INDUS REALTY TRUST, INC. - Annual Report: 2006 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

x                              ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 2, 2006

OR

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12879

GRIFFIN LAND & NURSERIES, INC.

(Exact name of registrant as specified in its charter)

 

(212) 218-7910

(Registrant’s Telephone Number, Including Area Code)

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 $81,767,000 based on the closing sales price on the Nasdaq National Market on June 2, 2006, 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 January 26, 2007, 5,132,663 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 approximate 4% interest in Centaur Media, plc (“Centaur Media”), a publicly held magazine and information services publisher based in the United Kingdom, and an approximate 14% interest in Shemin Nurseries Holding Corp. (“SNHC”), a private company that operates a landscape nursery distribution business through its subsidiary, Shemin Nurseries, Inc. (“Shemin Nurseries”).

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. In early 1997, prior to the Distribution, 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 expects to continue to sell some of its land holdings either before or after obtaining development approvals. Griffin Land may seek to acquire and develop properties not presently owned and expects to continue to seek to acquire existing buildings. The headquarters for this operation is in Bloomfield, Connecticut.

The majority of Griffin Land’s real estate holdings are located in the Hartford, Connecticut area, particularly in the northwest quadrant of the greater Hartford area. The Hartford market has experienced some recovery from its decline several years ago. The recovery has been more evident in the industrial warehousing/distribution and light manufacturing sectors. The office market continues to be weak, with the northern office submarket having the highest vacancy rate of all of Hartford’s submarkets. Recently, however, interest has increased for large blocks of office space and land parcels for development of user-owned office facilities. In the early part of fiscal 2006, there were a substantial number of requests for proposals for space in both industrial and office buildings. Although market activity softened in the second and third quarters of the year, as evidenced by a decline in inquiries from prospective tenants and brokers, these inquiries increased in the fourth quarter. There can be no assurance as to the direction of the real estate market in this region in the near future.

In fiscal 2004, Griffin Land leased approximately 78,000 square feet of additional space (net of vacated space) and leases aggregating approximately 78,000 square feet were extended. In fiscal 2005, Griffin Land leased approximately 56,000 square feet of additional space (net of vacated space) and leases aggregating approximately 90,000 square feet were extended. In fiscal 2006, Griffin Land leased approximately 206,000 square feet of additional space (net of vacated space) and leases aggregating approximately 167,000 square feet were extended. Approximately 137,000 square feet of the newly leased space in fiscal 2006 was in a new industrial building that was completed and placed in service at the beginning of fiscal 2006. That building is now fully leased.

In mid 2006, Griffin Land started, and has now substantially completed, construction of the shell of a new 127,000 square foot industrial building. In the latter part of fiscal 2006, Griffin Land started

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construction of the foundation of the next industrial building to be built, which will be approximately 149,000 square feet. Construction of the shell of that next industrial building is expected to start in the 2007 second quarter. All of this new construction is being done on speculation. Currently, there have not been any leases executed for these new facilities.

In June 2006, Griffin Land sold to Walgreen Co. (“Walgreen”) approximately 130 acres of undeveloped land in the New England Tradeport (“Tradeport”), Griffin Land’s 600 acre industrial park located in Windsor and East Granby, Connecticut. In August 2006, Griffin Land acquired an approximately 308,000 square foot warehouse facility in Manchester, Connecticut for its portfolio of properties held for lease. This facility was vacant at the time of the acquisition and is currently being marketed for lease.

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

The major portion of Griffin Land’s current commercial and industrial development effort is focused on the 600 acre tract of land owned by Griffin Land near Bradley International Airport and Interstate 91 known as the New England Tradeport, located in Windsor and East Granby, Connecticut. As of December 2, 2006, Tradeport contained, excluding the shell of a new 127,000 square foot building (the “new shell”), approximately 786,000 square feet of warehouse and light manufacturing space built and owned by Griffin Land, of which approximately 94% was leased, and a bottling and distribution plant built by the Pepsi Bottling Group (“Pepsi”) on land sold to Pepsi by Griffin Land in the early 1990s. A large distribution facility is currently being built in Tradeport by Walgreen on the land sold to Walgreen by Griffin Land in June 2006 (see below). In mid 2006, Griffin Land started construction, on speculation, of the new shell, which is intended for warehousing and light manufacturing. The new shell was completed in the first quarter of fiscal 2007 and is ready for tenant improvement work as leases for space in this building are signed. The new shell is on an approximate 90 acre parcel within Tradeport that received State Traffic Commission approval for approximately 900,000 square feet of new construction in connection with the fiscal 2006 sale of undeveloped land to Walgreen. During fiscal 2006, Griffin Land did much of the site work for the development of this 90 acre parcel. As of December 2, 2006, $39.7 million was invested (net book value) in buildings owned by Griffin Land that are located in Tradeport (including the new shell) and $5.5 million was invested (net book value) by Griffin Land in the undeveloped land there. As of December 2, 2006, all of Griffin Land’s existing buildings at Tradeport, other than the new shell, were mortgaged for an aggregate of approximately $37.0 million.

On June 9, 2006, Griffin Land sold approximately 130 acres of undeveloped land in Tradeport to Walgreen for their construction of a distribution center. The sale generated cash proceeds of $13.0 million, before transaction expenses. As provided under the terms of the sale contract and as required under a revised State Traffic Commission certificate (the “STC Certificate”) covering the area in Tradeport located in Windsor, certain improvements to existing roads are required. The cost of these improvements is the responsibility of Griffin, however, a portion of the costs will either be reimbursed from Walgreen or the improvement work will be performed by the town of Windsor. Accordingly, approximately $5.1 million of the revenue and approximately $3.8 million of the pretax gain on this transaction have not been recognized in Griffin’s fiscal 2006 statement of operations and will be recognized in future periods as the road improvements are completed.

In fiscal 2006, tenants took occupancy of approximately 137,000 square feet in an industrial building in Tradeport that was constructed in fiscal 2005 and placed in service at the beginning of fiscal 2006. Leases

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for approximately 69,000 of the 137,000 square feet in this building were executed in fiscal 2005 prior to the completion of construction with leases covering the balance of the square footage in this building being executed in fiscal 2006. This new building is currently fully leased. In addition, in fiscal 2006, Griffin Land executed leases for approximately 76,000 square feet of previously vacant space in Tradeport and extended Tradeport leases covering approximately 163,000 square feet. The only currently vacant spaces in Tradeport at the end of fiscal 2006 (excluding the new shell) were a total of approximately 44,000 square feet in two of Griffin Land’s older industrial buildings. Subsequent to the end of fiscal 2006, a lease for 10,000 square feet in one of the older industrial buildings was executed. A summary of Griffin Land’s square footage owned and leased in Tradeport at the end of each of the past three fiscal years and leases in the Tradeport scheduled to terminate during each of the next three fiscal years are as follows:

 

 

Griffin Land expects to negotiate renewals with its tenants that have expiring leases.

In connection with the June 2006 land sale to Walgreen, the State Traffic Commission of Connecticut approved a revised STC Certificate which will allow Griffin Land to construct an additional approximately 1.1 million square feet of light manufacturing and warehouse space in Tradeport (including the new shell). Griffin Land has no presently identified tenants for this additional space, which is expected to be built over time as demand warrants. Griffin Land expects that the construction and leasing of all of the space permitted under the STC Certificate will take place over the next several years. After the construction of all of the additional square footage permitted under the STC Certificate as currently planned, there will remain an additional approximate 152 acres of undeveloped land in Tradeport. There are no State Traffic Commission or other approvals (other than zoning) for the development of this additional land currently in place, and Griffin Land believes that additional significant infrastructure improvements may be required to obtain approvals to develop this 152 acres.

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 Tradeport. Griffin Land may also seek to acquire additional developed and/or undeveloped land parcels both in Connecticut and elsewhere to expand the industrial/warehouse portion of its real estate business.

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 that have an aggregate of approximately 161,000 square feet, a single story approximately 48,000 square foot office building, a 165,000 square foot light manufacturing building and the small restaurant building. As of December 2, 2006, $20.6 million was invested (net book value) in Griffin Land’s buildings in Griffin Center

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and $1.9 million was invested by Griffin Land in the undeveloped land there. Three of Griffin Land’s existing buildings are mortgaged for an aggregate of approximately $14.5 million.

As of December 2, 2006, approximately 306,000 square feet in Griffin Center was leased, comprising approximately 80% of Griffin Land’s total space in Griffin Center. In fiscal 2005, a tenant that had occupied approximately 44,000 square feet in one of Griffin Land’s multi-story office buildings relocated into approximately 32,000 square feet in Griffin Land’s single story office building, which resulted in the single story office building becoming fully leased. The space vacated by that tenant in the multi-story office building has remained vacant. A summary of Griffin Land’s square footage owned and leased in Griffin Center at the end of each of the past three fiscal years and leases in Griffin Center scheduled to terminate during each of the next three fiscal years are as follows:

 

 

Griffin Land expects to negotiate renewals with its tenants that have expiring leases.

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 original lease with JDS for the term of the original lease with JDS. This transaction resulted in a charge of approximately $0.2 million in fiscal 2005 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 approximately 7,000 square feet.

On September 8, 2006, Griffin entered into a contract to sell approximately 73 acres of undeveloped land in Griffin Center for cash proceeds of $6.8 million. Completion of this transaction is dependent on a number of contingencies, including the buyer receiving governmental approvals, including approval from the Connecticut State Traffic Commission, for the buyer’s planned development of office facilities on the site. There can be no assurance that this transaction will be completed under its current terms, or at all.

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 in Griffin Center South 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 2, 2006, Griffin Land’s aggregate investment (net book value) in its buildings in Griffin Center South was $9.3 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 2, 2006, approximately 147,000 square feet of space in the Griffin Center South buildings owned by Griffin Land was leased, comprising 63% of Griffin Land’s total space in Griffin Center South. A summary of Griffin Land’s square footage owned and leased in Griffin Center South at

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the end of each of the past three fiscal years and leases in Griffin Center South scheduled to terminate during each of the next three fiscal years are as follows:

 

 

Griffin Land expects to negotiate renewals with tenants that have expiring leases.

Other Office and Industrial Developments

In August 2006, Griffin Land completed the acquisition of an approximate 308,000 square foot warehouse facility in Manchester, Connecticut. The purchase price of $13.5 million was paid in cash at closing. The facility was used in the operations of its previous owner, and was vacant at closing. The purchase of this warehouse facility was part of a Section 1031 exchange whereby income taxes related to the gain on the June 2006 land sale to Walgreen and a smaller land sale completed in fiscal 2006 were deferred. Griffin Land is currently marketing this facility for lease. Currently, there have not been any leases executed for this newly acquired building.

Two additional parcels appropriate for office or industrial uses are currently marketed for development, including approximately 103 acres in the South Windsor Technology Center and approximately 20 acres in the Day Hill Technology Center in Windsor. On May 19, 2006, Griffin Land entered into an agreement with a prospective buyer to sell the approximately 103 acres of undeveloped land in the South Windsor Technology Center. Based on the terms of the agreement, Griffin Land, which holds a 75% interest in that property through a joint venture, would receive proceeds from the sale of approximately $2.7 million, before expenses. Completion of this transaction is subject to several contingencies, including the buyer receiving governmental approvals, including approval from the Connecticut State Traffic Commission, for their proposed development on this site. There can be no assurance that this transaction will be completed under its 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 2, 2006, the book value of the land for this proposed development, including design, development and legal costs, was $4.8 million. There have been discussions with town officials regarding potential settlement options for Meadowood. In January 2007, Griffin Land and the town of Simsbury jointly filed a court motion in anticipation of the parties potentially presenting a settlement proposal to the court for its review and approval. Management believes that the development costs for Meadowood that have been expended to date will be recovered.

Griffin Land owns another approximate 500 acres in Simsbury, portions of which are zoned residential and other portions of which are zoned for industrial use. Not all of such land is developable. The land currently zoned for industrial use is probably more suited to commercial use. Griffin Land may seek to develop or sell such lands if approvals can be obtained.

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 called Stratton Farms. A suit, brought by an adjoining landowner, challenging that approval was denied, and subsequent appeals by that landowner were also denied by the courts. 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. In fiscal 2006, Griffin Land entered into a contract with a home builder to sell the fifty residential lots over a three year time period. The first sale, which encompassed ten residential lots, was completed in the 2006 third quarter.

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Griffin Land is also in discussions to sell a portion of its undeveloped land in Suffield to a state agency where it will be used for conservation purposes.

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 will terminate on February 28, 2007 and is not expected to be extended. Some of the land that was leased under the Agricultural Lease may continue to be leased for farming on an annual basis.

Griffin Land is evaluating its other properties for residential development in the future. 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 of containerized landscape nursery stock and, to a small extent, a broker of wholesale landscape nursery stock. The landscape nursery industry is extremely fragmented and Imperial believes that its sales volume places it among the fifty largest landscape nursery growers in the country.

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). 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 the volume of production at that facility that was started several years earlier. A substantial portion of the products that were part of the increased Florida production were of larger sizes, requiring extended growing cycles. 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 available for container growing operations, however not all available space is being utilized. Imperial also uses approximately 45 acres of land in Connecticut owned by Griffin to grow liners (starter plants) in the field 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.

Imperial’s containerized 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, no single one of which represented more than 10% of Imperial’s total sales in fiscal 2006 and fiscal 2005. However, aggregate net sales to Imperial’s ten largest customers, including several large mass merchandisers, accounted for 35% of Imperial’s total net sales in fiscal 2006 and 36% of Imperial’s total net sales in fiscal 2005.

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

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flowering shrubs in Florida and rhododendron, evergreens and flowering shrubs in Connecticut. Other major product categories in Florida include nandina, magnolia 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. 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 that 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.

In 2006, Imperial reduced production at its Florida farm, which resulted in a reduction of the space utilized for growing plants at that facility and a reduction of the inventory level maintained at that facility. The reduction in the space utilized for growing started in the second half of the year as the number of new plants potted and the step-up of smaller sized plants to larger sizes was less than the amount they have been over the past several years. The reduction in inventory was intended to better match inventory quantities with expected sales volume and with the shorter shipping season from the Florida farm. 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 that facility is expected to remain consistent with the 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 reduction in product to be grown in Florida in order to better align its production with expected sales volume 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 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 2006, Imperial’s cost of goods sold includes $0.8 million for inventory losses. The inventory losses reflect a higher than expected level of disposals of unsaleable product, increases to inventory reserves because the carrying costs of certain inventories exceed their net realizeable values and the writeoff of certain inventories that will no longer be sold due to changes in product mix, principally at Imperial’s northern Florida operation. The charge for unsaleable inventories and net realizeable value issues was $3.1 million in fiscal 2005 and $1.1 million in fiscal 2004.

Shipping capacity and shipping expense are major cost concerns, especially on product shipped to customers from Imperial’s northern Florida location, because of the distance between the northern Florida farm and Imperial’s main markets. Costs of shipping have been increasing significantly as the result of higher fuel costs, the need to arrange for the return of portable shelving units for subsequent shipments and competition with other companies in northern Florida for the availability of trucks during Imperial’s peak spring shipping period. Management is continuing its efforts to increase the number of trucking vendors used on shipments from the Florida farm and to evaluate the methods used in shipping product, especially shipments from its northern Florida farm, including reviewing the timing and method of shipments, to reduce or limit the increases in shipping costs. Over the past two years, Imperial has purchased additional portable shelving units and planned its shipping in ways that reduced the need for returning trucks empty which did help in managing total shipping costs.

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Investments

Centaur Media, plc

The proceeds Griffin received from the March 2004 sale of Centaur Communications, Ltd. (“Centaur Communications”) included, in addition to the cash proceeds of  $68.9 million, 6,477,150 shares of common stock of Centaur Holdings, plc (“Centaur Holdings”), approximately 4% of the outstanding common stock of Centaur Holdings at the time of the transaction. In June 2006, Centaur Holdings changed its name to Centaur Media, plc (“Centaur Media”). Centaur Media is a publicly traded company listed on the London Stock Exchange. Griffin accounts for its investment in Centaur Media as an available-for-sale security. Accordingly, changes in the market value of Griffin’s investment in Centaur Media, 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 January 2001 sale of the portion of Imperial’s business that operated wholesale sales and service centers included, in addition to the cash proceeds of $18.4 million, approximately 14% of the outstanding common stock of Shemin Acquisition Corp. (“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% ownership interest. Imperial accounted for its investment in Shemin Acquisition under the cost method of accounting for investments. In May 2005, Griffin exchanged a portion of its holdings in Shemin Acquisition for common stock in Shemin Nurseries Holding Corp. (“SNHC”), which operates a landscape nursery distribution business through its subsidiary that previously was a wholly-owned subsidiary of Shemin Acquisition. Griffin then completed the sale of its remaining stock in Shemin Acquisition, receiving initial cash proceeds of $5.9 million from that sale. In June 2005, Griffin received a cash distribution of $1.5 million from SNHC. Subsequent to these transactions, SNHC 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 SNHC 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 Communications. Previously, Linguaphone was a subsidiary of Centaur Communications. In early 1999, a recapitalization of Linguaphone resulted in Griffin’s equity interest being reduced to approximately 14% (11% fully diluted). 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 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 for certain financial information regarding the real estate business and the landscape nursery business.

Employees

As of December 2, 2006, Griffin employed 206 people on a full-time basis, including 18 in its real estate business and 184 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.

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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 these 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 that 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.

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.

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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.

Competition and Governmental Regulations

Griffin Land’s real estate operations compete with other properties in Griffin Land’s area of operation and are subject to governmental regulations that affect real estate development, such as local zoning ordinances.

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.

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 the Landscape Nursery Business Not Covered by Insurance). Imperial’s production facilities could also 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 that 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 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 accounted for more than 10% of Imperial’s total net sales in fiscal 2006, Imperial’s ten largest customers, including several mass merchandisers, accounted for 35% of Imperial’s total net sales in fiscal 2006. 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. One of Griffin Land’s tenants accounted for approximately 11.5% of its total rental revenue in fiscal 2006.

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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 plant 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, 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 does not include losses that may occur from wind, such as from a hurricane or tornado.

Investment in a Foreign Company

Griffin has an investment in Centaur Media, plc, a public company 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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The Concentrated Ownership of Griffin Common Stock by Members of the Cullman and Ernst Families

Members of the Cullman and Ernst families (the “Cullman and Ernst Group”), which include directors Edgar M. Cullman, David M. Danziger and Frederick M. Danziger, members of their families and trusts for their benefit, partnerships in which they own substantial interests and charitable foundations on whose boards of directors they sit, owned, directly or indirectly, approximately 48.67% of the outstanding common stock of Griffin as of December 2, 2006. There is an informal understanding that the persons and entities included in the Cullman and Ernst Group will vote together the shares owned by each of them. As a result, the Cullman and Ernst Group may effectively control the determination of Griffin’s corporate and management policies and may limit other Griffin stockholders’ ability to influence Griffin’s corporate and management policies.

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 2, 2006, the book value of undeveloped land holdings, including land improvements, owned by Griffin, principally in the Hartford, Connecticut area, was approximately $18.4 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

 

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Nursery Real Estate

 

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 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 with respect to chlordane.

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. In 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 January 2007, Griffin Land and the town of Simsbury jointly filed a motion in the Appellate Court to have the appeal remanded to the Superior Court in anticipation of the parties potentially presenting a settlement proposal to the court for its review and approval.

In fiscal 2006, Griffin’s subsidiary, Imperial Nurseries, Inc. (“Imperial”) received notice from the United States Department of Labor (the “DOL”) stating that an independent farm labor contractor engaged by Imperial had underpaid the independent farm labor contractor’s employees who were then working at Imperial’s Connecticut farm. Imperial engaged the independent farm labor contractor principally to pot new plants at its Connecticut farm. The DOL notice stated that because the independent farm labor contractor refused to pay the back wages of approximately $47,000 to its employees, Imperial was required to pay those individuals. The DOL asserted that Imperial was a joint employer and thus

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should be required to pay. Based on an evaluation of the status of the individuals in question and in consultation with legal counsel, Griffin does not believe that Imperial meets the joint employer criteria under the statutes and, therefore, is not liable for back wages not paid by the independent farm labor contractor to its employees. Imperial has notified the DOL of its position. The outcome of this issue with the DOL is currently pending.

On February 8, 2007, a legal services organization filed a lawsuit against Griffin and an independent farm labor contractor claiming that certain individuals who were employed by the independent farm labor contractor were not paid sufficient wages as required by state and federal laws and that Griffin is liable for the acts of omission of the contractor as a joint employer. The lawsuit also includes other causes of action against the independent farm labor contractor and Griffin related to this issue, as well as causes of action under the Migrant and Seasonal Agricultural Protection Act, RICO causes of action and other related state claims. Griffin and its legal counsel believe the claims, as they relate to Griffin, are without merit.

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 January 26, 2007, the number of record holders of common stock of Griffin was approximately 418, 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 $33.20 per share.

Dividend Policy

From the Distribution in 1997 through fiscal 2006, Griffin has not paid any dividends. Griffin’s current policy is to retain any earnings to finance the operation and expansion of its businesses. Griffin’s board of directors has recently provided for the potential repurchase of up to 150,000 shares of common stock and will periodically review its dividend policy, considering factors such as Griffin’s liquidity position, expected capital spending plans and expected cash to be generated or used in its operations.

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 2002 through 2006 and balance sheet data as of the end of each fiscal year. The selected financial data for fiscal 2004, fiscal 2005 and fiscal 2006 are derived from the audited consolidated financial statements included in Item 8 of this report. The selected financial data for fiscal 2002 and fiscal 2003 were derived from the audited consolidated financial statements for those years.

(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)          In fiscal 2006, Griffin Land & Nurseries, Inc. (“Griffin”) adopted FASB Interpretation No. 47 “Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143” (“FIN No. 47”). See Note 1 to Griffin’s consolidated  financial statements.

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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”). Prior to March 10, 2004, Griffin had an equity investment in Centaur Communications, Ltd. (“Centaur Communications”), a privately held magazine publishing business based in the United Kingdom. On March 10, 2004, Griffin completed the sale of its investment in Centaur Communications and recorded a substantial gain. The proceeds from that sale included cash and stock in the acquiring company, Centaur Media, plc (“Centaur Media”). Griffin continues to hold its investment in Centaur Media 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 are the critical 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, and if the decline is deemed to be other than temporary, Griffin would record the decline in its statement of operations.

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 and sales pricing.

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.

Revenue and gain recognition: In the real estate business, revenue includes rental revenue from Griffin Land’s commercial and industrial properties and proceeds from property sales. Rental revenue is accounted for in accordance with SFAS No. 13, “Accounting for Leases.”  Gains on property sales are recognized in accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” based on the specific terms of each sale. When the percentage of completion method is used to account for a sale of real estate, costs included in determining the percentage of completion include the costs of the land

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sold, allocated master planning costs, selling and transaction costs and estimated future costs related to the land sold.

Stock based compensation: Griffin determines stock based compensation based on the estimated fair values of stock options as determined on their grant dates using the Black-Scholes option-pricing model. In determining the estimated fair values of stock options issued, Griffin makes assumptions on expected volatility, risk free interest rates, expected option terms and dividend yields.

Summary

Griffin’s loss before the cumulative effect of its change in accounting principle for asset retirement obligations, net of tax, for fiscal 2006 was $0.2 million as compared to a loss before the cumulative effect of a change in accounting principle, net of tax, of $1.4 million in fiscal 2005. The improved results in fiscal 2006 principally reflect an increase in gains recognized on property sales completed by Griffin Land. In fiscal 2006, Griffin Land sold to Walgreen Co. (“Walgreen”) approximately 130 acres of undeveloped land in the New England Tradeport for cash proceeds of $13 million, before transaction costs. The land sale to Walgreen is being accounted for under the percentage of completion method, therefore, a significant portion of the total revenue and total pretax gain from the land sale to Walgreen has been deferred and will be recognized when future costs related to that transaction are incurred. In fiscal 2006, Griffin Land recognized revenue of $7.9 million and a pretax gain of $5.9 million on this transaction.

Imperial incurred an operating loss of $2.4 million in fiscal 2006 as compared to an operating loss of $3.7 million in fiscal 2005. The lower operating loss at Imperial principally reflects lower charges for unsaleable inventories in fiscal 2006, partially offset by the effect of lower margins on sales. Griffin’s general corporate expense increased to $4.2 million in fiscal 2006 from $3.4 million in fiscal 2005 due to higher costs for compliance with Section 404 of the Sarbanes-Oxley Act and higher incentive compensation expense. Interest expense in fiscal 2006 was higher than fiscal 2005 due to interest expense on a $12.7 million nonrecourse mortgage entered into by Griffin Land in the 2005 third quarter being incurred for the entire 2006 fiscal year as compared to a portion of the 2005 fiscal year. Income from interest, dividends, gains on short-term investments and other investment income was higher in fiscal 2006 as compared to fiscal 2005 due principally to the increased yield on short-term investments as a result of higher interest rates in the current year and higher dividend income from Griffin’s investment in Centaur Media. Fiscal 2005 also included a pretax gain of $3.2 million from the sale of stock of Shemin Acquisition.

Griffin’s net loss in fiscal 2006 was $0.4 million as compared to a net loss of $1.4 million in fiscal 2005. Griffin’s lower net loss reflects the factors noted above, partially offset by a net of tax charge of $0.2 million in fiscal 2006 for the effect of its change in accounting principle. The change in accounting principle reflected the recording of conditional asset retirement obligations in accordance with FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143.”  Also, at the beginning of the 2006 fiscal year, Griffin adopted SFAS No. 123(R) “Share-Based Payment” (“SFAS No. 123(R)”) using the modified prospective method of adoption. Results for prior periods have not been restated. The effect of the adoption of SFAS No. 123(R) on fiscal 2006 results of operations was not material. See Notes 1 and 7 to the consolidated financial statements included in Item 8.

Fiscal 2006 Compared to Fiscal 2005

Total revenue increased from $41.9 million in fiscal 2005 to $53.2 million in fiscal 2006, reflecting an increase in rental revenue and property sales of approximately $7.5 million at Griffin Land and an increase in net sales of approximately $3.8 million at Imperial.

Rental revenue and property sales at Griffin Land increased from $14.2 million in fiscal 2005to $21.8 million in fiscal 2006. The increase of approximately $7.5 million reflects an approximately $7.1 million

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increase in revenue from property sales and an increase of approximately $0.4 million in rental revenue from leasing operations. The increase in revenue from property sales principally reflects revenue of $7.9 million recognized on the sale of approximately 130 acres of undeveloped land in Tradeport to Walgreen. The land sale to Walgreen generated cash proceeds of $13.0 million and has been accounted for using the percentage of completion method. Accordingly, approximately $5.1 million of revenue from that sale has been deferred and will be recognized in future periods when the costs of required road improvements related to this transaction are incurred. In addition, Griffin Land also closed the first sale of residential lots of its Suffield, Connecticut residential development, Stratton Farms, which generated revenue of $1.0 million. Two other smaller land sales were completed in fiscal 2006 and generated revenue of $0.8 million in the aggregate. Rental revenue from leasing operations increased from $11.7 million in fiscal 2005 to $12.0 million in fiscal 2006. The increase principally reflects: (i)  revenue of $1.1 million from leases in two industrial buildings that were in service during the entire year in fiscal 2006 as compared to one of these buildings not in service during fiscal 2005 and the other building in service for approximately six months of fiscal 2005; and (ii) $0.5 million from leasing previously vacant space.  Partially offsetting those increases was the loss of revenue of $1.2 million from leases in effect during fiscal 2005 that either expired and were not renewed or were terminated early.

At the end of fiscal 2006, Griffin Land owned 1,711,000 square feet of industrial, flex and office space, with 1,194,000 square feet (70%) leased, as compared to 989,000 square feet (78%) leased of Griffin Land’s 1,266,000 square feet at the end of fiscal 2005. The increase in total space in fiscal 2006 as compared to fiscal 2005 reflects the acquisition of a 308,000 square foot warehouse near the end of the 2006 third quarter and a 137,000 square foot industrial building that was completed and placed in service at the beginning of fiscal 2006. The increase in space leased principally reflects leasing all of the new industrial building completed and placed in service in the early part of fiscal 2006 and leasing other previously vacant industrial and office space. Excluding the recently acquired warehouse facility, which was vacant at the time of the acquisition and has not yet been leased, 85% of Griffin’s square footage is currently leased.

Net sales and other revenue at Imperial increased from $27.7 million in fiscal 2005 to $31.5 million in fiscal 2006. Unit sales volume increased approximately 7.0% in fiscal 2006 as compared to fiscal 2005. The increase in sales volume took place mostly in the second quarter and was attributed to improved spring weather this year, as compared to last year, and management’s focus on reducing Imperial’s inventory levels to be more in line with expected sales. Imperial’s business is highly seasonal with spring sales, which take place mainly in the second quarter, comprising a majority of its annual sales.

Griffin had consolidated operating profit of $0.3 million in fiscal 2006 as compared to a consolidated operating loss of $4.8 million in fiscal 2005. Operating profit at Griffin Land increased to $7.0 million in fiscal 2006 from $2.3 million in fiscal 2005. Imperial’s operating loss decreased to $2.4 million in fiscal 2006 from $3.7 million in fiscal 2005. General corporate expense increased to $4.2 million in fiscal 2006 from $3.4 million in fiscal 2005.

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Operating results at Griffin Land for fiscal 2006 and fiscal 2005 were as follows:

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

Griffin Land’s profit from leasing activities before general and administrative expenses and before depreciation and amortization expense decreased slightly in fiscal 2006 as compared to fiscal 2005. The approximate $0.4 million increase in rental revenue was substantially offset by an approximate $0.4 million increase in costs related to rental revenue excluding depreciation and amortization expenses. The increase in costs principally reflects a $0.6 million increase in building operating expenses offset by the effect of fiscal 2005 including a charge of $0.2 million to write off capitalized costs related to a lease termination in that year. The increase in building operating expenses reflects $0.5 million for the two buildings on line for the entire 2006 fiscal year as compared to one of the buildings on line for six months in fiscal 2005 and the other not in operation during fiscal 2005, $0.1 million of operating expense related to the warehouse facility acquired near the end of the fiscal 2006 third quarter and an increase in utility expenses of $0.2 million across all buildings due to a utility rate increase effective at the beginning of fiscal 2006. These were partially offset by a $0.2 million reduction in other building operating expenses, principally snow removal. The charge to write off capitalized costs of $0.2 million in fiscal 2005 related to a lease that was terminated in that year. The lease termination was in connection with a new longer-term lease with a new tenant for that building, with lease rates that are equal to the rental rates under the terminated lease over the remaining term of the terminated lease.

The gain from property sales in fiscal 2006 includes approximately $5.9 million from the sale of approximately 130 acres of undeveloped land in Tradeport to Walgreen and approximately $1.1 million

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from the sale of residential land in the Stratton Farms development and two smaller land sales. The land sale to Walgreen has been accounted for using the percentage of completion method.  Accordingly, an additional gain of approximately $3.8 million from that transaction has been deferred and will be recognized in future periods when the costs of required roadwork improvements related to this transaction are incurred. While management has used its best estimates, based on industry knowledge and experience, in projecting the total costs of the required road improvements, increases or decreases in future costs as compared with current estimated amounts would reduce or increase the gain to be recognized in future periods. The gain from property sales at Griffin Land in fiscal 2005 principally reflects the sale of commercial land in Windsor, Connecticut and three sales of undeveloped residential land. General and administrative expenses at Griffin Land increased from $2.7 million in fiscal 2005 to $2.9 million in fiscal 2006 principally reflecting higher incentive compensation expense in fiscal 2006 related to Griffin Land’s operating results, principally completed property sales.

Depreciation and amortization expense at Griffin Land increased approximately $0.2 million in fiscal 2006 as compared to fiscal 2005. The increase reflects an additional approximate $0.6 million of depreciation expense related to the two industrial buildings that were in service for the entire 2006 fiscal year as compared to one of the buildings not in service during fiscal 2005 and the other placed in service midway during fiscal 2005 and $0.1 million of depreciation expense related to the warehouse facility acquired near the end of the 2006 third quarter. Partially offsetting those increases was a net decrease of $0.5 million of depreciation and amortization expense in two office buildings as a result of accelerated depreciation and amortization recorded in fiscal 2005 related to early lease terminations in those buildings.

Imperial’s operating results in fiscal 2006 and fiscal 2005 were as follows:

 

Imperial’s operating loss decreased by approximately $1.3 million in fiscal 2006 as compared to fiscal 2005 reflecting an approximate $1.5 million increase in gross profit partially offset by an approximate $0.2 million increase in selling, general and administrative expenses. Fiscal 2006 includes a cost of goods sold charge of $0.8 million to reserve for unsaleable inventories and inventories that are expected to be sold below their carrying values. Fiscal 2005 included a cost of goods sold charge of $3.1 million for these items. Partially offsetting the positive effect on gross profit of the lower cost of goods sold charge in fiscal 2006 as compared to fiscal 2005 were higher plant costs and higher delivery costs in fiscal 2006 as compared to fiscal 2005. The higher plant costs reflect, in part, increased costs of production and inventory sold in fiscal 2006 that had been held beyond its expected sales window thus having additional costs. The higher shipping costs reflect increased delivery charges from trucking vendors. Imperial’s gross margin on sales (excluding in each year the effect of the cost of goods sold charges related to unsaleable inventories) decreased from 14.5% in fiscal 2005 to 10.2% in fiscal 2006.

Imperial’s selling, general and administrative expenses increased by approximately $0.2 million in fiscal 2006 as compared to fiscal 2005. The increase reflects higher selling expenses, principally sales commissions, related to the increase in net sales in fiscal 2006. As a percentage of net sales, selling, general and administrative expenses decreased from 16.7% in fiscal 2005 to 15.4% in fiscal 2006.

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Griffin’s general corporate expense was $4.2 million in fiscal 2006 as compared to $3.4 million in fiscal 2005. Fiscal 2005 included a $0.1 million retrospective insurance charge related to a former affiliate of Griffin. Excluding the effect of that item in fiscal 2005, general corporate expense increased by $0.9 million due principally to an increase of $0.6 million related to compliance with Section 404 of the Sarbanes-Oxley Act and an increase of $0.5 million in incentive compensation expense in fiscal 2006, partially offset by a net reduction of $0.2 million of other expenses.

In fiscal 2005, Griffin sold its investment in Shemin Acquisition 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 Holding Corp. (“SNHC”), which operates a landscape nursery distribution business through its subsidiary. Griffin has retained its ownership in SNHC. See Note 9 to the consolidated financial statements.

Griffin’s consolidated interest expense increased from $2.4 million in fiscal 2005 to $2.9 million in fiscal 2006. The increase principally reflects interest on the $12.7 million mortgage that was completed in the 2005 third quarter. This mortgage was outstanding for the entire 2006 fiscal year as compared to less than six months in fiscal 2005. Griffin’s average outstanding debt in fiscal 2006 was $44.4 million as compared to $36.8 million in fiscal 2005.

Griffin’s income from interest, dividends, gains on short-term investments and other investment income was $2.3 million in fiscal 2006 as compared to $1.3 million in fiscal 2005. The increase of investment income in the current year reflects a higher yield from short-term investments due generally to higher short-term interest rates, interest income on the proceeds from the sale of land to Walgreen that were held in escrow during most of the 2006 third quarter and an increase in dividend income from Centaur Media. The proceeds from the land sale to Walgreen were used to purchase a warehouse facility in fiscal 2006. In addition, fiscal 2006 includes approximately $0.2 million of undistributed equity income from an investment in an agricultural cooperative in which Griffin holds a 25% interest. Because this investment had not been accounted for in prior years, the cumulative effect was recorded within other investment income in fiscal 2006. Management believes the amount recorded is immaterial to annual periods and expects that the results of this investment will not be significant to Griffin in future periods.

Griffin’s income tax benefit for fiscal 2006 reflects the federal statutory rate of 35% substantially offset by the establishment of a valuation allowance of $0.1 million against certain deferred tax assets and the effect of permanent differences. The deferred tax assets on which the valuation allowance was recorded relate to certain state net operating loss carryforwards (“NOLs”) of Imperial. The establishment of the valuation allowance reflects management’s determination that it is more likely than not that Imperial will not generate sufficient taxable income in the future to utilize the NOLs. In addition, the fiscal 2006 income tax benefit reflects the effect of permanent differences and adjustments to certain deferred tax assets and liabilities. Although these items are not significant amounts, their impact on the effective tax rate is significant because of the small pretax loss in fiscal 2006. The effective income tax rate for fiscal 2005 was a benefit of 47.1% reflecting the federal statutory 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.

In the fourth quarter of fiscal 2006, Griffin recorded a net of tax charge of $0.2 million for a change in accounting principle. This change relates to Griffin’s recording the fair value of its conditional asset retirement obligations as prescribed by FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143.”  The conditional asset retirement obligations relate principally to tobacco barns and other structures on Griffin’s land holdings that contain asbestos, primarily in roofing materials. These structures are not currently used in Griffin’s operations and do not have any book value, therefore, the full amount of the conditional asset retirement obligation was

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recorded as a charge in Griffin’s consolidated statement of operations. These structures remain from the tobacco growing operations of former affiliates of Griffin.

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 $3.3 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 customers, which have more favorable pricing than Imperial’s mass merchant and wholesaler and landscaper customers.

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

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Operating profit at Griffin Land in fiscal 2005 and fiscal 2004 was as follows:

(a)           The costs related to rental revenue excluding depreciation and amortization expense, profit from leasing activities before general and administrative expenses and before depreciation and amortization expense, general and administrative expenses excluding depreciation and amortization expense and profit before 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 division. However, they should not be considered as an alternative to operating profit as a measure of operating results in accordance with accounting principles generally accepted in the United States of America.

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.

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

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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’s operating results in fiscal 2005 and fiscal 2004 were 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 can be 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. (“SNHC”), which operates a landscape nursery distribution business through its subsidiary. Griffin has retained its interest in SNHC. See Note 9 to the consolidated financial statements.

In fiscal 2004, Griffin completed the sale of its investment in Centaur Communications to Centaur Holdings , plc (“Centaur Holdings”), a newly formed company. In fiscal 2006, Centaur Holdings changed

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its name to Centaur Media plc (“Centaur Media”). 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 Media, 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 Media 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 Communications transaction, substantially all of the stock options of Centaur Communications were exercised immediately prior to the closing of the 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 Media and the book value of the pro rata portion of the investment in Centaur Communications that remained as a result of receiving the Centaur Media 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 Media 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 Media 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 offsetting 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 Communications. In addition, fiscal 2004 included the release of an income tax liability of $0.2 million upon completion of tax examinations of prior years.

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

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Off Balance Sheet Arrangements

Griffin does not have any material off balance sheet arrangements.

Liquidity and Capital Resources

Net cash provided by operating activities was $6.1 million in fiscal 2006 as compared to net cash used in operating activities of $12.8 million in fiscal 2005. Net cash provided by operating activities in fiscal 2006 includes $5.3 million of cash generated from a reduction of short-term investments as compared to $10.7 million of cash invested in short-term investments in fiscal 2005. Excluding these items in each period, Griffin had net cash provided by operating activities of $0.8 million in fiscal 2006 as compared to $2.1 million of net cash used in operating activities in fiscal 2005. The change in fiscal 2006 as compared to fiscal 2005, excluding the effect of cash invested in short-term investments, principally reflects the increase in operating results and a net favorable change in inventories, partially offset by an increase in other current assets.

In fiscal 2006, Griffin had net cash of $14.5 million used in investing activities as compared to net cash used in investing activities of $6.8 million in fiscal 2005. The net cash used in investing activities in the current year includes additions to Griffin Land’s real estate assets of $28.2 million, including the acquisition, completed on August 29, 2006, of a warehouse facility in Manchester, Connecticut, for $13.5 million. The warehouse facility acquired was used by the previous owner in its operations and was vacant at the time of the closing. This acquisition was part of a Section 1031 exchange for income tax purposes, which results in the deferral of income taxes related to the gains from the sale of undeveloped land to Walgreen and a smaller land sale completed in fiscal 2006. The balance of the additions to Griffin Land’s real estate assets principally reflect the construction, on speculation, of a new 127,000 square foot industrial building in Tradeport, which was substantially completed by the end of fiscal 2006, site work for several industrial buildings in Tradeport, infrastructure work on a residential subdivision in Suffield, Connecticut, payments related to the completion of the new industrial building that came on line in the 2006 first quarter and tenant improvements related to new leases. Partially offsetting the cash used for the additions to Griffin’s real estate assets were cash proceeds, net of expenses, of $14.0 million from property sales, including the sale to Walgreen of undeveloped land in Tradeport and the sale of residential lots in Stratton Farms. The land sale to Walgreen was recorded using the percentage of completion method, accordingly, revenue recognition of $5.1 million of the cash proceeds from that transaction has been deferred and will be recognized in future periods when the costs of required road improvements are incurred. Additions to property and equipment, principally for Imperial, were $0.4 million in fiscal 2006 as compared to $0.7 million in fiscal 2005. Capital expenditures in fiscal 2006 were principally to replace equipment used in Imperial’s farming operations.

Net cash provided by financing activities was $9.5 million in fiscal 2006 period as compared to $12.0 million in fiscal 2005. The net cash provided by financing activities in fiscal 2006 reflects the proceeds of $8.5 million from a nonrecourse mortgage completed in the 2006 fourth quarter and cash proceeds from stock options exercised in the current year, partially offset by payments of mortgage principal. Also included in cash provided by financing activities in fiscal 2006 is a $1.2 million tax benefit from the exercise of stock options. In accordance with SFAS No. 123(R), the presentation in Griffin’s statement of cash flows in fiscal 2006 has changed from prior years to report the tax benefits from the exercise of stock options as a financing cash flow. Prior to the adoption of SFAS No. 123(R), these tax benefits were reported as an operating cash flow. The net cash provided by financing activities in fiscal 2005 principally reflected the proceeds of a nonrecourse mortgage entered into by a subsidiary of Griffin.

In the near-term, Griffin plans to continue to invest in its real estate business. In addition to the construction in fiscal 2006 of a 127,000 square foot industrial building in Tradeport, Griffin Land recently started foundation work on an approximately 149,000 square foot industrial building in Tradeport. These

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facilities are being built on speculation. Griffin Land has also started the site work for several additional industrial buildings in the Tradeport. The cost of site work in the portion of Tradeport where these new buildings will be located is higher than site costs for previous buildings recently built by Griffin Land. The higher site costs reflect the nature of the land on which the buildings will be located along with required berming and roadwork on this site. Griffin Land also expects to incur expenditures to build out the interiors of its new 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. In fiscal 2006, Griffin Land substantially completed infrastructure work on Stratton Farms, a residential development in Suffield, Connecticut. The first sale of residential lots in Stratton Farms was subsequently completed in fiscal 2006. Griffin Land is also continuing to work towards obtaining approvals for Meadowood, its proposed residential development in Simsbury, Connecticut. There have been discussions with town officials regarding potential settlement options for Meadowood. In January 2007, Griffin Land and the town of Simsbury jointly filed a court motion in anticipation of the parties presenting a settlement proposal to the court for its review and approval. Griffin Land intends to proceed with other residential development plans on its land holdings that are appropriate for that use.

On May 19, 2006, a joint venture in which Griffin holds a 75% ownership interest, entered into an agreement with a prospective buyer to sell approximately 103 acres of undeveloped land in South Windsor, Connecticut. Based on the terms of the agreement, Griffin Land’s share of the proceeds would be approximately $2.7 million, before transaction expenses. Completion of this transaction is subject to several contingencies, including the buyer receiving governmental approvals for its proposed development on this site. On September 8, 2006, Griffin Land entered into an agreement to sell approximately 73 acres of its undeveloped land in Griffin Center for total proceeds of approximately $6.8 million, before transaction expenses. Completion of this sale is dependent on a number of contingencies, including the buyer receiving governmental approvals, including approval from the Connecticut State Traffic Commission, for the buyer’s planned development of office facilities on the site. On December 8, 2006, Griffin entered into an agreement with the State of Connecticut Department of Environmental Protection (the “DEP”) to sell approximately 165 acres of undeveloped land in Suffield, Connecticut. The proceeds from this transaction would be approximately $3.2 million, before transaction expenses. This land would be used for conservation purposes by the DEP. There can be no assurance that these transactions will be completed under their current terms, or at all.

On November 16, 2006, a subsidiary of Griffin completed an amended and restated mortgage of the $12.7 million nonrecourse mortgage entered into in fiscal 2005 to add to the collateral of that nonrecourse mortgage an additional industrial building in Tradeport that was completed and placed in service at the beginning of fiscal 2006. The amended and restated mortgage generated an additional $8.5 million in proceeds, before transaction expenses. The amended and restated mortgage has an interest rate of 5.73% with payments based on a thirty-year amortization schedule. The mortgage has a term of approximately 8.7 years.

On January 31, 2007, Griffin announced that its board of directors had authorized a program to repurchase, from time to time, up to 150,000 shares of its outstanding common stock. The repurchases, if and when made, will be done through private transactions and are expected to commence early in the fiscal 2007 second quarter. The plan to repurchase does not obligate Griffin to repurchase any specific number of shares, and may be suspended at any time at management’s discretion. Based on the market price of its common stock at the time the repurchase plan was announced, if the total authorized number of shares are repurchased, Griffin will expend approximately $5.0 million.

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Griffin’s payments (including principal and interest) under contractual obligations as of December 2, 2006 are as follows:

(1)          Includes obligations for the construction of the shell of a new industrial building at Griffin Land, completion of tenant improvements, infrastructure improvements in Tradeport and for the purchase of raw materials by Imperial.

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

As of December 2, 2006, Griffin had cash and short-term investments of approximately $38.2 million. Management believes that the significant amount of cash and short-term investments held by Griffin 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 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. Real estate acquisitions may or may not occur based on many factors, including real estate pricing.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”) which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”). SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. SFAS No. 155 will be effective for Griffin in the first quarter of fiscal 2007 and is not expected to have an impact on Griffin’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“Fin No. 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, Fin No. 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Fin No. 48 also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. Fin No. 48 is effective for fiscal years beginning after December 15, 2006. Griffin is evaluating the impact of this new pronouncement on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This new standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting

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principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements but provides guidance in determining fair value measurements presently used in the preparation of financial statements. This new standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. Griffin is evaluating the impact of this new pronouncement on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This new standard requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. For employers that have equity securities that trade in a public market, this new standard requires the recognition of the funded status of a defined benefit postretirement plan and requires disclosures as of the end of the fiscal year ending after December 15, 2006. Griffin does not have a defined benefit pension plan and its defined benefit postretirement benefit plan is unfunded and is included as a liability on Griffin’s balance sheet.

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, completion of property sales currently under contract, or the repurchase by Griffin of the number of shares of its outstanding common stock as authorized by its board of directors. 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.

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. 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 2, 2006.

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 twenty months, with a weighted average maturity of approximately five months as of December 2, 2006. Due to the generally short-term composition of its investments, Griffin’s investments are not significantly exposed to interest

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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 Communications in the fiscal year ended November 27, 2004, Griffin entered into a foreign currency exchange forward contract 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 Communications 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 Communications.

Griffin does not have foreign currency exposure in operations. Griffin does have an investment in a public company, Centaur Media, 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)

 

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 2, 2006, December 3, 2005 and November 27, 2004
(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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