 reflected a loss of $0.2 million on the sale of the remaining development rights at Griffin Land’s Walden Woods residential development because of the high cost basis of that development and the writeoff of $0.2 million of costs on two potential land sale transactions that did not take place, partially offset by the gain of $0.3 million from the sale of undeveloped residential land.

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Griffin Land’s general and administrative expenses increased from $2.3 million in fiscal 2004 to $2.7 million in fiscal 2005. The increase of approximately $0.4 million principally reflects an increase of $0.2 million in bad debt expense and increases aggregating $0.2 million in all other general and administrative expenses. Depreciation and amortization expense increased from $3.3 million in fiscal 2004 to $3.9 million in fiscal 2005. The increase of $0.6 million reflects $0.4 million for the accelerated depreciation of tenant improvements and amortization of intangible assets as a result of the early termination of a lease of office space in fiscal 2005, depreciation on tenant improvements related to new leases in fiscal 2005 and depreciation expense on the new 137,000 square foot industrial building placed in service in mid 2005. The early termination of the lease was agreed to by Griffin Land because that tenant relocated to another of Griffin Land’s office buildings.

Imperial incurred an operating loss of $3.7 million in fiscal 2005 as compared to an operating loss of $2.2 million in fiscal 2004, as follows:

 

Imperial’s operating loss in fiscal 2005 increased over its fiscal 2004 operating loss due principally to higher cost of goods sold, reflecting increased inventory charges in the current year. In fiscal 2005, cost of goods sold included $3.1 million of charges related to disposals for unsalable inventories, inventories expected to be sold below their carrying values and charges to reserve for inventories that will not be sold as a result of production plan changes made in fiscal 2005. Inventory charges included in fiscal 2004 cost of goods sold were approximately $1.1 million. Excluding the additional inventory charges in both periods, Imperial’s gross margin on sales increased from 12.7% in fiscal 2004 to 14.5% in fiscal 2005, principally reflecting improved pricing in the current year as a result of an increase in sales to independent garden center customers. In addition, increased delivery charges to customers and slightly lower delivery costs also contributed to the improved gross margins on sales in fiscal 2005 as compared to fiscal 2004. Although Imperial is seeking to improve its operations and eliminate charges for excess disposals of unsaleable inventory, there is no assurance that such charges will be eliminated in future periods. Imperial’s selling, general and administrative expenses increased by approximately $0.1 million in fiscal 2005 as compared to fiscal 2004, principally reflecting higher consulting costs in fiscal 2005. As a percentage of net sales, selling, general and administrative expenses increased from 16.3% in fiscal 2004 to 16.7% in fiscal 2005.

Griffin’s general corporate expense increased from $2.7 million in fiscal 2004 to $3.4 million in fiscal 2005. The increase principally reflects $0.4 million for preparations to comply with Section 404 of the Sarbanes-Oxley Act, $0.5 million for higher legal and audit expenses due mostly to the restatement of prior year financial statements that was completed in the 2005 fourth quarter, $0.1 million for increased donation costs and $0.1 million for a retrospective insurance charge related to a former affiliate of Griffin. These increases in general corporate expense were partially offset by lower compensation expenses in fiscal 2005, as fiscal 2004 included $0.6 million of incentive compensation expense as compared $0.2 million of incentive compensation expense in fiscal 2005.

In fiscal 2005, Griffin sold its common stock in Shemin Acquisition Corporation for cash proceeds of $5.7 million, resulting in a pretax gain of $3.2 million. Immediately prior to the sale, Griffin exchanged a portion of its Shemin Acquisition common stock for common stock of Shemin Nurseries Holdings Corp. (“Shemin Nurseries”), which operates a landscape nursery distribution business through its subsidiary.

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Griffin has retained its interest in Shemin Nurseries. See Note 9 to the consolidated financial statements in Item 8.

In fiscal 2004, Griffin completed the sale of its investment in Centaur to Centaur Holdings, plc (“Centaur Holdings”), a newly formed company. Griffin received cash proceeds of $68.9 million after transaction expenses of $1.5 million but before income tax payments. In addition to the cash proceeds, Griffin received 6,477,150 shares of common stock of Centaur Holdings, which was valued at approximately $11.7 million based on the £1.00 per share price of the initial public offering of shares by Centaur Holdings and the foreign currency exchange rate in effect at that time. Griffin recorded a pretax gain of $51.1 million on the sale and a foreign currency exchange gain of $1.1 million related to the sale. In connection with the Centaur transaction, substantially all of the stock options of Centaur were exercised immediately prior to the closing of the Centaur transaction, which resulted in Griffin’s ownership being reduced from 35% to 32%. The gain of approximately $2.3 million that resulted from the dilution of Griffin’s ownership is included in the gain on the sale of that investment. In addition, Griffin recorded other comprehensive income of $5.4 million at the time of the transaction in fiscal 2004, reflecting the difference, net of tax, between the value of Griffin’s investment in Centaur Holdings and the book value of the pro rata portion of the investment in Centaur that remained as a result of receiving the Centaur Holdings common stock as a part of the sale proceeds. In fiscal 2004, subsequent to the transaction, Griffin recorded an other comprehensive loss of $0.2 million reflecting changes in the market price of the common stock of Centaur Holdings and changes in the foreign currency exchange rate, each net of taxes, during that time period. In fiscal 2005, Griffin recorded an other comprehensive loss of $0.5 million, reflecting the change in the value of Centaur Holdings common stock and the change in the foreign currency exchange rate, each net of taxes.

Griffin’s consolidated interest expense decreased from $2.9 million in fiscal 2004 to $2.4 million in fiscal 2005. The lower interest expense in fiscal 2005 principally reflects the prior year’s interest expense including $0.3 million for the accelerated amortization of debt issuance costs as a result of the termination of Griffin’s credit agreement and $0.2 million of interest for borrowings under the credit agreement before it was terminated in fiscal 2004. Griffin repaid the amount outstanding under the credit agreement with a portion of the cash proceeds from the sale of Centaur. In addition, in fiscal 2005, $0.3 million of interest was capitalized as compared to a minimal amount of capitalized interest in fiscal 2004. The increase in capitalized interest reflects a greater amount of construction activity in fiscal 2005 as compared to fiscal 2004. Partially offseting the reduction in interest expense from the termination of the credit agreement in fiscal 2004 and the higher amount of capitalized interest in fiscal 2005, was interest expense on a new $12.7 million nonrecourse mortgage, which was completed in fiscal 2005. Griffin’s average outstanding debt in fiscal 2005 was $36.8 million as compared to $36.4 million in fiscal 2004.

Griffin had $1.3 million of interest income, dividend income and gains on short-term investments in fiscal 2005 as compared to $0.5 million in fiscal 2004. The increase reflects Griffin having short-term investments for the entire year in fiscal 2005 as compared to only a portion of fiscal 2004 and generally higher short-term interest rates in fiscal 2005.

Griffin’s effective income tax benefit rate was 47.1% for fiscal 2005 as compared to an effective income tax rate of 33.0% for fiscal 2004. The effective tax rate for fiscal 2005 reflects a federal tax rate of 35%, the reversal of a valuation allowance of $0.3 million related to a deferred tax asset and the effect of state income tax benefits. The deferred tax asset related to a basis difference in Griffin’s investment in Linguaphone Group Ltd., which was sold in the fiscal 2005 fourth quarter.  The fiscal 2004 effective tax rate reflects a 35% rate for federal income taxes adjusted for state income taxes and certain tax credits related to foreign income taxes paid by Centaur. In addition, fiscal 2004 included the release of an income tax liability of $0.2 million upon completion of tax examinations of prior years.

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Fiscal 2004 included equity income of $0.3 million through the date of Griffin’s sale of its investment in Centaur. There was no equity income from Centaur in fiscal 2005.

Fiscal 2004 Compared to Fiscal 2003

Griffin’s consolidated total revenue increased from $37.1 million in fiscal 2003 to $41.3 million in fiscal 2004. The increase in total revenue reflects increases in revenue of approximately $3.5 million at Griffin Land and approximately $0.6 million at Imperial.

Revenue at Griffin Land increased from $10.3 million in fiscal 2003 to $13.8 million in fiscal 2004, principally reflecting an increase in revenue of $3.3 million from property sales. The 2004 property sales included $3.0 million from the sale of Griffin Land’s remaining development rights at its Walden Woods residential development in Windsor, Connecticut and two smaller sales of residential land. There were no property sales in fiscal 2003.

Griffin Land’s revenue from leasing operations increased $0.3 million in fiscal 2004 as compared to fiscal 2003 as rental revenue from new leases, including two new tenants in the 117,000 square foot industrial building that was completed near the end of fiscal 2003 and partially leased in 2004, was partially offset by the effect of vacancies in space that was leased in fiscal 2003 but was unleased for most or all of fiscal 2004. During fiscal 2004, Griffin Land released 77,988 square feet and signed new leases for 96,296 square feet and had leases for 18,241 square feet which were terminated without a replacement tenant. At the end of fiscal 2004, Griffin Land owned 1,129,000 square feet of industrial, flex and office space, with 933,000 square feet (83%) leased, as compared to 858,000 (76%) of Griffin Land’s 1,129,000 square feet leased at the end of fiscal 2003. The increase in space leased principally reflects the partial leasing of the new building discussed above. Market activity, based on inquiries from potential tenants, in the area where Griffin’s properties are located increased in 2004 as compared to 2003, especially for industrial space. Inquiries by prospective tenants and requests for proposals for both office and industrial space were strong at the end of 2004 into mid 2005.

Total revenue at Imperial increased from $26.8 million in fiscal 2003 to $27.4 million in fiscal 2004. Unit sales volume in fiscal 2004 declined 4.5% from the unit sales volume in fiscal 2003. The effect of the decline in unit sales volume in fiscal 2004 was more than offset by increased sales to Imperial’s garden center customer segment, which generally have higher per unit selling prices than units sold to Imperial’s other customer segments.

Griffin incurred a consolidated operating loss of $4.0 million in fiscal 2004 as compared to a consolidated operating loss of $1.9 million in fiscal 2003. The lower operating results reflect decreases of approximately $0.4 million and approximately $0.6 million at Griffin Land and Imperial, respectively, and an increase of approximately $1.1 million in general corporate expense.

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Operating profit at Griffin Land decreased from $1.3 million in fiscal 2003 to $0.8 million in fiscal 2004, reflecting the following:

(a)           The costs related to rental revenue excluding depreciation and amortization expense, the profit from leasing activities before general and administrative expenses and before depreciation and amortization expense and general and administrative expenses excluding depreciation and amortization expense are disclosures not in conformity with generally accepted accounting principles. They are presented because Griffin believes they are useful financial indicators for measuring the results in its real estate business segment. However, they should not be considered as an alternative to operating profit as a measure of operating results in accordance with generally accepted accounting principles.

The decrease of $0.2 million in Griffin Land’s profit from leasing activities before general and administrative expenses and before depreciation and amortization expense principally reflects higher building operating expenses, reflecting higher utility expenses, real estate taxes and repair and maintenance expenses, partially offset by lower snow removal expenses. A portion of the increased operating expenses were not subject to reimbursement from tenants.

Griffin Land’s overall loss from property sales reflects a loss of $0.2 million on the sale of the remaining development rights at Griffin Land’s residential development, Walden Woods, in Windsor, Connecticut, and the writeoff of $0.2 million of costs on two potential property sale transactions that did not take place, partially offset by a gain of $0.3 million from sales of undeveloped residential land. The increase of approximately $0.1 million in general and administrative expenses excluding depreciation and amortization expense reflects higher salary and benefit expenses.

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Imperial’s operating loss increased from $1.6 million in fiscal 2003 to $2.2 million in fiscal 2004, as follows:

 

The $0.6 million increase in Imperial’s operating loss was due principally to a $1.1 million charge for unsaleable inventories in fiscal 2004 as compared to a charge of $0.4 million for unsaleable inventories in fiscal 2003. The increased charge for unsaleable inventories in fiscal 2004 was principally due to disease and other horticultural issues caused by excessive rainfall in the summer and early fall at Imperial’s northern Florida operation, insufficient sell through on certain inventories, particularly smaller size fast growing products at Imperial’s Connecticut operation, and production plan changes whereby certain young liner plants will not be grown into larger sizes. Inventories of the smaller sized products are planned to be much lower in fiscal 2005 than they were in fiscal 2004.

Excluding the additional charges for unsaleable inventories in both years, Imperial’s gross margins on sales increased from 11.9% in fiscal 2003 to 12.7% in fiscal 2004. The increase in gross margins, excluding those charges, principally reflected the improved pricing in fiscal 2004 that resulted from selling a greater percentage of higher priced plants to garden center customers.

Imperial’s selling, general and administrative expenses increased from $4.4 million in fiscal 2003 to $4.5 million in fiscal 2004. As a percentage of net sales, Imperial’s selling, general and administrative expenses were 16.3% of net sales in both fiscal 2003 and fiscal 2004. An increase in selling expenses of $0.3 million in fiscal 2004 as compared to fiscal 2003 was mostly offset by lower marketing and general and administrative expenses. The higher selling expenses reflect higher salesperson compensation expense and higher bad debt expense. The increase in salesperson compensation expense reflects an increased headcount of salespersons and an increase in commissions due to the improved pricing and higher sales to customer segments that generate higher commissions. The increase in bad debt expense reflects the Chapter 11 filing by Frank’s Nursery & Crafts, Inc. (“Frank’s”), one of Imperial’s larger customers. Imperial’s bad debt expense on the Frank’s bankruptcy was mitigated by the subsequent sale of its claim, which recovered a significant percentage of the total amount due from Frank’s at the time it declared bankruptcy. The lower marketing expenses principally reflect the inclusion in fiscal 2003 of expenses related to the introduction of plants to be sold under the new “Novalis” trade name. The lower general and administrative expenses reflect lower donation and contribution expenses.

Griffin’s general corporate expense increased from $1.6 million in fiscal 2003 to $2.7 million in fiscal 2004. The increase principally reflects incentive compensation expense of $0.6 million in fiscal 2004 as compared to no incentive compensation expense in fiscal 2003. In addition, general corporate expense increased $0.2 million for capital based state and local taxes and $0.2 million for increased audit expenses.

In fiscal 2004, Griffin completed the sale of its investment in Centaur to Centaur Holdings, a newly formed company. Griffin received cash proceeds of $68.9 million after transaction expenses of $1.5 million but before income tax payments. In addition to the cash proceeds, Griffin received 6,477,150 shares of common stock of Centaur Holdings, which was valued at approximately $11.7 million based on the £1.00 per share price of the initial public offering of shares by Centaur Holdings and the foreign currency exchange rate in effect at that time. Griffin was prohibited from selling its Centaur Holdings common

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stock for six months from the transaction date. That restriction lapsed in the 2004 fourth quarter. Griffin recorded a pretax gain of $51.1 million on the sale and a foreign currency exchange gain of $1.1 million related to the sale. In connection with the Centaur transaction, substantially all of the stock options of Centaur were exercised immediately prior to the closing of the Centaur transaction, which resulted in Griffin’s ownership being reduced from 35% to 32%. The gain of approximately $2.3 million that resulted from the dilution of Griffin’s ownership is included in the gain on the sale of that investment. In addition, Griffin recorded other comprehensive income of $5.4 million at the time of the transaction, reflecting the difference, net of tax, between the value of Griffin’s investment in Centaur Holdings and the book value of the pro rata portion of the investment in Centaur that remained as a result of receiving the Centaur Holdings common stock as a part of the sale proceeds. Subsequent to the transaction, Griffin recorded an other comprehensive loss of $0.2 million reflecting changes in the market price of the common stock of Centaur Holdings and changes in the foreign currency exchange rate.

Griffin’s consolidated interest expense increased from $2.8 million in fiscal 2003 to $2.9 million in fiscal 2004. Higher interest expense in the 2004 first quarter as compared to the 2003 first quarter and the accelerated amortization of $0.3 million of unamortized debt issuance costs related to the termination of Griffin’s credit agreement was offset by lower interest expense in the balance of the year as a result of the paydown of the entire amount outstanding under the credit agreement with a portion of the proceeds from the sale of Centaur. Griffin’s average outstanding debt in fiscal 2004 was $36.4 million as compared to $39.7 million in fiscal 2003.

Griffin had $0.5 million of interest income, dividend income and gains on short-term investments in fiscal 2004 from the investment of the remaining proceeds from the sale of Centaur, after repaying the Credit Agreement debt and making estimated income tax payments.

Griffin’s effective income tax provision rate was 33.0% for fiscal 2004, as compared to an effective income tax benefit rate of 36.8% in fiscal 2003. The 2004 effective income tax provision rate principally reflects a 35% rate for federal income taxes adjusted for certain tax credits related to foreign income taxes paid by Centaur and a basis difference on that investment. In addition, the fiscal 2004 effective tax rate includes the release of an income tax liability of $0.2 million upon completion of tax examinations of prior years. The effective income tax benefit rate for fiscal 2003 reflects a 34% rate for federal income taxes adjusted for state income taxes.

Griffin’s fiscal 2004 results include equity income of $0.3 million through the date of Griffin’s sale of its investment in Centaur, as compared to equity income of $0.4 million in fiscal 2003. Griffin’s 2003 equity income included a charge, of which Griffin’s allocable share was $0.5 million, to accrue future costs (less expected sublease income) for an operating lease of office space that was no longer used by Centaur. Excluding the effect of the charge of future lease costs, the lower equity results reflected the sale of Griffin’s investment early in fiscal 2004 as compared to recording equity income for the entire year in fiscal 2003.

Off Balance Sheet Arrangements

Griffin does not have any material off balance sheet arrangements.

Liquidity and Capital Resources

Net cash used in operating activities decreased from $46.9 million in fiscal 2004 to $12.8 million in fiscal 2005. The $34.1 million decrease in net cash used in operating activities principally reflects a decrease of $19.4 million of cash used to acquire trading securities in fiscal 2005 as compared to fiscal 2004 and the effect of income tax payments of $16.0 million in fiscal 2004. There were no net income tax payments made in fiscal 2005.

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In fiscal 2005, net cash used in investing activities was $6.8 million, as compared to net cash provided by investing activities of $65.0 million in fiscal 2004. Net cash provided by investing activities in fiscal 2004 included cash proceeds of $69.9 million from the sale of Centaur and a related foreign currency exchange gain and $3.0 million of cash proceeds from property sales. Fiscal 2005 includes cash proceeds of $7.4 million from the sale of Griffin’s investment in Shemin Acquisition and a subsequent distribution from Griffin’s remaining investment in Shemin Nurseries Holding Corp. and cash proceeds of $2.5 million from property sales. Cash used for additions to real estate held for sale or lease increased from $7.2 million in fiscal 2004 to $16.3 million in fiscal 2005, reflecting increased investment in Griffin Land’s real estate business as a result of the completion of construction in mid 2005 of a 137,000 square foot industrial building in the Tradeport that had been started in fiscal 2004, the construction of another 137,000 square foot industrial building in the Tradeport that was started in fiscal 2005 and substantially completed at the end of the year and tenant improvements by Griffin Land related to several new leases executed in the current year. Additions to property and equipment, principally for Imperial were $0.7 million in fiscal 2005 and $0.6 million in fiscal 2004. The fiscal 2005 expenditures were principally to purchase additional portable shelving units that are used on trucks in delivering product to customers. The additional shelving units contributed to reducing freight costs in fiscal 2005 by reducing the number of empty trucks required to return to Imperial’s Florida location in order to have shelving units available for another shipment during the peak spring shipping season. The fiscal 2004 additions at Imperial were principally for completion of the expansion of its Florida operations.

Net cash provided by financing activities was $12.0 million in fiscal 2005 as compared to net cash of $9.2 million used in financing activities in fiscal 2004. The net cash provided by financing activities in fiscal 2005 includes the proceeds from executing a $12.7 million nonrecourse mortgage on two industrial buildings in the Tradeport. This new mortgage has an interest rate of 5.46% and a ten year term with payments based on a thirty year amortization schedule. In addition, the exercise of stock options in fiscal 2005 generated $0.5 million of cash. Partially offsetting these items was $0.9 million used to reduce outstanding mortgage debt and $0.3 million of cash used for debt issuance costs. The net cash used in financing activities in fiscal 2004 principally reflects the repayment of all of Griffin’s outstanding borrowings under its credit agreement with a portion of the cash proceeds Griffin received from the sale of Centaur. The credit agreement was subsequently terminated in fiscal 2004 after the repayment was made.

In the near-term, Griffin plans to continue to invest in its real estate business. As a result of the recent completion of new leases for industrial space, Griffin Land intends to begin construction in fiscal 2006, on speculation, of the shell of another industrial building in the Tradeport. The cost of site work in the portion of Tradeport where this new building and several other future Tradeport buildings will be located is expected to be higher than site costs incurred on previous Tradeport construction. Griffin Land expects to continue to build out the interiors of its other buildings as leases are completed and to continue to invest in infrastructure improvements required for present and future development in its office and industrial parks.

On February 3, 2006, Griffin Land  executed a purchase and sale agreement to sell to Walgreen Co. (“Walgreen”) approximately 130 acres of undeveloped land in the Tradeport. The purchase price is $13 million, before transaction expenses, to be paid in cash at closing. Completion of this transaction is contingent on several factors, including: (i) obtaining all required approvals from governmental authorities for Walgreen’s proposed construction of a distribution facility on the land to be sold; (ii) obtaining a certificate from the Connecticut State Traffic Commission (the “STC Certificate”) approving both the construction of Walgreen’s proposed facility and the construction of additional buildings by Griffin Land having more than an additional one million square feet of light industrial and warehouse space; and (iii) Griffin Land receiving satisfactory site plan approval for the additional square footage to be built under the STC Certificate. Griffin Land’s buildings, if built, would be built over time based on anticipated demand, on other Tradeport land currently held by Griffin Land. Griffin Land has no presently identified

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tenants for this additional space. The completion of this transaction is also subject to Walgreen’s satisfactory completion of due diligence on the land to be sold. Obtaining the required approvals and due diligence on this transaction are expected to require a number of months with a closing expected to take place in mid 2006 if all conditions are satisfied. If completed under its present terms, Griffin Land expects to record a substantial pretax gain from this proposed transaction. There is no assurance that this proposed transaction will be completed under its present terms, or at all.

In 2004, Griffin Land received approval for its proposed residential development, Stratton Farms, in Suffield, Connecticut. An owner of certain land adjacent to Stratton Farms filed an appeal of the approvals issued by the town’s land use commissions. A court ruling denied that appeal, and the owner of the adjacent land requested a hearing. That request was also denied by the court and the owner filed a petition for certification of an appeal of the court’s decision. The court then denied the landowner’s petition. Griffin Land started infrastructure work on this residential development in the 2005 fourth quarter, as all required permits were received. Griffin Land expects to continue with the infrastructure work in fiscal 2006. Griffin Land expects to begin offerings for sales of residential lots of this planned 50 unit residential subdivision in fiscal 2006. Griffin Land is also continuing development activities to obtain approvals for its proposed residential development in Simsbury, Connecticut. Griffin Land intends to proceed with other residential development plans on its land holdings that are also appropriate for that use.

Griffin’s payments (including principal and interest) under contractual obligations as of December 3, 2005 are as follows:

(1)          Includes obligations for tenant improvement work for new leases at Griffin Land and for the purchase of raw materials by Imperial.

(2)          Includes Griffin’s deferred compensation plan and other postretirement benefit liabilities.

As of December 3, 2005, Griffin had cash and short-term investments of approximately $42.2 million. Management believes that the significant amount of cash and short-term investments will be sufficient to finance the working capital requirements of its businesses and fund continued investment in Griffin’s real estate assets for the foreseeable future. Griffin Land may also continue to seek nonrecourse mortgage placements on selected properties. Griffin also anticipates seeking to purchase either or both land and buildings with a substantial portion of its cash and short-term investment balances. There are no specific real estate acquisitions planned at this time. Such acquisitions may or may not occur based on many factors, including real estate pricing.

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs (an amendment of ARB No. 43, Chapter 4).” This new standard requires the recognition of abnormal inventory costs related to idle facility expenses, freight, handling costs and spoilage as period costs. SFAS No. 151 will be effective for Griffin in fiscal 2006 and is not expected to have a material impact on Griffin’s financial statements.

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In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This new standard supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R requires an issuer to recognize the cost of employee services received in exchange for an award of equity instruments. Therefore, the cost of rewarding individuals with equity instruments will be recognized in Griffin’s financial statements rather than disclosed in a pro forma statement in the financial statement footnotes. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 related to the valuation of share-based payment arrangements under SFAS No. 123R. SFAS No. 123R will be effective for Griffin in the first quarter of fiscal 2006. Management expects to adopt SFAS 123R in the 2006 first quarter using the modified prospective method, and expects that the adoption of SFAS No. 123R will decrease Griffin’s annual basic and diluted per share results by $0.01 to $0.04 per share.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets” (“SFAS No. 153”). This Statement amends the guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions” (“APB No. 29”). APB No. 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar assets, requiring that some nonmonetary exchanges be recorded on a carryover basis. SFAS No. 153 eliminates the exception to fair value for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance, that is, transactions that are not expected to result in significant changes in the cash flows of the reporting entity. SFAS No. 153 was effective for Griffin in the fourth quarter of fiscal 2005 and did not have an impact on Griffin’s consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations (an interpretation of FASB Statement No. 143)” (“Fin No. 47”). Fin No. 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets. Fin No. 47 will be effective for Griffin in fiscal 2006. Griffin is evaluating the impact of this new pronouncement on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS No. 154”). This new standard requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principles, unless it is impracticable to do so. SFAS No. 154 also provides that a correction of errors in previously issued financial statements should be termed a “restatement”. The new standard is effective for accounting changes and correction of errors in fiscal years beginning after December 15, 2005.

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 improved return on assets of Imperial’s operations, construction and leasing of additional facilities in the real estate business, approval of proposed residential subdivisions, or completion of property sales currently under contract. The projected information disclosed herein is based on assumptions and 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.

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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 included 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 did not have any variable rate debt outstanding during the fiscal year ended December 3, 2005.

Griffin is exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on market values of Griffin’s cash equivalents. These investments generally consist of overnight investments that are not significantly exposed to interest rate risk. Griffin’s short-term investments generally consist of debt instruments with maturities ranging from one to ten months, with a weighted average maturity of approximately six months as of December 3, 2005. These investments 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.

In connection with the sale of its investment in Centaur in the fiscal year ended November 27, 2004, Griffin entered into a foreign currency exchange forward contract with Fleet National Bank to hedge Griffin’s exposure to the short-term fluctuation in the foreign currency exchange rate between the time the definitive agreement on the sale of Centaur was completed and the closing of the transaction and receipt of the sale proceeds. Griffin fulfilled its obligation under the contract with the proceeds from the sale of Centaur.

Griffin does not have foreign currency exposure in operations. Griffin does have an investment in a public company, Centaur Holdings, plc based in the United Kingdom. The ultimate liquidation of that investment 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 Statements 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 Sheets
(dollars in thousands, except per share data)

		Dec. 3, 2005		Nov. 27, 2004
ASSETS
Current Assets
Cash and cash equivalents		$   1,207		$   8,827
Short-term investments, net		40,985		30,173
Accounts receivable, less allowance of $311 and $188		2,696		2,162
Inventories, net		33,184		32,184
Deferred income taxes		1,770		1,572
Other current assets		3,228		3,423
Total current assets		83,070		78,341
Real estate held for sale or lease, net		78,401		65,675
Property and equipment, net		10,686		11,310
Investment in Centaur Holdings, plc		10,440		11,290
Other assets		6,053		10,274
Total assets		$ 188,650		$ 176,890
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Current portion of long-term debt		$   1,060		$       855
Accounts payable and accrued liabilities		7,089		6,044
Total current liabilities		8,149		6,899
Long-term debt		43,159		31,479
Deferred income taxes		780		1,758
Other noncurrent liabilities		3,705		2,624
Total liabilities		55,793		42,760
Commitments and Contingencies (Note 12)
Stockholders’ Equity
Common stock, par value $0.01 per share, 10,000,000 shares authorized, 4,999,604 and 4,959,162 shares issued and outstanding, respectively		50		50
Additional paid-in capital		95,339		94,699
Retained earnings		32,809		34,177
Accumulated other comprehensive income, net of tax		4,659		5,204
Total stockholders’ equity		132,857		134,130
Total liabilities and stockholders’ equity		$ 188,650		$ 176,890

 

See Notes to Consolidated Financial Statements.

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GRIFFIN LAND & NURSERIES, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Fiscal Years Ended December 3, 2005, November 27, 2004 and November 29, 2003
(dollars in thousands)

 

See Notes to Consolidated Financial Statements.

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GRIFFIN LAND & NURSERIES, INC.
Consolidated Statements 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 unless otherwise noted, 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.

Through March 9, 2004, Griffin held an investment in Centaur Communications, Ltd. (“Centaur”) which it accounted for under the equity method of accounting for investments. Centaur reported on a June 30 fiscal year in accordance with generally accepted accounting principles in the United Kingdom. However, Griffin reported its share of equity in Centaur’s earnings (losses) based upon Griffin’s fiscal year. Griffin converted Centaur’s financial statements to accounting principles generally accepted in the United States of America and translated balance sheet information at the exchange rate as of the balance sheet date and used the average exchange rates over the respective periods to translate the statements of operations. On March 10, 2004 Griffin completed the sale of Centaur (see Note 2).

Business Segments

Griffin is engaged in the landscape nursery and real estate businesses. Griffin’s real estate division, Griffin Land, builds, leases and manages commercial and industrial properties and develops residential subdivisions on its land in Connecticut and Massachusetts. Imperial, Griffin’s subsidiary in the landscape nursery segment, is engaged in growing plants in containers which are sold principally to mass merchandisers, home centers, garden centers, wholesalers and landscape contractors.

Fiscal Year

Griffin’s fiscal year ends on the Saturday nearest November 30. Fiscal 2005 ended December 3, 2005 and contained 53 weeks. Fiscal years 2004 and 2003 each contained 52 weeks and ended November 27, 2004 and November 29, 2003, respectively. The effect of an additional week in fiscal 2005 as compared to fiscal 2004 and fiscal 2003 was not material to Griffin’s results of operations or cash flows.

Cash and Cash Equivalents

Cash equivalents are composed of highly liquid investments with insignificant interest rate risk and an original maturity of three months or less, and are recorded at market. For the fiscal years ended December 3, 2005 and November 27, 2004, $1,188 and $8,791, respectively, of the cash and cash equivalents included on Griffin’s consolidated balance sheets were held in the form of money market funds.

Investments

Griffin’s short-term investments are comprised of debt securities and are accounted for as trading securities under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accordingly, the securities are carried at their fair values based upon the quoted market prices of those investments at the balance sheet date, and the net realized and unrealized gains and losses on these investments are included in pretax income (loss).

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GRIFFIN LAND & NURSERIES, INC.
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands unless otherwise noted, except per share data)

1.   Summary of Significant Accounting Policies (Continued)

Griffin’s investment in the common stock of Centaur Holdings, plc (“Centaur Holdings”) is accounted for as an available-for-sale security under SFAS No. 115, whereby increases or decreases in the value of this investment, net of income taxes, along with the effect of changes in the foreign currency exchange rate, are included in other comprehensive income (loss).

Through May 30, 2005, Griffin had an investment in Shemin Acquisition Corporation (“Shemin Acquisition”) which it received as part of the consideration in the fiscal 2001 sale of a portion of Imperial’s landscape nursery business. Griffin accounted for its investment in Shemin Acquisition under the cost method of accounting for investments. On May 31, 2005, Griffin exchanged a portion of its investment in Shemin Acquisition for common stock of Shemin Nurseries Holding Corp. (“Shemin Nurseries”), which operates a landscape nursery distribution business through its subsidiary. Griffin then sold its remaining investment in Shemin Acquisition. Griffin’s investment in Shemin Nurseries Holding Corp. (“Shemin Nurseries”) is accounted for under the cost method of accounting for investments, and is included in other assets on Griffin’s balance sheet (see Note 9).

Griffin’s investment in a real estate joint venture is accounted for under the equity method. This investment is included in other assets on Griffin’s balance sheet.

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 complies with the disclosure provisions of SFAS No. 123 and SFAS No. 148, 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 reported results would have been the following pro forma amounts under the method prescribed by SFAS No. 123:

 

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GRIFFIN LAND & NURSERIES, INC.
Notes to Consolidated Financial Statements (Continued)
(dollars in thousands unless otherwise noted, except per share data)

1.   Summary of Significant Accounting Policies (Continued)

The weighted average fair values of each option granted during fiscal 2005, fiscal 2004 and fiscal 2003, were $11.15, $11.59, and $5.63, respectively, estimated as of the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the model to calculate the fair value of each option:

 

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. Repair and maintenance costs are expensed as incurred.

Upon disposal of property, plant and equipment, the appropriate accounts are reduced by the related costs and accumulated depreciation. The resulting gains or losses are reflected in the consolidated statements of operations.

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.

Upon disposal of real estate held for sale or lease, the appropriate accounts are reduced by the related costs and accumulated depreciation. The resulting gains or losses are reflected in the consolidated statements of operations.

Impairment of Investments in Long-Lived Assets

Griffin periodically reviews its 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 an underlying asset if its fair value is determined to be less than its book value.

Griffin also periodically reviews the recoverability of its development costs, including expected remediation costs on current projects, that are included in real estate held for sale or lease. To the extent that carrying value exceeds the fair value of a project’s development costs, an impairment loss is recorded. There were no impairment losses recorded in the fiscal years ended December 3, 2005, November 27, 2004 and November 29, 2003.

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