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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 29, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______
Commission File No. 0-29288
GRIFFIN LAND & NURSERIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0868496
(state or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
One Rockefeller Plaza, New York, New York 10020
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number including Area Code (212) 218-7910
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
Number of shares of Common Stock outstanding at July 6, 2004: 4,903,062
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GRIFFIN LAND & NURSERIES, INC.
Form 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Statements of Operations
13 and 26 Weeks Ended May 29, 2004 and
May 31, 2003, respectively 3
Consolidated Balance Sheets
May 29, 2004 and November 29, 2003 4
Consolidated Statements of Changes in Stockholders' Equity
26 Weeks Ended May 29, 2004 and May 31, 2003 5
Consolidated Statements of Cash Flows
26 Weeks Ended May 29, 2004 and May 31, 2003 6
Notes to Consolidated Financial Statements 7-17
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-26
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 26
ITEM 4 - Controls and Procedures 26-27
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 28
ITEM 6 - Exhibits and Reports on Form 8-K 28-29
SIGNATURES 30
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Griffin Land & Nurseries, Inc.
Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
For the 13 Weeks Ended, For the 26 Weeks Ended,
----------------------- -----------------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
---------- ---------- ----------- ----------
Net sales and other revenue. . . . . . . . . . . . $ 22,265 $ 21,863 $ 25,360 $ 24,964
Cost of goods sold . . . . . . . . . . . . . . . . . 18,813 17,812 21,336 20,074
Selling, general and administrative expenses . . . . 3,149 2,216 5,118 4,545
---------- ---------- ----------- ----------
Operating profit (loss). . . . . . . . . . . . . . . 303 1,835 (1,094) 345
Gain on sale of Centaur Communications, Ltd. . . . . 51,107 - 51,107 -
Foreign currency exchange gain . . . . . . . . . . . 1,070 - 1,070 -
Interest expense . . . . . . . . . . . . . . . . . . (624) (687) (1,331) (1,311)
Interest income. . . . . . . . . . . . . . . . . . . 99 9 105 17
--------- ---------- ----------- ----------
Income (loss) before income tax provision
(benefit) and equity investment . . . . . . . . . 51,955 1,157 $ 49,857 (949)
Income tax provision (benefit) . . . . . . . . . . . 17,565 403 16,782 (341)
--------- ---------- ----------- ----------
Income (loss) before equity investment . . . . . . . 34,390 754 33,075 (608)
Income (loss) from equity investment . . . . . . . . 417 (268) 328 (558)
--------- ------------- ----------- ----------
Net income (loss). . . . . . . . . . . . . . . . . .$ 34,807 $ 486 $ 33,403 $ (1,166)
========== ========== =========== ==========
Basic net income (loss) per common share . . . . . .$ 7.10 $ 0.10 $ 6.83 $ (0.24)
========== ========== =========== ==========
Diluted net income (loss) per common share . . . . .$ 6.79 $ 0.10 6.58 $ (0.24)
========== ========== =========== ==========
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Griffin Land & Nurseries, Inc
Consolidated Balance Sheets
(dollars in thousands, except per share data)
(unaudited)
May 29, 2004 November 29, 2003
------------------ -------------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 40,379 $ 18
Accounts receivable, less allowance of $194 and $149. . 13,057 1,948
Inventories . . . . . . . . . . . . . . . . . . . . . . 29,852 32,396
Deferred income taxes . . . . . . . . . . . . . . . . . 2,770 1,812
Other current assets. . . . . . . . . . . . . . . . . . 2,522 3,161
------------------ -------------------
Total current assets . . . . . . . . . . . . . . . . . . . 88,580 39,335
Real estate held for sale or lease, net. . . . . . . . . . 65,490 64,653
Property and equipment, net. . . . . . . . . . . . . . . . 11,704 11,919
Investment in Centaur Holdings, PLC. . . . . . . . . . . . 9,439 -
Investment in Centaur Communications, Ltd. . . . . . . . . - 20,895
Other assets . . . . . . . . . . . . . . . . . . . . . . . 8,747 8,919
------------------ -------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 183,960 $ 145,721
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Income taxes payable. . . . . . . . . . . . . . . . . . $ 9,709 $ -
Accounts payable and accrued liabilities. . . . . . . . 5,036 4,573
Current portion of long-term debt . . . . . . . . . . . 819 11,428
------------------ -------------------
Total current liabilities. . . . . . . . . . . . . . . . . 15,564 16,001
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 31,832 30,737
Other noncurrent liabilities . . . . . . . . . . . . . . . 1,751 1,659
------------------ -------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 49,147 48,397
------------------ -------------------
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $0.01 per share, 10,000,000 shares
authorized, 4,903,062 and 4,876,916 shares issued and
outstanding, respectively . . . . . . . . . . . . . . . 49 49
Additional paid-in capital . . . . . . . . . . . . . . . . 93,699 93,392
Retained earnings. . . . . . . . . . . . . . . . . . . . . 37,015 3,612
Accumulated other comprehensive income . . . . . . . . . . 4,050 271
------------------ -------------------
Total stockholders' equity . . . . . . . . . . . . . . . . 134,813 97,324
------------------ -------------------
Total liabilities and stockholders' equity . . . . . . . . $ 183,960 $ 145,721
================== ===================
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Griffin Land & Nurseries, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands)
(unaudited)
Shares Of Additional
Common Common Paid-In Retained
Stock Stock Capital Earnings
--------- ------- ------------ --------
Balance at
November 30, 2002 . . . 4,864,916 $ 49 $ 93,372 $ 5,961
Exercise of stock options 12,000 - 20 -
Net loss . . . . . . . . . - - - (1,166)
Other comprehensive
income . . . . . . . . - - - -
---------- -------- ----------- ------
Balance at
May 31, 2003 . . . . . 4,876,916 $ 49 $ 93,392 $ 4,795
========= ======= =========== =======
Accumulated
Other Total
Comprehensive Comprehensive
Income Total Income (Loss)
------------- -------- -------------
Balance at
November 30, 2002 . . . $ (128) $ 99,254 $ -
Exercise of stock options - 20 -
Net loss . . . . . . . . . - (1,166) $ (1,166)
Other comprehensive
income . . . . . . . . . 240 240 240
------------- --------- -----------
Balance at
May 31, 2003 . . . . . . $ 112 $ 98,348 $ (926)
=============== ========= ============
- --------------------------------------------------------------------------------
Shares Of Additional
Common Common Paid-In Retained
Stock Stock Capital Earnings
--------- ------- ------------ --------
Balance at
November 29, 2003 . . . . 4,876,916 $ 49 $ 93,392 $ 3,612
Exercise of stock options
including tax benefit
of $115 . . . . . . . . . 26,146 - 307 -
Net income . . . . . . . . . - - - 33,403
Other comprehensive
income . . . . . . . . . - - - -
--------- ------- ---------- -------
Balance at
May 29, 2004 . . . . . . 4,903,062 $ 49 $ 93,699 $37,015
========= ======= ========== =======
Accumulated
Other Total
Comprehensive Comprehensive
Income Total Income (Loss)
------------- ---------- -------------
Balance at
November 29, 2003 . . . . . $ 271 $ 97,324 $ -
Exercise of stock options
Including tax benefit
of $115 . . . . . . . . . . - 307 -
Net income . . . . . . . . . . - 33,403 $ 33,403
Other comprehensive
income . . . . . . . . . . 3,779 3,779 3,779
----------- ----------- ------------
Balance at
May 29, 2004 . . . . . . . $ 4,050 $ 134,813 $ 37,182
=========== =========== ============
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Griffin Land & Nurseries, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
For the 26 Weeks Ended,
-------------------------
May 29, 2004 May 31, 2003
--------------------- ---------------------
Operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . $ 33,403 $ (1,166)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Gain on sale of Centaur Communications, Ltd.. . . . . . (51,107) -
Tax payment included in other comprehensive income. . . (2,959) -
Depreciation and amortization . . . . . . . . . . . . . 2,387 2,052
Gain on foreign exchange contract . . . . . . . . . . . (1,070) -
(Income) loss from equity investment. . . . . . . . . . (328) 558
Deferred income taxes . . . . . . . . . . . . . . . . . (340) (426)
Write-off of unamortized financing costs. . . . . . . . 280 -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . (11,154) (11,834)
Inventories . . . . . . . . . . . . . . . . . . . . . . 2,544 1,820
Other current assets. . . . . . . . . . . . . . . . . . 639 197
Accounts payable and accrued liabilities. . . . . . . . 463 975
Income taxes payable. . . . . . . . . . . . . . . . . . 9,824 -
Other, net. . . . . . . . . . . . . . . . . . . . . . . 397 277
--------------------- ---------------------
Net cash used in operating activities. . . . . . . . . . . (17,021) (7,547)
--------------------- ---------------------
Investing activities:
Proceeds from the sale of Centaur Communications, Ltd. . . 68,852 -
Acquisition of 70% interest in real estate joint venture,
net of cash acquired of $16 . . . . . . . . . . . . . . - (7,419)
Additions to real estate held for sale or lease. . . . . . (2,381) (1,976)
Proceeds from foreign exchange contract. . . . . . . . . . 1,070 -
Additions to property and equipment. . . . . . . . . . . . (427) (444)
Investment in Shemin Acquisition Corporation . . . . . . . (143) -
--------------------- ---------------------
Net cash provided by (used in) investing activities. . . . 66,971 (9,839)
--------------------- ---------------------
Financing activities:
Payments of debt . . . . . . . . . . . . . . . . . . . . . (11,122) (340)
Increase in debt . . . . . . . . . . . . . . . . . . . . . 1,500 17,750
Exercise of stock options. . . . . . . . . . . . . . . . . 192 20
Other, net . . . . . . . . . . . . . . . . . . . . . . . . (159) (47)
--------------------- ---------------------
Net cash (used in) provided by financing activities. . . . (9,589) 17,383
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents . . . 40,361 (3)
Cash and cash equivalents at beginning of period . . . . . 18 24
--------------------- ---------------------
Cash and cash equivalents at end of period . . . . . . . . $ 40,379 $ 21
===================== =====================
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Griffin Land & Nurseries, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements of Griffin Land &
Nurseries, Inc. ("Griffin") include the accounts of Griffin's real estate
division ("Griffin Land") and Griffin's wholly-owned subsidiary, Imperial
Nurseries, Inc. ("Imperial"), and have been prepared in conformity with the
standards of accounting measurement set forth in Accounting Principles Board
Opinion No. 28 and amendments thereto adopted by the Financial Accounting
Standards Board ("FASB"). Also, the accompanying financial statements have been
prepared in accordance with the accounting policies stated in Griffin's audited
financial statements for the year ended November 29, 2003 included in the Report
on Form 10-K as filed with the Securities and Exchange Commission, and should be
read in conjunction with the Notes to Financial Statements appearing in that
report. All adjustments, comprising only normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of results
for the interim periods have been reflected. The year end consolidated balance
sheet data as of November 29, 2003 was derived from audited financial statements
but does not include all disclosures required by accounting principles generally
accepted in the United States of America.
The results of operations for the thirteen and twenty-six weeks ended
May 29, 2004 are not necessarily indicative of the results to be expected for
the full year.
Griffin accounts for stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted SFAS
No. 123 which requires disclosure of the pro forma effect on earnings and
earnings per share of the fair value method of accounting for stock-based
compensation and SFAS No. 148 which prescribes a method of disclosure.
Griffin's results would have been the following pro forma amounts under the
method prescribed by SFAS No. 123:
For the 13 Weeks Ended, For the 26 Weeks Ended,
----------------------- -----------------------
May 29, 2004 May 31, 2003 May 29, 2004 May 31, 2003
------------ ------------ ------------ ------------
Net income (loss), as reported. . . . . . . $ 34,807 $ 486 $ 33,403 $ (1,166)
Total stock based employee compensation
expense determined under fair value
method for all awards, net of tax effects . (28) (67) (55) (132)
------------ ------------ ---------- -----------
Net income (loss), pro forma (under SFAS
No. 123). . . . . . . . . . . . . . . . . $ 34,779 $ 419 $ 33,348 $ (1,298)
============ ============ =========== ===========
Adjusted net income (loss) for computation
of diluted per share results,
pro forma (under SFAS No. 123). . . . . . $ 34,741 $ 419 $ 33,310 $ (1,298)
============ ============ =========== ===========
Basic net income (loss) per common
share, as reported. . . . . . . . . . . . $ 7.10 $ 0.10 $ 6.83 $ (0.24)
============ ============ =========== ==========
Basic net income (loss) per common
share, pro forma (under SFAS No. 123) . . $ 7.10 $ 0.09 $ 6.82 $ (0.27)
============ ============ =========== ===========
Diluted net income (loss) per common
share, as reported. . . . . . . . . . . . $ 6.79 $ 0.10 $ 6.58 $ (0.24)
============ ============ =========== ===========
Diluted net income (loss) per common
share, pro forma (under SFAS No. 123) . . $ 6.78 $ 0.09 $ 6.57 $ (0.27)
============ ============ =========== ===========
There were no stock options granted during the twenty-six weeks ended
May 29, 2004. The weighted average fair values of each option granted during
the twenty-six weeks ended May 31, 2003 were $5.79, estimated as of the dates of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used in the model to calculate the fair values of each
option: expected volatility of approximately 47%; risk free interest rates
ranging from 2.43% to 3.03%; expected option term of 5 years and no dividend
yield.
2. Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities (an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements)," ("Fin No. 46"). Fin No. 46 requires
existing unconsolidated variable interest entities to be included in the
consolidated financial statements of a business enterprise if the primary
beneficiaries of the variable interest entities do not effectively disperse risk
among all parties involved. The requirements of Fin No. 46 were effective for
Griffin in the first quarter of fiscal 2004. The adoption of Fin No. 46 did not
have an impact on Griffin's financial statements.
3. Industry Segment Information
Griffin's reportable segments are defined by their products and services,
and are comprised of the landscape nursery and real estate segments. Management
operates and receives reporting based upon these segments. Griffin has no
operations outside the United States. Griffin's export sales and transactions
between segments are not material.
For the 13 Weeks Ended, For the 26 Weeks Ended,
----------------------- -----------------------
May 29, May 31, May 29, May 31,
Net sales and other revenue: 2004 2003 2004 2003
-------- ------- -------- --------
Landscape nursery product sales . . . . . . . $ 19,125 $19,042 $ 19,547 $19,316
Real estate sales and rental revenue. . . . . 3,140 2,821 5,813 5,648
-------- ------- -------- --------
$ 22,265 $21,863 $ 25,360 $24,964
======== ======= ======== ========
Operating profit (loss):
Landscape nursery . . . . . . . . . . . . . . $ 899 $ 1,792 $ 26 $ 556
Real estate . . . . . . . . . . . . . . . . . 335 442 354 641
-------- ------- -------- --------
Industry segment totals . . . . . . . . . . . 1,234 2,234 380 1,197
General corporate expense . . . . . . . . . . (931) (399) (1,474) (852)
-------- ------- -------- --------
Operating profit (loss) . . . . . . . . . . . 303 1,835 (1,094) 345
Gain on sale of Centaur Communications, Ltd.. 51,107 - 51,107 -
Foreign currency exchange gain. . . . . . . . 1,070 - 1,070 -
Interest expense, net . . . . . . . . . . . . (525) (678) (1,226) (1,294)
-------- ------- -------- --------
Income (loss) before income taxes
and equity investment. . . . . . . . . . . $ 51,955 $ 1,157 $ 49,857 $ (949)
======== ======= ======== ========
May 29, Nov. 29,
Identifiable assets: 2004 2003
-------- --------
Landscape nursery. . . . . . . . . . . . . . $ 59,559 $ 50,904
Real estate. . . . . . . . . . . . . . . . . 71,199 71,124
-------- --------
Industry segment totals. . . . . . . . . . . 130,758 122,028
General corporate. . . . . . . . . . . . . . 53,202 23,693
------- --------
Total assets . . . . . . . . . . . . . . . . $183,960 $145,721
======== ========
See Note 4 for information on Griffin's equity investment in Centaur.
4. Equity Investment
On March 10, 2004, Griffin completed the sale of its equity investment
in Centaur Communications, Ltd. ("Centaur") to a newly formed company, Centaur
Holdings, PLC ("Centaur Holdings"). At the time of the sale, Griffin held
5,428,194 B Ordinary shares of Centaur common stock, approximately 32% of
Centaur's outstanding common stock. The sale agreement between Griffin, holders
of A Ordinary shares of Centaur and the holder of C Ordinary shares of Centaur
(collectively, the "Sellers") and Centaur Holdings contains certain warranties.
Warranty claims by Centaur Holdings must first exceed 1 million British
Sterling (approximately $1.8 million based on the foreign currency exchange
rate in effect at the time of the sale) in the aggregate before the Sellers
are required to make any payments. The warranty period expires on
September 30, 2005, except for warranties related to income taxes and pension
liabilities, which expire on September 30, 2010. In conjunction with this
transaction, Centaur Holdings completed an initial public offering of its
common stock, and is currently trading on the Alternative Investment Market
of the London Stock Exchange.
The consideration received by Griffin included cash proceeds of
approximately $68.9 million after transaction expenses of approximately $1.5
million but before income tax payments. In addition to the cash proceeds,
Griffin received 6,477,150 shares of Centaur Holdings common stock (representing
approximately 4.4% of its newly issued outstanding common stock), which was
valued at approximately $11.7 million based on the 1.00 British Sterling per
share price of the initial public offering of shares by Centaur Holdings and
the foreign currency exchange rate in effect at that time. Griffin is
prohibited from selling its ownership in Centaur Holdings for six months from
the date the transaction was completed. A portion of the cash proceeds from
the sale were used to repay all of the amount outstanding ($18.4 million)
under Griffin's Credit Agreement with Fleet National Bank.
Included in Griffin's pretax income for the thirteen weeks ended May
29, 2004 is a gain on the sale of Centaur of $51.1 million and a foreign
currency exchange gain of $1.1 million related to the sale (see Note 8). In
connection with the Centaur transaction, substantially all of the stock options
of Centaur 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. Griffin's
remaining investment in Centaur Holdings is recorded based on the fair market
value of that investment. At the time of the sale, approximately $5.4 million
was reported as other comprehensive income, reflecting the difference, net of
tax, between the estimated fair market value of Griffin's investment in Centaur
Holdings and the book value of the pro rata portion of the investment in Centaur
that remained as a result of receiving Centaur Holdings common stock as part of
the sale proceeds. Griffin is accounting for its investment in Centaur Holdings
as an available for sale security under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," whereby increases or decreases in
the value of that investment, net of income taxes, along with the effect of
changes in the foreign currency exchange rate, are included in other
comprehensive income (loss). From the date of the transaction through May 29,
2004, Griffin recorded an other comprehensive loss of $1.4 million reflecting
the reduction, net of tax, of the fair market value of Centaur Holdings (see
Note 8) from the transaction date through the end of the period.
Prior to the sale, Griffin accounted for its investment in Centaur under
the equity method of accounting for investments. The unaudited summarized
financial data of Centaur presented below were derived from consolidated
financial information of Centaur for the 100 day period from December 1, 2003
through March 9, 2004 and the six months ended May 31, 2003. Griffin's equity
income (loss) for the 100 day period from December 1, 2003 through March 9, 2004
and the six months ended May 31, 2003 included $101 and $184, respectively, in
each period for amortization of publishing rights. Griffin's equity income
(loss) from Centaur also reflects adjustments necessary to present Centaur's
results for the respective periods in accordance with generally accepted
accounting principles in the United States of America.
From December 1, 2003 Six Months Ended
through March 9, 2004 May 31, 2003
--------------------- ----------------
Net sales. . . . . . . . . . . $ 31,972 $ 47,055
Costs and expenses . . . . . . 29,753 47,953
--------------- --------------
Operating profit (loss). . . . 2,219 (898)
Nonoperating expenses. . . . . (319) (373)
--------------- --------------
Pretax income (loss) . . . . . 1,900 (1,271)
Income tax provision (benefit) 670 (204)
--------------- --------------
Net income (loss). . . . . . . $ 1,230 $ (1,067)
=============== ==============
As of
Nov. 30, 2003
--------------
Current assets . . . . . . . . . . . . . . $ 25,275
Intangible assets. . . . . . . . . . . . . 9,732
Other noncurrent assets. . . . . . . . . . 10,975
--------------
Total assets . . . . . . . . . . . . . . . $ 45,982
==============
Current liabilities. . . . . . . . . . . . $ 30,047
Other noncurrent liabilities . . . . . . . 2,581
--------------
Total liabilities. . . . . . . . . . . . . 32,628
Stockholders' equity . . . . . . . . . . . 13,354
--------------
Total liabilities and stockholders' equity $ 45,982
==============
5. Long-Term Debt
Long-term debt includes:
May 29, 2004 November 29, 2003
------------------- -----------------
Nonrecourse mortgages:
8.54% due July 1, 2009. . $ 7,879 $ 7,914
6.08% due January 1, 2013 9,521 9,610
6.30% due May 1, 2014 . . 1,491 -
8.13% due April 1, 2016 . 5,938 6,019
7.0% due October 1, 2017. 7,475 7,537
------------------- -----------------
Total nonrecourse mortgages . 32,304 31,080
Credit Agreement. . . . . . . - 10,725
Capital leases. . . . . . . . 347 360
------------------- -----------------
Total . . . . . . . . . . . . 32,651 42,165
Less: current portion . . . . (819) (11,428)
------------------- -----------------
Total long-term debt. . . . . $ 31,832 $ 30,737
=================== =================
As a result of the proceeds received from the sale of Centaur (see Note 4),
Griffin repaid the entire amount then outstanding ($18.4 million) under its
Credit Agreement (the "Credit Agreement") with Fleet National Bank and
subsequently terminated the Credit Agreement, which was scheduled to expire in
February 2005. Accordingly, unamortized debt issuance costs of approximately
$0.3 million are included in general and administrative expense in the thirteen
weeks ended May 29, 2004. The Credit Agreement balance was included in the
current portion of long-term debt at November 29, 2003.
On December 17, 2002 Griffin completed a $9.75 million nonrecourse
mortgage of two office buildings. Proceeds of the mortgage were used to finance
Griffin's acquisition, completed on December 6, 2002, of a 70% interest in those
buildings. Griffin previously held the remaining 30% interest in those
buildings. The mortgage has a 6.08% rate and a term of ten years, with payments
based on a twenty-five year amortization period.
On April 16, 2004, Griffin completed an Amendment to its mortgage
(the "Mortgage Amendment") on two industrial buildings in Windsor, Connecticut.
The Mortgage Amendment provided for an additional borrowing of $1.5 million for
a term of ten years at an interest rate of 6.3%. Proceeds from the additional
borrowing under the Mortgage Amendment were used for capital improvements made
for a major tenant in one of the buildings. The capital improvements were
related to a ten year lease extension by that tenant.
At May 29, 2004 and November 29, 2003, the fair values of Griffin's
Mortgages were $32.6 million and $32.3 million, respectively. Fair value is
based on the present value of future cash flows discounted at estimated
borrowing rates for comparable risks, maturities and collateral. Management
believes that because of its variable interest rate, the amount included on
Griffin's balance sheet for the Credit Agreement at November 29, 2003
reflects its fair value.
6. Stock Options
Activity under the Griffin Land & Nurseries, Inc. 1997 Stock Option Plan (the
"Griffin Stock Option Plan") is summarized as follows:
Number Weighted Avg.
of Shares Exercise Price
------------ --------------
Outstanding at November 29, 2003 659,542 $ 12.57
Exercised. . . . . . . . . . . . (26,146) 7.36
----------- --------------
Outstanding at May 29, 2004. . . 633,396 $ 12.78
============ ==============
Number of option holders at May 29, 2004 26
==
Weighted Ave.
Remaining
Outstanding at Weighted Ave. Contractual Life
Range of Exercise Prices May 29, 2004 Exercise Price (in years)
- ------------------------ --------------- --------------- ----------------
Under $3.00. . . . . . . . 8,011 $ 1.88 0.9
3.00-$11.00 . . . . . . . 98,172 7.53 1.7
Over $11.00. . . . . . . . 527,213 13.93 4.5
---------------
633,396
===============
At May 29, 2004, 564,768 options outstanding under the Griffin Stock
Option Plan were exerciseable with a weighted average exercise price of
$12.68 per share.
7. Per Share Results
Basic and diluted per share results were based on the following:
For the 13 Weeks Ended, For the 26 Weeks Ended,
----------------------- -----------------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
--------- ---------- ---------- ----------
Net income (loss) as reported for computation
of basic per share results. . . . . . . . . $ 34,807 $ 486 $ 33,403 $ (1,166)
Adjustment to net income (loss) for exercise
of options of equity investee . . . . . . . (38) - (38) -
--------- ---------- ---------- ----------
Net income (loss) for computation
of diluted per share results. . . . . . . . $ 34,769 $ 486 $ 33,365 $ (1,166)
========= ========== ========== ==========
Weighted average shares outstanding for
computation of basic per share results . . 4,899,000 4,874,000 4,889,000 4,869,000
Incremental shares from assumed exercise of
Griffin stock options . . . . . . . . . . . 223,000 55,000 179,000 -
--------- ---------- ---------- ---------
Weighted average shares outstanding for
computation of diluted per share results . 5,122,000 4,929,000 5,068,000 4,869,000
========= ========= ========= =========
8. Supplemental Financial Statement Information
Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) for the twenty-six
weeks ended May 29, 2004 and May 31, 2003 consist of the following:
For the 26 Weeks Ended,
-----------------------
May 29, 2004 May 31, 2003
------------ ------------
Balance at beginning of period . . . . . . . . . . . . . $ 271 $ (128)
Effect of foreign currency exchange rate changes related
to investment in Centaur Communications, Ltd. . . . . 302 240
Transfer to pretax income as a result of the sale of
Centaur Communications, Ltd.. . . . . . . . . . . . . (494) -
Increase to record the investment in Centaur Holdings,
PLC at fair market value, net of tax of $2,958. . . . 5,414 -
Reduction in fair market value of Centaur Holdings,
PLC, net of tax benefit of $777 . . . . . . . . . . . (1,443) -
------------- ------------
Balance at end of period . . . . . . . . . . . . . . . . $ 4,050 $ 112
============== ============
Foreign Currency Exchange Contract
In connection with the sale of Centaur (see Note 4), Griffin entered into a
foreign currency exchange forward contract with Fleet National Bank on February
27, 2004. The contract hedged the currency fluctuation of British Sterling
between the time the agreement on the sale of Centaur was executed (February 27,
2004) and the date the transaction was closed (March 10, 2004). Griffin's
obligation under the contract was fulfilled with the proceeds from the sale of
Centaur. As a result of the contract, the exchange rate of the proceeds was
higher than the prevailing exchange rate at the time the transaction was
completed. Accordingly, in the thirteen weeks ended May 29, 2004, Griffin
reported a foreign currency exchange gain of $1.1 million related to the sale of
its investment in Centaur.
Supplemental Cash Flow Information
In the twenty-six weeks ended May 29, 2004 and May 31, 2003, Griffin made
income tax payments of $10.0 million and $0.1 million, respectively. In the
twenty-six weeks ended May 29, 2004 and May 31, 2003, Griffin made interest
payments of $1.3 million in each period.
Inventories
Inventories consist of:
May 29, 2004 Nov. 29, 2003
------------- -------------
Nursery stock. . . . . $ 27,767 $ 31,076
Materials and supplies 2,085 1,320
------------- -------------
$ 29,852 $ 32,396
============= =============
Property and Equipment
Property and equipment consist of:
Estimated May 29, 2004 Nov. 29, 2003
Useful Lives
------------ ------------ -------------
Land and improvements $ 4,892 $ 5,003
Buildings. . . . . . . . 10 to 40 years 3,033 3,028
Machinery and equipment. 3 to 20 years 15,813 15,309
------------- -------------
23,738 23,340
Accumulated depreciation (12,034) (11,421)
------------- -------------
$ 11,704 $ 11,919
============= =============
Griffin incurred capital lease obligations of $108 and $76, respectively,
in the twenty-six weeks ended May 29, 2004 and May 31, 2003.
Real Estate Held for Sale or Lease
Real estate held for sale or lease consists of:
May 29, 2004
--------------
Estimated
Useful Lives Held for Sale Held for Lease Total
------------- ------------- -------------- ---------
Land $ 1,316 $ 4,101 $ 5,417
Land improvements. . . . 15 years 9 4,527 4,536
Buildings. . . . . . . . 40 years - 60,320 60,320
Development costs 7,191 4,121 11,312
------------- -------------- ---------
8,516 73,069 81,585
Accumulated depreciation - (16,095) (16,095)
------------- -------------- --------
$ 8,516 $ 56,974 $ 65,490
============= ================ =========
November 29, 2003
-----------------
Estimated
Useful Lives Held for Sale Held for Lease Total
------------- ------------- -------------- ----------
Land $ 1,330 $ 4,101 $ 5,431
Land improvements. . . . 15 years 9 4,522 4,531
Buildings. . . . . . . . 40 years - 57,481 57,481
Development costs 6,880 5,073 11,953
------------- ------------- ---------
8,219 71,177 79,396
Accumulated depreciation - (14,743) (14,743)
------------- ------------- ---------
$ 8,219 $ 56,434 $ 64,653
============= ============= =========
Real Estate Joint Venture
On December 6, 2002, Griffin acquired the remaining 70% interest in a
joint venture that owned two office buildings of approximately 80,000 square
feet each in Griffin Center in Windsor, Connecticut. Griffin previously held
the remaining 30% interest in the joint venture. Subsequent to the acquisition,
Griffin's investment in the joint venture was terminated. The book value of
Griffin's investment in the joint venture was $3.1 million at the time of the
acquisition and was reclassified, principally into real estate held for lease.
Griffin accounted for its acquisition of the remaining 70% interest in the real
estate joint venture in accordance with SFAS No. 141 "Business Combinations",
which required the purchase price to be allocated to the assets acquired and
liabilities assumed. Accordingly, the purchase price was allocated to real
estate held for lease, intangible assets related to the leases in place, lease
commissions and tenant relationships based upon their fair values.
Approximately $1.0 million of the purchase price was allocated to intangible
assets and is being amortized over periods ranging from five to fifteen years.
At May 29, 2004, intangible assets of $828, net of accumulated amortization, are
included in other assets on Griffin's balance sheet.
Postretirement Benefits
Griffin maintains a postretirement benefits program which provides
principally health and life insurance benefits to certain of its retirees. The
liability for postretirement benefits is included in other noncurrent
liabilities on the consolidated balance sheet. Because Griffin's obligation for
retiree medical benefits is fixed under the terms of Griffin's postretirement
benefits program, any increase in the medical cost trend would have no effect on
the accumulated postretirement benefit obligation, service cost or interest
cost. Griffin's postretirement benefits are unfunded, with benefits to be paid
from Griffin's general assets. Griffin's contributions for the twenty-six weeks
ended May 29, 2004 were $6, with an expected contribution of $12 for the full
fiscal year. The components of Griffin's postretirement benefits expense are as
follows:
For the 13 Weeks Ended, For the 26 Weeks Ended,
----------------------- -----------------------
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
------- ------- ------ --------
Service cost . . . . $ 5 $ 4 $ 11 $ 10
Interest . . . . . . 14 15 28 29
------- ------- ------ --------
$ 19 $ 19 $ 39 $ 39
======= ======= ====== ========
9. Commitments and Contingencies
As of May 29, 2004, Griffin had committed purchase obligations of $1.2
million.
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 counsel, the ultimate liability, if any, with respect to these matters
will not be material to Griffin's consolidated financial position, results of
operations or cash flows.
In the 2004 second quarter, Griffin Land agreed to an amended lease for its
165,000 square foot building in Griffin Center. The amended lease reflects the
replacement of the current tenant with a new tenant and extends the term of the
lease from 2016 to 2024. Rental revenue under the amended lease is the same as
the original lease through the original lease term. The amended lease also
provides the new tenant an option to purchase this facility, at fair market
value, in 2021. The amended lease will become effective if certain
contingencies are resolved prior to November 30, 2004. If these contingencies
are not resolved, the original lease remains in effect.
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The consolidated financial statements of Griffin Land & Nurseries, Inc.
("Griffin") include the accounts of Griffin's subsidiary in the landscape
nursery business, Imperial Nurseries, Inc. ("Imperial"), and Griffin's
Connecticut and Massachusetts based real estate business ("Griffin Land").
Through March 9, 2004, Griffin had an equity investment in Centaur
Communications, Ltd. ("Centaur"), a privately held magazine publishing business
based in the United Kingdom. On March 10, 2004, Griffin completed the sale of
its investment in Centaur (see Note 4 to Griffin's consolidated financial
statements included in Item 1 of this report).
The significant accounting policies and methods used in the preparation of
Griffin's consolidated financial statements included in Item 1 are consistent
with those used in the preparation of Griffin's audited financial statements for
the year ended November 29, 2003 included in the Report on Form 10-K as filed
with the Securities and Exchange Commission. The preparation of Griffin's
financial statements in conformity with generally accepted accounting
principles requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
revenue and expenses during the periods reported. Actual results could differ
from those estimates. The significant accounting estimates used by Griffin in
preparation of its financial statements for the thirteen and twenty-six weeks
ended May 29, 2004 are consistent with those used by Griffin in preparation of
its fiscal 2003 financial statements.
Summary
Results of Griffin's operating businesses for the thirteen weeks ended May
29, 2004 (the "2004 second quarter") were lower than the results for the
thirteen weeks ended May 31, 2003 (the "2003 second quarter"). The 2004 second
quarter operating profit at Imperial was lower than the operating profit in the
2003 second quarter due principally to cost of goods sold being a higher
percentage of net sales in the 2004 second quarter as compared to the 2003
second quarter and higher selling expenses. Operating results at Griffin Land
were slightly lower in the 2004 second quarter as compared to the 2003 second
quarter. The 2004 second quarter includes a substantial gain on Griffin's sale
of its investment in Centaur and a related foreign currency exchange gain.
Results of Griffin's operating businesses for the twenty-six weeks ended
May 29, 2004 (the "2004 six month period") were lower than the results of
Griffin's operating businesses for the twenty-six weeks ended May 31, 2003 (the
"2003 six month period"). Lower operating results at Imperial were due to cost
of goods sold being a higher percentage of net sales in the 2004 six month
period as compared to the 2003 six month period. Operating profit at Griffin
Land was lower in the 2004 six month period, as compared to the 2003 six month
period, due to higher building operating expenses, higher general and
administrative expenses and higher depreciation and amortization expense. The
2004 six month period includes the substantial gain on the sale of Centaur and
the related foreign currency exchange gain.
Results of Operations
Thirteen Weeks Ended May 29, 2004 Compared to the Thirteen Weeks Ended May 31,
2003
Net sales and other revenue increased from $21.9 million in the 2003 second
quarter to $22.3 million in the 2004 second quarter. The increase of $0.4
million reflects a $0.3 million increase at Griffin Land and a $0.1 million
increase at Imperial.
Net sales and other revenue at Griffin Land increased from $2.8 million in
the 2003 second quarter to $3.1 million in the 2004 second quarter, reflecting
$0.2 million of revenue from land sales in the 2004 second quarter and a $0.1
million increase in revenue from its leasing operations. There were no land
sales in the 2003 second quarter. The land sale revenue related to the sale of
undeveloped land intended for residential development. The increase in revenue
from leasing operations principally reflected increased tenant reimbursement of
operating expenses and revenue from new leases. At May 29, 2004, Griffin Land
owned 1,130,000 square feet of industrial, flex and office space, with 921,000
square feet (81%) leased. At the end of the 2003 second quarter, Griffin Land
had 1,013,000 square feet of industrial, flex and office space, with 885,000
square feet (87%) leased. The lower percentage of space leased at the end of
the 2004 second quarter and the increase in total square feet available in
Griffin Land's portfolio versus the comparable time last year principally
reflects the completion in the 2003 fourth quarter of the shell of a 117,000
square foot industrial building that was built on speculation, of which 54,000
square feet was leased and occupied as of May 29, 2004. Activity of prospective
tenants has increased in fiscal 2004 as compared to the prior year. In addition
to the 54,000 square feet leased in the new industrial building in the New
England Tradeport, Griffin Land also leased 15,000 square feet in one of its
older industrial buildings in the New England Tradeport. Subsequent to the end
of the 2004 second quarter, Griffin Land leased 16,000 square feet in the shell
of a new 50,000 square foot office building that was built on speculation at the
end of fiscal 2002.
Net sales and other revenue at Imperial increased from $19.0 million in the
2003 second quarter to $19.1 million in the 2004 second quarter, as unit sales
volume in the 2004 second quarter was essentially flat as compared to the 2003
second quarter.
Griffin's consolidated operating profit decreased from $1.8 million in the
2003 second quarter to $0.3 million in the 2004 second quarter. The lower
consolidated operating profit reflects operating profit decreases of $0.9
million and $0.1 million at Imperial and Griffin Land, respectively, and an
increase of $0.5 million in general corporate expense.
Operating profit at Griffin Land decreased from $0.4 million in the 2003
second quarter to $0.3 million in the 2004 second quarter, reflecting the
following:
2004 2003
Second Qtr. Second Qtr.
------------- ------------
(amounts in millions)
Profit from leasing activities before general and
administrative expenses and before depreciation
and amortization expense . . . . . . . . . . . . $ 1.7 $ 1.6
Profit from land sales. . . . . . . . . . . . . . . - -
General and administrative expenses . . . . . . . . (0.6) (0.5)
-------------- -------------
Profit before depreciation and amortization expense 1.1 1.1
Depreciation and amortization expense . . . . . . . (0.8) (0.7)
-------------- -------------
Operating profit. . . . . . . . . . . . . . . . . . $ 0.3 $ 0.4
============== =============
The increase of $0.1 million in Griffin Land's profit from leasing
Activities before general and administrative expenses and before depreciation
and amortization expense was due to the increase in revenue from leasing.
Results from land sales reflect a profit of $0.2 million from the sale of
Undeveloped residential land, substantially offset by a writeoff of costs on a
Potential land sale transaction that will not proceed. Griffin Land's 2004
second quarter general and administrative expenses increased by $0.1 million
over the 2003 second quarter, due principally to higher employee compensation
expense. Griffin Land's 2004 second quarter depreciation and amortization
expense increased by $0.1 million over the 2003 second quarter, due to several
factors, including depreciation on the new 117,000 square foot industrial
building completed at the end of the 2003 fiscal year and depreciation on
building improvements completed in the current year.
Operating profit at Imperial decreased from $1.8 million in the 2003 second
quarter to $0.9 million in the 2004 second quarter, as follows:
2004 2003
Second Qtr. Second Qtr.
------------- ------------
(amounts in millions)
Net sales and other revenue. . . . . . . . . $ 19.1 $ 19.0
Cost of goods sold . . . . . . . . . . . . . 16.6 15.9
------------- ------------
Gross profit . . . . . . . . . . . . . . . . 2.5 3.1
Selling, general and administrative expenses 1.6 1.3
------------- ------------
Operating profit . . . . . . . . . . . . . . $ 0.9 $ 1.8
============= ============
The $0.9 decrease in operating profit was due principally to higher cost of
goods sold as a percentage of net sales in the 2004 second quarter as compared
to the 2003 second quarter, which resulted in a decrease in gross profit of $0.6
million. Imperial's gross margins decreased from 16.2% in the 2003 second
quarter to 13.1% in the 2004 second quarter. Approximately 60% of the increase
in cost of goods sold was due to higher shipping and delivery costs, caused by
higher labor and shipping supplies costs and higher trucking costs, which
management believes was caused, in part, by higher fuel costs and new trucking
regulations that became effective in early 2004. The balance of the increase in
cost of goods sold was due principally to higher inventory costs.
Imperial's selling, general and administrative expenses increased by $0.3
million in the 2004 second quarter as compared to the 2003 second quarter. As a
percentage of net sales, selling, general and administrative expenses increased
from 6.8% in the 2003 second quarter to 8.4% in the 2004 second quarter. The
increase in selling, general and administrative expenses principally reflects
higher selling expenses as a result of increased headcount of salespersons and
the timing of when selling expenses are incurred. Imperial changed its
salesperson compensation program in fiscal 2004, whereby a greater portion of
salesperson compensation expense is based on sales commission, in which the
expenses are incurred when the sales are made. Previously, a greater portion of
salesperson compensation was based on salaries, which are incurred evenly
throughout the year. The increased headcount of salespersons in 2004 was
intended to expand Imperial's distribution of product to parts of the southeast
and provide additional sales coverage in Imperial's New England market.
Griffin's general corporate expense increased from $0.4 million in the 2003
second quarter to $0.9 million in the 2004 second quarter. The increase
reflects approximately $0.3 million for the write off of unamortized debt
issuance costs related to Griffin's Credit Agreement with Fleet National Bank
(the "Credit Agreement"), which was scheduled to terminate in February 2005, but
was terminated early by Griffin as a result of the paydown of all amounts
outstanding under the Credit Agreement with a portion of the proceeds received
from the sale of Griffin's investment in Centaur (see below). In addition,
Griffin's 2004 second quarter general corporate expense included $0.1 million in
connection with a proposed additional financing that would have been required
under the terms of an amendment to the Credit Agreement had the Centaur sale not
been completed.
In the 2004 second quarter Griffin completed the sale of its investment in
Centaur to Centaur Holdings, PLC ("Centaur Holdings"), a newly formed company.
Griffin received cash proceeds of $68.9 million after transaction expenses of
$1.5 million. In addition to the cash proceeds, Griffin received 6,477,150
shares of common stock of Centaur Holdings, which was valued at approximately
$11.7 million based on the 1.00 British Sterling per share price of the initial
public offering of shares by Centaur Holdings and the foreign currency exchange
rate in effect at that time. Griffin is prohibited from selling its Centaur
Holdings common stock for six months from the transaction date. Griffin
recorded a pretax gain of $51.1 million on the sale and a foreign currency
exchange gain of $1.1 million related to the sale. In connection with the
Centaur transaction, substantially all of the stock options of Centaur were
exercised immediately prior to the closing of the Centaur transaction, which
resulted in Griffin's ownership being reduced from 35% to 32%. The gain of
approximately $2.3 million that resulted from the dilution of Griffin's
ownership is included in the gain on the sale of that investment. In addition,
Griffin recorded other comprehensive income of $4.0 million in the 2004 second
quarter, reflecting the difference, net of tax, between the value of Griffin's
investment in Centaur Holdings and the book value of the pro rata portion of
the investment in Centaur that remained as a result of receiving the Centaur
Holdings common stock as a part of the sale proceeds, adjusted to reflect
market pricing of Centaur Holdings as of the balance sheet date.
Griffin's consolidated interest expense decreased by $0.1 million from $0.7
million in the 2003 second quarter to $0.6 million in the 2004 second quarter.
The decrease in interest expense reflects the lower amount of borrowings
outstanding in the 2004 second quarter as compared to the 2003 second quarter.
Griffin's average outstanding debt in the 2004 second quarter was $36.2 million
as compared to average outstanding debt of $42.5 million in the 2003 second
quarter. The lower outstanding debt reflects the paydown of the entire amount
outstanding under Griffin's Credit Agreement with Fleet National Bank from a
portion of the proceeds from the sale of Centaur. Griffin reported interest
income of $0.1 million in the 2004 second quarter, reflecting interest earned on
investment of the remaining proceeds from the sale of Centaur.
Griffin's effective income tax rate was 33.8% in the 2004 second quarter as
compared to 34.8% in the 2003 second quarter. The 2004 second quarter effective
tax rate reflects a 35% rate for a federal income taxes adjusted for state
income taxes and certain tax credits related to foreign income taxes paid by
Centaur. The effective tax rate for the 2003 second quarter reflects a 34% rate
for federal income taxes adjusted for state income taxes.
Griffin's 2004 second quarter equity income from Centaur through the date
of sale was $0.4 million as compared to an equity loss of $0.3 million in the
2003 second quarter. The 2003 second quarter equity loss included a charge, of
which Griffin's allocable share was $0.5 million, to accrue future costs (less
expected sublease income) for an operating lease of office space that was no
longer used by Centaur.
Twenty-Six Weeks Ended May 29, 2004 Compared to the Twenty-Six Weeks Ended May
31, 2003
Net sales and other revenue increased from $25.0 million in the 2003 six
month period to $25.4 million in the 2004 six month period, reflecting increases
of $0.2 million each at Griffin Land and Imperial.
Net sales and other revenue at Griffin Land increased from $5.6 million in
the 2003 six month period to $5.8 million in the 2004 six month period. The
increase of $0.2 million reflects revenue from a sale of undeveloped residential
land in the 2004 six month period as compared to no land sales revenue in the
2003 six month period. Revenue from leasing operations was $5.6 million in both
the 2003 and 2004 six month periods, as increased rental revenue from new leases
and an increase in expense reimbursement by tenants during the 2004 six month
period was offset by lower billings for services provided to tenants,
particularly snow removal.
Net sales and other revenue at Imperial increased from $19.3 million in the
2003 six month period to $19.5 million in the 2004 six month period. Unit sales
volume in the 2004 six month period was essentially flat as compared to the 2003
six month period.
Griffin incurred a consolidated operating loss of $1.1 million in the 2004
six month period as compared to consolidated operating profit of $0.3 million in
the 2003 six month period. The lower operating results reflect decreases of
$0.5 million and $0.3 million in operating results at Imperial and Griffin Land,
respectively, and an increase of $0.6 million in general corporate expense.
Operating profit at Griffin Land decreased from $0.6 million in the 2003
six month period to $0.3 million in the 2004 six month period, reflecting the
following:
2004 2003
Six Months Six Months
---------- ----------
(amounts in millions)
Profit from leasing activities before general and
administrative expenses and before depreciation
and amortization expense . . . . . . . . . . . . $ 3.1 $ 3.2
Profit from land sales. . . . . . . . . . . . . . . - -
General and administrative expenses . . . . . . . . (1.2) (1.1)
---------- ----------
Profit before depreciation and amortization expense 1.9 2.1
Depreciation and amortization expense . . . . . . . (1.6) (1.5)
---------- ----------
Operating profit. . . . . . . . . . . . . . . . . . $ 0.3 $ 0.6
========== ==========
The decrease of $0.1 million in Griffin Land's profit from leasing
Activities before general and administrative expenses and before depreciation
and amortization expense was due to higher building operating expenses,
reflecting higher utility expenses, real estate taxes and repair and
maintenance expenses, partially offset by lower snow removal costs. Results
from land sales reflect a profit of $0.2 million from the sale of undeveloped
residential land offset by the writeoff of $0.2 million of costs on two
potential land sale transactions that will not proceed. The increase of
$0.1 million in general and administrative expenses reflects higher salary
and benefit expenses. The increase of $0.1 million in depreciation and
amortization expense principally reflects depreciation on the new 117,000
square foot industrial building completed at the end of fiscal 2003.
Imperial's operating profit decreased from $0.5 million in the 2003 six
month period to break even results in the 2004 six month period, as follows:
2004 2003
Six Month Period Six Month Period
---------------- -----------------
(amounts in millions)
Net sales and other revenue. . . . . . . . . $ 19.5 $ 19.3
Cost of goods sold . . . . . . . . . . . . . 17.0 16.2
---------------- -----------------
Gross profit . . . . . . . . . . . . . . . . 2.5 3.1
Selling, general and administrative expenses 2.5 2.6
---------------- -----------------
Operating profit . . . . . . . . . . . . . . $ - $ 0.5
================ =================
The $0.5 million decrease in operating profit was due to higher cost of
goods sold as a percentage of net sales in the 2004 six month period as
compared to the 2003 six month period, which resulted in a decrease in gross
profit of $0.6 million. Imperial's gross margin on sales decreased from 16.0%
in the 2003 six month period to 12.7% in the 2004 six month period. The higher
cost of goods sold reflects increased shipping and delivery costs (as discussed
in the 2004 second quarter results) and higher inventory costs. Imperial's
selling, general and administrative expenses decreased by $0.1 million in the
2004 six month period as compared to the 2003 six month period. As a
percentage of net sales, selling, general and administrative expenses decreased
from 13.0% in the 2003 six month period to 12.6% in the 2004 six month period.
Decreases of $0.1 million in general and administrative expenses and $0.1
million in marketing expenses in the 2004 six month period were partially
offset by higher selling expenses. The lower marketing expenses principally
reflect the inclusion in the 2003 six month period of expenses related to the
introduction of plants to be sold under the new "Novalis" trade name. The
lower general and administrative expenses in the 2004 six month period as
compared to the 2003 six month period reflects lower donation and contribution
expenses. The increase in selling expenses in the 2004 six month period as
compared to the 2003 six month period principally reflects a change in the
compensation program for salespersons and an increase in salesperson headcount
(as discussed in the 2004 second quarter results).
Griffin's general corporate expense increased from $0.9 million in the 2003
six month period to $1.5 million in the 2004 six month period. The increase
principally reflects the 2004 second quarter expenses of $0.3 million for the
write off of unamortized debt issuance costs related to the Credit Agreement,
which was terminated by Griffin in May 2004, and the write off of $0.1 million
of costs associated with a proposed financing that did not take place.
In the 2004 six month period, Griffin completed the sale of its investment
in Centaur, recording a pretax gain on the sale of $51.1 million. Griffin also
recorded a foreign currency exchange gain of $1.1 million in the 2004 six month
period related to a foreign currency exchange contract entered into as a result
of the sale of Centaur (see discussion of these transactions in the 2004 second
quarter results).
Griffin's consolidated interest expense was $1.3 million in both the 2003
and 2004 six month periods. Higher interest expense in the 2004 first quarter
as compared to the 2003 first quarter offset the lower interest expense in the
2004 second quarter as a result of the paydown of the entire amount outstanding
under the Credit Agreement with a portion of the proceeds from the sale of
Centaur. Griffin had $0.1 million of interest income in the 2004 six month
period from investment of the remaining proceeds from the sale of Centaur after
repaying the Credit Agreement debt.
Griffin's effective income tax rate was 33.7% for the 2004 six month
period, as compared to 35.9% for the 2003 six month period. The 2004 six month
period 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. The effective tax rate for the 2003 six month period reflects
a 34% rate for federal taxes adjusted for state income taxes.
Griffin's 2004 six month period included equity income of $0.3 million
through the date of Griffin's sale of its investment in Centaur, as compared to
an equity loss of $0.6 million in the 2003 six month period. The 2003 six month
period included a charge, of which Griffin's allocable share was $0.5 million,
to accrue future costs (less expected sublease income) for an operating lease of
office space that was no longer used by Centaur.
Liquidity and Capital Resources
Cash used in operating activities increased from $7.5 million in the 2003
six month period to $17.0 million in the 2004 six month period. The $9.5
million increase in cash used in operating activities principally reflects
Griffin's second quarter income tax payments of $10.0 million related to the
gain on the sale of Centaur.
Cash provided by investing activities was $67.0 million in the 2004 six
month period as compared to cash used in investing activities of $9.8 million in
the 2003 six month period. The cash provided by investing activities in the
2004 six month period reflects the proceeds from the sale of Centaur and the
foreign currency exchange contract. The net cash used in investing activities
in the 2003 six month period reflects $7.4 million used for the acquisition of a
70% interest in a real estate joint venture that owned two office buildings of
approximately 80,000 square feet each located in Griffin Center in Windsor,
Connecticut. Griffin had previously held the remaining 30% interest. Additions
to real estate in 2004 principally reflect tenant improvements, completed in the
second quarter, on space in which Griffin Land recently entered into a ten year
lease extension with a major tenant. The new lease rates consider these
expenditures, including an interest factor, to provide Griffin Land an
appropriate return over the lease term on its investment of these initial costs.
Additions to property and equipment, principally for Imperial, were
approximately $0.4 million in both the 2003 and 2004 six month periods. The
additions in the 2003 six month period were generally for the completion of the
expansion of Imperial's northern Florida growing operation that had been ongoing
over the prior four years. Additions to property and equipment in the 2004 six
month period were to construct facilities needed for a portion of the product to
be sold under the new "Novalis" trade name, to increase shipping capacity to
meet its needs during its peak spring demand period and for general
improvements.
Net cash used in financing activities was $9.6 million in the 2004 six
month period as compared to net cash of $17.4 million provided by financing
activities in the 2003 six month period. The net cash used in financing
activities in the 2004 six month period reflects the paydown of all of the
outstanding amounts under the Credit Agreement using a portion of the proceeds
from the sale of Centaur. The 2004 six month period also includes $1.5 million
of proceeds of an additional mortgage on two industrial buildings. The proceeds
were used to finance tenant improvements related to a ten year lease extension
by a major tenant in one of those buildings. The net cash generated from
financing activities in the 2003 six month period includes the proceeds from a
$9.75 million nonrecourse mortgage placed on the two office buildings of the
joint venture acquired in December 2002 and borrowings under the Credit
Agreement to finance Griffin's operations.
For the balance of fiscal 2004, Griffin is planning to continue to invest
in its real estate business. Additional amounts will be required to complete
the remainder of the interiors of the shells of an office building and an
industrial building that were built on speculation. Currently, each building
is partially leased. The buildout of the unleased parts of these buildings will
be started when leases are obtained. Griffin Land will also continue to invest
in infrastructure improvements required for present and future development in
its office and industrial parks. In the second half of fiscal 2004, Griffin
Land expects to start construction, on speculation, of the shell of a new
approximately 130,000 square foot industrial building in the New England
Tradeport. Griffin Land will also continue to seek approval for its proposed
residential developments, including a 50 lot subdivision in Suffield,
Connecticut, the proposed development in Simsbury, Connecticut that is currently
in litigation, and the sale of the remaining development rights of Griffin
Land's Walden Woods development in Windsor, Connecticut. Griffin Land has an
agreement for the sale of those development rights, and subsequent to the end of
the 2004 second quarter, the purchaser received approval of its development
plans from the Windsor Town Planning & Zoning Commission. Based on the sale
terms, proceeds to Griffin are expected to be approximately $3.0 million, and
the transaction is expected to be completed in the 2004 third quarter. Griffin
Land recently completed an agreement to sell undeveloped residential land for
$0.8 million. The completion of this transaction is contingent on the buyer
obtaining approvals from the town's land use commissions. This transaction is
not expected to be completed this year. Griffin Land intends to proceed with
residential development plans on other of its lands that are also appropriate
for that use.
Griffin's payments (including principal and interest) under contractual
obligations as of May 29, 2004 are as follows:
Due Due Due Due in
Within From From More Than
Total One Year 1-3 Years 3-5 Years 5 Years
------- -------- --------- --------- ---------
(in millions)
Mortgages. . . . . . . . . . $ 51.0 $ 3.0 $ 6.0 $ 6.1 $ 35.9
Capital Lease Obligations. . 0.4 0.2 0.2 - -
Operating Lease Obligations. 0.7 0.2 0.3 0.2 -
Purchase Obligations. . . . 1.2 1.2 - - -
Other (1). . . . . . . . . . 1.2 - - - 1.2
------- -------- --------- --------- ---------
$ 54.5 $ 4.6 $ 6.5 $ 6.3 $ 37.1
======= ======== ========= ========= =========
(1) Includes Griffin's deferred compensation plan and other postretirement
benefit liabilities.
As a result of the Centaur transaction, Griffin prepaid the entire amount
outstanding under its Credit Agreement and subsequently terminated the Credit
Agreement. Management believes that the significant amount of cash proceeds,
after payment of income taxes, generated from the completion of the Centaur
transaction and cash flow generated from its operations will be sufficient to
finance the working capital requirements of Griffin's businesses and fund
continued investment in Griffin's real estate assets for the foreseeable future.
Griffin expects to use the balance of the proceeds from the Centaur sale for
additional real estate investment; however, there are no specific real estate
investments planned at this time. Such investment may or may not occur based on
many factors, including real estate pricing. Griffin Land may also continue to
seek nonrecourse mortgage placements on selected properties.
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, successful completion of negotiations for leasing currently vacant
space, construction of additional facilities in the real estate business,
completion of the sale of the development rights of Walden Woods and approval of
other proposed residential subdivisions. 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 3. 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 repay 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. For variable rate debt,
changes in interest rates generally do not impact the fair market value of the
debt instrument, but do affect future earnings and cash flows. Griffin had no
variable rate debt outstanding at May 29, 2004. An increase in interest rates
of 1% would have increased Griffin's interest expense by approximately $38,000
in the twenty-six weeks ended May 29, 2004.
Griffin is exposed to market risks from fluctuations in interest rates and
the effects of those fluctuations on market values of Griffin's cash equivalent
short-term investments. These investments generally consist of overnight
investments that are not significantly exposed to interest rate risk, except to
the extent that changes in interest rates will ultimately affect the amount of
interest income earned and cash flow from these investments.
Griffin does not currently have any derivative financial instruments in
place to manage interest costs, but that does not mean that Griffin will not use
them as a means to manage interest rate risk in the future.
In connection with the sale of its investment in Centaur, Griffin entered
into a foreign currency exchange forward contract with Fleet National Bank to
hedge Griffin's exposure to the short-term fluctuation in the foreign currency
exchange rate between the time the definitive agreement on the sale of Centaur
was completed and the closing of the transaction and receipt of the sale
proceeds. Griffin fulfilled its obligation under the contract with the proceeds
from the sale of Centaur.
Griffin does not have foreign currency exposure in its operations. Griffin
retains an investment in Centaur Holdings PLC, a newly formed public company
traded on the Alternative Investment Market of the London Stock Exchange. The
ultimate liquidation of this investment and conversion of proceeds into United
States currency is subject to future foreign currency exchange rates.
- --------------------------------------------------------------------------------
ITEM 4 . CONTROLS AND PROCEDURES
Griffin maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in Griffin's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
such information is accumulated and communicated to Griffin's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Also, we have
investments in certain unconsolidated entities. As we do not control or manage
these entities, our disclosure controls and procedures with respect to such
entities are necessarily substantially more limited than those we maintain with
respect to our consolidated subsidiaries.
As required by SEC Rule 13a-15(b), Griffin carried out an evaluation, under
the supervision and with the participation of Griffin's management, including
Griffin's Chief Executive Officer and Griffin's Chief Financial Officer, of the
effectiveness of the design and operation of Griffin's disclosure controls and
procedures as of the end of the quarter covered by this report. Based on the
foregoing, Griffin's Chief Executive Officer and Chief Financial Officer
concluded that Griffin's disclosure controls and procedures were effective at
the reasonable assurance level.
There has been no change in Griffin's internal controls over financial
reporting during Griffin's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, Griffin's internal
controls over financial reporting.
- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
As a result of the denials in 2000 by the land use commissions of the town of
Simsbury, Connecticut, of Griffin Land's proposed residential development called
Meadowood, Griffin Land brought several separate but related suits appealing
those decisions. In a ruling released on May 18, 2004, the Supreme Court of the
State of Connecticut reversed a lower court ruling which upheld a denial of
Griffin's wetlands application related to its proposed residential development
by Simsbury's Inland Wetlands Commission (the "Commission"). The Connecticut
Supreme Court concluded that the trial court improperly applied the substantial
evidence test when it relied on speculative evidence to support the Commission's
denial of Griffin's application. The case was remanded to the lower court for
further proceedings. There remains outstanding two appeals by Simsbury of lower
court decisions favorable to Griffin in separate but related cases involving
Griffin's proposed residential development.
ITEMS 2 - 5. Not Applicable
ITEM 6. Exhibits And Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.28 Secured Installment Note and First Amendment of Mortgage and Loan
Documents dated April 16, 2004 among Tradeport Development I, LLC,
Griffin Land & Nurseries, Inc. and Farm Bureau Life Insurance Company
31.1 Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a),
as Adopted Pursuant to Section 301 of the Sarbanes Oxley Act of 2002
32.1 Certifications of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certifications of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
(1) On March 9, 2004, Griffin filed a Form 8-K which included the Share
Acquisition Agreement and Tax Deed Agreement with respect to the
Sale by Griffin of all of its B Ordinary Shares of Centaur
Communications, Ltd.
(2) On March 10, 2004, Griffin filed a Form 8-K announcing the
completion of the sale of all of its B Ordinary Shares in Centaur
Communications, Ltd.
(3) On March 25, 2004, Griffin filed a Form 8-K on the sale of its
investment in Centaur Communications, Ltd., including pro forma
financial information.
(4) On April 8, 2004, Griffin filed a Form 8-K to announce its 2004
first quarter results of operations.
(5) On May 11, 2004, Griffin filed a Form 8-K regarding the decision
by the Connecticut State Supreme Court on litigation related to
Griffin's proposed residential development in Simsbury, CT.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRIFFIN LAND & NURSERIES, INC.
/s/ FREDERICK M. DANZIGER
-------------------------
Date: July 12, 2004
Frederick M. Danziger
President and Chief Executive Officer
/s/ ANTHONY J. GALICI
----------------------
Date: July 12, 2004
Anthony J. Galici
Vice President, Chief Financial Officer
and Secretary
- --------------------------------------------------------------------------------
Exhibit 10.28
20-25 International Drive
Windsor, CT
SECURED INSTALLMENT NOTE
$1,500,000.00 April 16, 2004
FOR VALUE RECEIVED, the undersigned, TRADEPORT DEVELOPMENT I, LLC, a Connecticut
limited liability company having its chief executive office at 204 West Newberry
Road, Bloomfield, Connecticut 06002 ("MAKER"), promises to pay to the order of
FARM BUREAU LIFE INSURANCE COMPANY, an Iowa corporation or its assigns
("HOLDER") at its principal office located at 5400 University Avenue, West Des
Moines, Iowa 50266, or at such other place as Holder may designate in writing,
the principal sum of ONE MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS
($1,500,000.00) together with interest from the date advanced on the balance of
the principal sum remaining from time to time unpaid at the rate of SIX AND
THIRTY HUNDREDTHS PERCENT (6.30%) per annum (the "BASE INTEREST RATE") subject,
however, to the provisions of PARAGRAPHS F AND O below. Interest only upon the
principal amount outstanding and unpaid shall be computed at the aforesaid rate
and shall be paid on the first day of the month following the date hereof or, at
Holder's option, on the date hereof. Thereafter, interest shall be computed as
aforesaid and such principal and interest shall be payable in monthly
installments of Sixteen Thousand Eight Hundred Seventy-Nine and 95/100 Dollars
($16,879.95) the first of which shall be due and payable on the first (1st) day
of June, 2004 (the "FIRST MONTHLY PAYMENT DATE"), and the succeeding
installments of which shall be due and payable on the first day of each and
every month thereafter, except that the entire unpaid balance of said principal
and all accrued interest shall be due and payable in full on the first (1st) day
of May, 2014 (the "MATURITY DATE"). All terms not otherwise defined herein
shall have the same meanings as set forth in the Mortgage (as defined in
PARAGRAPH C below). The following terms and provisions shall apply to this
Note:
A. All interest referred to and payable pursuant to this Note shall be
calculated on the basis of a three hundred sixty (360) day year consisting of
twelve (12) thirty (30) day months. So long as no Event of Default occurs or
exists all monthly payments on account of the indebtedness evidenced by this
Note, or otherwise pursuant to this Note, shall be applied in the following
order: (i) first to late charges; (ii) second to the repayment of monies as may
be advanced by Holder under the Mortgage, defined below, with interest thereon,
until such monies are fully repaid, (iii) third to the payment of any costs
(including attorneys' fees) incurred by Holder in enforcing collection hereof;
(iv) fourth to interest on the unpaid principal balance of this Note; and (v)
fifth to the unpaid principal balance of this Note. In the event an Event of
Default occurs or exists Holder shall have the absolute right to apply any and
all monthly payments on account of the indebtedness evidenced by this Note, or
otherwise pursuant to this Note may be applied in any order that Holder deems
appropriate, in its sole and absolute discretion. The obligations of this Note
and the Original Note, as defined in Paragraph C, are intended to be pari passu
obligations.
B. Unless and until Maker is otherwise notified in writing by Holder,
all monthly payments due on account of the indebtedness evidenced by this Note
shall be made by electronic funds transfer debit transactions utilizing the
Automated Clearing House ("ACH") network of the U.S. Federal Reserve System and
shall be initiated by Holder from Maker's account (as shall have been previously
established by Maker and approved by Holder) at an ACH member bank (the "ACH
ACCOUNT") for settlement on the first day of each month as provided hereinabove;
provided, however, that if the first day of any such month is a Saturday, Sunday
or holiday, then settlement shall be made on the immediately following day which
is not a Saturday, Sunday or holiday. Maker hereby authorizes Holder to
electronically initiate the transfer of all monthly payments required on this
Note by Automated Clearing House transfer of funds from the following ACH member
bank:
Attn: Randy Gudawkas
---------------
ABA No: XXXXXXXXX
---------
ACH Account No: XXXXX-XXXXX
-----------
ACH Account Name: Griffin Land & Nurseries, Inc.
----------------------------------
Maker shall, prior to each payment due date, deposit and/or maintain
sufficient funds in the ACH Account to cover all debit transactions initiated or
to be initiated hereunder by or for Holder.
Concurrently with the delivery of this Note, Maker has executed and
delivered written authorization to Holder to effect the foregoing and will from
time to time execute and deliver further authorization to effect payment through
Automated Clearing House transfer. Maker has delivered to Holder, concurrently
with or prior to Maker's execution and delivery of this Note, a voided blank
check or a pre-printed deposit form for such ACH Account showing Maker's ACH
Account number with the ACH member bank and showing the ACH member bank routing
number.
Notwithstanding the foregoing regarding the ACH member bank and the ACH
network system, any failure, for any reason (other than a reason completely
outside the control of Maker), of the ACH network system or any electronic funds
transfer debit transaction to be timely or fully completed shall not in any
manner relieve Maker from its obligations to promptly, fully and timely pay and
make all payments or installments provided for under this Note when due, and to
comply with all other of Maker's obligations under this Note or any other
documents evidencing or securing the Note; or relieve Maker from any of its
obligations to pay any late charges due or payable under the terms of this Note.
Any failure of the ACH network system or of any electronic funds transfer debit
transaction to timely or fully complete any payment due hereunder which is
completely outside the control of Maker shall not cause Maker to be in default
hereunder nor allow for the imposition of any late charges or default interest
unless Maker does not cause such payment to be made within two (2) business days
after being notified of such failure. Maker shall provide Holder with at least
ten (10) days prior written notice of any change in the ACH information provided
above and Maker shall not change ACH member banks without first obtaining
Holder's written approval.
C. This Note is secured by, among other things, that certain Mortgage,
Security Agreement, Financing Statement and Fixture Filing with Absolute
Assignment of Rents and Leases dated September 17, 2002 (the "ORIGINAL
MORTGAGE") executed by Maker, as grantor, to secure Maker's Secured Installment
Note dated September 17, 2002 in the original principal amount of $7,675,000.00
(the "ORIGINAL NOTE") and encumbering certain real and personal property and
other rights and improvements, as more particularly described therein (the
"MORTGAGED PROPERTY"), as amended by First Amendment of Mortgage and Loan
Documents dated as of April __, 2004 (the "FIRST MORTGAGE MODIFICATION"; and
such Original Mortgage, as so modified, the "MORTGAGE"). In the event Maker
fails to pay any payment of principal or interest or both under this Note or the
Original Note on the date the same is due, or if any other or further default
occurs or exists under this Note, the Original Note, the Mortgage, or under any
other agreement, document or instrument executed, delivered or given to evidence
or secure this Note or the Original Note or any sums advanced in connection
herewith or therewith (the Mortgage, this Note, the Original Note, and all other
such agreements, documents, and instruments are herein collectively called the
"LOAN DOCUMENTS"), or if any Event of Default occurs or exists, or upon the
filing by Maker of any petition for bankruptcy, reorganization or arrangement
pursuant to federal or state law, or the consent to or acquiescence in such
filing by or with respect to Maker, then this Note shall be in default and
Holder may, without notice to Maker, accelerate the maturity of this Note and
the Original Note; provided, however, in the event of the filing of any
involuntary petition for bankruptcy, reorganization or arrangement pursuant to
federal or state law with respect to Maker to which Maker does not consent to or
acquiesce, Maker shall have a sixty (60) day period in which to cure such
default and in the event Maker does not cure within said sixty (60) day period
then Holder may, without notice to Maker, accelerate the maturity of this Note.
Upon acceleration, the entire unpaid principal balance plus all accrued interest
thereon, and any Prepayment Premium (defined below) and/or late charges provided
for in this Note and in the Original Note, shall, regardless of the Maturity
Date specified hereinabove or the maturity date specified in the Original Note,
at the option of Holder, be and become immediately due and payable, without any
further notice or demand, such notice and demand being expressly waived,
anything contained herein, in the Mortgage, in any other of the Loan Documents,
or in any other instrument now or hereafter securing this Note or the Original
Note to the contrary notwithstanding. Said option shall continue until all such
defaults have been cured.
D. The principal of the indebtedness evidenced by this Note may not be
prepaid in whole or in any part except as specifically provided in this
paragraph.
(1) Maker agrees that Maker is absolutely and unconditionally
prohibited from prepaying all or any portion of the principal of the
indebtedness evidenced by this Note prior to November 1, 2007. Thereafter, upon
at least thirty (30) days prior written notice to Holder of the Maker's
intention to prepay this Note, and provided that Maker shall not be in default
hereunder and no Event of Default (as defined in the Mortgage) has occurred and
is continuing, and Maker shall not have caused or permitted to occur or exist an
event which with the giving of notice or the passage of time (or both) would
constitute, ripen into or result in a default under this Note or an Event of
Default, Maker shall have the privilege of prepaying all (but not less than all)
of the unpaid principal balance and all accrued interest of and on the
indebtedness evidenced by this Note on any monthly installment payment due date,
provided that Maker shall also pay a prepayment premium ("PREPAYMENT PREMIUM")
equal to the greater of: (a) one percent (1%) of the then outstanding principal
-------
balance of the indebtedness evidenced by this Note; or (b) the "YIELD
MAINTENANCE PREMIUM," which shall be defined as being equal to the present
value, discounted at the yield of the 13.25% Treasury bond or note due May 1,
2014 (or similar issue if this issue is no longer traded), as reported in The
---
Wall Street Journal on the fifth (5th) business day preceding the prepayment
- ---------------------
date for the number of months remaining between the prepayment date and the
Maturity Date, of a series of payments equal in number to the number of months
from the prepayment date to the Maturity Date where the amount of each payment
is equal to (i) the product obtained by multiplying the difference obtained by
subtracting the yield to maturity on the above-stated Treasury bond or note from
the Base Interest Rate of this Note (but not below zero), times the unpaid
principal balance evidenced by this Note on the day of and immediately preceding
prepayment, (ii) divided by twelve (representing 12 months).
(2) A "LOAN YEAR" shall be a period of twelve consecutive months, the first
of which shall commence on the due date of the first installment of principal
and interest hereunder (and the first Loan Year also shall include the period
from the date hereof until such date), and each succeeding Loan Year shall
commence on the anniversary of such date.
(3) Once Maker notifies Holder of Maker's intention to make any
prepayment permitted under the foregoing provisions of this PARAGRAPH D, Maker
agrees to and shall be required to make the prepayment in accordance with such
provisions. Maker's failure to do so shall constitute a default under this
Note.
(4) The Prepayment Premium required to be paid hereunder is to
compensate Holder, and its successors and assigns, for the loss of interest it
would otherwise earn on the principal hereof if such principal were allowed to
remain outstanding, and for the cost incurred in connection with reinvestment of
principal so prepaid at an earlier date than the Maturity Date. Any prepayment
specified in the notice of intention to prepay referred to above shall become
due and payable at the time provided in said notice (provided that such notice
shall be given in accordance with the terms of this Note). Notwithstanding
anything to the contrary above, the Prepayment Premium shall be payable
regardless of whether or not the indebtedness evidenced by this Note is prepaid
voluntarily or involuntarily or as the result of the exercise by Holder of any
one or more of its rights and/or remedies on any Event of Default under this
Note, the Mortgage or any other Loan Documents or during any period when
prepayment is either not permitted, or is conditionally permitted (except that
no Prepayment Premium shall be payable on involuntary prepayments by reason of:
application of the proceeds of any proceedings in eminent domain, or proceedings
in lieu thereof, or of the proceeds of fire or other casualty insurance or by
operation of Section 7.01 of the Mortgage). Holder shall not be required to
accept, negotiate about or consider any prepayment or tendered prepayment unless
and until all terms and conditions of this Note have been strictly complied
with.
(5) If upon default by Maker hereunder or under the Mortgage and/or
other Loan Documents and following the acceleration of the maturity hereof, as
herein provided, a tender of payment of the amount necessary to satisfy the
indebtedness evidenced hereby is made by Maker, or by anyone on its behalf,
prior to a foreclosure sale or trustee's sale held under or pursuant to the
Mortgage, such tender shall be deemed to constitute an evasion of the payment
terms hereof and shall be deemed to be a prepayment hereunder and any such
prepayment shall also include the Prepayment Premium required above in this Note
in connection with prepayment, or if, at that time, there be no such privilege
of prepayment such payment shall also include a premium for such prepayment in
an amount which is the greater of (a) five percent (5%) of the then outstanding
principal balance of this Note, or (b) the Yield Maintenance Premium determined
in accordance with PARAGRAPH D(1)(B) above.
BY INITIALING BELOW, MAKER EXPRESSLY ACKNOWLEDGES, AGREES AND UNDERSTANDS
THAT, PURSUANT TO THE TERMS OF THIS NOTE, MAKER HAS AGREED THAT MAKER HAS NO
RIGHT TO PREPAY THIS NOTE IN WHOLE OR IN PART FOR THE APPLICABLE PERIOD (THE
"CLOSED PERIOD") SET FORTH ABOVE IN THIS NOTE; THAT AFTER SUCH CLOSED PERIOD
MAKER HAS NO RIGHT TO PREPAY THIS NOTE IN WHOLE OR IN PART WITHOUT PREPAYMENT
PREMIUM EXCEPT ONLY AS OTHERWISE EXPRESSLY PROVIDED IN THIS NOTE; AND THAT MAKER
SHALL BE LIABLE FOR THE PAYMENT OF A PREMIUM FOR PREPAYMENT OF THIS NOTE ON
ACCELERATION OF THIS NOTE IN ACCORDANCE WITH ITS TERMS. FURTHERMORE, BY
INITIALING BELOW, MAKER EXPRESSLY ACKNOWLEDGES, AGREES AND UNDERSTANDS THAT
HOLDER HAS MADE THE LOAN EVIDENCED BY THIS NOTE IN RELIANCE ON SUCH AGREEMENTS
OF MAKER AND HOLDER WOULD NOT HAVE MADE SUCH LOAN WITHOUT SUCH AGREEMENTS.
/S/AG
-------------
Maker's Initials
E. This Note is given for an actual loan in the above amount and is the
promissory note or note referred to in and secured by the Mortgage (together
with the Original Note which is also secured by the Mortgage). All of the
agreements, conditions and covenants contained in the Mortgage which are to be
kept and performed by the Maker are hereby made a part of this Note to the same
extent and with the same force and effect as if they were fully set forth
herein, and the Maker covenants and agrees to keep and perform them, or cause
them to be kept and performed, strictly in accordance with their terms.
F. After the Maturity Date, and/or upon and after the occurrence or
existence of any Event of Default under this Note, the Mortgage, or any of the
other Loan Documents (including, without limitation, any failure to pay any
monthly payment of principal, interest or any other sums on the date due), each
and every payment of principal, accrued interest and other sums (including the
entire unpaid principal balance of the indebtedness evidenced by this Note in
the event of an acceleration of this Note), shall bear interest at the rate of
fifteen percent (15%) per annum (the "DEFAULT RATE") until paid in full.
G. The Maker recognizes that default by the Maker in making the
payments herein agreed to be paid when due will result in the Holder incurring
damages, consisting of, among other things, the incurrence of additional expense
in servicing the Loan Documents, loss to the Holder of the use of the money due,
and frustration to the Holder in meeting its other financial commitments.
Therefore, the Maker agrees that, if, for any reason, the Maker fails to pay
when due any payment due under this Note or under any of the other Loan
Documents, then the Holder shall be entitled to a payment on account of the
damages and detriment caused thereby. The parties hereto acknowledge, however,
that it is extremely difficult and impractical to ascertain the extent of such
damages; accordingly, the Maker agrees that, if the Maker fails to pay when due
any payment due under this Note or under any of the other Loan Documents, then
the Maker shall pay to the Holder, promptly upon the Holder's demand therefor,
an amount equal to five cents ($0.05) for each dollar ($1.00) overdue, which
amount the parties hereto agree represents a reasonable estimate of the damages
sustained by the Holder.
H. Time is of the essence hereof and of every payment, obligation or
duty to be performed or paid on the part of Maker.
I. Maker agrees that if, and as often as, this Note is placed in the
hands of an attorney for collection or to defen