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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29288
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GRIFFIN LAND & NURSERIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0868496
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK (Zip Code)
(Address of principal
executive offices)
(212) 218-7910
(Registrant's Telephone Number, Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
COMMON STOCK $0.01 PAR VALUE NASDAQ NATIONAL MARKET
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/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. / /
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
$10,916,000 approximately, based on the closing sales price on the Nasdaq
National Market on February 5, 1999. Shares of Common Stock held by each
executive officer, director, holders of greater than 10% of the outstanding
Common Stock of the Registrant and persons or entities known to the Registrant
to be affiliates of the foregoing have been excluded in that such persons may be
deemed to be affiliates. This assumption regarding affiliate status is not
necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: Common Stock:
4,842,704 shares as of February 5, 1999.
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PART I
ITEM 1. BUSINESS
Griffin and its subsidiaries comprise principally a landscape nursery and
real estate business. At the end of its 1998 fiscal year Griffin engaged in two
principal lines of business: (1) the landscape nursery products business,
comprised of (x) the growing of containerized landscape nursery products for
sale principally to garden center operators and landscape nursery mass
merchandisers, and (y) the owning and operating of wholesale sales and service
centers whose principal customers are landscape contractors; and (2) the real
estate business, comprised of (x) the owning, building and managing of
commercial and industrial properties and (y) the developing of residential
subdivisions on real estate owned by Griffin in Connecticut and Massachusetts.
Griffin also owns an approximately 35% interest (33% fully diluted) in Centaur
Communications, Ltd., a United Kingdom magazine and information services
publisher and has a lesser interest in Linguaphone Group, plc which will be
accounted for under the cost method of accounting for investments in 1999 but
which is reflected on an equity basis in 1998 results.
LANDSCAPE NURSERY BUSINESS
The landscape nursery operations of Griffin are operated by its wholly-owned
subsidiary, Imperial Nurseries, Inc. ("Imperial"). Imperial is a grower,
distributor and, to a much lesser extent, broker of wholesale landscape nursery
stock. The landscape nursery industry is extremely fragmented, with the industry
leader having less than 1% of total market share. Imperial believes that its
volume places it among the twenty largest landscape nursery companies in the
country.
Imperial's container growing operations are located on property owned by
Griffin in Connecticut (400 acres) and in northern Florida (350 acres). The
majority of Imperial's inventories are container-grown plants on those two
farms. The largest portion of Imperial's container-grown product consists of
broad leaf evergreens, including azaleas and rhododendron. Other major product
categories include juniper and deciduous shrubs. Container-grown product is held
principally from one to five years prior to its sale by Imperial. Recently
Imperial has substantially increased its production of perennials which have a
much shorter growing cycle than most of the rest of Imperial's product. During
1997, Imperial determined to terminate its own growing of field-grown product
and created a reserve estimated to be sufficient to absorb the losses from
terminating these operations. The liquidation of the field-grown inventory
appears to be on schedule and budget. Imperial contracts with a grower in the
Mid-Atlantic states to grow field-grown product for Imperial. The agreement
provides for Imperial to purchase such product over a five year period and is
part of a program intended to replace Imperial's previous investment in
field-grown plants and to shorten its product growing cycles.
Imperial is also reviewing a variety of approaches to increase its return on
assets with potentially different approaches for different categories of
products. Among such possible approaches are changing the potting and growing
cycle for some of its containerized production, and adding a broader selection
of perennial flowers and flowering shrubs to its list of products. Some of these
programs are also directed at developing quicker growing products and improved
soil mixes.
The growing operations serve a market comprised principally of retail chain
store garden departments, retail nurseries and garden centers, wholesale
nurseries, distributors and to a lesser extent landscapers as direct customers.
Imperial-grown products are also distributed through its own wholesale
horticultural sales and service centers whose main customers are landscapers.
Imperial's major markets are in the Northeast, Mid-Atlantic, the northern
portion of the Southeast and Midwest. Nursery sales are extremely seasonal,
peaking in spring, and are strongly affected by commercial and residential
building activity as well as materially affected by weather conditions,
particularly in the Spring planting season.
1
Imperial operates seven wholesale horticultural sales and service centers
which sell a wide range of plant material, including a large portion purchased
from growers other than Imperial, and horticultural tools and products to the
trade. The largest portion of the sales of these centers is to professional
landscapers. The centers, all of which are owned by Imperial, are located in
Windsor, Connecticut; Aston and Pittsburgh, Pennsylvania; Columbus and
Cincinnati, Ohio; White Marsh, Maryland; and Manassas, Virginia. The Cincinnati
center is currently being expanded, and a site is being sought for a New Jersey
center. During 1998, results from these centers improved substantially.
Currently Imperial's sales are made to a large variety of customers, none of
whom represents more than 4% of sales.
Containerized growing and shipping capacity has been increased to meet the
potential volume and quality needs of Imperial's customers and to capitalize on
expected growth in the Mid-Atlantic and Midwest markets. Imperial has also added
to its sales coverage in these areas with additional sales personnel at the
farms and an additional salesperson in the marketplace. In coming years a larger
part of Imperial's shipping will probably be made on trucks outfitted with
shelves. This may increase shipping expenses.
REAL ESTATE BUSINESS
Griffin is directly engaged in the real estate development business on
portions of its land in Connecticut. Griffin develops portions of its properties
for commercial, residential and industrial use. The headquarters for this
operation is in Bloomfield, Connecticut.
During the last several years, the real estate market in the Hartford area,
particularly that in the northwest quadrant, where the majority of Griffin's
acreage is located, has been depressed by a number of factors, including the
decline of employment in the defense and insurance industries. There can be no
assurance that the condition of the real estate market in this region will
improve in the near future. The development of Griffin's land was also affected
by land planning issues, particularly in the town of Simsbury. In Simsbury, the
value of Griffin's land is affected by the presence of chlordane on a portion of
the land which is intended for residential development. Griffin is examining
means of remediation on its lands and will seek to subdivide certain of its
Simsbury properties over a reasonable period. Negotiations to sell one parcel in
Simsbury are continuing; but, completion of that proposed transaction is subject
to a number of conditions. Griffin anticipates that obtaining subdivision
approvals in many of the towns where it holds land to be an extended process.
The most substantial of Griffin's current development efforts are focused on
a 600 acre tract owned by Griffin near Bradley International Airport and
Interstate 91 known as the New England Tradeport. To date, approximately 240,000
square feet of warehouse and light manufacturing space have been completed and
are approximately 94% occupied, and a bottling and distribution plant for
Pepsi-Cola has been built. The completed and leased space includes approximately
98,000 square feet completed and leased last year. An additional warehouse of
approximately 100,000 square feet has been built on speculation and will be
ready for leasing in the 1999 second quarter. A state traffic control
certificate for the future development of 1.3 million square feet has been
obtained for the New England Tradeport. Griffin, based on satisfactory results
for its second building, intends to continue to direct its primary efforts at
the construction and leasing of light industrial and warehouse facilities at the
New England Tradeport. Development at the New England Tradeport may require
investment in offsite infrastructure on behalf of Windsor, Connecticut and may
require improvement of some state or town roads.
Griffin's most substantial development is the combination of Griffin Center
in Windsor, Connecticut and Griffin Center South in Bloomfield, Connecticut.
Together these master planned developments comprise approximately 600 acres,
half of which have been developed with nearly 1,750,000 square feet of office
and industrial space. Griffin Center currently includes nine corporate
2
office buildings built by Griffin. Griffin currently maintains only a 30%
interest in two office buildings in the Griffin Center office complex which have
an aggregate of 160,000 square feet. In Griffin Center South, a 130-acre tract
with fifteen buildings of industrial and research/development space, Griffin has
retained for rental nine buildings, which are now substantially fully rented.
These buildings have an aggregate of approximately 175,000 square feet. During
1998, the last major vacancy in the Griffin Center South buildings retained by
Griffin was rented with occupancy and rent expected to commence in March of this
year.
Two additional Griffin parcels appropriate for office or industrial
developments are available for development including 28 acres in the Day Hill
Technology Center in Windsor, and 100 acres in the South Windsor Technology
Center. State traffic certificates have been obtained for these parcels for
500,000 square feet and 200,000 square feet of development, respectively.
In 1988, a subsidiary of Griffin began infrastructure work at Walden Woods,
a 153-acre site in Windsor, Connecticut, which was planned to contain more than
365 residential units. Prior to 1992 Griffin had built and sold 45 homes before
discontinuing its home building operations at Walden Woods. Since then, two
third-party home builders have completed an additional 64 homes. Griffin is
evaluating other of its lands for residential development over a period of
years.
Griffin is seeking to develop a joint venture to process bulky waste and
build a transfer station and recycling operation on a portion of its Connecticut
land. In addition, approximately 500 acres in Connecticut are leased for tobacco
growing to General Cigar at rentals approximating the land's carrying cost. The
lease for these properties, which extends for 10 years, may be terminated as to
100 acres annually, on one year's prior notice.
EQUITY INVESTMENTS
ELI WITT
During 1998 Griffin's involvement with, and investment in, Eli Witt was
terminated. Griffin released its mortgage on an Eli Witt warehouse and its
creditor claims and was released from all claims which might have been made
against it in the bankruptcy proceedings of Eli Witt.
CENTAUR
Griffin owns approximately 35% (33% fully diluted) of the common stock of
Centaur Communications, Ltd., ("Centaur") a privately-held publisher of business
magazines in the United Kingdom and a compiler and supplier of computerized
financial information through a subsidiary, Perfect Information, Ltd. Although
Centaur's magazines are now operating substantially on plan, Centaur's earnings
are being affected by operating losses of Perfect Information, Ltd. Until August
4, 1998, Griffin's interest was approximately 25%. As a result of a repurchase
of common stock by Centaur and an additional investment by Griffin, Griffin's
interest was increased. The agreements relating to that transaction provide for
an offering of Centaur stock or sale of Centaur in four to five years.
LINGUAPHONE
Griffin received in 1997 from Centaur a 25% interest in Linguaphone Group,
plc ("Linguaphone"). Griffin's 1998 results included an equity loss from
Linguaphone of approximately $1.1 million. In early 1999, Linguaphone was
recapitalized. As a result of the recapitalization, Griffin's interest was
reduced to approximately 14% (11% fully diluted), and Linguaphone will now be
accounted for under the cost method of accounting for investments.
3
FINANCIAL INFORMATION REGARDING INDUSTRY SEGMENTS
See Note 3 to the Consolidated Financial Statements of Griffin included
elsewhere herein for certain financial information regarding the landscape
nursery business and the real estate business.
EMPLOYEES
Griffin employs approximately 332 persons on a full-time basis, including 12
in its real estate business and 320 in its landscape nursery business. At
present, none of these employees are represented by a union. Griffin believes
that its relations with its employees are satisfactory.
COMPETITION
The nursery business is competitive, and Imperial competes against a number
of other companies, including national, local and regional nursery businesses.
Some of Griffin's competitors in the nursery industry are larger than Imperial.
Numerous real estate developers operate in the portion of Connecticut and
Massachusetts in which Griffin's holdings are concentrated. Some of such
businesses compete in each business of Griffin and may have greater financial
resources than Griffin.
REGULATION: ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or petroleum product releases at such property and
may be held liable to a governmental entity or to third parties for property
damage and for investigation and clean-up costs incurred by such parties in
connection with contamination. The cost of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances, or
the failure properly to remediate such substances, may adversely affect the
owner's ability to sell or rent such property or to borrow using such property
as collateral. In connection with the ownership (direct or indirect), operation,
management and development of real properties, Griffin may be considered an
owner or operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and, therefore, potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental fines and injuries to persons and property. In Simsbury,
the value of Griffin's land is affected by the presence of chlordane on a
portion of the land which is intended for residential use. Griffin is
experimenting with means of remediation on such lands. Although Griffin believes
that it will be able to take steps to reduce chlordane contamination to levels
below that which would impede residential development of such properties, there
can be no assurance that Griffin will be able to do so in a timely or economic
fashion, or at all. In the event that Griffin is unable adequately to remediate
this property, its ability to develop such property for its intended purposes
would be materially affected. In addition, Griffin is seeking to develop a joint
venture to process bulky waste and build a transfer station and recycling
operation on a portion of its land in Windsor, Connecticut. Although Griffin
intends to conduct such operations in compliance with all applicable
environmental laws, there can be no assurance that Griffin will not incur
incremental additional costs in connection with such operations resulting from
environmental compliance efforts, or as a result of any future noncompliance
with such laws.
Griffin periodically reviews its properties for the purpose of evaluating
such properties' compliance with applicable state and federal environmental
laws. Griffin does not anticipate experiencing in the immediate future material
expense in complying with such laws.
4
ITEM 2. PROPERTIES
LAND HOLDINGS
Griffin Land & Nurseries, Inc. is a major landholder in the State of
Connecticut and also owns land in Massachusetts. In addition, Griffin owns
approximately 1,000 acres in Florida, most of which is used for Imperial
Nurseries' growing operations or is contiguous to such operations, and also owns
sites for Imperial Nurseries' seven sales and service centers. Each such center
typically has a warehouse/ office facility and 10-15 acres of nursery stock.
The book value of undeveloped land holdings owned by Griffin, principally in
the Hartford CT area, is approximately $5,000,000. Griffin believes the fair
market value is substantially in excess of such book value including land
improvements.
A listing of the locations of Griffin's commercial and nursery real estate,
a portion of which, principally in Bloomfield, East Granby and Windsor, has been
developed, is as follows:
COMMERCIAL REAL ESTATE
LOCATION OF PROPERTY LAND AREA (ACRES)
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CONNECTICUT....................................................................................
Bloomfield................................................................................... 320
East Granby.................................................................................. 187
East Windsor................................................................................. 115
Granby....................................................................................... 106
Simsbury..................................................................................... 875
South Windsor................................................................................ 103
Suffield..................................................................................... 375
Windsor...................................................................................... 1,190
MASSACHUSETTS
Southwick.................................................................................... 425
FLORIDA
Hillsborough County.......................................................................... 9
Leon County.................................................................................. 6
5
NURSERY REAL ESTATE
LOCATION OF PROPERTY LAND AREA (ACRES)
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FLORIDA
Quincy....................................................................................... 1,046
CONNECTICUT
East Granby.................................................................................. 393
Granby....................................................................................... 267
Windsor...................................................................................... 52
PENNSYLVANIA
Aston........................................................................................ 16
Pittsburgh................................................................................... 10
VIRGINIA
Manassas..................................................................................... 16
OHIO
Columbus..................................................................................... 12
Cincinnati................................................................................... 11
MARYLAND
White Marsh.................................................................................. 20
Griffin also leases approximately 2,100 square feet in New York City for its
Executive Offices.
ITEM 3. LEGAL PROCEEDINGS
As a result of the spin-off arrangements pursuant to which Griffin became a
public company, Griffin acquired the 50.1% interest in Eli Witt previously held
by Culbro Corporation (Griffin's parent prior to the spinoff). In November 1996,
Eli Witt filed for protection under Chapter 11 of the Federal Bankruptcy Law.
All matters relating to this bankruptcy proceeding were settled by Griffin
releasing its claims against Eli Witt, including a second mortgage, and Eli Witt
releasing all possible claims against Griffin.
Certain parts of Griffin's property in Simsbury, Connecticut, are affected
by the presence of chlordane. Although the various federal, state and local
agencies may have an interest in the matter, there are no proceedings known by
Griffin to be contemplated by any of these agencies in connection with possible
chlordane exceedences on such properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The following are the high and low prices of common shares of Griffin Land &
Nurseries, Inc. as traded on the OTC Bulletin Board from the Distribution of
Griffin's common stock on July 3, 1997, through April 28, 1998 and on the Nasdaq
National Market subsequent to April 28, 1998:
1ST 2ND QUARTER 3RD QUARTER 4TH
QUARTER QUARTER
-------------------- -------------------- -------------------- ---------
HIGH LOW HIGH LOW HIGH LOW HIGH
--------- --------- --------- --------- --------- --------- ---------
1998......................................... 15 7/16 12 1/2 19 12 1/2 18 1/2 11 15
1997......................................... -- -- -- -- 17 7/8 14 7/8 19 7/8
LOW
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1998......................................... 11 1/16
1997......................................... 12 7/8
On February 5, 1999, the number of record holders of common stock of Griffin
was approximately 666, which does not include beneficial owners whose shares are
held of record in the names of brokers or nominees. The closing market price as
quoted on the Nasdaq National Market on such date was $10.00 per share. The
information appearing in Notes 8 and 12 to the Consolidated Financial Statements
are hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected statement of operations data for
fiscal years 1994 through 1998 and balance sheet data as of the end of each
fiscal year.
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales & other revenue.................................. $ 51,231 $ 46,288 $ 46,531 $ 41,756 $ 43,024
Operating profit (loss).................................... 74 (3,236) (1,245) 810 (4,867)
Income (loss) from continuing operations................... 121 (2,136) (4,063) (4,265) (7,157)
Net income (loss).......................................... 121 (2,136) (4,606) (580) (3,833)
Basic net income (loss) per share (a)...................... 0.03 (0.45)
Diluted net income (loss) per share (a).................... 0.01 (0.45)
BALANCE SHEET DATA:
Total assets............................................... 104,916 103,736 101,775 165,655 167,421
Working capital............................................ 33,304 41,130 36,698 23,069 28,112
Long-term debt (b)......................................... 2,666 2,830 38,846 72,737 91,614
Stockholders' equity /Culbro Investment (c)................ 91,186 90,523 47,449 61,299 44,426
The Selected Financial Data presented above reflects CMS Gilbreth Packaging
Systems, Inc. as a discontinued operation in 1993 through 1996. This business
was sold in 1996.
(a) Griffin was a consolidated subsidiary of Culbro through July 3, 1997.
Accordingly, the per share results for 1997 presented above are on a pro
forma basis because the Griffin common stock was not outstanding the entire
period.
(b) Culbro's general long-term debt was included on Griffin's historical balance
sheet through February 27, 1997, when such debt was assumed by Griffin's
former affiliate, General Cigar Holdings, Inc. in connection with the
distribution of Griffin's common stock to Culbro's shareholders.
(c) Prior to July 3, 1997, Griffin was a wholly-owned subsidiary of Culbro.
Accordingly, the retained earnings and intercompany balances with its former
parent are reflected in Culbro Investment prior to July 3, 1997.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The consolidated financial statements of Griffin include the accounts of
Griffin's subsidiary in the landscape nursery business, Imperial Nurseries, Inc.
("Imperial"), and Griffin's Connecticut and Massachusetts based real estate
business, Griffin Land. Griffin also has equity interests in Centaur
Communications, Ltd. ("Centaur"), a magazine publishing business, based in the
United Kingdom and Linguaphone Group plc ("Linguaphone"), a distributor of
language learning materials based in the United Kingdom with sales in Europe and
Asia. Prior to July 3, 1997, Griffin was a wholly-owned subsidiary of Culbro
Corporation ("Culbro"). On July 3, 1997, Culbro distributed the common stock of
Griffin to its shareholders in a tax-free distribution (the "Distribution").
Subsequent to the Distribution, Griffin has operated as an independent
stand-alone entity. Prior to March 18, 1997, Griffin was known as Culbro Land
Resources, Inc. As a result of a recapitalization of Linguaphone in early 1999,
Griffin's common equity ownership was reduced and Griffin will account for its
investment in Lingauphone under the cost method of accounting for investments,
prospectively.
The financial statements of Griffin reflect the results of the operations of
Griffin's businesses and investments. Prior to the Distribution in July 1997,
Griffin's results included allocations to Griffin from Culbro for corporate
overhead of $1.0 million and $1.8 million in fiscal 1997 and fiscal 1996,
respectively. Additionally, $0.9 million of a Culbro unusual expense item was
allocated to Griffin in fiscal 1996. These allocations, which may not
necessarily reflect the additional expenses Griffin would have incurred had it
operated as a separate stand-alone entity prior to the Distribution, are deemed
reasonable by Griffin management. Griffin's results of operations in 1997 and
prior years include interest expense on Culbro general corporate debt. The
Culbro debt was included in Griffin's financial statements through the 1997
first quarter, when that debt was assumed by General Cigar Holdings, Inc. ("GC
Holdings") pursuant to the Distribution Agreement. Interest expense on Culbro's
general debt that was included in Griffin's results of operations was $0.7
million and $7.3 million in fiscal 1997 and fiscal 1996, respectively. Such
interest expense has not been part of Griffin's results of operations subsequent
to the Distribution. In 1998, Griffin operated as a stand-alone entity for the
full year. Accordingly, there are no allocations or charges from Culbro
reflected in Griffin's 1998 results.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
In fiscal 1998, Griffin's net sales increased $4.9 million, or 11%, to $51.2
million from $46.3 million in fiscal 1997. The net sales increase was due to net
sales at Imperial, which were $48.2 million in fiscal 1998 as compared to $42.6
million in fiscal 1997. The $5.6 million (13%) net sales increase at Imperial
principally reflected increased volume and higher prices at the wholesale sales
and service centers, which accounted for substantially all of Imperial's net
sales increase.
Net sales in Griffin's real estate business, Griffin Land, decreased from
$3.7 million in fiscal 1997 to $3.1 million in fiscal 1998. Net sales in fiscal
1997 included $0.7 million from sales of remaining residential lots from
developments started in earlier years. There were no land sales in fiscal 1998.
Excluding the residential lot sales, net sales at Griffin Land increased
slightly in fiscal 1998 as compared to fiscal 1997. Rental revenue from Griffin
Land's buildings increased to $2.6 million in fiscal 1998 from $2.1 million in
fiscal 1997. The higher rental revenue principally reflected increased occupancy
as the result of new leases. Occupancy in Griffin Land's properties, excluding
the new warehouse constructed in 1998, increased from 80% at the end of fiscal
1997 to 91% at the end of fiscal 1998. Including new leases that became
effective subsequent to the end of fiscal 1998, Griffin Land's occupancy rate in
its properties was approximately 95%, including full occupancy in its Griffin
Center South development.
8
Griffin's consolidated operating results were substantially break-even in
fiscal 1998 as compared to an operating loss of $3.2 million in fiscal 1997. The
increased operating results principally reflected the effect of the $3.3 million
charge incurred in fiscal 1997 by Imperial to reserve for certain plant
inventories. Operating profit at Imperial increased to $2.3 million in fiscal
1998 as compared to $1.9 million in fiscal 1997, excluding the effect of last
year's inventory charge. Imperial's overall gross profit margins decreased
slightly to 28.8% in fiscal 1998 from 29.4% in fiscal 1997, again excluding the
effect of the inventory charge in 1997. The operating profit increase at
Imperial reflects the effect of higher net sales in fiscal 1998, partially
offset by higher operating expenses. As a percentage of net sales, operating
expenses were 24.1% in fiscal 1998 as compared to 25.0% in fiscal 1997. The
operating expense increase principally reflected higher selling expenses related
to the increased volume at Imperial's wholesale sales and service centers.
Griffin Land incurred an operating loss of $0.3 million in fiscal 1998
versus an operating loss of $0.2 million in fiscal 1997. Operating results in
fiscal 1998 include the settlement of a litigation initiated by Griffin Land for
reimbursement of certain costs to repair two commercial buildings owned by
Griffin Land. Proceeds from the settlement in excess of repair costs were
approximately $0.2 million and are reflected as a reduction of Griffin Land's
operating expenses. Excluding the effect of the benefit from the litigation
settlement in fiscal 1998, operating results at Griffin Land decreased by $0.3
million, principally reflecting the effect of the residential land sales in
fiscal 1997. Griffin Land's rental properties generated an operating profit,
before depreciation, of $2.1 million in fiscal 1998 versus $1.8 million in
fiscal 1997, reflecting the higher occupancy noted above and corresponding
increase in rental revenue. Although Griffin Land's overall operating results
were lower, there has been a substantial amount of development activity at
Griffin Land that management believes should benefit future years. In 1998,
Griffin Land completed construction of a new approximately 98,000 square foot
warehouse in the New England Tradeport, Griffin Land's 600 acre industrial park
adjacent to Bradley International Airport. Although only partially leased in the
1998 third and fourth quarters, new leases that were effective in December 1998
resulted in this new warehouse being fully leased at the start of fiscal 1999.
Additionally, Griffin Land started construction in 1998 on another approximately
100,000 square foot warehouse that is expected to be completed in the 1999
second quarter. This new warehouse is not yet leased.
The decrease in Griffin's interest expense principally reflects the
inclusion in the 1997 first quarter of interest expense of $0.7 million related
to Culbro's general corporate debt that was assumed by General Cigar Holdings at
the end of the 1997 first quarter. The higher income tax rate principally
reflects the effect of state and local taxes.
Income from Griffin's equity investments was lower in 1998 as a result of
losses at Linguaphone, which more than offset increased profit at Centaur.
Centaur's 1998 results included one-time expenses aggregating approximately $1.1
million before taxes (approximately $0.3 million allocable to Griffin's
interest), relating to the restructuring of Centaur's ownership. Additionally,
increased operating profit of Centaur's magazine publishing operations was
partially offset by operating losses incurred by Centaur's subsidiary, Perfect
Information, Ltd., which operates a database service that provides financial
information to its customers. During 1998, Griffin's common equity ownership of
Centaur increased to approximately 35% (33% fully diluted) as a result of
Griffin's purchase of Centaur common stock and Centaur's repurchase of common
stock from other Centaur stockholders (see Note 10 of the consolidated financial
statements included in Item 8). The equity loss for Linguaphone includes foreign
currency exchange losses incurred by Linguaphone for which Griffin's allocable
share was approximately $0.5 million. Linguaphone recently completed an offering
of its common stock in which Griffin participated to a limited extent. As a
result, Griffin's common equity ownership in Linguaphone was reduced from
approximately 25% to approximately 14% (11% fully diluted). Griffin will account
for its investment in Linguaphone under the cost method of accounting for
investments, prospectively.
9
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales and other revenue of $46.3 million in fiscal 1997 was slightly
lower than fiscal 1996 net sales and other revenue of $46.5 million. Net sales
at Imperial increased 15% to $42.6 million in fiscal 1997 from $37.0 million in
fiscal 1996. The increased sales reflected higher volume and improved pricing at
Imperial's wholesale sales and service centers, which contributed approximately
75% of Imperial's total increase in net sales. The balance of Imperial's sales
increase reflected higher sales volume of containerized plants from its growing
operations in Connecticut and Florida. Net sales and other revenue in Griffin's
real estate business, Griffin Land, were $3.7 million in fiscal 1997 as compared
to $9.5 million in fiscal 1996. The decrease principally reflected the effect of
a 1996 sale, which generated $4.0 million in proceeds, of Griffin's 30% interest
in a joint venture that owned commercial properties.
Griffin incurred a consolidated operating loss of $3.2 million in fiscal
1997 as compared to an operating loss of $1.2 million in fiscal 1996. The higher
operating loss reflected results at Imperial, which incurred a $1.4 million
operating loss in fiscal 1997 as compared to an operating profit of $1.6 million
in fiscal 1996. Imperial's fiscal 1997 results included a $3.3 million charge to
reserve for certain plant inventories. Approximately 75% of the charge related
to field grown plant inventories in which the current carrying cost will not be
recovered as a result of horticultural issues and market conditions. The
remaining portion of the charge related principally to certain container grown
plants originally potted in 1994 which have not matured properly. Imperial is
continuing to phase out its field grown plant program and will concentrate its
production resources on its container plant facilities in Connecticut and
Florida, which are substantially larger than its field grown inventory
operation. Imperial is replacing its field grown program by entering into
strategic alliances and contract growing agreements. Excluding this charge,
Imperial's operating results in fiscal 1997 were slightly higher as compared to
fiscal 1996. The effect of Imperial's higher net sales was substantially offset
by higher costs, principally due to increased costs associated with
containerized plants sold from the Connecticut and Florida operations. As a
result, margins on sales declined from 29.9% in 1996 to 29.4% in 1997. Operating
expenses at Imperial increased in fiscal 1997 versus fiscal 1996; however, as a
percentage of net sales, operating expenses decreased to 25.0% of net sales in
fiscal 1997 from 25.5% of net sales in fiscal 1996.
Griffin Land incurred an operating loss of $0.2 million in fiscal 1997 as
compared to an operating loss of $0.3 million in fiscal 1996. Increased results
from sales of property, due principally to the effect of the loss on the sale of
the joint venture last year, were substantially offset by lower income from
joint venture operations and lower property management income.
Griffin's general corporate expense decreased from $2.6 million in fiscal
1996 to $1.6 million in fiscal 1997. The decrease principally reflects the
allocation to Griffin of $0.9 million for its share of a Culbro unusual expense
item principally related to the termination of certain incentive programs. The
other nonoperating income of $1.9 million in fiscal 1996 reflected accrued
dividends and accretion income on the preferred stock of Eli Witt previously
held by Griffin. The accrued dividends and accretion income were equal to
interest on a subordinated note payable that was satisfied by exchange of the
Eli Witt preferred stock in November 1996. Interest on the subordinated note
payable was included in interest expense in fiscal 1996.
Interest expense decreased to $1.0 million in fiscal 1997 from $7.8 million
in fiscal 1996. The decrease reflects the assumption on February 27, 1997, of
Culbro's general corporate debt by GC Holdings in accordance with the
Distribution Agreement. Additionally, the fiscal 1996 fourth quarter reflected
the reduction of Culbro's general corporate debt from the proceeds received on
the sale of CMS Gilbreth Packaging Systems, Inc., and from the exchange of Eli
Witt preferred stock to satisfy a related subordinated note payable.
10
Griffin's income from its equity investments, principally Centaur, was $0.3
million in fiscal 1997 and fiscal 1996. Fiscal 1997 results included an expense
for stock option compensation at Centaur for which the portion attributable to
Griffin was approximately $0.6 million. Excluding that item, Centaur's operating
results were significantly improved over the prior year, reflecting improved
markets in the United Kingdom, where Centaur operates.
The net loss from the discontinued operation in fiscal 1996 reflects
operating results of CMS Gilbreth Packaging Systems, Inc. and the loss on the
sale of that business, which was completed in November 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.6 million in fiscal 1998 as
compared to $1.0 million of net cash used in operating activities in fiscal
1997. The improved cash flow from operating activities principally reflects
improved operating results at Imperial, partially offset by an increase in
inventories at Imperial. Net cash used in 1998 financing activities reflected
debt payments partially offset by proceeds from the exercise of stock options.
Net cash provided by financing activities in 1997 principally reflected
borrowings under Culbro's general corporate debt prior to such debt being
assumed by GC Holdings on February 27, 1997.
Net cash used in investing activities was $9.8 million in fiscal 1998 as
compared to $1.9 million in fiscal 1997. The increased use of cash in investing
activities reflects the significant amount of real estate development activity
that took place in fiscal 1998, Griffin's first full year as a stand-alone
company. Additions to real estate of $6.2 million included the completion of an
approximately 98,000 square foot warehouse building, now fully leased, and the
start of another approximately 100,000 square foot warehouse building in the New
England Tradeport. The balance of the additions to real estate reflect building
improvements and tenant improvements related to the new leases entered into in
1998. Investment activities in 1998 also included approximately $3.0 million for
Griffin's additional investment in Centaur (see Note 10 of the consolidated
financial statements included in Item 8), and approximately $1.2 million of
capital expenditures in the landscape nursery business, principally for
improvements at Imperial's container plant production facilities. Net cash used
in Griffin's investing activities in fiscal 1998 was partially offset by
proceeds of $0.5 million from the settlement of a litigation initiated by
Griffin Land for reimbursement of certain costs to repair two commercial
buildings owned by Griffin Land.
On May 6, 1998, Imperial entered into a Revolving Credit Agreement with a
bank which provides a seasonally adjusted line of credit of up to $10 million to
supplement Imperial's cash flow from operations, as required. The Credit
Agreement is collateralized principally by Imperial's accounts receivable and
inventories, and is guaranteed by Griffin. The Credit Agreement contains
financial covenants with respect to Imperial's net worth, fixed charge coverage
(as defined), capital expenditures and cash distributions to Griffin. There were
no borrowings under the Credit Agreement in fiscal 1998.
In early 1999, Imperial purchased land adjacent to one of its wholesale
distribution centers to enable that location to expand. Total expenditures,
including land improvements are estimated to be $1.1 million. Additionally,
Imperial is examining locations to locate a new wholesale sales and service
center that would open in fiscal 1999. Management also anticipates the continued
development of its real estate assets in fiscal 1999, including completion of
the approximately 100,000 square foot warehouse in the New England Tradeport
that was started in fiscal 1998. Completion of this new facility is expected in
the 1999 second quarter and will require expenditures of approximately $2.5
million in fiscal 1999. Additionally, Griffin Land will continue to upgrade its
rental properties and intends to begin subdivision activities on some of its
land that is naturally useable for residential purposes.
11
In 1999, Griffin intends to seek mortgage financing on several of its
buildings in the New England Tradeport. Proceeds will be used to repay an
existing mortgage on some of those properties with the balance used for further
development of Griffin's real estate asssets.
Management believes that in the near term, based on the current level of
operations and anticipated growth, cash flow from operations and borrowings
under the landscape nursery credit facility or real estate financing will be
sufficient to finance its landscape nursery business and fund development of its
real estate assets. Over the intermediate and long term, selective mortgage
placements and borrowings under a credit facility may also be required to fund
capital projects.
YEAR 2000
Griffin is addressing its year 2000 ("Y2K") issues and has identified its
critical computer applications that are not Y2K compliant. A substantial portion
of the applications not Y2K compliant have been modified, successfully tested
and are now Y2K compliant. Modification of the balance of the computer
applications originally identified as not Y2K compliant is currently under way,
with all applications anticipated to be Y2K compliant no later than March 31,
1999. The modification on the applications that are already Y2K compliant and
the work currently in process is being performed by Griffin employees. Costs
attributed to such work are expected to be less than $0.1 million in the
aggregate.
Griffin has initiated a company-wide review of major customers, vendors and
other third parties to determine the extent, if any, to which Griffin would be
vulnerable to those third parties' failure to remedy their own Y2K issues. Those
third parties contacted have indicated that they have Y2K readiness programs in
place or they anticipate being Y2K compliant on or before December 31, 1999. We
will continue to assess the progress of our critical business partners in
reaching Y2K readiness.
Griffin believes that its efforts to address the Y2K issue will be
successful. However, failure of critical third parties adequately to address
their respective Y2K issues could have a material adverse effect on Griffin's
business, financial condition and results of operations. Therefore, Griffin's
program for Y2K compliance includes the development of contingency plans for
continuing operations in the event such problems arise. However, there can be no
assurance that such contingency plans will be adequate to handle all problems
which may arise.
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 completion of the new warehouse, obtaining
mortgage financing, opening of an additional sales and service center and
becoming Y2K compliant in a timely manner. The projected information disclosed
herein is based on assumptions and estimates that, while considered reasonable
by Griffin as of the date hereof, are inherently subject to significant
business, economic, competitive and regulatory uncertainties and contingencies,
many of which are beyond the control of Griffin.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GRIFFIN LAND & NURSERIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE FISCAL YEARS ENDED,
------------------------------
NOV.
28, NOV. 29, NOV. 30,
1998 1997 1996
------- ---------- --------
Net sales and other revenue.................................................. $51,231 $ 46,288 $ 46,531
Costs and expenses:
Cost of goods sold........................................................... 36,218 35,767 34,210
Selling, general and administrative expenses................................. 14,939 13,757 12,666
Other expense................................................................ -- -- 900
------- ---------- --------
Operating profit (loss)...................................................... 74 (3,236) (1,245)
Other nonoperating income.................................................... -- -- 1,917
Interest expense............................................................. 185 1,002 7,805
Interest income.............................................................. 298 266 --
------- ---------- --------
Income (loss) before income tax provision (benefit).......................... 187 (3,972) (7,133)
Income tax provision (benefit)............................................... 101 (1,470) (2,767)
------- ---------- --------
Income (loss) before equity investments...................................... 86 (2,502) (4,366)
------- ---------- --------
Income (loss) from equity investments:
Investment in Centaur Communications, Ltd.................................. 1,088 426 303
Investment in Linguaphone Group plc........................................ (1,053) (60) --
------- ---------- --------
Income from equity investments............................................... 35 366 303
------- ---------- --------
Income (loss) from continuing operations..................................... 121 (2,136) (4,063)
------- ---------- --------
Discontinued operation:
Loss on sale of discontinued operation, net of tax benefit and reversal of
deferred taxes of $4,182................................................... -- -- (1,311)
Income from discontinued operation, net of taxes of $527..................... -- -- 768
------- ---------- --------
Net loss from discontinued operation......................................... -- -- (543)
------- ---------- --------
Net income (loss)............................................................ $ 121 $ (2,136) $ (4,606)
------- ---------- --------
------- ---------- --------
Basic net income (loss) per common share..................................... $ 0.03 $ (0.45)(a)
------- ----------
------- ----------
Diluted net income (loss) per common share................................... $ 0.01 $ (0.45)(a)
------- ----------
------- ----------
(a) 1997 per share results are pro forma. See Note 8.
See Notes to Consolidated Financial Statements.
13
GRIFFIN LAND & NURSERIES, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOV. 28, NOV. 29,
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................................. $ 2,059 $ 11,519
Accounts receivable, less allowance of $490 and $456...................................... 4,654 4,541
Inventories............................................................................... 26,746 25,343
Deferred income taxes..................................................................... 3,220 2,844
Other current assets...................................................................... 2,625 2,107
---------- ----------
TOTAL CURRENT ASSETS...................................................................... 39,304 46,354
Real estate held for sale or lease, net................................................... 31,519 26,429
Investment in Centaur Communications, Ltd................................................. 16,153 12,097
Property and equipment, net............................................................... 12,635 12,524
Investment in Linguaphone Group plc....................................................... 1,911 2,964
Other assets, including investments in real estate joint ventures of $3,128 and $3,261.... 3,394 3,368
---------- ----------
TOTAL ASSETS.............................................................................. $ 104,916 $ 103,736
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities.................................................. $ 5,586 $ 4,980
Long-term debt due within one year........................................................ 322 244
Income tax payable........................................................................ 92 --
---------- ----------
TOTAL CURRENT LIABILITIES................................................................. 6,000 5,224
Long-term debt............................................................................ 2,666 2,830
Deferred income taxes..................................................................... 1,097 986
Other noncurrent liabilities.............................................................. 3,967 4,173
---------- ----------
TOTAL LIABILITIES......................................................................... 13,730 13,213
---------- ----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 13)............................................... -- --
Common stock, par value $0.01 per share,
authorized 10,000,000 shares, issued and outstanding 4,842,704 shares................... 48 47
Additional paid in capital................................................................ 93,491 92,950
Accumulated deficit....................................................................... (2,353) (2,474)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................................................ 91,186 90,523
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................ $ 104,916 $ 103,736
---------- ----------
---------- ----------
See Notes to Consolidated Financial Statements.
14
GRIFFIN LAND & NURSERIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE FISCAL YEARS ENDED,
---------------------------------
NOV. 28, NOV. 29, NOV. 30,
1998 1997 1996
---------- --------- ----------
OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 121 $ (2,136) $ (4,606)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization................................................... 2,004 1,921 2,405
Loss from discontinued operation, before tax.................................... -- -- 4,198
Income from equity investments.................................................. (35) (366) (303)
Proceeds from sale of investment in a real estate joint venture................. -- -- 4,042
Deferred income taxes........................................................... 186 (1,085) (7,739)
Increase in inventory deposits.................................................. (188) (108) (71)
Changes in assets and liabilities which increased (decreased) cash:
Accounts receivable............................................................. (147) (829) (232)
Inventories..................................................................... (1,403) 2,187 (1,599)
Accounts payable and accrued liabilities........................................ 606 (579) (1,474)
Other, net...................................................................... (557) 33 3,746
---------- --------- ----------
Net cash provided by (used in) operating activities of continuing operations.... 587 (962) (1,633)
Cash provided by operating activities of discontinued operation................. -- -- 3,547
---------- --------- ----------
Net cash provided by (used in) operating activities............................. 587 (962) 1,914
---------- --------- ----------
INVESTING ACTIVITIES:
Additions to real estate held for sale or lease................................. (6,182) (953) (592)
Additional investment in Centaur Communications, Ltd............................ (2,968) -- --
Additions to property and equipment............................................. (1,164) (936) (1,378)
Proceeds from litigation settlement............................................. 500 -- --
Proceeds from sale of discontinued operation.................................... -- -- 35,030
Investing activities of discontinued operation.................................. -- -- (947)
---------- --------- ----------
Net cash (used in) provided by investing activities............................. (9,814) (1,889) 32,113
---------- --------- ----------
FINANCING ACTIVITIES:
Payments of debt................................................................ (324) (271) (25,099)
Proceeds from exercise of stock options......................................... 91 408 --
Net transactions with Culbro.................................................... -- (560) (9,244)
Increase in debt (prior to Liability Assumption in 1997)........................ -- 7,422 --
---------- --------- ----------
Net cash (used in) provided by financing activities............................. (233) 6,999 (34,343)
---------- --------- ----------
Net (decrease) increase in cash and cash equivalents............................ (9,460) 4,148 (316)
Cash and cash equivalents at beginning of year.................................. 11,519 7,371 7,687
---------- --------- ----------
Cash and cash equivalents at end of year........................................ $ 2,059 $ 11,519 $ 7,371
---------- --------- ----------
---------- --------- ----------
See Notes to Consolidated Financial Statements.
15
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Griffin Land &
Nurseries, Inc. ("Griffin") include the accounts of Griffin's real estate
division ("Griffin Land"), Imperial Nurseries, Inc. ("Imperial") and CMS
Gilbreth Packaging Systems, Inc. ("CMS Gilbreth"), which was sold in 1996 (see
Note 2) and is reported as a discontinued operation in these statements. Prior
to July 3, 1997, Griffin was a wholly-owned subsidiary of Culbro Corporation
("Culbro"). On July 3, 1997, as previously approved by Culbro's Board of
Directors, Culbro distributed (the "Distribution") the common stock of Griffin
to Culbro's shareholders on a one-to-one ratio. Prior to March 18, 1997, Griffin
was known as Culbro Land Resources, Inc. The consolidated financial statements
have been presented as if Griffin had operated as an independent stand-alone
entity for all periods presented (see Note 2). Such financial statements may not
necessarily present the financial position, results of operations and cash flows
Griffin would have reported had it actually operated as a stand-alone entity
prior to the Distribution in 1997. All intercompany transactions have been
eliminated.
Griffin accounts for its investments in Centaur Communication, Ltd.
("Centaur"), Linguaphone Group plc ("Linguaphone") and real estate joint
ventures under the equity method. Results of real estate joint ventures are
included in operating profit. As a result of a recapitalization of Linguaphone
in early 1999, Griffin's common equity ownership was reduced and Griffin will
account for its investment in Linguaphone under the cost method of accounting
for investments prospectively (see Note 10).
BUSINESS SEGMENTS
Griffin is engaged in the landscape nursery and real estate businesses.
Imperial, Griffin's subsidiary in the landscape nursery segment, is engaged in
growing plants which are sold principally to garden centers, wholesalers and
merchandisers, and operating sales and service centers which sell principally to
landscapers. Griffin's real estate segment, Griffin Land, builds and manages
commercial and industrial properties and develops residential subdivisions on
its land in Connecticut and Massachusetts.
FISCAL YEAR
Griffin's fiscal year ends on the Saturday nearest November 30. Fiscal years
1998, 1997 and 1996 each contained 52 weeks and ended November 28, 1998,
November 29, 1997 and November 30, 1996, respectively.
INVENTORIES
Griffin's inventories are stated at the lower of cost or market using the
average cost method. Nursery stock includes certain inventories which will not
be sold or used within one year. It is industry practice to include such
inventories in current assets.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is determined on a
straight-line basis over the estimated useful asset lives for financial
reporting purposes and principally on accelerated methods for tax purposes.
16
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE HELD FOR SALE OR LEASE
Real estate held for sale or lease is carried at cost. Interest is
capitalized during the construction period of major facilities. The capitalized
interest is recorded as part of the asset to which it relates and is amortized
over the asset's useful life. Depreciation is determined on a straight-line
basis over the estimated useful asset lives for financial reporting purposes and
principally on accelerated methods for tax purposes.
REVENUE AND GAIN RECOGNITION
In the landscape nursery business, sales and the related cost of sales are
recognized upon shipment of products. Sales returns are not material. In the
real estate business, gains on real estate sales are recognized in accordance
with SFAS No. 66, "Accounting for Sales of Real Estate."
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts included in the financial statements for accounts receivable,
accounts payable and accrued liabilities reflect their fair values because of
the short-term maturity of these instruments. The fair values of Griffin's other
financial instruments are discussed in Note 6.
STOCK OPTIONS
Griffin accounts for stock-based compensation under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". In 1997,
Griffin adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" which require disclosing the pro forma effect on
earnings and earnings per share of the fair value method of accounting for
stock-based compensation.
EARNINGS PER SHARE
In the 1998 first quarter, Griffin adopted SFAS No. 128, "Earnings Per
Share". The new standard requires direct presentation of net income per common
share and net income per common share assuming dilution on the face of the
statement of operations.
Prior to July 3, 1997, Griffin was a wholly-owned subsidiary of Culbro.
Accordingly, per share results for 1997 are presented on a pro forma basis.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenue and expenses during the period reported. Actual results
could differ from those estimates.
17
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. CERTAIN TRANSACTIONS
On February 27, 1997, Griffin, Culbro and General Cigar Holdings, Inc. ("GC
Holdings"), a Culbro subsidiary, entered into a Distribution Agreement (the
"Distribution Agreement"). Pursuant to the Distribution Agreement, Culbro
transferred (the "Asset Transfers") to Griffin substantially all the non-tobacco
related assets of Culbro, including: (i) all of the outstanding common stock of
Imperial Nurseries, Inc., then a wholly-owned subsidiary of Culbro; (ii)
approximately 5,500 acres of land in Connecticut and Florida, as well as nursery
sales and service centers; (iii) Culbro's interests in, and assets previously
owned by, Eli Witt; (iv) Culbro's approximately 25% interest in Centaur; and (v)
all licenses, permits, accounts receivable, prepaid expenses, reserves and other
assets (other than cash) related to the real estate and landscape nursery
businesses. The Distribution Agreement provided for (i) the consummation of the
Asset Transfers described above, (ii) the Distribution of Griffin's common stock
to the existing shareholders of Culbro following the initial public offering
(the "Offering") of GC Holdings Class A Common Stock, and (iii) following the
Distribution, the merger of Culbro, subject to certain conditions, with and into
GC Holdings (the "Merger"). The Merger was completed on August 29, 1997.
The Distribution Agreement also provided for the assumption by Griffin of
all the liabilities related to the businesses and assets transferred to Griffin
from Culbro. Pursuant to the Distribution Agreement, Griffin was also allocated
$7 million in cash. All of the transferred assets and related liabilities are
included in the accompanying consolidated financial statements at Culbro's
historical cost.
Under the terms of the Distribution Agreement, on February 27, 1997, GC
Holdings assumed all of Culbro's general corporate debt and certain other
liabilities, including retirement obligations, which were included in Griffin's
historical financial statements through that date (the "Liability Assumption").
The following consolidated condensed unaudited pro forma statement of operations
for 1997 gives effect to the Liability Assumption by GC Holdings as if it
occurred at the beginning of that fiscal year. The pro forma financial
information presented may not necessarily reflect the results of operations had
this transaction actually taken place on the assumed date.
CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
1997
---------
Net sales.......................................................................... $ 46,288
---------
Operating loss..................................................................... (3,236)
Interest expense, net.............................................................. 6
---------
Loss before income tax benefit..................................................... (3,242)
Income tax benefit................................................................. (1,200)
---------
Loss before equity investments..................................................... (2,042)
Income from equity investments..................................................... 366
---------
Net loss........................................................................... $ (1,676)
---------
---------
Basic net loss per share........................................................... $ (0.35)
---------
---------
Diluted net loss per share......................................................... $ (0.35)
---------
---------
18
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. CERTAIN TRANSACTIONS (CONTINUED)
On November 8, 1996, the sale of Griffin's labeling and packaging systems
business, CMS Gilbreth, was completed. Net proceeds, after sale expenses, were
$35.0 million, and Griffin recorded a pretax loss of $5.5 million on the sale,
net of operating profit of $1.6 million earned during the phase-out period. The
sale proceeds were used to repay debt. CMS Gilbreth is reported as a
discontinued operation in the accompanying financial statements. Net sales of
CMS Gilbreth were $43.6 million in 1996 through the date of sale.
3. INDUSTRY SEGMENT INFORMATION
Griffin has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Griffin's reportable segments are defined
by their products and services, and are comprised of the landscape nursery and
real estate segments (see Note 1). Griffin has no operations outside the United
States. Griffin's export sales and transactions between segments are not
material.
1998 1997 1996
---------- ---------- ----------
NET SALES AND OTHER REVENUE
Landscape nursery............................................................ $ 48,180 $ 42,618 $ 37,045
Real estate.................................................................. 3,051 3,670 9,486
---------- ---------- ----------
$ 51,231 $ 46,288 $ 46,531
---------- ---------- ----------
---------- ---------- ----------
OPERATING PROFIT (LOSS)
Landscape nursery (a)........................................................ $ 2,277 $ (1,433) $ 1,650
Real estate.................................................................. (320) (202) (300)
---------- ---------- ----------
Industry segment totals...................................................... 1,957 (1,635) 1,350
General corporate expense, net (b)........................................... 1,883 1,601 2,595
Other nonoperating income, net............................................... -- -- 1,917
Interest income (expense), net............................................... 113 (736) (7,805)
---------- ---------- ----------
Income (loss) before income tax provision (benefit).......................... $ 187 $ (3,972) $ (7,133)
---------- ---------- ----------
---------- ---------- ----------
IDENTIFIABLE ASSETS
Landscape nursery............................................................ $ 46,881 $ 46,558 $ 44,113
Real estate.................................................................. 35,480 31,320 31,499
---------- ---------- ----------
Industry segment totals...................................................... 82,361 77,878 75,612
General corporate............................................................ 22,555 25,858 26,163
---------- ---------- ----------
$ 104,916 $ 103,736 $ 101,775
---------- ---------- ----------
---------- ---------- ----------
(a) Results in the landscape nursery segment in 1997 include a charge of $3.3
million to reserve for certain plant inventories. Approximately 75% of the
charge relates to field grown plant inventories in which the carrying cost
will not be recovered as a result of horticultural problems and market
conditions. Imperial is continuing to phase out its field grown program. The
remaining portion of the charge relates principally to certain container
grown plant inventories which did not mature properly.
19
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INDUSTRY SEGMENT INFORMATION (CONTINUED)
(b) General corporate expense in 1996 includes an allocation to Griffin by
Culbro of $0.9 million for the termination of an incentive compensation
plan, severance and other expenses in contemplation of the Distribution (see
Note 2).
DEPRECIATION AND AMORTIZATION
CAPITAL EXPENDITURES
------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
Landscape nursery............................................... $ 1,144 $ 861 $ 1,258 $ 1,212 $ 1,145 $ 1,116
Real estate..................................................... 6,188 957 712 775 772 889
--------- --------- --------- --------- --------- ---------
Industry segment totals......................................... 7,332 1,818 1,970 1,987 1,917 2,005
General Corporate............................................... 14 71 -- 17 4 400
--------- --------- --------- --------- --------- ---------
$ 7,346 $ 1,889 $ 1,970 $ 2,004 $ 1,921 $ 2,405
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
See Note 10 for information on Griffin's equity investments in Centaur and
Linguaphone.
4. RELATED PARTY TRANSACTIONS
Prior to the Distribution in 1997, Griffin, as lessor, and General Cigar
Co., Inc. ("General Cigar"), a wholly owned subsidiary of GC Holdings, as
lessee, entered into a lease for certain agricultural land in Connecticut and
Massachusetts (the "Agricultural Lease"). The Agricultural Lease is for
approximately 500 acres of arable land held by Griffin for possible development
in the long term, but which is being used by General Cigar for growing
Connecticut Shade wrapper tobacco. General Cigar's use of the land is limited to
the cultivation of cigar wrapper tobacco. The Agricultural Lease has an initial
term of ten years and provides for the extension of the lease for additional
periods thereafter. In addition, at Griffin's option, the Agricultural Lease may
be terminated with respect to 100 acres of such land annually upon one year's
prior notice. The rent payable by General Cigar under the Agricultural Lease is
approximately equal to the aggregate amount of all taxes and other assessments
payable by Griffin attributable to the land leased.
Also in 1997, Griffin, as lessor, and General Cigar, as lessee, entered into
a lease for approximately 40,000 square feet of office space in the Griffin
Center South office complex in Bloomfield, Connecticut (the "Commercial Lease").
The Commercial Lease has an initial term of ten years and provides for the
extension of the lease for additional annual periods thereafter. Management
believes the rent payable by General Cigar to Griffin under the Commercial Lease
is at market rates.
5. INCOME TAXES
For all periods prior to the Distribution, Griffin's results of operations
were included in Culbro's consolidated U.S. federal income tax returns and all
tax liabilities were paid by Culbro. Subsequent to the Distribution, Griffin has
filed separate tax returns from its former parent company. Griffin's income tax
provisions and deferred tax assets and liabilities in the accompanying financial
statements have been calculated in accordance with SFAS No. 109 "Accounting for
Income Taxes" as if Griffin had filed
20
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INCOME TAXES (CONTINUED)
separate tax returns for the periods prior to the Distribution. The income tax
provision (benefit) for 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
--------- --------- ---------
Continuing operations:
Current federal................................................................... $ (246) $ (680) $ 1,788
Current state and local........................................................... 170 (208) 138
Deferred, principally federal..................................................... 177 (582) (4,693)
--------- --------- ---------
Income tax provision (benefit) from continuing operations........................... $ 101 $ (1,470) $ (2,767)
--------- --------- ---------
Discontinued operation:
Current federal................................................................... -- -- (553)
Current state and local........................................................... -- -- (277)
Deferred, principally federal..................................................... -- -- (2,825)
--------- --------- ---------
Income tax benefit from discontinued operation...................................... -- -- (3,655)
--------- --------- ---------
Total income tax provision (benefit)................................................ $ 101 $ (1,470) $ (6,422)
--------- --------- ---------
--------- --------- ---------
The reasons for the difference between the United States statutory income
tax rate and the effective rates for continuing operations are shown in the
following table:
1998 1997 1996
--------- --------- ---------
Tax provision (benefit) at statutory rates.......................................... $ 64 $ (1,350) $ (2,497)
State and local taxes............................................................... 111 (137) 90
Other............................................................................... (74) 17 (360)
--------- --------- ---------
$ 101 $ (1,470) $ (2,767)
--------- --------- ---------
--------- --------- ---------
The significant components of Griffin's deferred tax asset and liability are
as follows:
1998 1997
--------- ---------
Inventory......................................................................... $ 2,532 $ 2,391
Accrued expenses.................................................................. 688 453
--------- ---------
Deferred tax asset................................................................ $ 3,220 $ 2,844
--------- ---------
--------- ---------
1998 1997
--------- ---------
Depreciation...................................................................... $ 2,256 $ 2,250
NOL carryover..................................................................... (1,568) (1,414)
Other............................................................................. 409 150
--------- ---------
Deferred tax liability............................................................ $ 1,097 $ 986
--------- ---------
--------- ---------
21
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. INCOME TAXES (CONTINUED)
As of November 28, 1998, Griffin has available for income tax purposes
approximately $3.8 million in federal net operating loss carryforwards which may
be used to offset future taxable income. These loss carryforwards begin to
expire in fiscal year 2012.
In connection with the Distribution, Culbro and Griffin entered into a Tax
Sharing Agreement which provided, among other things, for the allocation between
Culbro and Griffin of federal, state, local and foreign tax liabilities for all
periods through the Distribution. With respect to the consolidated tax returns
filed by Culbro, the Tax Sharing Agreement provides that Griffin will be liable
for any amounts that it would have been required to pay with respect to any
deficiencies assessed, generally as if it had filed separate tax returns.
6. LONG-TERM DEBT
Long-term debt includes:
NOV. 28, NOV. 29,
1998 1997
--------- ---------
Mortgages...................................................................................... $ 2,495 $ 2,573
Capital leases................................................................................. 493 501
Credit Agreement............................................................................... -- --
--------- ---------
Total.......................................................................................... 2,988 3,074
Less: due within one year...................................................................... 322 244
--------- ---------
Total long-term debt........................................................................... $ 2,666 $ 2,830
--------- ---------
--------- ---------
As of November 28, 1998, the annual principal payment requirements under the
terms of the mortgages are $0.1 million for each of the years 1999 through 2003.
The mortgages are on two office buildings and three industrial buildings which
had a combined net book value of $3.6 million at November 28, 1998. The interest
rates on these mortgages range from 9.0% to 10.2%.
On May 6, 1998, Imperial entered into a Revolving Credit Agreement (the
"Credit Agreement") with a bank which provides a seasonally adjusted line of
credit up to $10 million to supplement Imperial's cash flow from operations, as
required. Borrowings under the Credit Agreement may be, at Imperial's option, on
an overnight basis or for periods of one, two, three or six months. Overnight
borrowings bear interest at the bank's prime rate. Borrowings of one month and
longer bear interest at the London Interbank Offered Rate plus a margin of
1.75%. The Credit Agreement terminates in June, 1999, and there are no
compensating balance requirements. Imperial pays a commitment fee of
1/4 of 1% per annum on unused borrowing capacity. The Credit Agreement is
collateralized principally by Imperial's accounts receivable and inventories,
and is guaranteed by Griffin. The Credit Agreement contains financial covenants
with respect to Imperial's net worth, fixed charge coverage (as defined),
capital expenditures and cash distributions to Griffin. There were no borrowings
under the Credit Agreement during 1998.
Management believes that the amounts reflected on the balance sheet for its
mortgages reflect their current market values based on market interest rates for
comparable risks, maturities and collateral.
22
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. RETIREMENT BENEFITS
SAVINGS PLAN
In connection with the Distribution, Griffin established the Griffin Land &
Nurseries, Inc. 401(k) Savings Plan ("Griffin Savings Plan") for its employees.
Prior to the Distribution, Griffin's employees participated in the Culbro
Corporation 401(k) Savings Plan ("Culbro Savings Plan"). Subsequent to the
Distribution, amounts related to Griffin employees in the Culbro Savings Plan
were transferred to the Griffin Savings Plan. The Griffin Savings Plan is a
defined contribution plan whereby Griffin matches 60% of each employee's
contribution, up to a maximum of 5% of base salary. Griffin's contributions to
the Griffin Savings Plan and, prior to the Distribution, to the Culbro Savings
Plan were $0.2 million in fiscal 1998 and $0.1 million per year in fiscal 1997
and fiscal 1996. The matching percentage by Griffin of each employee's
contribution is greater under the Griffin Savings Plan as compared to the Culbro
Savings Plan.
OTHER POSTRETIREMENT BENEFITS
Through the Distribution, Griffin's employees participated in Culbro's
postretirement benefits program which provides principally health and life
insurance benefits to certain of its retired employees. The annual cost of such
benefits attributable to Griffin's employees under the plan's benefit formula
was approximately $0.1 million per year in fiscal 1998, fiscal 1997 and fiscal
1996. In accordance with the Distribution Agreement, the liabilities for Griffin
employees who had retired prior to the Distribution and the liabilities for
employees related to businesses no longer a part of Griffin were assumed by GC
Holdings. The liability for postretirement benefits for certain of Griffin's
active employees at the time of the Distribution remains with Griffin and is
included in other noncurrent liabilities on the consolidated balance sheet.
The components for Griffin's postretirement benefits expense is as follows:
1998 1997
--------- ---------
Service cost--benefits earned during the year..................................................... $ 18 $ 26
Interest on accumulated post retirement benefit obligation........................................ 22 16
--------- ---------
Total expense..................................................................................... $ 40 $ 42
--------- ---------
--------- ---------
Griffin's liability for postretirement benefits, as determined by the Plan's
actuaries, is shown below. None of these liabilities have been funded at
November 28, 1998 and November 29, 1997.
1998 1997
--------- ---------
Retirees.......................................................................................... $ -- $ --
Fully eligible active participants................................................................ 98 78
Other active participants......................................................................... 272 201
Unrecognized net gain from experience differences and assumption changes.......................... (58) (7)
--------- ---------
Liability for other postretirement benefits....................................................... $ 312 $ 272
--------- ---------
--------- ---------
Discount rates of 7.15% and 7.50% were used to compute the accumulated
postretirement benefit obligations at November 28, 1998 and November 29, 1997,
respectively. Because Griffin's obligation for
23
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. RETIREMENT BENEFITS (CONTINUED)
retiree medical benefits is fixed, any increase in the medical cost trend would
have no effect on the accumulated postretirement benefit obligation, service
cost or interest cost.
PENSION PLAN
Through the Distribution, Griffin's employees participated in Culbro's
noncontributory defined benefit pension plan. Pension expense of $0.1 million
per year for fiscal 1997 through the Distribution and fiscal 1996 is included in
the consolidated statement of operations, and reflects Griffin's direct share of
Culbro's consolidated pension expense based on the benefit costs attributable to
Griffin's employees, as determined by the plan's actuaries.
In accordance with the Distribution Agreement, the pension plan was assumed
by GC Holdings. Effective at the time of the Distribution, Griffin terminated
its participation in the plan, and Griffin's employees' years of service and
benefits accrued at that time were frozen at the date of termination.
Accordingly, Griffin has not incurred pension expense subsequent to the
Distribution. All vested pension obligations as of the date of the Distribution
Agreement for Griffin's current and former employees were assumed by GC
Holdings.
8. STOCKHOLDERS' EQUITY
Activity in Griffin's stockholders' equity accounts subsequent to the
Distribution was as follows:
ADDITIONAL
COMMON PAID ACCUMULATED
STOCK IN CAPITAL DEFICIT
----------- -------------- ------------
Reclassification of Culbro Investment account on July 3, 1997............ $ 46 $ 91,722 $ --
Exercise of stock options, including $821 income tax benefit............. 1 1,228 --
Net loss subsequent to Distribution...................................... -- -- (2,474)
----- ------- ------------
Balance at November 29, 1997............................................. $ 47 $ 92,950 $ (2,474)
Exercise of stock options, including $451 income tax benefit............. 1 541 --
Net income............................................................... -- -- 121
----- ------- ------------
Balance at November 28, 1998............................................. $ 48 $ 93,491 $ (2,353)
----- ------- ------------
----- ------- ------------
PER SHARE RESULTS
Per share results for 1997 are pro forma because Griffin was a wholly-owned
subsidiary of Culbro during a portion of that year, and have been restated to
present basic and diluted per share results consistent with Griffin's required
adoption of Statement of Financial Accounting Standard No. 128, "Earnings per
Share" at the beginning of fiscal 1998. Basic and diluted per share results were
based on the following information:
24
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
1998 1997
---------- -----------
Net income (loss) as reported for computation of basic per share results............... $ 121 $ (2,136)
Adjustment to net income (loss) for assumed exercise of options of equity investee
(Centaur)............................................................................ (91) (12)
---------- -----------
Adjusted net income (loss) for computation of diluted per share results................ $ 30 $ (2,148)
---------- -----------
---------- -----------
1997
1998 (PRO FORMA)
---------- -----------
Weighted average shares outstanding for computation of basic per share results......... 4,776,000 4,730,000
Incremental shares from assumed exercise of Griffin stock options...................... 164,000 --
---------- -----------
Adjusted weighted average shares for computation of diluted per share results.......... 4,940,000 4,730,000
---------- -----------
---------- -----------
GRIFFIN STOCK OPTION PLAN
In 1997, Griffin established the Griffin Land & Nurseries, Inc. 1997 Stock
Option Plan (the "Griffin Stock Option Plan"), which made available a total of
700,000 options to purchase shares of Griffin common stock. Options granted
under the Griffin Stock Option Plan may be either incentive stock options or
non-qualified stock options. Incentive stock options issued under the Griffin
Stock Option Plan will satisfy certain Internal Revenue Code requirements
applicable thereto. Of such 700,000 options, 250,000 were made available for
issuance with respect to new options that may be granted to certain officers,
employees, consultants and directors of Griffin following the Distribution. The
remaining options were made available for the conversion of the Culbro options
to Griffin options at the time of the Distribution. Upon completion of the
Distribution, Culbro converted all employee stock options then outstanding under
Culbro's stock option plans into options to purchase shares of common stock of
Griffin, par value $0.01 per share, and options to purchase shares of common
stock of Culbro. The number of outstanding options and exercise prices were
adjusted to preserve the value of the Culbro options. At the time of the
Distribution, there were 438,202 Culbro stock options outstanding under various
Culbro stock option plans and an employment agreement with an officer of Culbro.
A portion of the options outstanding under the Culbro plans were able to be
exercised as incentive stock options, which under current tax laws will not
provide any tax deductions to Griffin. All Culbro options held by Culbro
employees who did not become employees of Griffin were vested as of the
Distribution date. None of the options outstanding at November 28, 1998 may be
exercised as stock appreciation rights.
The Griffin Stock Option Plan is administered by the Compensation Committee
of the Board of Directors of Griffin. A summary of the activity under the
Griffin Stock Option Plan is as follows:
25
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
WEIGHTED AVG
NUMBER OF EXERCISE
SHARES PRICE
----------- -------------
Culbro options converted to Griffin options at time of Distribution.................... 438,202 $3.01
Options granted by Griffin............................................................. 229,000 14.68
Exercised in 1997...................................................................... (184,481) 2.21
----------- -------------
Outstanding at November 29, 1997....................................................... 482,721 8.86
Exercised in 1998...................................................................... (99,114) 0.92
Cancelled in 1998...................................................................... (20,000) 14.68
----------- -------------
Outstanding at November 28, 1998....................................................... 363,607 $10.66
----------- -------------
----------- -------------
Number of option holders at November 28, 1998.......................................... 16
-----------
-----------
WEIGHTED AVG.
OUTSTANDING AT EXERCISE
RANGE OF EXERCISE PRICES NOV. 28, 1998 PRICE
- --------------------------------------------------------------- -------------- -------------
Under $3.00.................................................... 54,435 $ 1.01
$3.00-$9.00.................................................... 100,172 $ 7.52
Over $13.00.................................................... 209,000 $ 14.68
-------
363,607
-------
-------
Options granted by Griffin in 1997 vest in equal installments on the third,
fourth and fifth anniversaries from the date of grant. At November 28, 1998,
153,401 options outstanding under the Griffin Stock Option Plan were vested with
a weighted average price of $5.32 per share.
In January 1999, Griffin's Board of Directors approved an amendment which
made available an additional 300,000 shares for grant under the Griffin Stock
Option Plan. The Board approved a total of 248,100 options to be granted at the
market price at time of grant. Such amendment is subject to approval by
Griffin's stockholders.
STOCK-BASED COMPENSATION
Griffin accounts for stock options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and has adopted the
disclosure provisions of SFAS No. 123 which require disclosing the pro forma
effect on earnings and earnings per share of the fair value method of accounting
for stock-based compensation. Griffin's results would have been the following
pro forma amounts under the method prescribed by SFAS No. 123.
1998 1997
--------- ---------
Net income (loss) as reported................................................................. $ 121 $ (2,136)
Net loss, pro forma (unaudited)............................................................... $ (59) $ (2,228)
Basic net income (loss) per common share, as reported......................................... $ 0.03 $ (0.45)
Basic net loss per common share, pro forma (unaudited)........................................ $ (0.01) $ (0.47)
Diluted net income (loss) per common share, as reported....................................... $ 0.01 $ (0.45)
Diluted net loss per common share, pro forma (unaudited)...................................... $ (0.03) $ (0.47)
26
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted average fair value of each option granted during 1997 was
$6.10, estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions; expected volatility of
approximately 35%; risk free interest rate of 6.15%; expected option term of 5
years and no dividend yield for all options issued. Because the options were
granted in 1997 immediately after the Distribution of Griffin common stock by
Culbro, the expected option term was developed using Culbro's historical grant
and exercise information.
9. LEASES
CAPITAL LEASES
Future minimum lease payments under capital leases for transportation
equipment and the present value of such payments as of November 28, 1998 were:
1999................................................................. $ 260
2000................................................................. 162
2001................................................................. 87
2002................................................................. 37
---------
Total minimum lease payments......................................... 546
Less: amounts representing interest.................................. 53
---------
Present value of minimum lease payments (a).......................... $ 493
---------
---------
(a) Includes current portion of $0.2 million at November 28, 1998.
At November 28, 1998 and November 29, 1997, machinery and equipment included
capital leases amounting to $0.5 million, which is net of accumulated
amortization of $1.6 million at both November 28, 1998 and November 29, 1997.
Amortization expense relating to capital leases was $0.2 million per year in
fiscal 1998, fiscal 1997 and fiscal 1996.
OPERATING LEASES
Future minimum rental payments for the next five years under noncancelable
leases as of November 28, 1998 were:
1999................................................................ $ 493
2000................................................................ 368
2001................................................................ 257
2002................................................................ 187
2003................................................................ 87
---------
Total minimum lease payments........................................ $ 1,392
---------
---------
Total rental expense for all operating leases was $0.5 million, $0.4 million
and $0.3 million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
27
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. LEASES (CONTINUED)
As lessor, Griffin Land's real estate activities include the leasing of
office and industrial space in Connecticut. Future minimum rentals to be
received under noncancelable leases as of November 28, 1998 were:
1999............................................................... $ 2,553
2000............................................................... 2,354
2001............................................................... 2,299
2002............................................................... 1,535
2003............................................................... 1,058
Later years........................................................ 1,981
---------
Total minimum rental revenue....................................... $ 11,780
---------
---------
Total rental revenue from all leases was $2.3 million, $1.9 million and $2.5
million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
10. EQUITY INVESTMENTS
INVESTMENT IN CENTAUR
In accordance with the Asset Transfers (see Note 2), Culbro transferred to
Griffin its ownership of approximately 25% of the outstanding common stock of
Centaur, which is primarily engaged in the publishing business in the United
Kingdom.
On August 4, 1998, Griffin purchased 500,000 shares of Centaur common stock
from another stockholder of Centaur for approximately $2.9 million. Griffin's
purchase was in connection with transactions whereby the stockholder who sold
the Centaur common stock to Griffin also sold its remaining Centaur common stock
to a third party, and Centaur purchased approximately 4.8 million shares of its
common stock from certain of its other stockholders at the same per share price
paid by Griffin. As a result of these transactions, Griffin now holds
approximately 5.4 million shares of the 15.2 million shares of Centaur common
stock outstanding after these transactions.
Substantially all of the book value of Griffin's investment in Centaur
represents the excess of the cost of Griffin's investment over the book value of
its equity in Centaur (representing the value of publishing rights and goodwill)
and is being amortized on a straight-line basis over 30 to 40 years, which
commenced in 1985.
Centaur reports on a June 30 fiscal year. The unaudited summarized financial
data presented below was derived from Centaur's audited consolidated financial
statements, adjusted to report on a fiscal year consistent with Griffin.
Centaur's consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United Kingdom. Griffin's equity
income reflects certain adjustments to reflect Centaur's results in accordance
with generally accepted accounting principles in the United States. Such
adjustments included an expense in fiscal 1997 for stock option compensation of
which Griffin's allocable share was $0.6 million. Centaur's consolidated
28
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. EQUITY INVESTMENTS (CONTINUED)
results of operations presented below include the results of Linguaphone prior
to the distribution, in September 1997, of Linguaphone's common stock to
Centaur's stockholders (see below).
TWELVE MONTHS ENDED,
-------------------------------
NOV. 28, NOV. 29, NOV. 30,
1998 1997 1996
--------- --------- ---------
Net sales........................................................................ $ 73,324 $ 85,713 $ 69,450
Costs and expenses............................................................... 64,390 79,948 65,932
--------- --------- ---------
Income before taxes.............................................................. 8,934 5,765 3,518
Income taxes..................................................................... 3,634 3,217 1,544
--------- --------- ---------
Net income....................................................................... $ 5,300 $ 2,548 $ 1,974
--------- --------- ---------
--------- --------- ---------
NOV. 28, NOV. 29,
1998 1997
--------- ---------
Current assets................................................................... $ 20,637 $ 27,345
Intangible assets................................................................ 8,752 7,510
Other noncurrent assets.......................................................... 8,074 7,015
--------- ---------
Total assets..................................................................... $ 37,463 $ 41,870
--------- ---------
--------- ---------
Current liabilities.............................................................. $ 21,897 $ 18,844
Debt............................................................................. 19,800 --
Noncurrent liabilities........................................................... 3,493 6,549
--------- ---------
Total liabilities................................................................ 45,190 25,393
Shareholders' equity (deficit)................................................... (7,727) 16,477
--------- ---------
Total liabilities and shareholders' equity (deficit)............................. $ 37,463 $ 41,870
--------- ---------
--------- ---------
INVESTMENT IN LINGUAPHONE
Prior to September 1997, Linguaphone was a wholly-owned subsidiary of
Centaur. In September 1997, the common stock of Linguaphone was distributed to
the Centaur stockholders. At the time the Linguaphone common stock was
distributed to Centaur's stockholders, Griffin held approximately 25% of the
outstanding common stock of Centaur. Accordingly, Griffin held approximately 25%
of the Linguaphone common stock outstanding after its distribution by Centaur.
Linguaphone reports on a June 30 fiscal year. The unaudited summarized
financial data presented below was derived from Linguaphone's audited financial
statements adjusted to report on a fiscal year consistent with Griffin.
Linguaphone's financial statements are prepared in accordance with generally
accepted accounting principles in the United Kingdom. Griffin's equity loss
reflects certain adjustments
29
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. EQUITY INVESTMENTS (CONTINUED)
to reflect Linguaphone's results in accordance with generally accepted
accounting principles in the United States.
TWELVE MONTHS ENDED
--------------------
NOV. 28, NOV. 29,
1998 1997
--------- ---------
Net sales................................................................................... $ 23,935 $ 25,781
Costs and expenses.......................................................................... 28,035 25,145
--------- ---------
Loss before tax benefits.................................................................... (4,100) 636
Income taxes................................................................................ 180 586
--------- ---------
Net loss.................................................................................... $ (4,280) $ 50
--------- ---------
--------- ---------
NOV. 28, NOV. 29,
1998 1997
--------- ---------
Current assets.............................................................................. $ 14,050 $ 18,460
Intangible assets........................................................................... 3,090 3,001
Noncurrent assets........................................................................... 995 1,393
--------- ---------
Total assets................................................................................ $ 18,135 $ 22,854
--------- ---------
--------- ---------
Current liabilities......................................................................... $ 10,342 $ 10,449
Noncurrent liabilities...................................................................... 25 228
--------- ---------
Total liabilities........................................................................... 10,367 10,677
Shareholders' equity........................................................................ 7,768 12,177
--------- ---------
Total liabilities and shareholders' equity.................................................. $ 18,135 $ 22,854
--------- ---------
--------- ---------
Subsequent to the end of fiscal 1998, Linguaphone completed a share offering
in which Griffin participated to a limited extent. As a result of the issuance
of additional shares of Linguaphone common stock, Griffin's common equity
ownership was reduced to approximately 14% of Linguaphone's outstanding common
stock after the offering. As a result, Griffin will account for its investment
in Linguaphone under the cost method of accounting for investments subsequent to
this reduction in its common equity ownership interest in Linguaphone.
REAL ESTATE JOINT VENTURES
Included in other assets at November 28, 1998 and November 29, 1997, is $3.1
million and $3.3 million, respectively, for Griffin's 30% interest in a real
estate joint venture that owns commercial properties in Connecticut. Results of
this investment are included in operating profit. In 1996, all of the assets of
another real estate joint venture were sold. Griffin received net proceeds of
approximately $4.0 million from the sale and recorded a pretax loss on the sale
of approximately $0.4 million in 1996.
30
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
OTHER NONOPERATING INCOME, NET
Included in other nonoperating income, net, in fiscal 1996, was the accrual
of dividend and accretion income on the preferred stock of Eli Witt that was
held by Griffin, which was equal to the interest expense on the subordinated
note, that was satisfied by the exchange of the preferred stock in 1996.
INVENTORIES
NOV. 28, NOV. 29,
Inventories consist of: 1998 1997
--------- ---------
Nursery stock................................................. $ 24,329 $ 23,224
Finished goods................................................ 1,420 1,255
Materials and supplies........................................ 997 864
--------- ---------
$ 26,746 $ 25,343
--------- ---------
--------- ---------
PROPERTY AND EQUIPMENT
Property and equipment consist of:
ESTIMATED USEFUL NOV. 28, NOV. 29,
LIVES 1998 1997
---------------- ---------- ----------
Land and improvements............................... $ 6,336 $ 6,205
Buildings........................................... 10 to 40 years 3,871 3,824
Machinery and equipment............................. 3 to 20 years 13,297 12,714
---------- ----------
23,504 22,743
Accumulated depreciation............................ (10,869) (10,219)
---------- ----------
$ 12,635 $ 12,524
---------- ----------
---------- ----------
Total depreciation expense related to property and equipment was $1.2
million per year in fiscal 1998, fiscal 1997 and fiscal 1996.
31
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED)
REAL ESTATE HELD FOR SALE OR LEASE
Real estate held for sale or lease consists of:
ESTIMATED USEFUL NOV. 28, NOV. 29,
LIVES 1998 1997
---------------- ---------- ----------
Land................................................ $ 4,808 $ 4,808
Land improvements................................... 14,480 10,967
Buildings........................................... 40 years 19,687 17,438
---------- ----------
38,975 33,213
Accumulated depreciation............................ (7,456) (6,784)
---------- ----------
$ 31,519 $ 26,429
---------- ----------
---------- ----------
In fiscal 1998, Griffin capitalized interest of approximately $0.1 million.
There was no interest capitalized in fiscal 1997 and fiscal 1996. Total
depreciation expense related to real estate held for sale or lease was $0.7
million per year in fiscal 1998 and fiscal 1997 and $0.8 million per year in
fiscal 1996.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include trade payables of $3.7 million
and $3.0 million at November 28, 1998 and November 29, 1997, respectively;
accrued salaries, wages and other compensation of $0.8 million and $0.6 million
at November 28, 1998 and November 29, 1997, respectively; and other accrued
liabilities of $1.1 million and $1.3 million at November 28, 1998 and November
29, 1997, respectively.
SUPPLEMENTAL CASH FLOW INFORMATION
Griffin incurred capital lease obligations of $0.2 million per year in
fiscal 1998, fiscal 1997 and fiscal 1996.
Prior to the Distribution in 1997, interest and tax payments were made by
Culbro on behalf of Griffin. Griffin was included in Culbro's consolidated
federal income tax returns through the Distribution (see Note 5). Accordingly,
tax and interest payments made by Culbro through the Distribution are reflected
in Net Transactions with Culbro on the consolidated statement of cash flows. Tax
payments were approximately $0.1 million in fiscal 1998. Interest payments, net
of capitalized interest in 1998, were $0.2 million, $1.0 million and $5.9
million in fiscal 1998, fiscal 1997 and fiscal 1996, respectively, including
payments of $0.7 million and $5.4 million in fiscal 1997 and fiscal 1996,
respectively, under Culbro's general corporate debt facilities that were either
repaid by Griffin or transferred to GC Holdings pursuant to the Distribution
Agreement.
In 1996, Griffin Land exchanged a commercial property in satisfaction of the
outstanding nonrecourse mortgage on that property. Also in 1996, Griffin
exchanged preferred stock of Eli Witt that it held in satisfaction of a
subordinated note payable and all accrued interest thereon. There was no cash
paid or received in either of these transactions.
32
GRIFFIN LAND & NURSERIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data are presented below:
1997 QUARTERS 1ST 2ND 3RD 4TH TOTAL
- ------------------------------------------------------------ --------- --------- --------- --------- ---------
Net sales and other revenue................................. $ 2,725 $ 20,905 $ 10,878 $ 11,780 $ 46,288
Gross profit................................................ 782 6,336 313 3,090 10,521
Net income (loss)........................................... (2,013) 1,989 (1,651) (461) (2,136)
Pro forma basic net income (loss) per share................. (0.43) 0.42 (0.35) (0.10) (0.45)
Pro forma diluted net income (loss) per share............... (0.43) 0.41 (0.35) (0.10) (0.45)
1998 QUARTERS 1ST 2ND 3RD 4TH TOTAL
- ------------------------------------------------------------ --------- --------- --------- --------- ---------
Net sales and other revenue................................. $ 3,514 $ 23,707 $ 11,019 $ 12,991 $ 51,231
Gross profit................................................ 1,019 6,907 3,595 3,492 15,013
Net income (loss)........................................... (1,430) 2,438 (726) (161) 121
Basic net income (loss) per share........................... (0.30) 0.51 (0.15) (0.03) 0.03
Diluted net income (loss) per share......................... (0.30) 0.48 (0.15) (0.04) 0.01
13. COMMITMENTS AND CONTINGENCIES
As a result of the Asset Transfers described in Note 2, Griffin acquired the
50.1% interest in Eli Witt previously held by Culbro. In 1993 and 1994, Culbro,
Eli Witt and other parties engaged in two complex acquisitions and
reorganizations, pursuant to which Culbro received significant distributions
from Eli Witt to repay debt, including substantial amounts Culbro had previously
borrowed from unaffiliated third parties to fund Eli Witt's business. Culbro
subsequently loaned $5 million to Eli Witt. In 1996, Eli Witt filed for
protection under Chapter 11 of the Federal Bankruptcy Law. In connection with
such filing, Eli Witt sold all of its operating assets to another wholesale
distributor in March 1997. Shareholders of Eli Witt did not receive any proceeds
from the sale. These transactions (including the transfer of funds to Culbro)
were reviewed by Eli Witt's creditors and other parties in interest in
connection with Eli Witt's Chapter 11 filing. On May 21, 1998, the United States
Bankruptcy Court approved a motion whereby Griffin released all of its remaining
claims against Eli Witt in exchange for the creditors of Eli Witt releasing
Griffin from any liability in connection with the Chapter 11 filing by Eli Witt
in 1996. The claims that Griffin released had been fully reserved for by Griffin
in previous years, therefore there was no effect on Griffin's 1998 financial
statements as a result of the Bankruptcy Court ruling.
Imperial has entered into contract growing agreements with suppliers of
field grown plants. In accordance with these agreements, Imperial has agreed to
purchase inventory as it becomes available with an aggregate purchase price of
approximately $2.9 million over the next four years.
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Griffin Land & Nurseries, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and cash flows present fairly, in all
material respects, the financial position of Griffin Land & Nurseries, Inc. and
its subsidiaries at November 28, 1998 and November 29, 1997, and the results of
their operations and their cash flows for the fiscal years ended November 28,
1998, November 29, 1997 and November 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the management of Griffin Land & Nurseries, Inc.; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the fiscal 1998 and fiscal 1997 financial
statements of Centaur Communications, Ltd., an investment which is carried at
equity in the consolidated financial statements (see Note 10) and represents
approximately 15.4% and 11.7%, respectively, of consolidated assets. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Centaur
Communications, Ltd. included in the consolidated financial statements for the
years ended November 28, 1998 and November 29, 1997, is based on the report of
the other auditors. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 8, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-30639) of Griffin Land & Nurseries, Inc. of our
report dated February 8, 1999 which appears above in this Form 10-K of Griffin
Land & Nurseries, Inc. for the fiscal year ended November 28, 1998. We also
consent to the incorporation by reference of our report on the financial
statement schedules, which appears in Exhibit 23.2 of this Form 10-K of Griffin
Land & Nurseries, Inc. for the fiscal year ended November 28, 1998.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 8, 1999
34
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION
The following table sets forth the information called for in this Item 10:
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
Edgar M. Cullman 81 Chairman of the Board and Director
Frederick M. Danziger 59 President, Chief Executive Officer and Director
Anthony J. Galici 41 Vice President, Chief Financial Officer and Secretary
John L. Ernst 58 Director
Winston J. Churchill, Jr. 59 Director
David F. Stein 58 Director
Martha Collier 42 Senior Vice President of Marketing and Leasing
Gregory M. Schaan 41 Senior Vice President of Sales and Marketing of Imperial Nurseries,
Inc.
EDGAR M. CULLMAN has been the Chairman of the Board of Griffin since April
1997. He has been Chairman of the Board of General Cigar Holdings, Inc. since
December 1996. From 1962 to 1996 he served as Chief Executive Officer of Culbro.
Mr. Cullman served as a Director of Culbro from 1961 until 1997 and has been
Chairman of Culbro since 1975. He also is a Director of Centaur Communications
Ltd, Bloomingdale Properties, Inc. and was a director of the Eli Witt Company.
Eli Witt filed for relief from its creditors under Chapter 11 of the Federal
Bankruptcy Code in November 1996. Edgar M. Cullman is the uncle of John L. Ernst
and the father-in-law of Frederick M. Danziger.
FREDERICK M. DANZIGER has been a Director and the President and Chief
Executive Officer of Griffin since April 1997, and was a director of Culbro from
1975 until 1997. He was previously involved in the real estate operations of
Griffin in the early 1980's. Mr. Danziger was Of Counsel to the law firm of
Latham & Watkins from 1995 until 1997. From 1974 until 1995, Mr. Danziger was a
Member of the law firm of Mudge Rose Guthrie Alexander & Ferdon. Mr. Danziger
also is a director of Monro Muffler/Brake, Inc., Bloomingdale Properties, Inc.,
The Technology Group Inc., Centaur Communications Ltd. and Linguaphone Group
plc, and is a general partner of Ryan Instruments, L.P.
ANTHONY J. GALICI has been the Vice President, Chief Financial Officer and
Secretary of Griffin since April 1997. Mr. Galici was Vice President-Assistant
Controller of Culbro from 1995 until 1997. Prior to 1995, he was Assistant
Controller of Culbro.
JOHN L. ERNST is a Director of Griffin and GC Holdings. He has been a
Director of Griffin since April 1997 and a director of GC Holdings since
December 1996. Mr. Ernst also was a Director of Culbro from 1983 until 1997. He
is the Chairman of the Board and President of Bloomingdale Properties, Inc., an
investment and real estate company. Mr. Ernst also is a director of the Doral
Financial Corporation.
WINSTON J. CHURCHILL, JR. has been a Director of Griffin since April 1997.
Mr. Churchill is also Chairman of the Board of Central Sprinkler Corporation and
a member of the board of The Technology Group Inc. He is a managing general
partner of SCP Private Equity Partners, L.P., a private equity fund sponsored by
Safeguard Scientifics Inc., and is chairman of Churchill Investment Partners,
Inc. and CIP Capital, Inc.
35
DAVID F. STEIN has been a Director of Griffin since November 1997. Mr. Stein
is Vice Chairman of J&W Seligman & Co. Inc., an asset management firm. He has
been Vice Chairman since 1996. Mr. Stein was Managing Director of J&W Seligman &
Co. Inc. from 1990 until 1996.
MARTHA COLLIER has been the Senior Vice President of Marketing and Leasing
of Griffin since 1997. From 1995 until 1997 she was a Vice President of Griffin,
and from 1989 until 1995 she was Controller of Griffin.
GREGORY M. SCHAAN has been the Senior Vice President of Sales and Marketing
of Imperial Nurseries, Inc. since December 1997. From 1992 until 1997 he was
Vice President of Sales and Marketing of Imperial Nurseries, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for Mr.
Danziger, Griffin's Chief Executive Officer and Mr. Galici, Griffin's Vice
President, Chief Financial Officer and Secretary (the "Named Executive
Officers"), as well as the total compensation paid by Griffin during 1998 and
1997 to the Named Executive Officers. Mr. Danziger and Mr. Galici were not
employed by Griffin prior to 1997.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL ---------------------------------- OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS
- ----------------------------------------------- --------- ---------- ----------- ---------------- -------------
Frederick M. Danziger.......................... 1998 $ 300,000 $ -- $ 5,112 --
President and Chief Executive Officer 1997 126,213 -- 692 150,000
Anthony J. Galici..............................
Vice President, Chief Financial Officer and 1998 162,558 -- 60,511(2) --
Secretary 1997 71,256 -- 1,688 15,000
(1) Amounts shown under Other Annual Compensation include matching contributions
made by Griffin under its Savings Plan and other miscellaneous cash
benefits, but do not include funding for or receipt of retirement plan
benefits. No Executive Officer who would otherwise have been includable in
such table resigned or terminated employment during 1998.
(2) Includes $56,097 for reimbursement of relocation costs.
There were no stock options granted to the Named Executive Officers during
fiscal 1998 nor were there any options exercised by the Named Executive Officers
in 1998. The following table presents the value of unexercised options held by
the Named Executive Officers at November 28, 1998.
NUMBER OF SECURITIES
UNDERLYING OPTIONS HELD AT VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END (1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------- ------------- ------------- ----------- ---------------
Frederick M. Danziger........................................... -- 150,000 $ -- $ --
Anthony J. Galici............................................... 6,435 16,206 71,852 9,286
(1) The amounts presented in this column have been calculated based upon the
difference between the fair market value of $12.75 per share (the average of
the high and low prices of Griffin's Common Stock on November 27, 1998) and
the exercise price of each stock option.
36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the number of shares and options to purchase
shares of Common Stock of Griffin beneficially owned or held by (i) each person
known by Griffin to beneficially own more than 5% of the outstanding shares of
Common Stock, (ii) the nominees for election as directors (who are all current
directors), (iii) the Named Executive Officers (as defined in Item 11) and (iv)
all directors and officers of Griffin collectively. Unless otherwise indicated,
information is provided as of November 28, 1998.
SHARES BENEFICIALLY OWNED
NAME AND ADDRESS (1) (2) PERCENT OF TOTAL
- -------------------------------------------------------------------- --------------------------- -----------------
Edgar M. Cullman (3)................................................ 954,342 19.7
Edgar M. Cullman, Jr. (3)........................................... 963,038 19.9
Louise B. Cullman (3)............................................... 823,775 17.0
Susan R. Cullman (3)................................................ 758,607 15.7
Frederick M. Danziger (3)........................................... 199,120 4.1
Lucy C. Danziger (3)................................................ 1,028,692 21.2
John L. Ernst (3)................................................... 421,250 8.7
Winston J. Churchill, Jr............................................ 30,200 *
David F. Stein...................................................... 25,000 *
Anthony J. Galici................................................... 7,641 *
B. Bros. Realty Limited Partnership (4)............................. 233,792 4.8
Gabelli Funds, Inc. (5)............................................. 1,417,537 29.3
All directors and officers collectively, consisting of 6 persons
(6)............................................................... 1,372,232 28.3
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each person named in the table is
641 Lexington Avenue, New York, New York 10022.
(2) This information reflects the definition of beneficial ownership adopted by
the Securities and Exchange Commission (the "Commission"). Beneficial
ownership reflects sole investment and voting power, except as reflected in
footnote 3. Where more than one person shares investment and voting power in
the same shares, such shares may be shown more than once. Such shares are
reflected only once, however, in the total for all directors and officers.
Includes options exercisable within 60 days granted to Directors pursuant to
the 1997 Stock Option Plan. Excluded are shares held by charitable
foundations and trusts of which members of the Cullman and Ernst families,
including persons referred to in this footnote 2, are officers and
directors. As of November 28, 1998, a group (the "Cullman and Ernst Group")
consisting of Messrs. Cullman, direct members of their families and trusts
for their benefit; Mr. Ernst, his sister and direct members of their
families and trusts for their benefit; a partnership in which members of the
Cullman and Ernst families hold substantial direct and indirect interests;
and charitable foundations and trusts of which members of the Cullman and
Ernst families are directors or trustees, owned an aggregate of
approximately 2,277,095 shares of Common Stock (approximately 47.0% of the
outstanding shares of Common Stock). Among others, Edgar M. Cullman, Edgar
M. Cullman, Jr., Mr. Ernst and Mr. Danziger (who is a member of the Cullman
& Ernst Group) hold investment and voting power or shared investment and
voting power over such shares. Certain of such shares are pledged as
security for loans payable under standard pledge arrangements. A form filed
with the Commission on behalf of the Cullman & Ernst Group states that there
is no formal agreement governing the group's holding and voting of such
shares but that there is an informal understanding that the persons and
entities included in the group will hold and vote together the shares owned
by each of them in each case subject to any applicable fiduciary
responsibilities.
37
Louise B. Cullman is the wife of Edgar M. Cullman; Edgar M. Cullman, Jr. is
the son of Edgar M. Cullman and Louise B. Cullman; Susan R. Cullman and Lucy
C. Danziger are the daughters of Edgar M. Cullman and Louise B. Cullman; and
Lucy C. Danziger is the wife of Frederick M. Danziger.
(3) Included within the shares shown as beneficially owned by Edgar M. Cullman
are 843,204 shares in which he holds shared investment and/or voting power;
included within the shares shown as beneficially owned by Mr. Ernst are
411,321 shares in which he holds shared investment and/or voting power; and
included within the shares shown as beneficially owned by Frederick M.
Danziger are 182,578 shares in which he holds shared investment and/or
voting power. Included within the shares shown as beneficially owned by
Edgar M. Cullman, Jr. are 733,918 shares in which he holds shares investment
and/or voting power; included with the shares owned by Louise B. Cullman are
720,365 shares in which she holds shared investment and/or voting power;
included within the shares shown as beneficially owned by Susan R. Cullman
are 670,842 shares in which she holds shared investment and/or voting power;
and included within the shares shown as beneficially owned by Lucy C.
Danziger are 946,850 shares in which she holds shared investment and/or
voting power. Excluded in each case are shares held by charitable
foundations and trusts in which such persons or their families or trusts for
their benefit are officers and directors. Messrs. Cullman, Danziger and
Ernst disclaim beneficial interest in all shares over which there is shared
investment and/or voting power and in all excluded shares.
(4) The address of B. Bros. Realty Limited Partnership ("B. Bros.") is 641
Lexington Avenue, New York, New York 10022. Lucy C. Danziger and John L.
Ernst are the general partners of B. Bros.
(5) The address of such person is Gabelli Funds, Inc., One Corporate Center,
Rye, New York 10580. A form filed with the Securities and Exchange
Commission in July 1997 by Gabelli Funds, Inc., as subsequently amended,
indicates that the securities have been acquired by Gabelli Funds, Inc. and
its wholly-owned subsidiaries on behalf of their investment advisory
clients. Griffin has been informed that no individual client of Gabelli
Funds, Inc. has ownership of more than 5% of Griffin's outstanding Common
Stock.
(6) Excluding shares held by certain charitable foundations the officers and/or
directors of which include certain officers and directors of Griffin.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information of stockholders, attention is called to the following
transactions between Griffin and other parties in which the persons mentioned
below might have had a direct or indirect interest.
Messrs. Cullman, Danziger and Ernst are members of the Board of Directors of
Bloomingdale Properties, Inc. ("Bloomingdale Properties") of which Mr. Ernst is
Chairman and President and other members of the Cullman & Ernst Group are
associated. Real estate management and advisory services have been provided to
Griffin by John Fletcher, an employee of Bloomingdale Properties, for which Mr.
Fletcher receives compensation at a rate of approximately $50,000 per year.
Edgar M. Cullman, the Chairman of Griffin, is also the Chairman of General
Cigar Holdings, Inc. ("GC Holdings"), the successor to Culbro. In addition,
certain members of the Cullman & Ernst Group who may be deemed to beneficially
own more than five percent of Griffin's Common Stock (see Item 12) also may be
deemed to beneficially own more than five percent of the Class A Common Stock of
GC Holdings. Prior to the Distribution in 1997, Griffin, as lessor, and General
Cigar Co., Inc. ("General Cigar"), a wholly owned subsidiary of GC Holdings, as
lessee, entered in a lease for certain agricultural land in Connecticut and
Massachusetts (the "Agricultural Lease"). The Agricultural Lease is for
approximately 500 acres of arable land held by Griffin for possible development
in the long-term,
38
but which is being used by General Cigar for growing Connecticut Shade wrapper
tobacco. General Cigar's use of the land is limited to the cultivation of cigar
wrapper tobacco. The Agricultural Lease has an initial term of ten years and
provides for the extension of the lease for additional periods thereafter. In
addition, at Griffin's option, the Agricultural Lease may be terminated with
respect to 100 acres of such land annually upon one year's prior notice. In 1998
GC Holdings made a total of $80,000 in rental payments to Griffin in respect of
the Agricultural Lease.
Also in 1997, Griffin, as lessor, and General Cigar, as lessee, entered into
a lease for approximately 40,000 square feet of office space in the Griffin
Center South office complex in Bloomfield, Connecticut (the "Commercial Lease").
The Commercial Lease has an initial term of ten years and provides for the
extension of the lease for additional annual periods thereafter. In 1998 General
Cigar made a total of $437,000 in rental payments to Griffin in respect of the
Commercial Lease.
In 1997, Griffin entered into a Services Agreement (the "Services
Agreement") with Culbro. Pursuant to the Services Agreement, Culbro, and its
successor, GC Holdings, provided Griffin, for a period of one year after the
Distribution, with certain administrative services, including internal audit,
tax preparation, legal and transportation services. The Services Agreement was
terminated with respect to all services provided by GC Holdings as of July 1998,
except for certain transportation services, with respect to which the Services
Agreement was amended and extended through June 1999. In fiscal 1998, Griffin
paid $400,000 to GC Holdings under the Services Agreement.
39
PART IV
ITEM 14. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements--see also Item 8.
The following financial statements of equity investees and additional
financial data should be read in conjunction with the financial statements in
such 1998 Annual Report to Shareholders. Schedules not included with this
additional financial data have been omitted because they are not applicable or
the required information is shown in the financial statements or notes thereto.
SCHEDULES
- --------------------------------------------------------------------------------------------------------------------
II - Valuation and Qualifying Accounts and Reserves S-1
III - Real Estate and Accumulated Depreciation S-2/S-3
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
Centaur Communications, Ltd. financial statements for the year ended June 30, 1998. F-1
Linguaphone Group plc financial statements for the year ended June 30, 1998 F-32
(b) Exhibits
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
2.1 Form of Distribution Agreement among Culbro Corporation, Griffin Land & Nurseries, Inc. and General Cigar
Holdings, Inc. (incorporated by reference to the Registration Statement on Form S-1 of General Cigar
Holdings, Inc., filed December 24, 1996, as amended)
3.1 Form of Amended and Restated Certificate of Incorporation of Griffin Land & Nurseries, Inc. (incorporated
by reference to the Form 10 of Griffin Land & Nurseries, Inc., filed April 8, 1997, as amended)
3.2 Form of Bylaws of Griffin Land & Nurseries, Inc. (incorporated by reference to the Form 10 of Griffin
Land & Nurseries, Inc., filed April 8, 1997, as amended)
10.1 Form of Tax Sharing Agreement among Culbro Corporation, Griffin Land & Nurseries, Inc. and General Cigar
Holdings, Inc. (incorporated by reference to the Registration Statement on Form S-1 of General Cigar
Holdings, Inc., filed December 24, 1996, amended)
10.2 Form of Benefits and Employment Matters Allocation Agreement among Culbro Corporation, Griffin Land &
Nurseries, Inc. and General Cigar Holdings, Inc. (incorporated by reference to the Registration Statement
on Form S-1 of General Cigar Holdings, Inc., filed December 24, 1996, amended)
10.3 Form of Services Agreement among Culbro Corporation, Griffin Land & Nurseries, Inc. and General Cigar
Holdings, Inc. (incorporated by reference to the Registration Statement on Form S-1 of General Cigar
Holdings, Inc., filed December 24, 1996, amended)
10.4 Form of Agricultural Lease between Griffin Land & Nurseries, Inc. and General Cigar Holdings, Inc.
(incorporated by reference to the Registration Statement on Form S-1 of General Cigar Holdings, Inc.,
filed December 24, 1996, amended)
10.5 Employment Agreement between Culbro Corporation and Jay M. Green, dated as of April 8, 1994, and as
amended on January 11, 1997 (incorporated by reference to the Registration Statement on Form S-1 of
General Cigar Holdings, Inc., filed December 24, 1996, amended)
10.6 Form of 1997 Stock Option Plan of Griffin Land & Nurseries, Inc. (incorporated by reference to the Form
10 of Griffin Land & Nurseries, Inc., filed April 8, 1997, as amended)
40
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
10.7 Form of 401 (k) Plan of Griffin Land & Nurseries, Inc. (incorporated by reference to the Form 10 of
Griffin Land & Nurseries, Inc., filed April 8, 1997, as amended)
10.8 1996 Stock Plan of Culbro Corporation dated as of March 15, 1996 (incorporated by reference to the
definitive proxy statement of Culbro Corporation, dated March 15, 1996, for its Annual Meeting of
Shareholders held on April 11, 1996)
10.9 1992 Stock Plan of Culbro Corporation, dated December 10, 1993 (incorporated by reference to the
definitive proxy statement of Culbro Corporation, dated March 31, 1993, for its Annual Meeting of
Shareholders held on April 8, 1993)
10.10 Stock Option Plan for Non-employee Directors of Culbro Corporation, dated December 10, 1993 (incorporated
by reference to the definitive proxy statement of Culbro Corporation, dated March 3, 1993, for its Annual
Meeting of Shareholders held on April 8, 1993)
10.11 1991 Employees Incentive Stock Option Plan of Culbro Corporation, dated as of January 31, 1991 and as
amended on February 12, 1995 (incorporated by reference to the definitive proxy statement of Culbro
Corporation, dated April 9, 1991, for its Annual Meeting of Shareholders held on May 9, 1993)
10.12 Annual Incentive Compensation Plan of Culbro Corporation, dated as of December 7, 1995 (incorporated by
reference to the Registration Statement on Form S-1 of General Cigar Holdings, Inc., filed December 24,
1996, amended)
10.13 Annual Incentive Compensation Plan of General Cigar Co., Inc., dated as of December 7, 1995 (incorporated
by reference to the Registration Statement on Form S-1 of General Cigar Holdings, Inc., filed December
24, 1996, amended)
10.14 Long Term Performance Plan of Culbro Corporation for the three-year period 1995-1997 (incorporated by
reference to the Registration Statement on Form S-1 of General Cigar Holdings, Inc., filed December 24,
1996, amended)
10.15 Deferred Incentive Compensation Plan of Culbro Corporation, dated as of December 13, 1982 and as amended
on February 12, 1985 (incorporated by reference to the Registration Statement on Form S-1 of General
Cigar Holdings, Inc., filed December 24, 1996, amended)
10.16 Revolving Credit Agreement and Guaranty dated May 6, 1998 (incorporated by reference to Form 10Q dated
May 30, 1998 filed July 10, 1998)
21 Subsidiaries of Griffin Land & Nurseries, Inc. (incorporated by reference to the Form 10 of Griffin Land
& Nurseries, Inc., filed April 8, 1997, as amended)
23.1 Consent of PricewaterhouseCoopers LLP (included with the report accompanying Item 8 of this Form 10K)
23.2 Report of Independent Accountants on Financial Statement Schedules
27 Financial Data Schedule
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Corporation has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GRIFFIN LAND & NURSERIES, INC.
By: /s/ FREDERICK M. DANZIGER
-----------------------------------------
Frederick M. Danziger
CHIEF EXECUTIVE OFFICER
By: /s/ ANTHONY J. GALICI
-----------------------------------------
Anthony J. Galici
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed by the following persons on behalf of the
Corporation and in the capacities indicated as of February 25, 1999.
NAME TITLE
- ------------------------------ --------------------------
/s/ WINSTON J. CHURCHILL,
JR.
- ------------------------------ Director
Winston J. Churchill, Jr.
/s/ EDGAR M. CULLMAN
- ------------------------------ Chairman of the Board and
Edgar M. Cullman Director
/s/ FREDERICK M. DANZIGER
- ------------------------------ President, Director and
Frederick M. Danziger Chief Executive Officer
/s/ JOHN L. ERNST
- ------------------------------ Director
John L. Ernst
/s/ ANTHONY J. GALICI Vice President, Chief
- ------------------------------ Financial Officer and
Anthony J. Galici Secretary
/s/ DAVID F. STEIN
- ------------------------------ Director
David F. Stein
42
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS RESERVES OF YEAR
- ----------------------------------------- ----------- ----------- ----------- ----------- -----------
FOR FISCAL YEAR ENDED NOVEMBER 28, 1998
Reserves:
Uncollectible accounts--trade............ $ 456 111 4 81(1) $ 490
----------- ----- ----- ----------- -----------
Inventories.............................. $ 3,519 -- -- 697(2) $ 2,822
----------- ----- ----- ----------- -----------
FOR FISCAL YEAR ENDED NOVEMBER 29, 1997
Reserves:
Uncollectible accounts--trade............ $ 302 163 35 44(1) $ 456
----------- ----- ----- ----------- -----------
Inventories.............................. $ 965 3,300 -- 746(2) $ 3,519
----------- ----- ----- ----------- -----------
FOR FISCAL YEAR ENDED NOVEMBER 30, 1996
Reserves:
Uncollectible accounts--trade............ $ 338 70 22 128(1) $ 302
----------- ----- ----- ----------- -----------
Inventories.............................. $ 1,000 16 300 351(2) $ 965
----------- ----- ----- ----------- -----------
Notes:
(1) Accounts receivable written off.
(2) Inventories disposed.
S-1
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
(DOLLARS IN THOUSANDS)
COST
CAPITALIZED
SUBSEQUENT GROSS AMOUNT
INITIAL COST TO ACQUISITION AT NOVEMBER 28, 1998
-------------------------- --------------- ------------------------------------
DESCRIPTION ENCUMBRANCES LAND BLDG& IMPROVE IMPROVEMENTS LAND BLDG& IMPROVE TOTAL
- ------------------------- ------------- --------- --------------- --------------- --------- -------------- ---------
Land..................... $ 4,574 $ 9,513 $ 4,574 $ 9,513 $ 14,087
Restaurant
Bloomfield, CT......... 1,370 1,370 1,370
Residential Development,
Windsor, CT............ 126 3,689 126 3,689 3,815
Office Building,
Bloomfield, CT......... 604 47 2,657 47 2,657 2,704
Office Building,
Bloomfield, CT......... 3 1,815 3 1,815 1,818
Office Building,
Bloomfield, CT......... 1 1,563 1 1,563 1,564
Office Building,
Bloomfield, CT......... 1 1,494 1 1,494 1,495
Office Building,
Bloomfield, CT......... 669 669 669
Office Buildings,
Bloomfield, CT......... 5 3,067 5 3,067 3,072
Industrial Buildings,
East Granby, CT........ 1,891 29 3,311 29 3,311 3,340
Industrial Building,
East Granby, CT........ 13 1,722 212 13 1,934 1,947
Industrial Building
Windsor, CT............ 9 3,085 9 3,085 3,094
------ --------- ------ ------- --------- ------- ---------
$ 2,495 $ 4,808 $ 1,722 $ 32,445 $ 4,808 $ 34,167 $ 38,975
------ --------- ------ ------- --------- ------- ---------
------ --------- ------ ------- --------- ------- ---------
DESCRIPTION ACCUM DEP DATE OF CONSTR. DATE OF ACQ DEPR LIFE
- ------------------------- ----------- ----------------- ------------- -----------
Land..................... $ (497)
Restaurant
Bloomfield, CT......... (610) 1983 40 Yrs
Residential Development,
Windsor, CT............
Office Building,
Bloomfield, CT......... (1,355) 1977 40 Yrs
Office Building,
Bloomfield, CT......... (654) 1985 40 Yrs
Office Building,
Bloomfield, CT......... (418) 1988 40Yrs
Office Building,
Bloomfield, CT......... (423) 1988 40 Yrs
Office Building,
Bloomfield, CT......... (203) 1988 40 Yrs
Office Buildings,
Bloomfield, CT......... (613) 1991 40 Yrs
Industrial Buildings,
East Granby, CT........ (1,961) 1978 40 Yrs
Industrial Building,
East Granby, CT........ (676) 1989 40 Yrs
Industrial Building
Windsor, CT............ (46) 1998 40 Yrs
-----------
$ (7,456)
-----------
-----------
S-2
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
(DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED NOVEMBER 28, 1998
COST RESERVE
--------- ---------
Balance at beginning of year................................................................. $ 33,213 $ (6,784)
Changes during the year:
Improvements................................................................................. 6,182
Additions to reserve charged to costs and expense............................................ (739)
Other........................................................................................ (420) 67
--------- ---------
Balance at end of year....................................................................... $ 38,975 $ (7,456)
--------- ---------
--------- ---------
FISCAL YEAR ENDED NOVEMBER 29, 1997
COST RESERVE
--------- ---------
Balance at beginning of year................................................................. $ 32,768 $ (6,071)
Changes during the year:
Improvements................................................................................. 953
Additions to reserve charged to costs and expense............................................ (713)
Cost of sales................................................................................ (508)
--------- ---------
Balance at end of year....................................................................... $ 33,213 $ (6,784)
--------- ---------
--------- ---------
FISCAL YEAR ENDED NOVEMBER 30, 1996
COST RESERVE
--------- ---------
Balance at beginning of year................................................................. $ 37,921 $ (6,179)
Changes during the year:
Improvements................................................................................. 592
Additions to reserve charged to costs and expense............................................ (822)
Transfer to lender for outstanding mortgage.................................................. (4,648) 930
Cost of sales................................................................................ (1,097)
--------- ---------
Balance at end of year....................................................................... $ 32,768 $ (6,071)
--------- ---------
--------- ---------
S-3
CENTAUR COMMUNICATIONS
LIMITED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
JUNE 30, 1998
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of CENTAUR COMMUNICATIONS LIMITED
Dear Sirs,
CENTAUR COMMUNICATIONS LIMITED ("THE COMPANY") AND ITS SUBSIDIARIES
("THE GROUP")
We have audited the accompanying consolidated balance sheet of Centaur
Communications Limited and its subsidiaries as at June 30, 1998 and the
related consolidated statements of operations, of changes in
shareholders' equity and of the cash flows for the year ended June 30,
1998.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the
financial statements, It is our responsibility to form an independent
opinion, based on our audit, on those financial statements and to
report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with auditing standards generally
accepted in the United Kingdom and the United States.
We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the
financial statements are free from material misstatement, whether
caused by fraud or other irregularity or error. In forming our opinion
we also evaluated the overall adequacy of the presentation of
information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of
the state of affairs of the Group for the year ended June 30, 1998 and
have been properly prepared in accordance with the Companies Act 1985.
United Kingdom accounting standards vary in certain important respects
from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of
consolidated net profit for the year ended June 30, 1998 and the
determination of consolidated shareholders' equity and consolidated
financial position as at June 30, 1998 to the extent summarised in note
32 to the consolidated financial statements.
/s/ Grant Thornton
------------------
GRANT THORNTON
CHARTERED ACCOUNTANTS
LONDON 8 FEBRUARY 1999 (EXCEPT FOR NOTES 32 AND 33 AS TO WHICH DATE IS
10 FEBRUARY 1999)
F-2
CENTAUR COMMUNICATIONS LIMITED
PRINCIPAL ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PREPARATION
The financial statements have been prepared in accordance with
applicable accounting standards and under the historical cost
convention. The principal accounting policies are described below and
have remained unchanged from the previous year.
BASIS OF CONSOLIDATION
The group financial statements consolidate those of the company and of
its subsidiary undertakings (see note 11) drawn up to June 30, 1998.
Profits or losses on intra-group transactions are eliminated in full.
On acquisition of a subsidiary, all of the subsidiary's assets and
liabilities which exist at the date of acquisition are recorded at
their fair values reflecting their condition at that date.
INVESTMENTS
Investments are included at cost less amounts written off.
INTANGIBLE ASSETS
Intangible assets comprise magazines and language course publishing
rights, computer databases, customer lists, brand names and other
intangible assets and are stated at cost. When such assets are acquired
through the acquisition of companies they are stated at fair value at
acquisition which normally represents the excess of purchase price over
net tangible assets of the business acquired.
Amortisation is not provided on intangible assets as they have no
finite economic life. These assets are subject to annual review and any
permanent impairment in value is written off in the profit and loss
account.
Where the cost of businesses acquired exceeds the fair value of the net
tangible and intangible assets the difference is written off to
reserves as goodwill.
TURNOVER
Turnover represents sales of publications, subscriptions, advertising
space, language courses and other revenue, exclusive of value added
tax.
SUBSCRIPTION INCOME
Magazine subscription income is deferred and amortised over the period
of the subscription except that for controlled circulation titles,
where subscription income is incidental, the income is taken to profit
on receipt.
F-3
CENTAUR COMMUNICATIONS LIMITED
PRINCIPAL ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NEW PRODUCT DEVELOPMENT
BUSINESS INFORMATION PUBLISHING
The trading results of new products which are in the course of
development often include substantial launch and other promotional
expenditure. These costs are written off in the profit and loss account
in the period in which they are incurred. The results of new products
in the course of development are included under new product development
in the profit and loss account until such time as they become
established. A product is regarded as established after the
commencement of trading at a profit.
LANGUAGE COURSE PUBLISHING
All costs incurred in the development of existing courses are written
off in the period in which they are incurred. Development expenditure
on new bespoke projects is held as work in progress where future
recoverability can be foreseen with reasonable assurance. Any
expenditure carried forward is amortised against the contribution from
the related project.
DEPRECIATION
Depreciation of tangible assets is provided on a straight line basis at
the following annual rates, based on the estimated useful lives of the
assets:
Leasehold improvements - 5% or the length of the lease if shorter
Fixtures and fittings - 10%
Computer equipment - 20%
Motor vehicles - 25%
DEFERRED TAXATION
Deferred taxation is provided on timing differences using the liability
method, except where it can be demonstrated with reasonable probability
that the timing differences will not reverse in the foreseeable future.
Timing differences arise on items of income and expenditure which are
recognised for tax purposes in different periods from those in which
they are recognised in the profit and loss account.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
in foreign currencies are translated at the rates of exchange ruling
at the balance sheet date. The balance sheets of financial statements
of foreign subsidiaries are translated at the rate of exchange ruling
at the balance sheet date. The results of overseas subsidiaries are
translated at an average rate for the year and the resulting
difference is taken to reserves. The exchange differences arising from
the retranslation of the opening net investment in subsidiaries are
taken directly to reserves. All other exchange differences are dealt
with through the profit and loss account.
F-4
CENTAUR COMMUNICATIONS LIMITED
PRINCIPAL ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
STOCK AND WORK-IN-PROGRESS
Stocks are stated at the lower of cost and net realisable value after
making provisions for any obsolete or slow moving items.
Work-in-progress consists of costs relating to exhibitions,
conferences, publications and the development of bespoke language
course products, the income from which has yet to be dealt with in the
profit and loss account.
LEASED ASSETS
Assets held under finance leases and hire purchase contracts are
capitalised in the balance sheet and depreciated over their expected
useful lives. The interest element of leasing payments represents a
constant proportion of the capital balance outstanding and is charged
to the profit and loss account over the period of the lease.
Rentals payable under operating leases are charged to the profit and
loss account as they are incurred.
F-5
CENTAUR COMMUNICATIONS LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended JUNE 30, 1998
- --------------------------------------------------------------------------------
Note 1998 1997
Established NEW PRODUCT
activities DEVELOPMENT TOTAL TOTAL
L'000 L'000 L'000 L'000
TURNOVER 1 45,018 2,699 47,717 52,617
--------------------------------------------------------------------------------------------------
- excluding Linguaphone 42,490 2,699 45,189 37,611
--------------------------------------------------------------------------------------------------
Cost of sales (22,902) (3,094) (25,996) (25,012)
-------- ------- -------- --------
GROSS PROFIT/(LOSS) 23,116 (1,395) 21,721 27,605
Distribution costs (3,741) (103) (3,844) (8,069)
Administrative expenses (11,045) (425) (11,470) (14,363)
-------- ------- -------- --------
OPERATING PROFIT/(LOSS) 8,330 (1,923) 6,407 5,173
--------------------------------------------------------------------------------------------------
- excluding Linguaphone 7,990 (1,923) 6,067 3,928
--------------------------------------------------------------------------------------------------
Publishing rights written off (75) -
Professional fees relating to
demerger of Linguaphone Group
and restructuring (668) -
Interest receivable and
similar income 506 159
Interest payable and
similar charges 6 (298) (203)
------ -----
PROFIT ON ORDINARY ACTIVITIES 1,2
BEFORE TAXATION 5,872 5,129
Taxation on ordinary activities 7 (2,390) (1,807)
------ -----
PROFIT ON ORDINARY ACTIVITIES
AFTER TAXATION 3,482 3,322
Minority interests - equity (22) 60
------ -----
PROFIT FOR THE YEAR
ATTRIBUTABLE
TO SHAREHOLDERS 3,460 3,382
Dividends 12 (17,304) -
-------- -----
RETAINED (LOSS)/PROFIT FOR 21 (13,844) 3,382
THE YEAR
-------- -----
-------- -----
The results of the Linguaphone group of companies are set out in note
1. Turnover amounted to L2,528,000 (1997: L15,006,000) and operating
profit was L340,000 (1997: L1,245,000).
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-6
CENTAUR COMMUNICATIONS LIMITED
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998
- --------------------------------------------------------------------------------
Note 1998 1997
L'000 L'000 L'000 L'000
FIXED ASSETS
Intangible assets 8 6,742 17,551
Tangible assets 9 4,601 4,404
Investments 10 180 444
------ -------
11,523 22,399
CURRENT ASSETS
Stocks 13 458 2,697
Debtors 14 11,321 16,715
Cash at bank and in hand 5,137 1,944
-------- --------
16,916 21,356
CREDITORS: AMOUNTS FALLING
DUE
WITHIN ONE YEAR 15 (13,288) (14,751)
-------- --------
NET CURRENT ASSETS 3,628 6,605
------ -------
TOTAL ASSETS LESS
CURRENT LIABILITIES 15,151 29,004
CREDITORS: AMOUNTS FALLING
DUE
AFTER MORE THAN ONE YEAR 16 - (230)
PROVISION FOR LIABILITIES
AND CHARGES
Deferred taxation 17 (628) (736)
------ -------
14,523 28,038
------ -------
------ -------
CAPITAL AND RESERVES
Called up share capital 18 2,007 2,000
Share premium account 19 13,278 13,170
Other reserves 20 (98) (290)
Profit and loss account 21 (686) 13,158
------ -------
SHAREHOLDERS' FUNDS - equity 14,501 28,038
Minority interests - equity 22 -
------ -------
14,523 28,038
------ -------
------ -------
The financial statements were approved by the Board of Directors on 22
January 1999
G T D Wilmot - Director
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-7
CENTAUR COMMUNICATIONS LIMITED
CONSOLIDATED CASH FLOW STATEMENT
For the year ended JUNE 30, 1998
- --------------------------------------------------------------------------------
Note 1998 1997
L'000 L'000
NET CASH INFLOW FROM OPERATING ACTIVITIES 27 6,682 3,597
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE 28 208 (93)
TAXATION 28 (947) (579)
CAPITAL EXPENDITURE 28 (2,897) (2,443)
------- ------
3,046 482
ACQUISITIONS AND DISPOSALS 28 (681) (15)
------- ------
2,365 467
FINANCING - issue of shares 115 214
- increase in debt 600 372
------- ------
INCREASE IN CASH 29 3,080 1,053
------- ------
------- ------
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-8
CENTAUR COMMUNICATIONS LIMITED
OTHER PRIMARY STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
1998 1997
L'000 L'000
Profit for the year attributable to shareholders 3,460 3,382
Exchange adjustments 74 (65)
-------- -----
Total recognised gains and losses relating to the year 3,534 3,317
-------- ------
-------- ------
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
1998 1997
L'000 L'000
Total recognised gains and (losses) relating to the year 3,534 3,317
Demerger dividend re Linguaphone Group (17,304) -
Movement on goodwill reserve on demerger of Linguaphone Group 162 -
Movement in currency translation reserve on demerger of the
Linguaphone Group 39 -
New share capital issued 115 214
Goodwill written off directly to goodwill reserve (83) (15)
-------- ------
Net (decrease)/increase in shareholders' funds (13,537) 3,516
Opening shareholders' funds 28,038 24,522
-------- ------
Closing shareholders' funds 14,501 28,038
-------- ------
-------- ------
F-9
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
1 SEGMENTAL REPORTING
ANALYSIS BY BUSINESS SEGMENT
1998 Electronic
Magazine Information Linguaphone
publishing Providing Group Total
L'000 L'000 L'000 L'000
Turnover 43,781 1,408 2,528 47,717
Cost of sales (23,754) (1,924) (318) (25,996)
Distribution costs (3,078) - (766) (3,844)
Administrative expenses (9,855) (511) (1,104) (11,470)
-------- ----- ----- ------
Operating profit/(loss) 7,094 (1,027) 340 6,407
-------- ----- -----
-------- ----- -----
Publishing Rights Written off (75)
Professional fees relating to demerger
of Linguaphone Group and restructuring (668)
Unallocated net interest 208
------
Profit before taxation 5,872
------
------
Net operating assets by segment 13,682 841 - 14,523
-------- ----- ----- ------
-------- ----- ----- ------
1997
Turnover 36,422 1,189 15,006 52,617
Cost of sales (20,456) (1,438) (3,118) (25,012)
Distribution costs (2,732) - (5,337) (8,069)
Administrative expenses (8,498) (559) (5,306) (14,363)
-------- ----- ----- ------
Operating profit/(loss) 4,736 (808) 1,245 5,173
-------- ----- -----
-------- ----- -----
Unallocated net interest (44)
------
Profit before taxation 5,129
------
------
Net operating assets by segment 6,972 2,127 19,597 28,696
-------- ----- -----
-------- ----- -----
Unallocated interest bearing (658)
net liabilities
------
28,038
------
------
F-10
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
SEGMENTAL REPORTING (CONTINUED)
Details regarding the demerger of the Linguaphone group of companies
are provided in note 12. The de-merger took place during the year and,
the results are categorised as discontinued per FRS 3.
ANALYSIS OF TURNOVER BY GEOGRAPHICAL DESTINATION
1998 1997
L'000 L'000
United Kingdom 44,877 42,202
Europe 230 2,436
Americas 1 333
Far East and Australasia 1,339 7,402
Other 1,270 244
------- ------
47,717 52,617
------- ------
------- ------
Substantially all of the turnover and profit before tax originates in
the United Kingdom.
Substantially all of the net assets are located in the United Kingdom.
2 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The profit on ordinary activities before taxation is stated after
charging/(crediting):
1998 1997
L'000 L'000
Leasehold property rents 888 1,321
Hire of equipment 112 114
Depreciation of owned assets 1,425 1,276
Depreciation of assets held under finance leases - 16
Auditors' remuneration
- audit 45 69
- non audit services 52 77
Profit on disposal of tangible fixed assets (33) (33)
------- ------
------- ------
F-11
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
3 STAFF COSTS AND NUMBER
Staff costs, including directors emoluments, were as follows:
1998 1997
L'000 L'000
Wages and salaries 13,492 13,312
Social security costs 1,303 1,227
Other pension costs 237 271
------ ------
15,032 14,810
------ ------
------ ------
The average number of persons employed by the group, including the
directors, was as follows:
1998 1997
Number NUMBER
Magazine publishing 525 467
Language course publishing 14 126
------ ------
539 593
------ ------
------ ------
4 DIRECTORS' EMOLUMENTS
Remuneration in respect of directors was as follows:
1998 1997
L'000 L'000
Emoluments 507 491
Pension contributions to money purchase schemes 57 54
------ ------
564 545
------ ------
------ ------
During the year 2 directors (1997: 3 directors) participated in money
purchase schemes.
Options have been granted to certain directors to subscribe for
ordinary shares of 10p each in Centaur Communications Limited. During
the year two directors including the highest paid director exercised a
portion of these options. Full details of the outstanding options are
disclosed in the directors' report.
The amounts set out above include remuneration in respect of the
highest paid director as follows:
1998 1997
L'000 L'000
Emoluments 240 230
Pension contributions to money purchase scheme 37 35
------ ------
277 265
------ ------
------ ------
F-12
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
5 INTEREST RECEIVABLE AND SIMILAR INCOME
1998 1997
L'000 L'000
Interest on bank deposits 491 159
Other interest receivable 15 -
------ ------
506 159
------ ------
------ ------
6 INTEREST PAYABLE AND SIMILAR CHARGES
1998 1997
L'000 L'000
Bank loans and overdrafts 285 179
Other loans and borrowings 13 24
------ ------
298 203
------ ------
------ ------
7 TAXATION
The charge for taxation comprises:
1998 1997
L'000 L'000
UK Corporation tax at 31% (1997: 33%) 2,346 1,305
Deferred taxation
- current year 20 259
Advance corporation tax utilised - (60)
Taxation charge on overseas subsidiaries
- current year including withholding tax - 178
- prior year - 125
Adjustments in respect of prior year 24 -
------ ------
2,390 1,807
------ ------
------ ------
The effective tax rate as disclosed is increased due to the non
allowable nature of the exceptional de-merger and restructuring
expenses and also due to the fact that group relief was not available
from a loss making subsidiary for the majority of the year.
F-13
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
8 INTANGIBLE ASSETS
Group Company
L'000 L'000
COST
At 1 July 1997 17,994 1,177
Acquired during the year 699 25
Demerger of Linguaphone Group (11,433) -
---------- ---------
At 30 June 1998 7,260 1,202
---------- ---------
AMOUNTS WRITTEN OFF
At 1 July 1997 443 6
Amounts written off during the year 75 75
---------- ---------
At 30 June 1998 518 81
---------- ---------
NET BOOK VALUE
At 30 June 1998 6,742 1,121
---------- ---------
---------- ---------
At 30 June 1997 17,551 1,171
---------- ---------
---------- ---------
F-14
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
-----------------------------------------------------------------------
9 TANGIBLE ASSETS
Leasehold Fixtures and Computer Motor
improvements fittings equipment vehicles Total
GROUP L'000 L'000 L'000 L'000 L'000
COST
At 1 July 1997 604 2,180 5,822 846 9,452
Additions 172 228 1,865 93 2,358
Acquisitions - 25 - - 25
Disposals - - (117) (66) (183)
Demerger (222) (279) (655) (260) (1,416)
--------- --------- --------- --------- ---------
At 30 June 1998 554 2,154 6,915 613 10,236
--------- --------- --------- --------- ---------
DEPRECIATION
At 1 July 1997 350 1,276 2,912 510 5,048
Charge for year 75 142 1,103 105 1,425
Acquisitions - 14 - - 14
Disposals - - (111) (54) (165)
Demerger (158) (82) (310) (137) (687)
--------- --------- --------- --------- ---------
At 30 June 1998 267 1,350 3,594 424 5,635
--------- --------- --------- --------- ---------
NET BOOK VALUE
At 30 June 1998 287 804 3,321 189 4,601
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
At 30 June 1997 254 904 2,910 336 4,404
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COMPANY
COST
At 1 July 1997 and at
30 June 1998 193 314 12 18 537
--------- --------- --------- --------- ---------
DEPRECIATION
At 1 July 1997 103 301 12 16 432
Charge for year 9 4 - 2 15
--------- --------- --------- --------- ---------
At 30 June 1998 112 305 12 18 447
--------- --------- --------- --------- ---------
NET BOOK VALUE
At 30 June 1998 81 9 - - 90
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
At 30 June 1997 90 13 - 2 105
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
F-15
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- -------------------------------------------------------------------------------
10 INVESTMENTS
1998 1997
GROUP COMPANY GROUP COMPANY
NOTES L'000 L'000 L'000 L'000
Investments in subsidiary
undertakings 11 - 211 - 4,856
Investment in subsidiary
undertaking
excluded from - - 75 75
consolidation
Trade investments 180 180 369 225
--- --- --- -----
180 391 444 5,156
--- --- --- -----
--- --- --- -----
In the opinion of the directors the value of the group's and of the
company's investments is not less than the amount at which they are
stated in the balance sheet.
11 INVESTMENTS IN SUBSIDIARY UNDERTAKINGS
L'000
COST
At 1 July 1997 7,957
Additions 3,362
Subsidiary undertaking previously excluded from 75
consolidation
Demerger of Linguaphone Group (8,053)
--------
At 30 June 1998 3,341
--------
PROVISIONS
At 1 July 1997 3,101
Charge for the year 29
--------
At 30 June 1998 3,130
--------
NET BOOK VALUE
At 30 June 1998 211
--------
--------
At 30 June 1997 4,856
--------
--------
F-16
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- -------------------------------------------------------------------------------
PRINCIPAL SUBSIDIARY UNDERTAKINGS AT 30 JUNE 1998
HOLDING OF ORDINARY
SHARES
COUNTRY OF
REGISTRATION/ BY BY
INCORPORATION PARENT GROUP
SUBSIDIARY AND OPERATION % % ACTIVITY
Chiron Communications Limited England and Wales 100 Magazine
publishing
Hali Publications Limited England and Wales 69.6 100 Magazine
publishing
Ascent Publishing Limited England and Wales 100 100 Magazine
organizer
publishing
IFA Events Limited England and Wales 51.96 51.96 Exhibition
Your Business Magazine Limited England and Wales 100 100 Investment
company
Mayfield Publishing Limited England and Wales 100 Investment
company
Perfect Information Limited England and Wales 87.50 87.50 Electronic
information
providing
12 DEMERGER OF LINGUAPHONE GROUP
On 3 September 1997 the members ratified a de-merger of the Linguaphone
group of companies. This transaction was effected by a dividend in
specie with the existing members receiving two shares in Linguaphone
Group Plc for every share held in Centaur Communications Limited.
The consolidated profit and loss account includes the results of the
Linguaphone group for the period ended 3 September 1997 and the year
ended 30 June 1997. The results are shown in note 1.
HOLDING OF ORDINARY
SHARES
COUNTRY OF
REGISTRATION/ BY BY
INCORPORATION PARENT GROUP
SUBSIDIARY AND OPERATION % % ACTIVITY
Linguaphone Group plc England and Wales 100 - Holding
company
Linguaphone Institute Limited England and Wales 100 Language
course
publishing
Linguaphone Institute (Hong Hong Kong 100 Language
Kong) Limited course
publishing
Linguapac Distributions Pte. Limited Singapore 100 Holding
company
Linguaphone Distributors SDN BHD Malaysia 100 Language
course
F-17
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- -------------------------------------------------------------------------------
13 STOCKS
1998 1997
Group COMPANY GROUP COMPANY
L'000 L'000 L'000 L'000
Consumables 77 - 72 -
Work-in-progress 258 - 532 -
Finished goods 123 - 2093 -
--- ---- ---- -----
458 - 2697 -
--- ---- ---- -----
--- ---- ---- -----
There is no significant difference between the replacement cost of the
stock and its balance sheet value.
14 DEBTORS
1998 1997
Group COMPANY GROUP COMPANY
L'000 L'000 L'000 L'000
Trade debtors 10,330 - 14,742 -
Other debtors 463 44 790 35
Prepayments and deferred charges 528 - 1,183 -
Loan notes owed by group undertakings - - - 39,000
Amounts owed by group undertakings - 62,363 - 33,093
------ ------ ------ ------
11,321 62,407 16,715 72,128
------ ------ ------ ------
------ ------ ------ ------
F-18
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- -------------------------------------------------------------------------------
15 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
1998 1997
Group COMPANY GROUP COMPANY
L'000 L'000 L'000 L'000
Bank overdrafts - - 1,836 -
Bank loan - - 250 -
Trade creditors 1,642 - 2,836 -
Other creditors 78 4 147 9
Accruals and deferred income 7,328 657 6,003 160
Corporation tax 2,954 111 2,000 -
Social security and other taxes 1,286 15 1,393 28
Obligations under finance leases - - 35 -
Loan notes - - 251 251
Loan notes owed to group undertakings - - - 38,000
Amounts owed to group undertakings - 20,176 - 22,319
------ ------ ------ ------
13,288 20,963 14,751 60,767
------ ------ ------ ------
------ ------ ------ ------
16 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1998 1997
Group COMPANY GROUP COMPANY
L'000 L'000 L'000 L'000
Bank loan - - 150 -
Obligations under finance leases - - 80 -
----- ----- ----- ------
- - 230 -
----- ----- ----- ------
----- ----- ----- ------
17 PROVISIONS FOR LIABILITIES AND CHARGES
Group COMPANY
L'000 L'000
Deferred tax
At 1 July 1997 736 1,283
Demerger (128) -
Charge for the year 20 -
--- -----
At 30 June 1998 628 1,283
--- -----
--- -----
F-19
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- --------------------------------------------------------------------------------
PROVISIONS FOR LIABILITIES AND CHARGES (CONTINUED)
The provision for deferred tax comprises the following amounts:
1998 1997
GROUP COMPANY GROUP COMPANY
L'000 L'000 L'000 L'000
Deferred pension asset - - 128 -
Accelerated capital allowances 85 15 20 15
Other timing differences 543 1,268 588 1,268
------- ------ ------ -------
628 1,283 736 1,283
------- ------ ------ -------
------- ------ ------ -------
Unprovided deferred tax in respect of accelerated capital allowances
for the group and the company is Lnil (1997: Lnil).
Unprovided deferred tax in respect of other timing differences for the
group and the company is L357,000 (1997: L357,000).
Where there is no intention to distribute the profits of overseas
subsidiary undertakings, no deferred tax is provided in respect of
liabilities which might arise on distributions by these companies.
18 SHARE CAPITAL
1998 1997
L'000 L'000
AUTHORISED
50,000,000 Ordinary shares of 10p each 5,000 5,000
------- -------
------- -------
ALLOTTED AND FULLY PAID
20,068,312 Ordinary shares of 10p each 2,007 2,000
------- -------
------- -------
During the year certain employees exercised their options to subscribe
for 40,000 ordinary shares of 10p each at a price of 67.5p per share
and 32,000 ordinary shares of 10p each at a price of L2.75 per share.
As at 30 June 1998 options have been granted and agreed to be granted
to certain directors and employees to subscribe for a total of
1,973,493 ordinary shares of 10p each at varying times and prices up to
August 2006. The directors' options, including those granted after the
year end, are disclosed in the directors' report.
F-20
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- --------------------------------------------------------------------------------
19 SHARE PREMIUM ACCOUNT
Group COMPANY
L'000 L'000
At 1 July 1997 13,170 13,170
Movement during the year 108 108
--------- ----------
At 30 June 1998 13,278 13,278
--------- ----------
--------- ----------
20 OTHER RESERVES
GROUP
L'000
GOODWILL RESERVE
At 1 July 1997 (177)
Demerger of Linguaphone Group 162
Goodwill written off in the year (83)
--------
At 30 June 1998 (98)
--------
CURRENCY TRANSLATION RESERVE
At 1 July 1997 (113)
Movement during the year 74
Demerger of Linguaphone Group 39
--------
At 30 June 1998 -
--------
TOTAL OTHER RESERVES
At 30 June 1998 (98)
--------
--------
At 30 June 1997 (290)
--------
--------
F-21
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- --------------------------------------------------------------------------------
21 PROFIT AND LOSS ACCOUNT
GROUP COMPANY
L'000 L'000
At 1 July 1997 13,158 2,740
Retained (loss)/profit for the year (13,844) 22,230
---------- ---------
At 30 June 1998 (686) 24,970
---------- ---------
---------- ---------
The company has not presented its own profit and loss account as
permitted by section 230 of the Companies Act 1985. The company made a
profit after taxation of L28,230,000 (1997: L13,000).
22 CAPITAL COMMITMENTS
The capital commitments at the year end were as follows:
1998 1997
L'000 L'000
Contracted but not provided for in the financial statements 109 101
---------- ---------
---------- ---------
23 FINANCE LEASE COMMITMENTS
The net obligations under finance leases are as follows:
1998 1997
L'000 L'000
Payable within one year - 35
Payable within two to five years - 80
---------- ---------
- 115
---------- ---------
---------- ---------
F-22
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
- --------------------------------------------------------------------------------
24 OPERATING LEASE COMMITMENTS
The operating lease rentals which are payable within one year of the
balance sheet date are as follows:
LAND AND BUILDINGS EQUIPMENT
1998 1997 1998 1997
L'000 L'000 L'000 L'000
Leases expiring
- within one year 8 311 - 19
- within two to five years 26 314 54 103
- after five years 1,597 584 10 -
----- ----- ----- ------
1,631 1,209 64 122
----- ----- ----- ------
----- ----- ----- ------
25 PENSION SCHEMES
The group contributes to individual and collective money purchase
pension schemes in respect of directors and employees once they have
completed the requisite period of service. The charge for the year in
respect of these pension schemes is shown in note 3.
26 CONTINGENT LIABILITIES
GUARANTEES
The company has granted a cross guarantee in favour of National
Westminster Bank PLC in respect of the bank borrowings of a number of
its subsidiary undertakings. The guarantee is secured by specific and
floating charges over the company's assets.
27 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
1998 1997
L'000 L'000
Operating profit 6,407 5,173
Depreciation charges 1,425 1,292
Trade investments written off - 19
Profit on disposal of tangible fixed assets (33) (33)
Loss on foreign currency transactions - (1)
Increase in stocks (77) (670)
Increase in debtors (2,645) (4,429)
Increase in creditors 1,605 2,246
------- --------
6,682 3,597
------- --------
------- --------
F-23
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
28 ANALYSIS OF CASH FLOWS FOR HEADINGS NETTED IN THE CASH FLOW STATEMENT
1998 1997
L'000 L'000
RETURNS ON INVESTMENT AND SERVICING OF FINANCE
Interest received 506 152
Interest paid (298) (244)
Interest element of finance lease rental payments - (1)
------- ------
NET CASH INFLOW/(OUTFLOW) FOR INTEREST 208 (93)
------- ------
TAXATION
UK corporation tax paid (947) (439)
Overseas tax paid - (140)
------- ------
NET CASH OUTFLOW FOR TAX PAID (947) (579)
------- ------
CAPITAL EXPENDITURE
Purchase of intangible fixed assets (699) (70)
Sale/(purchase) of trade investments 120 (180)
Purchase of tangible fixed assets (2,369) (2,312)
Sale of tangible fixed assets 51 119
------- ------
NET CASH OUTFLOW FOR CAPITAL EXPENDITURE (2,897) (2,443)
------- ------
ACQUISITIONS AND DISPOSALS
Purchase of/increase in interest in subsidiary undertakings (13) (15)
Demerger expenses (668) -
------- ------
NET CASH OUTFLOW FOR ACQUISITIONS AND DISPOSALS (681) (15)
------- ------
F-24
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
29 ANALYSIS OF NET FUNDS
At AT
1 July CASH 30 JUNE
1997 FLOW DE-MERGER 1998
L'000 L'000 L'000 L'000
Cash in hand and at bank 1,944 3,318 (125) 5,137
Overdrafts (1,836) (238) 2,074 -
-------- -------- -------- -------
108 3,080 1,949 5,137
-------- -------- -------- -------
Debt due within one year (250) - 250 -
Debt due after one year (150) (600) 750 -
Finance leases (115) - 115 -
-------- -------- -------- -------
(515) (600) 1,115 -
-------- -------- -------- -------
(407) 2,480 3,064 5,137
-------- -------- -------- -------
-------- -------- -------- -------
30 RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET FUNDS
1998 1997
L'000 L'000
INCREASE IN CASH IN THE PERIOD 3,080 1,053
Cash inflow from changes in debt and lease financing (600) (372)
-------- --------
Change in net debt resulting from cash flows 2,480 681
Demerger of Linguaphone 3,064 -
New finance leases - (113)
Exchange movement - (62)
-------- --------
MOVEMENT IN NET DEBT IN THE YEAR 5,544 506
Net debt at 1 July 1997 (407) (913)
-------- --------
Net funds at 30 June 1998 5,137 (407)
-------- --------
-------- --------
F-25
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
31 POST BALANCE SHEET EVENTS
On the 4 August 1998 the company purchased 4,828,004 of its own
ordinary shares of 10p each for an aggregate consideration of
L17,380,814.
32 RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP)
The accompanying financial statements have been prepared in accordance
with UK GAAP, which differs in certain material respects from US GAAP.
Such differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by US
GAAP.
The effect on the company's retained (loss)/profit and shareholders'
equity of applying the significant differences between UK GAAP and US
GAAP is summarised in the reconciliation statements set out below:
1998 1997
(a) Reconciliation of profit and loss L'000 L'000
accounts:
Net (loss)/profit per UK GAAP: (13,844) 3,382
Development expense (1) - (193)
Amortisation expense (2) (226) (585)
Taxation credit on development expense (1) - 60
De-merger dividend (3) 17,304 -
Remuneration element of stock options (6) (1,490) -
--------- --------
Net income in accordance with US GAAP 1,744 2,664
--------- --------
--------- --------
Earnings per share in accordance with US GAAP (in pence):
Basic 0.09 0.13
Diluted 0.08 0.13
Average number of shares outstanding (in thousands):
Basic 20,072 19,838
Diluted 21,180 20,333
Diluted earnings per share include the dilutive effects of share
options. The incremental dilutive effect of share options was 1,108,000
and 495,000 for the years ended June 30, 1998 and 1997 respectively.
1998 1997
L'000 L'000
(b) Reconciliation of Shareholders' Equity:
Shareholders' funds per UK GAAP: 14,523 28,038
Development expense (1) - (193)
Amortisation expense (2) (1,594) (4,407)
Taxation credit on development expense (1) - 60
Remuneration element of stock options (6) (1,490) -
--------
Reinstatement of goodwill written off (4) 83 -
--------- --------
Shareholders' equity per US GAAP 11,522 23,498
--------- --------
--------- --------
F-26
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
1998 1998 1997
L'000 L'000 L'000
(c) Changes in Shareholders' Equity on a US GAAP basis:
Shareholders' equity at beginning of year - 23,498 20,834
Net profit 1,744 2,664
Demerger dividend (3) - UK GAAP (17,304) -
Cumulative US GAAP adjustments in respect of Linguaphone 3,185 -
Exchange and goodwill adjustments in respect of Linguaphone 201 -
--------
Value of demerger dividend - US GAAP (13,918) -
Reinstatement of goodwill written off (4) 83 -
Issue of share capital 115 -
--------- --------
Shareholders' equity at the end of the year 11,522 23,498
--------- --------
--------- --------
The following are descriptions of US GAAP reconciling items:
(1) In compliance with UK GAAP, the Linguaphone group capitalises
development expenditure related to specific projects when
recoverability can be assessed with reasonable certainty and
amortised over the contribution period of the project. Under
US GAAP, development expenditures are expensed in the period
incurred.
(2) In compliance with UK GAAP intangible assets, representing
publishing rights, are carried forward in the balance sheet at
cost. A provision is only made where it is considered that a
permanent diminution in value has occurred. In accordance with
US GAAP these assets are amortised over the estimated economic
life of the asset. These assets have been amortised over 30
years.
(3) The Linguaphone Group of companies was de-merged from Centaur
Communications Limited on September 3, 1997. This resulted in
a distribution in specie of shares in Linguaphone Group Plc
being allocated to the existing shareholders of Centaur
Communications Limited.
In compliance with UK GAAP, the group has reflected this
dividend in the profit and loss account. Under US GAAP this
dividend is reflected through shareholders' equity.
(4) In compliance with UK GAAP, the group has written off certain
goodwill to shareholders' equity. Under US GAAP, the goodwill
has been reinstated and is being amortised over 30 years.
(5) In compliance with UK GAAP, the deferred tax effects of timing
differences existing at the balance sheet date are calculated
under the liability method (using tax rates likely to apply in
the future when the timing differences will reverse). However,
the company is not required to record the full liability, and
may elect to utilise the partial provision approach. Under the
partial provision approach, the amount of deferred tax to be
provided is the liability that is expected to arise in the
future based on a projection of the extent to which the
cumulative timing differences existing at the balance sheet
date are expected to reverse. Under US GAAP deferred taxes
are provided for on a full liability basis. Under the full
liability method, deferred tax assets and liabilities are
recognised between the financial and tax bases of assets
and liabilities and for tax loss carry forwards at the
statutory rate at each reporting date.
A valuation allowance is established when it is more than
likely than not that some portion or all of the deferred tax
assets will not be realised.
F-27
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US
GAAP) (CONTINUED)
There is a deferred tax liability of L357,000 relating to the
settlement of intra group indebtedness and the interest
thereon. For US GAAP purposes this amount could be shown as a
deferred liability if expected to crystallise in future
periods. As it is not expected to crystallise, a valuation
allowance has been set up to offset this amount.
A subsidiary company of Centaur Communications Limited,
Perfect Information Limited, has incurred significant losses
which, up to April 1998, under UK tax law are carried forward
indefinitely to be offset against taxable profits arising in
the same trade. The management accounts of the company for the
period ended June 30, 1998 disclose a loss of L1.3 million
(1997: L946,000). The company has not made a profit in the
recent past and is not anticipated that these losses will be
utilised in the foreseeable future. As such a deferred tax
asset has not been introduced to the balance sheet.
Losses incurred since April 1998 are available for offset
against profits arising in other subsidiary companies of
Centaur Communications Limited.
(6) In compliance with UK GAAP, remuneration expense relating to
share options is not allowable for corporate tax purposes,
thus has not been reflected in the profit and loss account. In
compliance with US GAAP, the compensatory expense related to
the stock options is recognised as an expense in the period
when granted in accordance with SFAS 123.
(7) CASH FLOW INFORMATION
In compliance with UK GAAP, the Cash Flow Statement is
presented in accordance with UK Financial Reporting Standard
No. 1, as revised (FRS1). The Statement prepared under FRS1
presents substantially the same information as that required
under US GAAP as interpreted by SFAS No. 95. In compliance
with UK GAAP, cash comprises cash in hand and at bank
(including overnight deposits), net of bank overdrafts. In
compliance with US GAAP, cash and cash equivalents include
cash and short-term investments with original maturities of
three months or less.
In compliance with UK GAAP, cash flows are presented for
operating activities; returns on investments and servicing of
finance; taxation; capital expenditure; acquisitions and
disposals; equity dividends paid; management of liquid
resources and financing. US GAAP requires the classification
of cash flows as resulting from operating, investing and
financing activities.
Cash flows in accordance with US GAAP in respect of interest
received, interest paid, investment income and taxation would
be included within operating activities. Capital expenditure
and financial investment and cash flows from disposals would
be included within investing activities under US GAAP.
Dividends paid by subsidiary undertakings, minority interests,
equity dividends paid, management of liquid resources and
returns on investments and servicing of finance would be
included within financing activities under US GAAP.
F-28
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US
GAAP) (CONTINUED)
A summary of the Company's operating, investing and financing
activities classified in accordance with US GAAP, is presented
below. For purposes of this summary, cash and cash equivalents
consist of cash at bank and in hand.
1998 1997
L'000 L'000
Cash provided by operating activities 5,735 3,018
Cash used in investing activities (3,370) (2,551)
Cash used in financing activities 953 1,127
Effect of exchange rate changes on cash - (62)
------- -------
Net increase in cash and cash equivalents 3,318 1,532
Linguaphone de-merger (125) -
Cash and cash equivalents under US GAAP at the beginning of the year 1,944 412
------- -------
Cash and cash equivalents under US GAAP at the end of the year 5,137 1,944
------- -------
------- -------
33 ADDITIONAL DISCLOSURE RELATING TO US GAAP
(I) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Centaur Communications Limited is a holding company which also
provides management services to the group. The principal
activity of the group is the creation and dissemination of
business and professional information through publications,
the internet and on-line.
MANAGEMENT ESTIMATES
In preparing the summary of differences between UK and US
GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses
during the reported period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, trade debtors,
trade creditors are approximately equivalent to their carrying
values due to the short maturity of these assets and
liabilities.
F-29
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
(II) RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 1997 the Financial Accounting Standards Board issued
SFAS 130 "Reporting Comprehensive Insurance", SFAS 130 is
effective for fiscal years beginning after December 15, 1997.
The company has considered the effects of this statement and
does not believe to have any comprehensive income as defined
by this statement.
In May 1997 the Financial Accounting Standards Board issued
SFAS 131 "Disclosure about Segments of an Enterprise and
Related Information" is effective for fiscal years beginning
after December 15, 1997. The company believes that the effect
of adoption of SFAS will not be material.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). The new standard required
companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives will
be reported in the statement of operations or as a deferred
item, depending on the use of derivatives and whether they
qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in
achieving offsetting changes in fair value or cash flows or
the hedged items during the term of the hedge. The company has
not yet determined the impact, if any, that the adoption of
FAS 133 will have on the consolidated financial statements.
(III) STOCK COMPENSATION PLAN
At June 30, 1998 the Group had a Stock Option Plan for all
employees. All share options vest over a maximum ten year
period. The fair value of each option grant is estimated on
the grant date using the minimum value pricing model with the
following weighted-average assumptions used for grants in
fiscal year 1998, risk free interest rate 6.5%; and expected
life 7 years.
A summary of the status of the Group's stock option plan at
June 30, 1998, and changes during the year is presented below:
1998 1998
Weighted
average
exercise
Shares price
000 L
Outstanding at beginning of year 881 1
Granted 1,164 1
Exercised (72) 1
Outstanding at end of year 1,973 1
Options exercisable at year end 1,973 1
------- -----
------- -----
Weighted-average fair value of options granted during the year 2.28
-----
-----
F-30
CENTAUR COMMUNICATIONS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the year ended JUNE 30, 1998
(III) STOCK COMPENSATION PLAN (CONTINUED)
The following table summarises information concerning options
outstanding at June 30, 1998
Weighted
average
remaining Weighted
contractual average
Range of exercise price Number life exercise
outstanding (Years) price
000 L
L1.00 - L3.60 1,973 6.5 1
F-31
LINGUAPHONE GROUP PLC
FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
F-32
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF LINGUAPHONE GROUP PLC
Dear Sirs
LINGUAPHONE GROUP PLC ("THE COMPANY") AND ITS SUBSIDIARIES ("THE GROUP")
We have audited the accompanying consolidated balance sheet of Linguaphone Group
plc and its subsidiaries as at June 30,1998 and the related consolidated
statements of operations, of changes in shareholders' equity and of the cash
flows for the year ended June 30, 1998.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors are responsible for the preparation of the financial
statements. It is our responsibility to form an independent opinion, based on
our audit, on those financial statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with auditing standards generally accepted
in the United Kingdom and the United States.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the Group for the year ended June 30, 1998 and have been properly
prepared in accordance with the Companies Act 1985.
United Kingdom accounting standards vary in certain important respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of consolidated
shareholders' equity and consolidated financial position as at June 30, 1998 to
the extent summarised in note 26 to the consolidated financial statements.
/s/ GRANT THORNTON
GRANT THORNTON
CHARTERED ACCOUNTANTS
LONDON
23 DECEMBER 1998 (EXCEPT FOR NOTES 26 AND 27 AS TO
WHICH THE DATE IS 10 FEBRUARY 1999
F-33
LINGUAPHONE GROUP PLC
PRINCIPAL ACCOUNTING POLICIES
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
The group's principal accounting policies are described below. They remain
unchanged from prior years with the exception, as detailed below, of the policy
in respect of intangible assets.
BASIS OF PREPARATION
The directors have reviewed the continued applicability of the going concern
basis of accounting in respect of the financial statements. The directors have
reviewed profit and cash forecasts and identified a need for additional working
capital. Post year end the company has raised additional capital from its
shareholders and also negotiated a restructuring of its bank obligations and
facilities.
Assuming the continued support of the Group's bankers, the directors consider it
appropriate to prepare the financial statements on the going concern basis. As a
result, long term liabilities have not been reclassified as being due within one
year.
BASIS OF CONSOLIDATION
The company did not trade during the financial year or the preceding financial
year.
The group financial statements consolidate those of the company and of its
subsidiary undertakings (see note 10) drawn up to June 30, 1998. Profits or
losses on intra-group transactions are eliminated in full. On acquisition of a
subsidiary, all of the subsidiary's assets and liabilities which exist at the
date of acquisition are recorded at their fair values reflecting their
conditions at that date.
INTANGIBLE ASSETS
Intangible assets comprised language course publishing rights and were stated at
cost. When such assets were acquired through the acquisition of companies they
were stated at fair value at acquisition which normally represented the excess
of purchase price over net tangible assets of the business acquired.
Where the cost of businesses acquired exceeds the fair value of the net tangible
and intangible assets the difference is written off to reserves as goodwill.
The directors have reassessed the nature of the language course publishing
rights in the light of the group's accounting policy in respect of goodwill and
the introduction of FRS 10. In the opinion of the directors the valuation placed
on publishing rights, which would not be recognised in accordance with the
requirements of FRS 10, is in the nature of goodwill and has therefore been
written off to reserves, in accordance with the group's existing accounting
policy, as a prior year adjustment.
Opening reserves at July 1, 1996 have been reduced by L2,679,000. There is no
adjustment to the profit and loss account in either the year ended June 30, 1997
or June 30, 1998.
TURNOVER
Turnover represents sales of language courses and other revenue, exclusive of
value added tax.
RESEARCH AND DEVELOPMENT
All costs incurred in the maintenance of existing courses and research of future
course concepts are written off in the period in which they are incurred.
F-34
LINGUAPHONE GROUP PLC
PRINCIPAL ACCOUNTING POLICIES
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
DEPRECIATION
Depreciation of tangible assets is provided on a straight line basis over the
expected useful lives of the assets as follows:
Leasehold Properties Over the period of the lease
Plant and Machinery 4 to 10 years
Motor Vehicles 4 years
DEFERRED TAXATION
Deferred taxation is provided on timing differences using the liability method,
except where it can be demonstrated with reasonable probability that the timing
differences will not reverse in the foreseeable future. Timing differences arise
on items of income and expenditure which are recognised for tax purposes in
different periods from those in which they are recognised in the profit and loss
account.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the exchange rate ruling at
the date of the transaction. Monetary assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the balance sheet
date. The results of foreign subsidiaries are translated at an average rate for
the year and the resulting difference is taken to reserves. Exchange differences
arising from the retranslation of the opening net investment in subsidiaries are
taken directly to reserves. All other exchange differences are dealt with
through the profit and loss account.
STOCKS
Stocks are stated at the lower of cost, on a first-in first-out basis, and net
realisable value after making due allowance for any obsolete or slow moving
items.
Development expenditure on new bespoke projects is held as work in progress
where future recoverability can be foreseen with reasonable assurance. Any
expenditure carried forward is amortised in line with the expected contribution
from the related project.
LEASED ASSETS
Assets held under finance leases are capitalised in the balance sheet and
depreciated in accordance with the Group's depreciation policy. The interest
element of leasing payments represents a constant proportion of the capital
balance outstanding and is charged to the profit and loss account over the
period of the lease.
Rentals payable under operating leases are charged to the profit and loss
account over the term of the lease.
F-35
LINGUAPHONE GROUP PLC
PRINCIPAL ACCOUNTING POLICIES
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
PENSIONS
Where the group makes contributions to the pension schemes which provide defined
benefits for employees, the charge to the profit and loss account is determined
so as to allocate the costs to the group over a period approximately to the
scheme members' average remaining service lives.
F-36
LINGUAPHONE GROUP PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
Notes 1998 1997
L'000 L'000
TURNOVER 1 14,952 15,006
Cost of Sales (2,844) (3,118)
------ ------
GROSS PROFIT 12,108 11,888
------ ------
Distribution Costs (6,417) (5,338)
------ ------
Other Administrative Expenses (6,183) (5,474)
Exceptional items 2 (1,488) --
------ ------
Total Administrative Expenses (7,671) (5,474)
------ ------
OPERATING (LOSS) /PROFIT 3 (1,980) 1,076
Net Interest 6 (353) (181)
------ ------
(LOSS) / PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (2,333) 895
Taxation on ordinary activities 7 (83) (431)
------ ------
(LOSS) / PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION
AND RETAINED FOR THE YEAR 18 (2,416) 464
------ ------
------ ------
All transactions arise from continuing operations.
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-37
LINGUAPHONE GROUP PLC
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1998
- --------------------------------------------------------------------------------
Notes 1998 1997
(as
restated)
L'000 L'000
FIXED ASSETS
Intangible Assets 8 -- --
Tangible assets 9 651 737
Investments 10 144 144
------ ------
795 881
------ ------
CURRENT ASSETS
Stocks 11 1,699 2,209
Debtors 12 7,123 7,351
Cash at bank and in hand 319 472
------ ------
9,141 10,032
------ ------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 13 (6,185) (6,527)
------ ------
NET CURRENT ASSETS 2,956 3,505
------ ------
TOTAL ASSETS LESS CURRENT LIABILITIES 3,751 4,386
CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR 14 (982) (230)
PROVISION FOR LIABILITIES AND CHARGES 15 (50) (60)
------ ------
2,719 4,096
------ ------
CAPITAL AND RESERVES
Equity share capital 16 2,007 88
Non-equity share capital 16 -- 830
------ ------
Called up share capital 16 2,007 918
Share premium account 17 3,646 3,892
Capital redemption reserve 17 157 --
Reserves 18 (3,091) (714)
------ ------
SHAREHOLDERS' FUNDS 2,719 4,096
------ ------
------ ------
The financial statements were approved by the Board of Directors on 23 December
1998.
PN Jamieson
Director
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-38
LINGUAPHONE GROUP PLC
COMPANY BALANCE SHEET
AS AT JUNE 30, 1998
- --------------------------------------------------------------------------------
Notes 1998 1997
L'000 L'000
FIXED ASSETS
Investments 10 4,841 4,841
------ ------
CURRENT ASSETS
Debtors 12 2,488 1,488
------ ------
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 13 (1,008) (1,008)
------ ------
NET CURRENT ASSETS 1,480 480
------ ------
6,321 5,321
------ ------
CAPITAL AND RESERVES
Equity share capital 16 2,007 88
Non-equity share capital 16 -- 830
------ ------
Called up share capital 16 2,007 918
Share premium account 17 3,646 3,892
Capital redemption reserve 17 157 --
Reserves 18 511 511
------ ------
SHAREHOLDERS' FUNDS 6,321 5,321
------ ------
------ ------
The financial statements were approved by the Board of Directors on 23 December
1998.
PN Jamieson
Director
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-39
LINGUAPHONE GROUP PLC
OTHER PRIMARY STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
STATEMENT OF TOTAL RECOGNISED
GAINS AND LOSSES
1998 1997
L'000 L'000
(Loss) / Profit for financial year attributable to shareholders (2,416) 464
Exchange adjustments 39 (63)
------ ------
Total recognised gains and losses relating to the year (2,377) 401
Prior year adjustment (2,679) --
------ ------
Total gains and losses recognised since last financial statements (5,056) 401
------ ------
------ ------
Opening shareholders' funds have been restated to reflect a change in the
recognition of language course publishing rights as described in the accounting
policy note on page 2. As a consequence, opening reserves and shareholders'
funds at July 1, 1996 have been decreased by L2,679,000.
RECONCILIATION OF MOVEMENTS IN
SHAREHOLDERS' FUNDS
1998 1997
(as
L'000 restated)
L'000
(Loss) / Profit for financial year attributable to shareholders (2,416) 464
Exchange adjustments 39 (63)
Issue of share capital 1,000 --
------ ------
Net (decrease) / increase in shareholders' funds (1,377) 401
Opening shareholders' funds as restated 4,096 3,695
------ ------
Closing shareholders' funds 2,719 4,096
------ ------
------ ------
The accompanying accounting policies and notes form an integral part of these
financial statements.
F-40
LINGUAPHONE GROUP PLC
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
Note 1998 1997
L'000 L'000
NET CASH OUTFLOW FROM OPERATING ACTIVITIES 19 (34) (972)
------ ------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:
Interest received 8 17
Interest paid (350) (198)
Finance lease interest paid (11) --
------ ------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
(353) (181)
------ ------
TAXATION (339) (140)
------ ------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT:
Purchase of tangible fixed assets (206) (577)
Sale of tangible fixed assets -- 43
------ ------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT (206) (534)
------ ------
FINANCING:
(Repayment of) / receipts from borrowing (173) 925
Sale and leaseback proceeds 280
Capital element of finance lease rentals (143) --
------ ------
NET CASH (OUTFLOW) / INFLOW FROM FINANCING (36) 925
------ ------
------ ------
DECREASE IN CASH 21 (968) (902)
------ ------
------ ------
The accompanying accounting policies and notes form an integral part of these
financial statements
F-41
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
1 SEGMENTAL REPORTING
Turnover (Loss)/ Profit Net Assets
before taxation
1998 1997 1998 1997 1998 1997
L'000 L'000 L'000 L'000 L'000 L'000
United Kingdom 7,558 8,253 (2,238) 585 2,335 4,000
Far East and Australasia 7,394 6,753 258 491 384 96
------ ------ ------ ----- ----- -----
14,952 15,006 (1,980) 1,076 2,719 4,096
------ ------
------ ------
Net interest and similar income/ (charges) (353) (181) -- --
------ ----- ----- -----
(2,333) 895 2,719 4,096
------ ----- ----- -----
------ ----- ----- -----
GEOGRAPHIC ANALYSIS OF TURNOVER BY DESTINATION 1998 1997
L'000 L'000
United Kingdom 5,521 5,732
Europe 1,590 1,701
Americas 155 295
Far East and Australasia 7,660 7,230
Other 26 48
------ ------
14,952 15,006
------ ------
------ ------
The turnover, result before tax and net assets mainly arise from the sale of
distance learning language courses. Net asset classifications are shown after
taking account of intra group indebtedness.
2 EXCEPTIONAL ITEMS
1998 1997
L'000 L'000
Reorganisation costs 254 --
Exchange losses 1,234 --
------ ------
1,488 --
------ ------
------ ------
Reorganisation costs include L197,000 (1997 - Lnil) in respect of
compensation paid to directors for loss of office.
The exchange losses result from the impact of the Asian currency crisis
and, in particular, the significant devaluation of the Malaysian
Ringitt across the year.
F-42
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
3 OPERATING (LOSS)/ PROFIT
Operating (loss)/ profit is stated after charging: 1998 1997
L'000 L'000
Leasehold property rents 499 387
Hire of equipment 12 80
Product development costs 447 379
Depreciation of owned assets 128 202
Depreciation of assets held under finance leases 114 6
Auditor's remuneration
- audit 15 15
- non audit services -- 18
Decrease in pension surplus 25 194
------ ------
------ ------
4 STAFF COSTS AND NUMBERS
Staff costs including directors' emoluments were as follows:
1998 1997
L'000 L'000
Wages and salaries 2,731 2,065
Social security costs 189 121
Other pension costs 104 69
------ ------
3,024 2,255
------ ------
------ ------
The average number of persons employed during the year by the group,
including directors, was 160 (1997: 126).
5 DIRECTORS' EMOLUMENTS
1998 1997
L'000 L'000
Management remuneration 401 340
Pension contributions 39 19
Compensation for loss of office 197 --
------ ------
637 359
------ ------
------ ------
1998 1997
L'000 L'000
Highest paid director 136 105
------ ------
------ ------
The number of directors participating in money purchase schemes was 5
(1997-4). Contributions in respect of the highest paid director were
L12,393 (1997 - L12,498).
F-43
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
6 NET INTEREST
1998 1997
L'000 L'000
Bank overdraft interest payable 307 62
Bank interest receivable (8) (17)
Net foreign currency transaction losses 25 7
Interest on finance leases 11 --
Other 18 124
------ ------
353 181
------ ------
------ ------
7 TAXATION
1998 1997
L'000 L'000
Corporation tax at 31% (1997-33%) - current -- 151
- prior years 4 --
ACT previously written off -- (60)
Release of deferred tax provision (10) (78)
Overseas taxation in - current year 89 178
- prior years -- 240
------ ------
83 431
------ ------
------ ------
8 INTANGIBLE ASSETS
Publishing
Rights
COST L'000
At July 1, 1997 2,679
Prior Year Adjustment (2,679)
------
At July 1, 1997 (as restated) --
Additions --
------
AT JUNE 30, 1998 --
------
------
F-44
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
9 TANGIBLE FIXED ASSETS
LAND AND PLANT AND MOTOR
BUILDINGS MACHINERY VEHICLES TOTAL
L'000 L'000 L'000 L'000
COST
At July 1, 1997 208 906 251 1,365
Additions 32 190 9 231
Disposals -- (8) (51) (59)
Exchange differences -- (77) (53) (130)
------ ------ ------ ------
At June 30, 1998 240 1,011 156 1,407
------ ------ ------ ------
------ ------ ------ ------
DEPRECIATION
At July 1, 1997 148 358 122 628
Charge for year 44 171 27 242
Disposals -- (8) (51) (59)
Exchange differences -- (41) (14) (55)
------ ------ ------ ------
At June 30, 1998 192 480 84 756
------ ------ ------ ------
------ ------ ------ ------
NET BOOK AMOUNTS AT JUNE 30, 1998 48 531 72 651
------ ------ ------ ------
------ ------ ------ ------
Net book amounts at June 30, 1997 60 548 129 737
------ ------ ------ ------
------ ------ ------ ------
Land and buildings are entirely comprised of short leasehold assets.
The net book value of the group's tangible fixed assets at June 30, 1998
includes an amount of L327,000 (1997 - L107,000) in respect of assets
held under finance leases, which includes an amount of L257,000 which was
the subject of a sale and leaseback transaction during the year.
The company held no tangible fixed assets at June 30, 1998 (1997 - Lnil).
F-45
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
10 FIXED ASSET INVESTMENTS
1998 1997
GROUP COMPANY Group Company
L'000 L'000 L'000 L'000
Investment in subsidiary undertakings at cost -- 4,697 -- 4,697
Other investments at cost 144 144 144 144
----- ----- ----- -----
144 4,841 144 4,841
----- ----- ----- -----
----- ----- ----- -----
In the opinion of the directors the value of the group's and of the
company's investments is not less than the amount at which they are
stated in the balance sheet.
Principal subsidiary undertakings at June 30, 1998 were:
SUBSIDIARY COUNTRY OF NATURE OF BUSINESS PROPORTION OF
INCORPORATION AND ORDINARY SHARE
OPERATION CAPITAL HELD
Linguaphone Institute Limited United Kingdom Provision of language courses 100%
Linguaphone Institute (Hong Kong) Hong Kong Provision of language courses 100% (a)
Limited
Linguaphone Singapore Pte Ltd Singapore Provision of language courses 100% (a)
Linguapac Distributors Sdn Bhd Malaysia Provision of language courses 100% (a)
LIL Singapore Pte Ltd Singapore Holding company 100% (a)
(a) Shares are indirectly held through other group undertakings. All
other shares are held directly by the company.
11 STOCKS
1998 1997
GROUP COMPANY Group Company
L'000 L'000 L'000 L'000
Work in progress 126 -- 214 --
Finished goods and goods for resale 1,573 -- 1,995 --
----- ----- ----- -----
1,699 -- 2,209 --
----- ----- ----- -----
----- ----- ----- -----
There is no significant difference between the replacement cost of
stocks and their balance sheet value.
F-46
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
12 DEBTORS
1998 1997
GROUP COMPANY Group Company
L'000 L'000 L'000 L'000
Trade debtors 6,530 -- 6,593 --
Other debtors 308 -- 408 --
Prepayments and deferred charges 285 -- 350 --
Amounts owed by subsidiary undertaking -- 2,488 -- 1,488
----- ----- ----- -----
7,123 2,488 7,351 1,488
----- ----- ----- -----
----- ----- ----- -----
13 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
1998 1997
GROUP COMPANY Group Company
L'000 L'000 L'000 L'000
Bank overdrafts 2,714 -- 1,836 --
Bank loan 250 -- 250 --
Trade creditors 1,259 -- 921 --
Corporation tax 140 390 --
Tax and social security 60 99 43 99
Obligations under finance leases 108 -- 35 --
Other creditors 445 -- 96 --
Amounts owed to the parent undertaking -- -- 2,013 --
Accruals and deferred income 1,209 909 943 909
----- ----- ----- -----
6,185 1,008 6,527 1,008
----- ----- ----- -----
----- ----- ----- -----
The bank overdraft is secured by specific and floating charges over the
group's assets.
The bank loan is secured by cross guarantees and first debentures
between Linguaphone Group plc and its subsidiary undertakings to
include a fixed charge over book debts and is repayable in equal
quarterly instalments of L62,500 until 30 April 2002 and carries
interest at LIBOR plus 1.75% per annum.
14 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1998 1997
GROUP COMPANY Group Company
L'000 L'000 L'000 L'000
Bank loan 813 -- 150 --
Obligations under finance leases 169 -- 80 --
----- ----- ----- -----
982 -- 230 --
----- ----- ----- -----
----- ----- ----- -----
F-47
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
15 PROVISION FOR LIABILITIES AND CHARGES
GROUP COMPANY
L'000 L'000
DEFERRED TAX
At July 1, 1997 60 --
Released during the year (10) --
----- -----
AT JUNE 30, 1998 50 --
----- -----
----- -----
Deferred tax relates to:
Pension scheme prepayment 50 --
----- -----
----- -----
Where there is no intention to distribute the profits of overseas
subsidiary undertakings, no deferred tax is provided in respect of
liabilities which might arise on distribution by these companies.
Unprovided deferred tax for both the group and the company amounts to
Lnil (1997 - Lnil).
16 CALLED-UP SHARE CAPITAL
AUTHORISED ALLOTTED AND
FULLY PAID
1998 1997 1998 1997
L'000 L'000 L'000 L'000
Ordinary shares of 5p each 2,500 100 2,007 88
4.2% cumulative convertible
preference shares of 15p each -- 1,100 -- 830
---------- ---------- ---------- ----------
2,500 1,200 2,007 918
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NUMBER OF SHARES:
Ordinary shares of 5p each 50,000,000 2,200,000 40,132,624 1,765,714
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
4.2% cumulative convertible
preference shares of 15p each -- 7,333,333 -- 5,531,609
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
On 3 September 1997, Linguaphone Group plc de-merged from it's ultimate
parent undertaking prior to that date, Centaur Communications Limited.
Prior to the de-merger, the following changes were made in respect of
the company's authorised and issued share capital:
1) The company's authorised share capital was amended to
50,000,000 ordinary shares of 5p each.
2) The whole of the issued preference share capital was
converted into 13,441,809 ordinary shares of 5p each and
15,765,090 of redeemable deferred shares of 1p each in
accordance with the company's Articles of Association. The
deferred shares were redeemed immediately for an aggregate
consideration of L1.00
3) L1 million of the intra-group indebtedness between the
Linguaphone and Centaur Groups was capitalised through the
subscription by Centaur for 20,000,000 new ordinary shares
of 5p each in the company at par.
F-48
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
4) A bonus issue of 4,865,101 ordinary shares of 5p each was
made by the company to Centaur Communications Limited at
par by capitalising part of the company's share premium
account.
5) A bonus issue of 60,000 ordinary shares of 5p each at par
was made to Centaur Communications Limited on 1 September
1997 by capitalising part of the company's share premium
account.
17 SHARE PREMIUM ACCOUNT AND CAPITAL REDEMPTION RESERVE
SHARE CAPITAL
PREMIUM REDEMPTION
ACCOUNT RESERVE
L'000 L'000
At July 1, 1997 3,892 --
Bonus Issue (see note 16) (246) --
Redemption of deferred shares (see note 16) -- 157
----- -----
AT JUNE 30, 1998 3,646 157
----- -----
----- -----
18 RESERVES
GROUP CURRENCY
PROFIT AND TRANSLATION
LOSS RESERVE RESERVE TOTAL
L'000 L'000 L'000
At July 1, 1997 (641) (73) (714)
Movement during the year (2,416) 39 (2,377)
------ ------ ------
AT JUNE 30, 1998 (3,057) (34) (3,091)
------ ------ ------
------ ------ ------
The cumulative amount of goodwill written off the profit and loss
account amounts to L2,927,000 (1997 -L2,927,000).
The company remained dormant in the year.
19 NET CASH OUTFLOW FROM OPERATING ACTIVITIES
1998 1997
L'000 L'000
Operating (loss) / profit (1,980) 1,076
Depreciation 242 208
Amortisation of pension surplus 25 194
Investments written off - 19
Decrease / (increase) in stock 510 (506)
Decrease / (increase) in debtors 199 (2,826)
Increase in creditors 970 863
------ -----
Net cash outflow from operating activities (34) (972)
------ -----
------ -----
F-49
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
20 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
1998 1997
L'000 L'000
Decrease in cash in the year (968) (902)
Cash outflow / (inflow) from financing 173 (925)
Cash (inflow) from finance leases (137) --
------ ------
Change in net debt resulting from cash flows (932) (1,827)
Inception of finance leases (25) (115)
Effect of foreign exchange (63) (75)
Other non-cash items 1,177 --
------ ------
Movement in net debt in the year 157 (2,017)
Net debt at July 1, 1997 (3,892) (1,875)
------ ------
Net debt at June 30, 1998 (3,735) (3,892)
------ ------
------ ------
21 ANALYSIS OF CHANGES IN NET DEBT
AT JULY 1, CASH FLOW NON-CASH EXCHANGE AT JUNE
1997 TRANSACTIONS MOVEMENT 30, 1998
L'000 L'000 L'000 L'000 L'000
Cash in hand and at bank 472 (90) -- (63) 319
Overdraft (1,836) (878) -- -- (2,714)
------ ------ ------ ------ ------
(1,364) (968) -- (63) (2,395)
Debt (400) (663) -- -- (1,063)
Finance leases (115) (137) (25) -- (277)
Parent undertaking (2,013) (836) 1,177 -- --
------ ------ ------ ------ ------
(3,892) (932) 1,152 (63) (3,735)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
22 MAJOR NON-CASH TRANSACTIONS
During the year the group entered into finance lease arrangements in
respect of assets with a total capital value at the inception of the
leases of L25,000 (1997-L115,000).
Part of the discharge of the debt owing at July 1, 1997 to the parent
undertaking comprised the capitalisation of L1 million on the issue of
20,000,000 ordinary 5p shares at par. A further L177,000 remains
outstanding within creditors.
F-50
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
23 FINANCIAL COMMITMENTS
FINANCE LEASE COMMITMENTS 1998 1997
The net obligations under finance L'000 L'000
leases are as follows:
Payable within one year 108 35
Payable within two to five years 169 80
--- ---
277 115
--- ---
--- ---
OPERATING LEASE COMMITMENTS
The group had annual non-cancellable operating lease commitments at
June 30, 1998 as follows:
LAND AND BUILDINGS OTHER
1998 1997 1998 1997
L'000 L'000
Leases expiring
- within one year 165 101 -- --
- within two to five 154 284 12 7
years
- over five years 173 109 -- --
--- --- --- ---
492 494 12 7
--- --- --- ---
--- --- --- ---
CAPITAL COMMITMENTS
The Group had made no contractual commitments not provided for in the
financial statements (1997 - Lnil).
24 PENSION SCHEME
The company contributes to individual and collective money purchase
pension schemes in respect of directors and employees once they have
completed the requisite period of service. The pension charge in
respect of these schemes for the year amounted to L104,466 (1997 -
L68,723)
The company also operates a pension scheme providing benefits based on
final pensionable pay. The assets of the scheme are held separately
from those of the company. The contributions are determined by
qualified actuary using the projected unit and the projected accrued
cost methods. The most recent valuation was at June 30, 1996. The
assumptions which have the most significant effect on the results of
the valuation are those relating to the rate of return on investments
and the rates of increase in salaries and pensions. It was assumed that
the investment returns would be 8.5% per annum, and that salary
increase at the rate of nil % per annum.
The most recent actuarial valuation showed that there was a surplus of
the scheme's assets and therefore no future contributions are expected
to be payable by the company in respect of this scheme. The future
contributions of employees will be 5% of earnings. It is anticipated
that these contribution levels will eliminate the pension scheme
surplus over the remaining service lives of employees in the scheme.
The surplus is included in the Balance Sheet within Prepayments and
Deferred Charges and at June 30, 1998 amounted to L127,008 (1997 -
L152,000). This surplus is being amortised over the remaining service
lives of employees in the scheme.
F-51
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
25 CONTINGENT LIABILITIES
The Group has given cross guarantees and first debentures in respect of
bank borrowings.
Linguaphone Group plc and Linguaphone Institute Limited have both
provided letters of support to contain subsidiary undertakings
indicating their intention to provide undertakings indicating their
intention to provide financial support where necessary to enable those
subsidiaries to meet their liabilities as they fall due.
26 RECONCILIATION TO US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP)
The accompanying financial statements have been prepared in accordance
with UK GAAP, which differs in certain material respects from US GAAP.
Such differences involve methods for measuring the amounts shown in the
financial statements, as well as additional disclosures required by US
GAAP.
The effect on the company's retained (loss)/profit and shareholders'
equity of applying the significant differences between UK GAAP and US
GAAP is summarised in the reconciliation statements set out below:
(a) Reconciliation of profit and loss accounts:
1998 1997
L'000 L'000
Net (loss)/profit per UK GAAP (2,416) 464
Movement in product development expense/(credit) (1) 67 (193)
Amortisation expense (2) (89) (89)
Pension charge (4) -- --
Taxation on development expense movement (1) (21) 60
------- -------
Net (loss)/income per US GAAP (2,459) 242
------- -------
------- -------
(Loss)/earnings per share in accordance with US GAAP:
Basic (.07) .14
Diluted (.07) .03
------- -------
------- -------
Average number of shares outstanding:
Basic 33,738 1,766
Diluted 33,738 7,297
------- -------
------- -------
F-52
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
(b) Reconciliation of Shareholders' Equity
1998 1997
L'000 L'000
Shareholders' funds per UK GAAP 2,719 4,096
Development expense (1) (126) (193)
Reinstatement of goodwill written off (2) 2,679 2,679
Amortisation expense (2) (803) (714)
Pension charge (4) - -
Taxation credit on development expense (1) 39 60
----- -----
Shareholders' equity per US GAAP 4,508 5,928
----- -----
----- -----
(c) Changes in Shareholders' equity on a US GAAP basis:
1998 1997
L'000 L'000
Shareholders' equity at beginning of year 5,928 5,749
Net (loss)/profit (2,459) 242
Translation adjustments 39 (63)
Issue of share capital 1,000 0
----- -----
Shareholders' equity at the end of the year 4,508 5,928
----- -----
----- -----
The following are descriptions of US GAAP reconciling items:
(1) In compliance with UK GAAP, the Group defers, within work
in progress, development expenditure related to specific
projects when recoverability can be assessed with
reasonable certainty and amortised over the contribution
period for the project. In compliance with US GAAP,
development expenditures are expensed in the period
incurred.
(2) In compliance with UK GAAP, the Group has written off
goodwill to shareholders' equity. In compliance with US
GAAP, the goodwill has been reinstated and is being
amortised over 30 years.
(3) In compliance with UK GAAP, the deferred tax effects of
timing differences existing at the balance sheet date are
calculated under the liability method (using tax rates
likely to apply in the future when the timing difference
will reverse). However, the Group is not required to record
the full liability, and may elect to utilise the partial
provision approach. Under the partial provision approach,
the amount of deferred tax to be provided is the liability
that is expected to arise in the future based on a
projection of the extent to which the cumulative timing
differences existing at the balance sheet date are expected
to reverse. In compliance with US GAAP deferred taxes are
provided for on a full liability basis.
Under the full liability method, deferred tax assets or
liabilities are recognised for differences between the
financial and tax bases of assets and liabilities and for
tax loss carryforwards at the statutory rate at each
reporting date. A valuation allowance is established when
it is more likely than not that some portion or all of the
deferred tax assets will not be realised.
F-53
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
The UK tax losses for the year ended June 30, 1998 were
L2,220,000. For US GAAP purposes this amount could be
capitalised as a deferred tax asset if the losses are
expected to crystallise in future periods. As it is not
expected that this loss will be utilised in the foreseeable
future, a valuation allowance has been set up for the full
amount of tax loss carry forward.
(4) In compliance with UK GAAP, the cost of providing pensions
should be recognised on a systematic and rational basis
over the working lives of the employees in the scheme. The
employer is able to select the actuarial valuation method
to fulfil the accounting objective. Broadly speaking, in
determining the regular pension cost of the year, pension
liabilities are discounted using an interest rate
representing the expected long-term return on scheme
assets. In compliance with US GAAP, a particular actuarial
approach is required to be used for measuring pension cost
(service cost) - the projected unit credit method - and in
general prescribes tightly drawn rules as to the
computation of pension liabilities to be assessed without
regard to the Company's pension funding arrangements.
A similar exercise was not carried out in the previous year
although the actuary confirmed that, in his estimation, the
charge would not be material to the Centaur Communications
Limited group's result.
Net pension cost included in operating results for the Plan
were:
1998 1997
L'000 L'000
Service cost 10 10
Interest cost on the project benefit obligation 112 112
Actual return on Plan assets (90) (100)
Deferred asset gain (55) (45)
Amortisation of net transition asset (23) (23)
--- ---
Net Pension cost (46) (46)
--- ---
--- ---
The actuarial computations that derived the above amounts
assumed a discount rate on project benefit obligations of
5.75% at June 30, 1998, an expected long-term rate of
return on plan assets of 7.50% and annual salary increases
averaging 4.0% for 1998.
Plan assets include primarily an insurance contract and, to
a lesser extent, comingled funds and a group annuity
contract from a Fund. The funded status and prepaid pension
cost are as follows:
1998 1997
L'000 L'000
Fair value of Plan assets 1,535 1,610
Actuarial present value of benefit obligation:
Vested 1,851 1,575
----- -----
Excess of Plan assets over projected benefit (316) 35
obligations
Unrecognised net transition (gain)/loss 220 38
----- -----
Net Pension asset 96 73
----- -----
----- -----
F-54
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
(5) CASH FLOW INFORMATION
In compliance with UK GAAP, the Cash Flow Statement is
presented in accordance with UK Financial Reporting
Standard No. 1, as revised (FRS 1). The Statement prepared
under FRS 1 presents substantially the same information as
that required in compliance with US GAAP as interpreted by
SFAS No. 95. In compliance with UK GAAP, cash comprises
cash in hand and at bank (including overnight deposits),
net of bank overdrafts. In compliance with US GAAP, cash
and cash equivalents include cash and short-term
investments with original maturities of three months or
less.
In compliance with UK GAAP, cash flows are presented for
operating activities; returns on investments and servicing
of finance; taxation; capital expenditure; acquisitions and
disposals; equity dividends paid; management of liquid
resources and financing. US GAAP requires the
classification of cash flows as resulting from operating,
investing and financing activities.
Cash flows in accordance with US GAAP in respect of
interest received, interest paid, investment income and
taxation would be included within operating activites.
Capital expenditure and financial investment and cash flows
from disposals would be included within investing
activities in compliance with US GAAP. Dividends paid by
subsidiary undertakings, minority interests, equity
dividends paid, management of liquid resources and returns
on investments and servicing of finance would be included
within financing activities in compliance with US GAAP.
A summary of the group's operating, investing and financing
activities classified in accordance with US GAAP, is
presented below. For purposes of this summary, cash and
cash equivalents consist of cash at bank and in hand.
1998 1997
L'000 L'000
Cash used by operating activites (726) (1,293)
Cash used in investing activities (206) (534)
Cash generated by financing activities 842 1,974
Effect of exchange rate changes on cash (63) (75)
--- ---
Net decrease in cash and cash equivalents (153) 72
Cash and cash equivalents in compliance with US GAAP at the
beginning of the year 472 400
--- ---
Cash and cash equivalents in compliance with US GAAP at the end of
the year 319 472
--- ---
--- ---
F-55
LINGUAPHONE GROUP PLC
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
27 ADDITIONAL DISCLOSURES RELATING TO US GAAP
(I) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Linguaphone Group Plc is a holding company which did not trade during
the year. The principal activities of the group are the creation,
assembly and sale of home study language courses in over 30 languages
for markets worldwide.
MANAGEMENT ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles in the United States, management is required to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reported period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, trade debtors, trade
creditors are approximately equivalent to their carrying values due to
the short maturity of these asset and liabilities.
(II) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board issued SFAS 130
"Reporting the Comprehensive Income", SFAS 130 is effective for fiscal
years beginning after December 15, 1997. The Company has considered the
effects of this statement and does not believe to have any
comprehensive income as defined by this statement.
In May 1997 the Financial Accounting Standards Board issued SFAS 131
"Disclosure about Segments of an Enterprise and Related Information",
SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company believes that the effect of adoption of SFAS will not
be material.
In June 1998 the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The new
standard requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives will be
reported in the statement of operations or as a deferred item,
depending on the use of derivatives and whether they qualify for hedge
accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in
fair value or cash flows of the hedged items during the term of the
hedge. The Company has not yet determined the impact, if any, that the
adoption of SFAS 133 will have on the consolidated financial
statements.
F-56