UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                            ------------------------

                                    FORM 10-K
                [ X ][X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended September 30, 19982001
                                       or
              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to

                           Commission File No. 1-6620

                              GRIFFON CORPORATION

             (Exact name of registrant as specified in its charter)


              Delaware                              11-1893410
    (State or other jurisdiction of              (I.R.S. Employer
     incorporation or organization)             Identification No.)

100 Jericho Quadrangle, Jericho, New York           11753
(Address of Principal Executive Offices)         (Zip Code)

Registrant's telephone number, including area code:    (516) 938-5544


          Securities registered pursuant to Section 12(b) of the Act:

                                          Name of Each Exchangeeach exchange on
        Title of Classeach class                  which Registered
          --------------                          ------------------------registered
        -------------------               -------------------------
    Common Stock, $.25 par value          New York Stock Exchange
    Preferred Share Purchase Rights       New York Stock Exchange


          Securities registered pursuant to Section 12(g) of the Act:

                                      None

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

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-K10-K. [x].

State the aggregate market value of the voting stockand non-voting common equity held
by  non-affiliates  of the  registrant.  (TheThe  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.) As of November 16, 1998 --December 14, 2001 - approximately $286,000,000.$469,000,000.

Indicate the number of shares outstanding of each of the registrant's classes of
common  stock,  as of the latest  practicable  date (applicable only to
corporate registrants).date.  As of November 16, 1998 -- 30,419,359.

     Documents  incorporated  by reference:December  14,  2001-
32,839,460.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Part III -  Registrant's  definitive  proxy  statement  to be filed  pursuant to
Regulation 14A of the Securities Exchange Act of 1934.


                                     PART I
------
ITEM 1 - BUSINESS

--------
                                    BUSINESS

THE COMPANYThe Company

     Griffon is a  diversified  manufacturing  company with  operations  in threefour
business segments: Building  Products;Garage Doors; Installation Services; Specialty Plastic Films;
and Electronic Information and Communication Systems. The company's Building ProductsGarage Doors
segment designs,  manufactures and manufacturessells garage doors for use in the residential
housing and commercial  building  markets.  The  Building  ProductsInstallation  Services  segment
also sells,  installs and installsservices  garage doors,  garage door openers,  manufactured
fireplaces, floor coverings,  cabinetry and a range of related building products
primarily  for the new  residential  housing  market.  The  company's  Specialty
Plastic  Films  segment  develops,  produces  and sells  plastic  films and film
laminates  for use in infant  diapers,  adult  incontinence  products,  feminine
hygiene  products  and  disposable  surgical  and  patient  care  products.  The
company's  Electronic  Information and  Communication  Systems segment  designs,
manufactures,  sells and provides logistical support for communication  systems,  sensor
systems,communications,  radar,
information,  and command and control systems and custom  mixed-signal
large  scalelarge-scale integrated circuits used in thefor
defense  and other  government
programs and commercial markets.

     The company has made  successful strategic investments in each of its business segments
to enhance its market position,  expand into new markets and further  accelerate
growth.   Building Products hasGarage  Doors  and   Installation   Services  have  acquired   several
manufacturing  and  installation  companies in recent years. In fiscal 1997, the
company acquired a West Coast-based  garage door  manufacturing and installation
company,  which  enhanced  the  company's  national  market  position.  In 1999,
Installation  Services acquired an operation located in the Southwest that sells
and installs a range of specialty  products to the new residential  construction
market,  expanding the products and services offered by the company. In 2000 the
company acquired a Michigan garage door wholesale and installation company and a
Seattle  fireplace  and garage door  installation  business.  In 1998  Specialty
Plastic Films acquired a manufacturer  of plastic  packaging and specialty films
located in Germany,  expanding its markets,  and  is addingsubsequently  added additional
production  capacity in its European joint venture in connection with multi-year
contracts from a major  international  consumer  products  company.  TheIn 2000 the
Electronic  Information and Communication  Systems segment has  been  awardedacquired a number  of new  contracts
including  its  largest  order to date,  which have  resulted  in  substantially
increased order backlog.

BUILDING PRODUCTSsearch and
weather radar business.

Garage Doors

     The company  believes  that its  wholly-owned  subsidiary,  Clopay,  is the
largest  manufacturer  and  marketer of  residential  garage doors and among the
largest  manufacturers of commercial  garage doors in the United States.  The company's
building products are sold under the Clopay,  AtlasClopay(R), Ideal Door(R), Holmes(R) and otherAtlasTM
brand names  through an extensive  distribution  network  throughout  the United
States.  The company  estimates that the majority of Building Products'Garage Doors' net sales are
from sales of garage  doors to the home  remodeling  segment of the  residential
housing market, with the balance from the new residential housing and commercial
constructionbuilding markets.  Sales into the home remodeling market are being driven by the
continued  aging of the housing stock and the conversion by homeowners from wood
doors to lighter weight, easier to maintain steel doors.

                                       The  company  also  operates  an  extensive  network  of  service
operations that sell and install garage doors, garage door openers, manufactured
fireplaces and a range of related  building  products.  The company provides its
installation services to residential builders and consumers from 37 locations in
24 cities located throughout the Southeast,  Southwest,  Midwest and West Coast.
The  company  believes  that  it is one of the  leading  installing  dealers  of
manufactured fireplaces in the United States.1


Industry

     According to industry  sources,  the garage  door  market  for  1997 was
estimated to be $1.4 billion, comprised of residential and  commercial/industrial
garage  doors.door market for 2000 was  estimated  to be $1.7  billion.  Over the past
decade  there have been  several key trends  driving  the garage  door  industry
including  the shift from wood to steel  doors and the growth of the home center
channel of distribution. The company estimates that over 90% of the total garage
door market  today is steel doors.  Superior  strength,  reduced  weight and low
maintenance have favored the steel door. Other product  innovations  during this
period include  insulated  double-sided  steel doors, and new springing systems.systems and,
most recently, residential garage doors with improved safety features.

     The growth of the home center channel of  distribution in the United States
has  resulted  in a shift  from  traditional  channels,  including  professional
installers and wholesalers. Over the past decade, an increasing number of garage
doors have been sold through home center  retail  chains such as The Home Depot,
Inc.  These home centers  offer garage doors primarily  for the  do-it-yourself  market and
commercial  contractors,  as well as installation  services for other customers.
Distribution  through the retail channel requires a different approach than that
traditionally utilized by garage door manufacturers. Factors such as immediately
available inventory,  national  distribution,  national  installation  services,
point-of-sale  merchandising  and special  packaging  are all  important  to the
retailer.

     The market for the installation  and service of garage doors,  manufactured
fireplaces and other  building  products is highly  fragmented.  It is primarily
characterized  by small operations that typically focus on the installation of a
single type of building product in one market.

Key Competitive Strengths

     The company believes that the following  strengths will continue to enhance
the market position of Building Products:Garage Doors:

     National   Distribution  Network.  The  company  distributes  its  building
products  through a wide range of  distribution  channels  including  installing
dealers,  retailers  and  wholesalers.  The company owns and operates a national
network of 4547 distribution  centers.centers  including two larger regional  distribution
centers targeted to handle retail distribution.  The company's building products
are sold to approximately 2,000 independent  professional installing dealers and
to major home center retail  chains,  including The Home Depot,  Inc.,  Menards,
Inc. and Lowe's Companies,  Inc. The company maintains strong relationships with
its  installing  dealers and believes it is the largest  supplier of residential
garage doors to retail channels.

     Low-Cost Manufacturing  Capabilities.  The company believes it has also developedlow-cost
manufacturing  capabilities as a substantial  networkresult of its own  building  products  installation  services  operations.automated,  continuous production
manufacturing facilities and its reduced costs for raw materials based on volume
purchases.  These 37
locations in 24 markets, covering manymanufacturing  facilities produce a broad line of the key new single family home markets
in the United  States,  offer an  increasing  variety of building  productshigh quality
garage doors for  distribution to professional  installer,  retail and services to the residential construction and remodeling industries.wholesale
channels.

     Strong Brand Franchise. The company's brand names,  particularly ClopayClopay(R),
Holmes(R) and Ideal Door(R)  residential doors and AtlasAtlasTM commercial doors, are
widely recognized in the building products  industry.  The company believes that
it has earned a reputation among installing  dealers,  retailers and wholesalers
for  producing  a broad  range  of  high-quality  doors.  The  company's  market
leadership and strong brand  recognition  are key marketing  tools for expanding
its customer base, leveraging its distribution network and increasing its market
share.

                                       2

     Low-Cost Manufacturing  Capabilities.  The company believes it has low-cost
manufacturing  capabilities as a result of its automated,  continuous production
manufacturing facilities and its reduced costs for raw materials based on volume
purchases.  These manufacturing  facilities produce a broad line of high quality
garage doors for  distribution to professional  installer,  retail and wholesale
channels.

Strategy

     The  company  intends  to  increase  its  market  share in Building  ProductsGarage  Doors by
capitalizing  on what it believes to be its  leadership  position as the largest
manufacturer  and  marketer of  residential  garage doors and one of the largest
manufacturers of commercial garage doors in the United States. Specifically, the
company  intends to: (i) expandcontinue  sales growth  through its dealer  network and
add  additional
distribution centers in existing and new markets;penetration  of  the  retail  market;  (ii)  increase  brand  awareness  through
continued  product  development,  merchandising programs and trade and
consumer  advertising,advertising;  (iii) leverage its  extensive  distribution  network by
selling additional products to professional  installers and to major home center
retail chains;maintain a leadership position in
new product development;  and (iv) expand its production and presence nationally
through continued strategic acquisitions.

     The company  seeks to promote the  continued  growth of Building  Products'
installation   services  business  by  adding  new  operations  in  high  growth
construction  markets.  The company  anticipates  that these  operations will be
capable of installing  multiple building products,  providing the company with a
competitive  advantage.  The company expects to expand its installation services
operations  through  continued  strategic  acquisitions as well as by adding new
products and increasing cross-selling of its products to its existing customers.

Products and Services

     The  company  manufactures  a  broad  line  of  residential  garage  doors,
commercial  sectional and coiling  doors and related  products with a variety of
options at varying  prices.  The company's  primary  manufactured  product lines
include  residential garage doors and  commercial/industrial  doors. The company
also sells  related  products such as garage door  openers and doors and components
for the self-storage  market.openers.  The company  offers
garage doors made from several  materials,  including  steel and wood. Steel  doors  accounted  for over 90%In fiscal
2000 Garage  Doors  launched  The Clopay  Reserve  Collection(R),  a new line of
premium wood garage doors sold by the company in fiscal 1998.doors.

     The company  generally  markets its linelines of  residential  garage  doors in
three  primary  product  categories:  Value,  Value Plus and Premium.  The Value
series  door  construction  consists  of a single  layer of steel or wood  doors
targeting the construction  market and the cost conscious  consumer market.  The
Value  Plus  series   consists  of  insulated  steel  doors  targeting  the  new
construction market and the quality-oriented consumer market. The Premium series
consists of steel doors with a layer of insulation  bonded between two sheets of
steel targeting  consumers thatwho desire  exceptional  strength,  durability,  high
insulation value, quiet operation, and a finished interior appearance.

     The company also markets
garage door openers that are manufactured by a third party.

     The company markets a line of  commercial  doors in threetwo basic  categories:  sectional  doors,  sheet steel roll-up
doors and slatted steel coiling doors. Commercial sectional doors are similar to
residential  garage doors,  but are designed to meet more demanding  performance
specifications.  Commercial sheet roll-upSlatted  steel  coiling  doors offer a lower cost  alternative to sectional  doors for lighter duty  commercial
applications.  Slatted  coiling  steel  doorsand their  openers are generally
utilized in more demanding commercial and industrial applications,  providing an
attractive combination of flexibility and durability.  In this category the company providesThe slatted steel coiling
door product line, which includes  service doors,  thermal doors, and fire doors
which can be found in warehouses, manufacturing andfacilities, military installations as  well  asand
in public and  other  institutional  buildings.  The company also  provides (i) counter
shutters,  fire shutters and grilles that are used in shopping  malls,  schools,
hospitals and the concession areas of large arenas and convention  centers,  and
(ii) commercial door
openers that are marketed with slatted door products,  and (iii)  sectional door openers that are manufactured by a third party.openers.

                                       3

Building Products'  installation  services business sells and installs a variety
of building products,  including manufactured fireplaces with decorative facings
and mantels,  garage  doors and garage door  openers.  The company  provides its
installation  services  through 37 locations in 24 markets  covering many of the
key new single family home markets in the United  States.  The company  provides
these services for both newly constructed and remodeled homes.

Sales and Marketing

     The  company  sells  residential  and  commercial  doors  for  professional
installation directly to a national network of professional  installing dealers.
The company also sells garage doors to retailers  such as The Home Depot,  Inc.,
Menards,  Inc. and Lowe's Companies,  Inc. In fiscal 2000 the company became the
principal  supplier of residential garage doors throughout the United States and
Canada  to  The  Home  Depot,  Inc.,  with  Clopay(R)  brand  doors  being  sold
exclusively to this retail customer in the retail channel of  distribution.  The
segment's  largest  customer is The Home Depot,  Inc. The loss of this  customer
would have a material  adverse  effect on the company's  business.  Sales of the
Clopay(R) brand outside the retail channel of  distribution  are not restricted,
and the  company  continues  to sell  doors to other  retailers  under the Ideal
Door(R) and Holmes(R) brands.  Recently,  national home center chains have begun
to offer installation  services to consumers,  provided through  sub-contractors
(including  the company),  for some of its product  categories.  Also, in fiscal
2000  Clopay  was  awarded  an  exclusive,   multi-year   contract  with  Lennar
Corporation,  one of the largest  homebuilders in the United States. The company
distributes  its garage doors  directly  from its  manufacturing  facilities  to
customers,  and through  its  network  of  4547  company-owned  distribution  centers,
including two regional distribution centers, throughout the United States and in
Canada. This  network  allowsThese distribution centers allow the company to maintain an inventory of
garage doors near installing dealers and to provide quick-ship service to the
retail
customers it services.

Acquisitions

     The  company  has  completed  a  number  of  acquisitions  within  Building
Products.  Since 1992, the company has completed  three  acquisitions  of garage
door  manufacturing  and  installation  companies  as well as eight  stand-alone
installation companies.

     In  1997,  the  company  acquired  Holmes-Hally  Industries,  a West  Coast
manufacturer  and installer of  residential  garage doors and related  hardware.
This  acquisition has increased the company's  manufacturing,  distribution  and
installation  presence in the West Coast and Southwestern  markets. In 1995, the
company acquired the Atlas Roll-lite  Corporation,  a manufacturer and installer
of heavy duty coiling steel doors,  grilles and counter  shutters for industrial
and commercial markets, sectional garage doors for residential applications, and
doors and components for the  self-storage  market.  Through Atlas Roll-lite the
company entered into the coiling steel door business and self-storage market. In
1992, the company  acquired  Ideal Door Company,  which  manufactured  sectional
garage doors for residential and commercial  applications  and also provided the
company with entry into the installation services business.

     Since 1992,  the  company has  expanded  its  presence in the  installation
services market through  acquisitions.  The company typically enters new markets
through a primary  acquisition  and then  expands  within  that  market  through
internal growth and smaller fill-in acquisitions.  The company believes that the
installation  and service  industry is highly  fragmented,  primarily with small
organizations that present a large number of acquisition opportunities.customers.

Manufacturing and Raw Materials

     The company currently operates sevenfive garage door manufacturing facilities for building
products.facilities. A
key  aspect of Building Products'Garage  Doors'  research  and  development  efforts  ishas been the
ability to continually  improve and streamline its  manufacturing  process.  The
company's  engineering and  technological  expertise,  combined with its capital
investment  in  equipment,  generally  enablehas enabled  the  company to  efficiently
manufacture  products in large  volume and meet  changing  customer  needs.  The
company's  facilities  use  proprietary  manufacturing  processes to produce the
majority of its products.  Certain of the company's  equipment and machinery are
internally modified to achieve its manufacturing objectives.

     During  1998  Building  Products'  profitability  was  impacted by capacity
constraints   and  related   manufacturing   inefficiencies   due  to  delay  in
implementing an additional production line. In 1999, this additional line plus a
number of other  plant  capacity  projects  are  planned  which  should ease the
shortage of capacity experienced in 1998.


     The principal raw material used in the company's  manufacturing  operations
is galvanized  steel. The company also utilizes  certain hardware  components as
well as wood and  insulated  foam.  All of these  raw  materials  are  generally
available from a number of sources.

Research and Development

     The company  operates a technical  development  center  where its  research
engineers  work to design,  develop and implement new products and  technologies
and perform  durability and  performance  testing of new and existing  products,
materials and finishes. Also at this facility, the company's process engineering
team works to develop new  manufacturing  processes  and  production  techniques
aimed at improving manufacturing efficiencies.

Competition

     The  garage  door  industry  is  characterized  by several  large  national
manufacturers  and many smaller  regional and local  manufacturers.  Several of the
national   garage  door   manufacturers,   including  the  company,   have  been
consolidating  the  industry  through  the  acquisition  of  regional  and local
manufacturers.  During 1998, Building Products experienced continued competitive
pricing pressures,  resulting in selling price reductions that narrowed margins.
The installation services industry is fragmented, primarily among small regional
and  local  companies.  The company
competes on the basis of service,  quality,  innovative  products and  services,
brand awareness and price.

                                       4


Installation Services

     The  company has  developed a  substantial  network of  specialty  building
products  installation  and service  operations.  These 38 locations  serving 24
markets,  covering  many of the key new single family home markets in the United
States,  offer an  increasing  variety of building  products and services to the
residential construction and remodeling industries. The company believes that it
is one of the leading  installing  dealers of both garage doors and manufactured
fireplaces in the United States.

Industry

     The company provides  installed  specialty building products to residential
builders and to consumers.  Builders are  increasingly  acting as developers and
marketers, sub-contracting a substantial portion of the actual construction of a
home.  Consumers  require  professional  installation  services of the company's
building  products due to the skill levels required for installation  and/or the
lack of time to perform the installation themselves.  Traditionally,  the market
for  installation  services  has been very  fragmented,  characterized  by small
operations offering a single type of building product in a single market.

Key Competitive Strengths

     The company believes that the following  strengths will continue to enhance
the market position of the Installation Services business:

     Scale of Operations.  In what has  historically  been an  undercapitalized,
fragmented industry, the company has sufficient capital and the scale to attract
professional  management,  achieve operating  economies,  and serve the needs of
even the largest national builders.

     Multiple product and service  offerings.  The company believes it is unique
in its  offering of products and services in several  product  categories.  This
offering is leveraged over a common customer base,  providing  efficiencies  and
convenience for the customer.

     Selection  Centers.  The company  operates  well-appointed  product  design
centers  that  facilitate  selection  of  products  by the  consumer,  enhancing
customer  service and  providing an  environment  conducive to  up-selling  into
higher margin products.

Strategy

     The company believes that Installation Services has distinguished itself in
the marketplace as an expert in select building product categories, with a focus
on value-added service.

     Installation  Services has targeted geographic markets that have a sizeable
population or significant growth  demographics.  The company currently serves 19
of the top 100 metropolitan markets based on population and 11 of the top 20 new
single-family  residential  construction markets. The markets served account for
approximately  25% of all new residential  housing permits in the United States.
The company seeks to promote the continued growth of the  Installation  Services
business  through  both  internal  growth  and  strategic  acquisitions  of  new
operations in high growth construction markets.

     Installation  Services'  multiple product offering is primarily targeted at
new construction,  wherein products are generally  consumed at approximately the
same time in the  construction  process.  Products  offered can be selected  and
upgraded by the customer in the company's  design centers.  The company believes

                                       5


that its multi-product  offering provides  strategic  marketing  advantages over
traditional,   single  product  competitors,   and  provides  the  company  with
operational efficiencies. The company seeks to increase the cross-selling of its
multiple  products to its existing  customers.  Additionally,  the company plans
further  growth  through  the  introduction  of  additional  installed  building
products.  The replacement and remodeling markets are additional markets for the
company's products and professional installation services.

Products and Services

     Installation Services sells and installs a variety of building products:

     Garage  Doors and Openers - garage  doors are  distributed,  professionally
installed and serviced in the new construction and replacement markets.  This is
the largest product category by volume for Installation  Services.  Installation
Services sources most of its garage doors from Garage Doors.

     Fireplaces - manufactured wood and gas fireplaces and related products such
as  stone or  marble  surrounds,  wood  mantels  and gas  logs are  distributed,
professionally installed and serviced primarily to the new construction market.

     Flooring  -  flooring  products   distributed  and  installed  to  the  new
construction market include carpeting, tile and stone, wood and vinyl.

     Appliances - appliances  distributed to the new construction market include
refrigerators, stoves, cooktops, ovens and dishwashers.

     Kitchen and Bath Cabinets - cabinetry,  with options in wood  varieties and
door  styles  are  offered  for   distribution   and  installation  to  the  new
construction market.

     Other - other products include  seamless  gutters,  closet systems,  window
coverings,   bath  enclosures,   and  architectural  hardware.  Tile  and  stone
applications for shower and bath walls, counter tops and fireplace surrounds are
also offered.

Acquisitions

     The  Installation  Services  business  has entered  new  markets  primarily
through  acquisition.  Once  established  in a market,  the  company  introduces
additional product categories to the acquired company's product offerings.  From
1993 through 2000, the company has completed  thirteen  acquisitions of building
products service and installation operations.

Competition

     The installation  services industry is fragmented,  consisting primarily of
small,  single-market  companies  which have less  financial  resources than the
company.  The company competes on the basis of service,  product line diversity, quality, service,
price and brand awareness.

                                       SPECIALTY PLASTIC FILMS6


Specialty Plastic Films

     The company believes that, through Clopay Plastics Products Company,  it is
a leading developer and producer of plastic films and laminates for a variety of
hygienic,  health care and industrial uses in domestic and certain international
markets.  Specialty  Plastic  Films'  products  include thin gauge  embossed and
printed films,  elastomeric  films and laminates of film and non-woven  fabrics.
These  products are used  primarily as moisture  barriers in  disposable  infant
diapers,   adult  incontinence   products  and  feminine  hygiene  products,  as
protective  barriers  in  single-use  surgical  and  industrial  gowns,  drapes,
equipment  covers,  and as packaging for hygienic  products.  Specialty  Plastic
Films'  products are sold through the company's  direct sales force primarily to
multinational consumer and medical products companies.

Industry

     The  specialty  plastic  films  industry  has been  affected by several key
trends over the past five years.  These  trends  include  the  increased  use of
disposable products in emergingdeveloping countries and favorable demographics,  in most
countries,  such as high birth rates in third world  countries  and
the aging of the  population.population,  in the major global  economies.  Other key trends
representing  significant  opportunities for manufacturers include the continued
demand for new advanced  products such as  cloth-like,  breathable and laminated
products and the need of major customers for global supply partners.

Key Competitive Strengths

     The company believes that the following  strengths will continue to enhance
the market position of Specialty Plastic Films:

     Technological Expertise and Product Development. The company believes that,
as a result of ongoing research and development activities and continued capital
investment,  it is a leader in new product  development  for  specialty  plastic
films and laminates. The company has developed technologically advanced embossed
films,  elastomeric  films,  breathable films,  laminates and cloth-like barrier
products for diapers,  feminine  hygiene  products,  and  disposable  health care and
industrial  products.  The company  believes  that its  technical  expertise and
product  development  capabilities  enhance  its market  position  and  customer
relationships.

     Long-Term Customer Relationships and Expanding  International Presence. The
company has developed strong,  long-term relationships with leading consumer and
medicalhealth care products companies.  The company believes that these  relationships,
combined with its technological  expertise,  product  development and production
capabilities,  have  positioned it to meet changing  customer  needs,  which the
company expects will drive growth. In addition, the company believes its strong,
long-term  relationships  provide it with increasing  opportunities to enter new
international markets, such as the Pacific RimSouth America and Latin America.Asia Pacific.

Strategy

     The company seeks to expand its market presence for Specialty Plastic Films
by  capitalizing on its  technological  and  manufacturing  expertise and on its
relationships   with   major   international    consumer   products   companies.
Specifically, the company believes that it can continue to increase its domestic
sales  and  substantially expand  internationally  through  continuedongoing  product  development  and
enhancement and by marketing its  technologically  advanced breathable films and
laminates for use in all of its markets.  The company believes that its Finotech
joint venture and 1998 acquisition of Bohme (see European  Operations) provide a
strong platform for additional sales growth in certain international markets.

                                       7
Products

     Specialty Plastic Films manufactures a wide variety of embossed and printed
specialty  films and laminates for the hygiene,hygienic,  healthcare  and other markets.
Specialty  Plastic Films' products are used as moisture  barriers for disposable
infant  diapers,  adult  incontinence  and  feminine  hygiene  products  and  as
protective  barriers  in  single-use  surgical  and  industrial  gowns,  drapes,
equipment  covers and packaging.  A specialty  plastic film is a thin-gauge film
(typically  0.0005" to 0.003") that is manufactured  from polyolefin  resins and
engineered to provide  certain  performance  characteristics.  A laminate is the
combination  of a  plastic  film ontoand a  non-woven  fabric.  These  products  are
produced  using both cast and blown  extrusion and  laminating  processes.  High
speed,  multi-color  custom printing of films and customized  embossing patterns
further  differentiate  the  products.  The  company's  specialty  plastic  film
products typically provide a unique  combination of performance  characteristics
that meet specific, proprietary customer needs. Examples of such characteristics
include  strength,   breathability,   barrier  properties,   processibility  and
aesthetic appeal.

Sales and Marketing

     The company  sells its products  primarily in the United  States and Europe
with sales also in Canada,  Latin America and the  Pacific  Rim.Asia Pacific. The company utilizes
an  internal  direct  sales  force, and  manufacturer  representatives,  organized  by  customer  accounts.   Senior
management  actively  participates by developing and maintaining  close contacts
with customers.

     The company's largest customer is Procter & Gamble, which has accounted for
a  substantial  portion of  Specialty  Plastic  Films'  sales over the last five
years.  The loss of this customer  would have a material  adverse  effect on the
company's business.  Specialty plastic films also are sold to a diverse group of
other leading consumer, and health care and industrial companies.

Research and Development

     The company  believes it is an industry leader in the research,  design and
development  of  specialty  plastic  films and  laminate  products.  The company
operates a technical  center where  approximately  30 chemists,  scientists  and
engineers work  independently  and in strategic  partnerships with the company's
customers  to develop  new  technologies,  products  and  product  applications.
Currently, the company is engaged in several joint efforts with the research and
development departments of its specialty plastic film customers.

     The  company's  research  and  development  efforts  have  resulted in severalmany
inventions  covering embossing patterns,  improved  processing methods,  product
formulations,  product applications and other proprietary technology. Recent new
products  include  microporous  breathable films and  cost-effective  cloth-like
films and  laminates.  Microporous  breathability  provides  for  air  flowairflow  while
maintaining  barrier  properties  resulting  in improved  comfort and skin care.
Cloth-like  films and laminates  provide consumer  preferred  aesthetics such as
softness  and visual  appeal.  The  company  holds a number of  patents  for its
current  specialty  film  and  laminate   products  and  related   manufacturing
processes.  Such  patents are  believed to be a less  significant  factor in the
company's success than its proprietary  know-how and the knowledge,  ability and
experience of its employees.

European Operations

     In 1996, the company formed Finotech,  a joint venture with Corovin GmbH, which is a
manufacturer of non-woven  fabrics  headquartered in Germany and a subsidiary of

                                       8


BBA Group PLC, a publicly owned diversified U.K. manufacturer. The joint venture
was  created to  develop,  manufacture  and market  specialty  plastic  film and
laminate  products for use in the infant  diaper,  healthcare and other markets.
Finotech,  which is 60% owned by the company, focuses on selling its products in
Europe.

     In 1997, Finotech constructed and began to operate a manufacturing facility
in Germany,  and subsequently  increased capacity by adding new state of the cost of which was approximately $9 million.  In 1998,  Finotech
had capital  expenditures of approximately $22 million for newart
production  lines.  This expansion which is being financed primarily by joint venture  borrowings,
iswas designed to meet anticipated demand under  multi-year
contracts with a major international consumer products company,   and  will  increase   Finotech's
manufacturing capacity by approximately 200%.company.

     In July 1998, the company  acquired Bohme  Verpackungsfolien  GmbH & Co., a
German manufacturer of high-quality  printed and conventional  plastic packaging
and  specialty  films  with  annual  sales of  approximately  $35  million.films.  The  acquisition  provides a platform to further  expand
Specialty Plastic Films' European  operations and the opportunity to broaden the
segment's product line by bringing Bohme technology and products to domestic and
other international  markets.  These products include printed and unprinted film
and flexible packaging for hygienic products.

Manufacturing and Raw Materials

     The company  manufactures its specialty  plastic film and laminate products
on high-speed equipment designed to meet stringent tolerances. The manufacturing
process  consists  of  melting  a  mixture  of  polyolefin   resins   (primarily
polyethylene)  and  additives,  and  forcing  this  mixture  through a  computer
controlled  die  and  rollers  to  produce  embossed  films.  In  addition,  the
lamination  processes involve extruding the melted plastic films directly onto a
non-woven  fabric  and  adhesively  bonding  these  materials  to form a  laminate.  Through
statistical  process control methods,  company personnel monitor and control the
entire production process.

     Plastic  resins,  such as  polyethylene  and  polypropylene,  and non-woven
fabrics are the basic raw materials used in the manufacture of substantially all
of Specialty  Plastic  Films'  products.  The company  currently  purchases  its
plastic  resins in pellet form from several  suppliers.  The  purchases are made
under annual supply  agreements  that do not specify fixed  pricing  terms.  The
non-woven fabricscompany's  sources for raw materials are available from several suppliers.believed to be adequate for its current
and anticipated needs.

Competition

     The market for the company's  specialty  plastic film and laminate products
is highly competitive.  The company has a number of competitors in the specialty
plastic  films and laminates  market,  some of which are larger and have greater
resources  than the  company.  Over the past several years the specialty  plastic
films  industry  has  experienced  periods of selling  price  reductions  due to
competitive pressures in connection with excess industry  manufacturing capacity
for commodity products. The company  competes  primarily  on the basis of
technical expertise, quality, service and price.


ELECTRONIC INFORMATION AND COMMUNICATION SYSTEMSElectronic Information and Communication Systems

     The company, through its wholly-owned subsidiary,  Telephonics Corporation,
specializes in advanced  electronic  information and  communication  systems for
defense,  aerospace,  civil,  industrial,  and commercial markets worldwide. The
company  designs,  manufactures,  sells,  and  provides  logistical  support for
aircraft   communication   systems,   radars,radar,  air  traffic  management  systems,
identification  friend or foe  ("IFF")  equipment,  transit  communications  and
custom, mixed-signal, large scaleapplication specific integrated circuits. The company believes that it hasis a
significant
presence in the markets forleading  supplier  of  airborne   maritime   surveillance   radar  and  aircraft
communicationintercommunication  management  systems,  two of the segment's  largest  product
lines. In addition to its continued focus ontraditional defense applications,products used predominantly by the
United States Government,  in recent years the company has successfully  adapted
its technologycore  technologies to expandproducts used in military and commercial  applications
worldwide  and has  expanded  its presence in non-military  government,
commercial and  international  markets.  As a result,  approximately  50% of the
Electronic Information and Communication Systems segment's fiscal 1998 net sales
were to  customers  other  than  the  United  Statesboth  non-defense  government  and
its  prime
contractors and subcontractors on defense programs, as compared to approximately
30% in fiscal 1992.

     Some of the major  programs  in which the  company  currently  participates
include:

Description Customer Products - ----------- -------- -------- SH-60R Lockheed Martin Multi-mode radar, (U.S. Navy Multi-mission intercommunication and Helicopter) radio management and IFF systems NIMROD 2000 (U.K. Royal British Aerospace Integration of Maritime Patrol Aircraft) communications and radio management systems C-17 (U.S. Air Force Boeing Integrated radio Cargo Transport) management and wireless communication systems AWACS (U.S. Air Boeing/NATO IFF and radio management Force/NATO Airborne systems Warning and Control System) Joint-STARS (U.S. Air Lockheed Martin Intercommunication and Force Airborne radio management systems Surveillance System) Maritime Patrol Radars Sikorsky/Kaman Airborne coastal surveillance radars Rail Transit Kawasaki, Bombardier Car-borne communications Communications and others and vehicle health monitoring systems for rail cars
commercial markets. 9 Industry The segment's market is comprised of defense and non-military government and commercial customers, both domestically and internationally. In recent years, the Electronic Information and Communication Systems segment has expanded its customer base with increasing emphasis on non-military government, commercial, industrial and new international markets. For example, sales to customers other than the U.S. Department of Defense and its contractors and subcontractors increased from approximately 30% of the segment's net sales in fiscal 1992 to approximately 50% of net sales in fiscal 1998. Although the United States defense budget has remained relatively constant in the last several years, the electronics procurement portion of the budget is expected to grow approximately 14% per year overfaster than the next 10overall defense budget. Growth in this budget area reflects the trend in recent years accordingfor the United States' Department of Defense to opt for the Electronics Industry Association. This is due in part to the government's plan to upgrade the technologyinstallation of new electronic systems and equipment in existing weapon systems platformsaircraft rather than purchase entirelydevelop totally new platformsweapons systems. Conflicts involving the country's military have also tended in recent years to require deployment and systems. Onesignificant coordination between air, sea and ground forces, often in distant parts of the world, underscoring the evolution and growing importance of electronic systems that provide surveillance, tracking, communication and command and control. It is anticipated that the need for such systems will also increase in connection with the increasingly active role that the military is expected to play in the war on terrorism, both at home and abroad. Telephonics' advanced systems and sub-systems are well positioned to address the needs of an electronic battlefield with emphasis on the generation and dissemination of timely data for use by highly mobile ground, air and naval forces. The table below lists some of the major non-defense markets forprograms the segment's productscompany currently participates in:
Customer Product Description ------- ------- ----------- The Boeing Intercommunications U.S. Air Force C-17A Cargo Company Management Systems Transport U.S. Air Force C-130 Hercules Air Transport NATO Airborne Warning and Control System (AWACS) U.S. Navy F/A-18E/F Fighter/Attack Aircraft Identification Friend or U.S./NATO AWACS Foe System BAE Systems Intercommunications UK NIMROD Royal Maritime Patrol System Integration Aircraft Northrop Grumman Intercommunications Joint STARS Surveillance Aircraft Management Systems Maritime Surveillance U.S. Coast Guard HU-25 Aircraft Radar Lockheed Martin Intercommunications U.S. Navy P-3 Aircraft Corporation Management Systems U.S. Navy MH-60S/MH-60R Helicopters Maritime Surveillance U.S. Navy MH-60R LAMPS Helicopter Radar and Identification Friend or Foe System Sikorsky Maritime Surveillance S-70B Maritime Surveillance Aircraft Company Radar Helicopter Intercommunications SH-60B Maritime Surveillance Management Systems Helicopter
10 Telephonics is generally a first tier supplier to prime contractors in the United States isdefense industry such as Boeing, Lockheed Martin, Northrop Grumman and BAE Systems. With the mass transit market. The company believessignificant contraction and consolidation that both federalhas occurred in the U.S. and local governments will increase funding overinternational defense industry, major prime contractors worldwide are relying more heavily on smaller, key suppliers to provide advances in technology and greater efficiencies to reduce the next few years to upgrade the infrastructurecost of their mass transit systems. This market is serviced by a limited number of manufacturers who are capable of providing the required electronics and logistics support. Electronic Information and Communication Systems' commercial projects include contracts with Kawasaki, Bombardier, Breda and other rail suppliers for rail communications systems as well as with Boeing for aircraft intercommunicationmajor systems and audio products.platforms. We believe that this situation creates an attractive opportunity for established, first tier suppliers to capitalize on existing relationships with major prime contractors and play a larger role in the foreseeable future. In recent years, the segment has also significantly expanded its customer base in international markets. The company's international projects include a contract with British Aerospace PLCBAE Systems as part of the United Kingdom's upgrade of the NIMROD surveillance aircraft and severalincreasing number of contracts with the Civil Aviation Authority of China for air traffic management systems. The international marketsystems for custom mixed-signal large scale integrated circuits has continued to benefit from the increasing complexity of circuits needed for commercial electronic applications throughout the world.Mainland China. As a result of these and other developments, the segment's sales to internationalthese markets increased from 8%continues to increase. Some of net salesthe major non-defense related programs in fiscal 1992 to 44% of net sales in fiscal 1998.which the company currently participates include:
Description Customers Products - ----------- --------- -------- Rail Transit Kawasaki, Bombardier Car-borne and wayside Communications and others communications and vehicle health monitoring systems for rail cars Air Traffic Control Civil Aviation Air traffic control Equipment Authority of China systems Commercial Weather China, India, Airborne weather Radar Eurocopter and and search radar others
Key Competitive Strengths The company believes that the following strengths will continue to enhance theTelephonics' market position of Electronic Information and Communication Systems:position: Innovative Design and Engineering Capability. The company believes that its reputation for innovative product design and engineering capabilities, especially in the areas of voice and data communications, radio frequency (RF) design, digital signal processing, networking systems, inverse synthetic aperture radar and analog, digital and mixed-signal integrated circuits, has enhanced its ability to secure, retain and expand key contractsits participation in its markets. In addition, thedefense programs and commercial undertakings. The company is capable of meeting a full range of customer requirements including system requirements definition, product conceptual design engineering, productionand development, manufacturing and test, integration and installation, and logistical support. As a result, the company has been successful in increasing its presence in both domesticdeveloping a number of relationships as an important strategic partner and international markets and in applying its defense technologies in non-military markets.first tier supplier to various prime contractors. Broad Base of Long-Life Programs.Programs and Incumbent Supplier Status. The company participates in a range of long-term defense and non-military government programs, both domestically and internationally. The company has developed a base of installed products in these programs that generate significant recurring revenue and retrofit, spare parts and customer support sales. Due to the 11 inherent complexity of defense electronics, the company believes that its incumbent status on major platforms give it a competitive advantage in the selection process for the upgrades and enhancements that have characterized defense electronics procurement. Furthermore, the company believes that awards such as the U.S. Navy's MH-60R LAMPS helicopter program and the recent contract award from Boeing to develop multiple configurations of Telephonics' Secure Digital Intercommunications System in support of the U.S. Air Force's C-130 Avionics Modernization Program, provide competitive advantages when such programs transition from development to the production phase. Strategy The company believes that it is a technological leader in its recent awards of significant contracts will add to its installed basecore markets and further enhance its ability to generate recurring revenues. Strategy The company intends to increase the market penetration of Electronic Information and Communication Systems' products in the defense and non-military government markets both domestically and internationallypursue new growth opportunities by leveraging its systems design and engineering capabilities.capabilities and incumbent position on key platforms. For example, during 2000 Telephonics was awarded a contract valued at over $21 million for the development of the next generation integrated radio management system for the U.S. Air Force's C-17A air transport. Following the development phase, the company has applied such capabilitiesexpects to develop an advanced imaging radar used inupgrade the U.S. Navy's SH-60R multi-mission helicopter. As a result,entire fleet of C-17A's with the new equipment. The company also expects substantial sales growth as it transitions from development to the production phase of the SH-60RMH-60R helicopter program, which is now expected to occurcommence in 2000. In addition,2004. Telephonics' objective is to anticipate the company intendsneeds of its core markets and to continue to capitalize on the technology it has developed for defense programs by entering into new non-military government markets, as exemplified by contractsinvest in research and development in an effort to provide car-bornesolutions well in advance of its competitors. To add additional value to customers' products and solidify relationships and its incumbent status, Telephonics often designs its products to exceed customers' minimum specifications, providing its customers with greater performance and flexibility. The company believes that these practices engender increased coordination and communication with its customers at the earliest stages of new program development, thereby increasing the likelihood that Telephonics' products will be selected and integrated as part of a total system solution. Due to increasing demand for broadband wireless voice and data communications, Telephonics is focusing on product development in this area with a view toward creating significant telecommunications market opportunities. Two examples where the segment is leveraging its extensive electronic systems design capability is in the development of equipment whose purpose is to substantially improve the performance of existing wireless networks by increasing their speed, capacity and their overall quality of service and in the development of an electronically steerable, broadband satellite tracking antenna for trainsvoice, data and subway cars.video applications. Additionally, TLSI, Telephonics' integrated circuit design subsidiary, also is expanding its markets by leveraging its expertise to develop application specific standard integrated circuits targeted at the telecommunications, computer and computer peripherals industries. In 2001, TLSI introduced a miniature high precision Clock Generator chip which is used to sequence and synchronize electronic signals. First in a series of application specific standard integrated circuits, this advanced, single chip solution is designed into fiber optic network applications. Products The company manufactures specialized electronic products for a variety of niche applications. Electronic Information and Communication SystemsSystems' products include communication systems, sensorradar systems, information and command and control systems, and custom mixed-signal large scaleapplication specific large-scale integrated circuits used in defense, non-military government, and commercial markets. 12 The company specializes in communication systems and products and is a leading manufacturer of aircraft intercommunication systems with products in digital and analog communication management, digital audio distribution and control, and communication systems integration. The company's communication products are used on the U.S. Navy SH-60RNavy's MH-60R multi-mission helicopter,and MH-60S utility helicopters, the United Kingdom's NIMROD surveillance aircraft, U.S. Air Force C-17C-17A cargo transport, the U.S. Air Force's Joint Surveillance and Target Acquisition Radar System (Joint-STARS), and AWACS. The company has also expanded its communications expertise into the mass transit rail market and its communication systems have been selected for installation by several major mass transit authorities, including the New York City Transit Authority, Long Island Railroad, Southeastern Pennsylvania Transit Authority, Massachusetts Bay Transit Authority and California Transit Authority.authorities. The company also manufactures audio products for commercial aircraft, such as headsets, microphones and handsets. The company's information and command and control systems include airborne maritime surveillance and weather and search radar systems, air traffic management systems and tactical instrument landing systems. During 2000, Telephonics acquired a search and weather radar business from Honeywell International, expanding its maritime radar product line. The company provides both the expertise and the equipment for detecting and tracking targets in a maritime environment and flight path management systems for air traffic control applications. Its maritime radar systems, which are used in more than 20 countries, are fitted aboard helicopters, fixed-wing aircraft, and aerostats for use at sea. The company's aerospace electronic systems include IFF systems used by the U.S. Air Force and NATO on the AWACS aircraft and tactical microwave landing systems used by the U.S. Navy, NASA and other customers for ground and ship based applications. TheThrough TLSI the company also manufactures custom and standard, mixed-signal, large scaleapplication specific large-scale integrated circuits primarily for customers in the security, automotive and telecommunications industries as well asand for customers in the defense industry.military. Security applications include smoke and motion detectors as well as intrusion alarm systems. Major suppliersSuppliers to the automotive industry feature the company's custom circuits in engine controllers, power window controllers, airbag sensors, fluid level sensors and rear window defoggers. Defense applications include chips used in weapon fuses and shipboard test and maintenance equipment used by the U.S. Navy to repair and maintain aircraft radar and communications equipment. In addition, the company's custom integrated circuits are important components in various computer peripheral devices. Backlog The company's funded backlog for Electronic Information and Communication Systems was approximately $189$176 million on September 30, 1998,2001, compared to $182$190 million on September 30, 1997. 2000. Sales and Marketing Telephonics has approximately 1516 technical business development personnel who act as the focal point for its marketing activities and approximately 30 sales representatives who introduce its products and systems to customers worldwide. Research and Development A portion of Electronic Informationthis segment's research and Communication Systems' product development activities are generally performed under government contracts. Thecontracts and the segment also regularly updates its core technologies through internally funded research and development. The selection of these R&D projects is based on available opportunities in the marketplace as well as input from the company's customers. These projects usually representhave generally represented an evolution of existing products rather than entirely new pursuits. The company's recentRecent internally funded research and development activities are exemplified byhas resulted in the development of a next generation airborne imaging maritime surveillance radar system and an all digital, interior communicationtotally secure intercommunication management system. 13 By leveraging its extensive military electronics systems' design and development capability, Telephonics believes it can create additional growth opportunities and enter new markets, and is undertaking a series of development initiatives related to broadband, wireless and integrated circuit operations (see "Strategy"). These development initiatives, which began in 2001 are estimated at approximately $5-6 million for fiscal 2002 with the objective of generating incremental revenue commencing in 2003. Competition Electronic Information and Communication Systems competes with major manufacturers of electronic information and communication systems that have greater financial resources than the company, and with several smaller manufacturers of similar products. The company competes on the basis of technology, design, quality, price and program performance. EMPLOYEESEmployees The company has approximately 5,400 employees located throughout the United States and in Europe. Approximately 100140 of its employees are covered by a collective bargaining agreements,agreement, primarily with affiliatesan affiliate of the AFL-CIO. The company believes its relationships with its employees are satisfactory. OFFICERS OF THE REGISTRANTResearch and Development Research and development costs not recoverable under contractual arrangements are charged to expense as incurred. Research and development costs for all business segments were approximately $13,800,000 in 2001, $10,700,000 in 2000, and $8,900,000 in 1999. Officers of the Registrant
Served as Positions and Name Age Officer Since Offices ---- --- ------------- ------------- Harvey R. Blau 6366 1983 Chairman of the Board and Chief Executive Officer Robert Balemian 5962 1976 President and Chief Financial Officer Patrick L. Alesia 5053 1979 Vice President and Treasurer Edward I. Kramer 6467 1997 Vice President, Administration and Secretary
14 ITEM 2 - PROPERTIES ---------- The company occupies approximately 4,100,0004,200,000 square feet of general office, factory and warehouse space and showrooms throughout the United States and in Germany. The following table sets forth certain information asrelated to each of the company's major facilities:
Approximate Owned Square or Location Business Segment Primary Use Footage Leased - -------- ---------------- ----------- ----------------------- ------ Jericho, NY Corporate Headquarters Office 10,00011,000 Leased Farmingdale,NY Electronic Information Manufacturing 167,000 Owned and Communication and research Systems and development Huntington, NY Electronic Information Manufacturing 89,000 Owned and Communication Systems Cincinnati, OH Building ProductsGarage Doors Office 44,000 Leased50,000 See below Installation Services Specialty Plastic Films Cincinnati, OH Building ProductsGarage Doors Research and 49,000 Leased52,000 See below Specialty Plastic Films Developmentdevelopment Aschersleben, Specialty Plastic Films Manufacturing 395,000 Owned Germany Dombuhl, SecialtySpecialty Plastic Films Manufacturing 398,000 Owned Germany Augusta, KY Specialty Plastic Films Manufacturing 143,000 Owned Nashville, TN Specialty Plastic Films Manufacturing 86,000 Leased Fresno, CA Specialty Plastic Films Manufacturing 37,000126,000 Leased Russia, OH Building ProductsGarage Doors Manufacturing 274,000 LeasedOwned Baldwin, WI Building ProductsGarage Doors Manufacturing 216,000116,000 Leased Orlando, FL Building ProductsNesbit, MS Garage Doors Manufacturing 196,00070,000 Owned Los Angeles, CA Garage Doors Garage door 40,000 Leased Nesbitt, MS Building Products Manufacturing 40,000 Ownedhardware manufacturing Auburn, WA Building ProductsGarage Doors Manufacturing 123,000 Leased Tempe, AZ Building ProductsGarage Doors Manufacturing 145,000143,000 Leased Commerce, CA Building Products Manufacturing 41,000 LeasedInstallation Services Warehousing
The company also leases approximately 1,500,0001,900,000 square feet of space for the Building Products'Garage Doors distribution centers and installation servicesInstallation Services locations in numerous facilities throughout the United States. 15 The company has aggregate minimum annual rental commitments under real estate leases of approximately $10$11.0 million. The majority of the leases have escalation clauses related to increases in real property taxes on the leased property and some for cost of living adjustments. Certain of the leases have renewal and purchase options. AllClopay, the company's wholly owned subsidiary, is in the process of relocating its offices and a research and development facility. It is anticipated that these two locations, which are leased and presently aggregate 102,000 square feet, will be replaced in fiscal 2002 by newly constructed premises in the Cincinnati, OH area that will provide approximately 126,000 square feet under a long-term lease with an option to purchase. Annual rent expense for the new facility is expected to be approximately the same as for the locations being replaced. The plants and equipment of the company are believed to be in adequate condition and contain sufficient space for current and presently foreseeable needs. ITEM 3 - LEGAL PROCEEDINGS ----------------- Department of Environmental Conservation with Lightron Corporation. --------------------------------------------------------------------------- Lightron, a wholly-owned subsidiary of the company, once conducted operations at a location in Peekskill in the Town of Cortland, New York owned by ISC Properties, Inc., a wholly-owned subsidiary of the company (the "Peekskill Site"). ISC Properties, Inc. sold the Peekskill Site in November 1982. Subsequently, the company was advised by the New York State Department of Environmental Conservation ("DEC") that random sampling at the Peekskill Site and in a creek near the Peekskill Site indicated concentrations of solvents and other chemicals common to Lightron's prior plating operations. ISC Properties has entered into a consent order with the DEC to perform a remedial investigation and prepare a feasibility study, which has been completed. Management believes, based on facts presently known to it, that the outcome of this matter will not have a material adverse effect on the company's consolidated financial position or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year. 16 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -------------------------------------(a) The company's Common Stock is listed for trading on the New York Stock Exchange. As of November 1, 1998 there were approximately 14,000 record holders. The following table shows for the periods indicated the quarterly range in the high and low sales prices for the company's Common Stock.Stock adjusted for the 10% Common Stock dividend issued in 2001:
FISCAL QUARTER ENDED HIGH LOW ------------------------ --- December 31, 1996 $12 1/41999 $ 9 3/87.44 $6.14 March 31, 1997 14 5/8 11 7/82000 7.73 6.25 June 30, 1997 14 7/8 11 7/82000 7.10 4.77 September 30, 1997 16 1/4 142000 7.33 5.11 December 31, 1997 17 1/2 14 3/82000 7.27 5.63 March 31, 1998 17 3/8 14 11/162001 7.27 6.14 June 30, 1998 15 7/16 12 3/82001 10.00 6.98 September 30, 1998 13 15/16 7 15/162001 12.20 9.12
ITEM 6 - SELECTED FINANCIAL DATA -----------------------
YEARS ENDED SEPTEMBER 30, ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net sales $914,874,000 $770,227,000 $655,063,000 $506,116,000 $451,166,000 ============ ============ ============ ============ ============ Income from continuing operations $ 29,321,000 $ 33,164,000 $ 28,067,000 $ 23,245,000 $ 29,394,000 ============ ============ ============ ============ ============ Per share: Basic $ .96 $ 1.12 $ .93 $ .73 $ .83 ============ ============ ============ ============ ============ Diluted $ .94 $ 1.06 $ .88 $ .69 $ .79 ============ ============ ============ ============ ============ Total assets $487,938,000 $384,759,000 $311,169,000 $285,616,000 $293,215,000 ============ ============ ============ ============ ============ Long-term obligations $112,829,000 $ 53,854,000 $ 32,458,000 $ 16,074,000 $ 15,538,000 ============ ============ ============ ============ ============
(b) As of November 1, 2001, there were approximately 14,300 recordholders of the company's Common Stock. (c) The company declared and paid a 10% Common Stock dividend during fiscal 2001. No cash dividends on Common Stock were declared or paid during the five years ended September 30, 1998.2001. 17 ITEM 6 - SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30, ------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Net sales $1,160,125,000 $1,118,386,000 $1,032,697,000 $914,874,000 $770,227,000 ============== ============== ============== ============ ============ Net income $ 30,593,000 $ 24,880,000 $ 20,211,000 $ 29,321,000 $ 33,164,000 ============== ============== ============== ============ ============ Per share: Basic $ .93 $ .75 $ .60 $ .87 $ 1.02 ============== ============== ============== ============ ============ Diluted $ .92 $ .75 $ .60 $ .85 $ .97 ============== ============== ============== ============ ============ Total assets $ 584,993,000 $ 582,026,000 $ 533,440,000 $487,938,000 $384,759,000 ============== ============== ============== ============ ============ Long-term obligations $ 117,943,000 $ 134,942,000 $ 135,284,000 $112,829,000 $ 53,854,000 ============== ============== ============== ============ ============
Operating results for 2001 include a $3,156,000 pre-tax pension curtailment gain and for 1999 include a $3,500,000 pre-tax restructuring charge. Net income for 2000 excludes a $5,290,000 charge for the cumulative effect of a change in accounting principle. 18 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------- RESULTS OF OPERATIONS Fiscal 19982001 Compared to Fiscal 1997 Net sales2000 Operating results (in thousands) by business segment were as follows:
Percentage 1998 1997 IncreaseNet Sales Operating Profit --------- ---------------- 2001 2000 2001 2000 ---- ---- -------- (millions)---- ---- Building products $590.5 $479.2 23.2% Garage doors $ 428,601 $ 431,213 $18,223 $17,002 Installation services 268,758 268,398 6,099 6,842 Specialty plastic films 167.5 163.7 2.3%297,100 262,075 41,772 20,315 Electronic information and communication systems 156.9 127.3 23.2% ------ ------ $914.9 $770.2 18.8% ====== ======191,782 186,592 16,076 19,097 Intersegment revenues (26,116) (29,892) - - ---------- ---------- ------- ------- $1,160,125 $1,118,386 $82,170 $63,256 ========== ========== ======= =======
Garage Doors Net sales of the building productsgarage door segment increaseddecreased by $111.3$2.6 million compared to 1997. Companies acquired during 1997 that are included2000 due to lower unit sales. Unit sales decreases occurred in 1998 operating results for a full year accounted for approximately $75 millionthe first half of the sales increase. Higheryear primarily due to competitive markets and economic conditions. Operating results strengthened and unit sales of garage doors resulting from continued strong demandincreased in the residential and related retail markets contributed approximately $18 million of the increase. Sales increases in the segment's installation services business stemming from geographic expansion and internal growth, partly offset bysecond half reflecting the effect of competitive pricing on the segment accounted for the balanceimproved service levels and market conditions. Operating profit of the increase.garage doors segment increased $1.2 million compared to last year. Gross profit as a percentage of sales was essentially unchanged compared to the prior year. Lower gross profit margins (approximately 25.4% in 2001 compared to 27.4% last year) and operating profit in the first six months of the year were offset in the second half by improved gross profit margins (approximately 29.0% in 2001 compared to 27.0% in 2000) and increased operating profit due primarily to the sales growth, increased manufacturing efficiencies and lower expense levels. Selling, general and administrative expenses decreased by approximately $1.4 million primarily due to the effect in the second half of the year of cost reduction programs. The profitability improvement that garage doors experienced in the second half of the year is expected to continue in 2002 through sales growth and the impact of improved operational efficiencies. Installation Services Net sales of the installation services segment were approximately the same as last year. The impact of softer housing markets was mitigated by growth from expanded product offerings. Operating profit of the installation services segment decreased $.7 million compared to last year. Gross margin percentage increased from approximately 25.9% last year to 26.4% in 2001 as expanded product offerings resulted in improved product mix. Selling, general and administrative expenses as a percentage of sales increased from approximately 23.3% last year to 24.2% in 2001 due to higher selling costs, offsetting the margin improvement. Specialty Plastic Films Net sales of the specialty plastic films segment increased by $3.8$35.0 million compared to 1997. In July 19982000. Domestic sales increased $27.3 million and sales of the segment's European operations increased by approximately $7.7 million. Both domestic and foreign unit sales increased approximately 20% compared to last 19 year due primarily to increased demand for its breathable hygienic products used in infant diapers and health care products. The effect of increased unit volumes was partly offset by the impact of a stronger U.S. dollar on translated foreign sales and due to selling price adjustments made to pass through raw material cost decreases to customers. Operating profit of the specialty plastic films segment acquiredincreased $21.5 million compared to last year with substantial increases occurring in both domestic and European operations. Strong demand was met using modern, state- of-the-art production facilities and processes that are able to perform at higher production rates. The increased manufacturing efficiencies, sales growth and a plastic packaging manufacturer located in Germany which accounted for a sales increase of $7.6 million. Lower than anticipated sales from new programsfavorable product mix resulted in the infant diaper market contributedgross margin percentage increasing from approximately 20.0% last year to 25.4% in 2001. Also contributing to the profitability improvement in 2001 was reduced selling, general and administrative expenses as a modest increasepercentage of sales, which decreased from approximately 11.9% last year to 11.1% in unit volume, the effects of which were offset by price competition in the commodity end of the segment's business,2001. Electronic Information and a pass-through to customers of lower resin prices.Communication Systems Net sales of the electronic information and communication systems segment increased $5.2 million compared to 2000. The increase was primarily due to increased sales in connection with the C-17 and other defense communications programs, partly offset by $29.6 million, principally because of new program awards and increased funding levels on several programslower sales in the segment's defense and internationalintegrated circuit business. Included were sales of approximately $22 million, a $10 million increase compared to the prior year, under a contract to provide integrated radio management and communication systems for a United Kingdom coastal surveillance aircraft program that is projected to extend through 2003. Operating income by business segment was as follows:
Percentage 1998 1997 Increase/Decrease ---- ---- ----------------- (millions) Building products $35.0 $40.7 (14.1%) Specialty plastic films 6.9 8.5 (18.6%) Electronic information and communication systems 13.4 11.8 13.9% ----- ----- $55.3 $61.0 (9.3)% ===== =====
Operating income of the building products segment decreased by $5.7 million compared to 1997. The effect of the sales growth was offset by competitive pricing pressures, capacity constraints and related manufacturing inefficiencies due to delay in implementing an additional production line, increased operating expenses associated with new distribution centers and certain manufacturing inefficiencies related to production of commercial doors. Orders in the garage door business remain strong. However, capacity constraints and continued competitive pricing impacted this segment's operating earnings. Additional capacity is being implemented and is expected to be in place early in fiscal 1999. Operating income of the specialty plastic films segment declined by $1.6 million compared to last year. The segment experienced decreased earnings in the first nine months of fiscal 1998 due to lower than anticipated sales from new programs and price competition in the commodity end of the segment's business. These decreases were partly offset by improving operating results in the last quarter of the year due to increased unit sales volume from new infant diaper programs and earnings from an acquired company. Although specialty plastic films continues to be affected by pricing pressures, it is anticipated that continued volume growth, principally in the segment's European operations, plus earnings from the acquired company for a full year will result in improved operating results in this segment. Operating incomeprofit of the electronic information and communication systems segment decreased $3.0 million compared to last year. Gross profit as a percentage of sales was approximately the same as fiscal 2000. The effect of increased sales in the segment's core business and lower selling, general and administrative expenses was offset by approximately $4.7 million of costs associated with its previously announced technology initiatives. These development initiatives are expected to aggregate $5-6 million for 2002 with the objective of generating incremental revenue commencing in 2003. Net Interest Expense Net interest expense decreased by $1.6 million compared to last year due to the increased sales. Neteffect of debt repayments and lower interest expense increased by $1.2 million compared to 1997 due to higher levels of outstanding debt in 1998 from acquisitions in 1997 and 1998, from borrowings to finance new production lines for specialty plastic films' joint venture and from lower investable balances in 1998.rates. Fiscal 19972000 Compared to Fiscal 1996 Net sales1999 Operating results (in thousands) by business segment were as follows:
Percentage 1997 1996 IncreaseNet Sales Operating Profit --------- ---------------- 2000 1999 2000 1999 ---- ---- ---------- (millions)---- ---- Building products $479.2 $404.8 18.4% Garage doors $ 431,213 $ 447,713 $17,002 $27,933 Installation services 268,398 240,669 6,842 6,518 Specialty plastic films 163.7 127.4 28.5%262,075 197,474 20,315 550 Electronic information and communication systems 127.3 122.9 3.6% ------ ------ ----- $770.2 $655.1 17.6% ====== ====== =====186,592 177,091 19,097 15,616 Intersegment revenues (29,892) (30,250) - - ---------- ---------- ------- ------- $1,118,386 $1,032,697 $63,256 $50,617 ========== ========== ======= =======
Garage Doors Net sales of the building productsgarage doors segment decreased by $16.5 million compared to 1999. The decrease was principally due to unit volume decreases in sales of residential and commercial garage doors by approximately 6% and 15%, respectively, and the effect of the sale in 1999 of a commercial product line that had net sales of approximately $7 million in the first half of 1999, offset in part by improved product mix. Operating profit of the garage doors segment decreased by $10.9 million compared to 1999. Increased profitability due to favorable product mix and manufacturing efficiencies was offset by the effect of the sales decrease, higher operating costs associated with establishing regional distribution 20 centers, brand development and merchandising and service programs for the segment's retail distribution channel and the effect of competitive pricing. Also contributing to the decrease was an increased loss of approximately $3 million from a commercial door product line. Installation Services Net sales of the installation services segment increased by $74.4$27.7 million compared to 1996. Acquired companies accounted for $34.2 million1999. The increase was principally due to the inclusion in fiscal 2000 operating results of a company which was acquired during the second quarter of fiscal 1999, internal growth from expanded product offerings and a business acquired in the latter part of the sales increase. Higher unit salesyear, partly offset by the impact of garage doors resulting from continued strong demand in the residential and related retail markets, along with sales increases insofter housing markets. Operating profit of the installation services business stemming from geographic expansionsegment increased $.3 million versus the prior year due primarily to earnings of acquired businesses, partially offset by increased distribution and internal growth, aggregated $38.8 million of the increase.labor costs. Specialty Plastic Films Net sales of the specialty plastic films segment increased $64.6 million compared to the prior year. Approximately $49.4 million of the increase was attributable to substantially higher unit sales volume at Finotech, the segment's European joint venture, partly offset by $36.3 million over 1996,the effect of a stronger U.S. dollar compared to 1999. The remainder of the increase is principally because ofdue to increased unit sales volume in the segment's domestic operations. Operating profit of the specialty plastic films segment increased $19.8 million. The majority of the increase was due to substantially higher unit sales volume of the segment's European joint venture and resultant manufacturing efficiencies, partly offset by the effect of a stronger U.S. dollar compared to 1999. The remainder of the increase was due to improved domestic operations from growth inunit sales increases, including sales of new, programs for its major customer forhigher margin products, partly offset by the infant diaper market.effects of higher raw material costs. Electronic Information and Communication Systems Net sales of the electronic information and communication systems segment increased by $4.4$9.5 million compared to 1996, principally because of new program awards and1999 due to increased funding levelssales on severaldefense programs transitioning from development to production in the segment's defenselatter part of the year and internationalby sales of an acquired search and weather radar business. Operating income by business segment was as follows:
Percentage 1997 1996 Increase/Decrease ---- ---- ----------------- (millions) Building products $40.7 $33.1 23.2% Specialty plastic films 8.5 9.0 (5.5%) Electronic information and communication systems 11.8 11.0 7.5% ----- ----- ----- $61.0 $53.1 15.1% ===== =====
Operating income of the building products segment increased by $7.6 million over 1996. Higher garage door unit sales, growth in the installation services business, earnings of acquired companies, operating efficiencies and lower raw material costs all contributed to the increase. Operating income of the specialty plastic films segment declined by $.5 million compared to 1996. New product development and start-up costs, increased raw material costs and price competition in the commodity end of the segment's business were the principal reasons for the decrease. Operating incomeprofit of the electronic information and communication systems segment increased by $.8$3.5 million compared to 1999. The increase reflects improved profitability on certain programs that have transitioned from development to production and earnings of an acquired search and weather radar business, partly offset by increased research and development expenditures. Net Interest Expense Net interest expense increased by $3.7 million compared to 1999 due to the increased sales.higher levels of outstanding debt used to pay for acquisitions in 2000 and 1999. LIQUIDITY AND CAPITAL RESOURCES Cash flow provided by operations for 19982001 was $20.8$98.8 million, and working capital was $168.5$205.9 million at September 30, 1998.2001. Operating cash flows increased compared to last year due to the higher earnings and improved working capital management. Net cash used in investing activities during 2001 was approximately $25.5 million. The company had capital expenditures of approximately $26.7 million, principally made in connection with increasing production capacity and 21 manufacturing efficiencies. During 1998,2002 the company anticipates capital expenditures of approximately $30 million. A substantial portion of these anticipated expenditures are for additional capacity in the specialty plastic films segment acquiredand garage doors segments. Net cash used for financing activities during 2001 was approximately $59.8 million, primarily notes payable and long-term debt reductions of $57.6 million. In June 2001 the company's European operations entered into new bank loan agreements, replacing then existing financing arrangements. Also, in October 2001 the company and a plastic packaging manufacturer located in Dombuhl, Germanysubsidiary entered into a six-year, $160 million credit agreement with annual salesseveral banks, replacing an existing bank agreement and certain short-term lines of approximately $35 million whose purchase pricecredit. See Note 2 of approximately $28 million was substantially financed by borrowings underNotes to Consolidated Financial Statements for a subsidiary's bank credit agreement. During the year, $5.6 million was used to acquire approximately 563,000 sharesfurther description of the company's Common Stock. Since 1993, approximately 8.4 million shares of capital stock have been purchased for $76.7 million under the company's stock repurchase program.new agreements. The company rents various real property and equipment through noncancellable operating leases. Related future minimum lease payments due in 19992002 approximate $21$20 million and are expected to be funded through operating cash flows. In 1998 the company had fixed asset additions of $48 million, including construction and equipment costs of approximately $22 million for new production lines for its specialty plastic films joint venture in Germany, and approximately $10 million to upgrade and enhance strategic business systems. The balance of capital expenditures were principally made in connection with increasing production capacity and to improve manufacturing efficiency in the building products segment. During 1999 the company anticipates capital expenditures of approximately $40 to $45 million, primarily in the building products and specialty plastic films segments in connection with additional production capacity and manufacturing improvements, and the continuing systems upgrade program. There are no other significant commitments for future capital expenditures or investments, although it is likely that cash outflows for business acquisitions, capital expenditures and leases will continue. Anticipated cash flows from operations, together with existing cash, bank lines of credit and lease line availability, should be adequate to finance presently anticipated working capital and capital expenditure requirements and to repay long-term debt as it matures. Year 2000Changes In Accounting Principle In June 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS 141 addresses financial accounting and reporting for business combinations, requiring the use of the purchase method of accounting. SFAS 142 addresses accounting and reporting for acquired goodwill. It eliminates the previous requirement to amortize goodwill and establishes new requirements with respect to the recognition and valuation of goodwill. The company had previously initiated programs to upgrade and enhance strategic business systemswill adopt these standards for fiscal 2002. Amortization of goodwill has been approximately $2 million per year. The company is in order to replace aging technologies and provide the infrastructure to support growth in eachprocess of its business segments. In addition to other benefits that are anticipated from these upgrades and enhancements,determining what impact adoption of the new systemsstandards will have on the carrying value of existing goodwill. Preliminary indications are designedthat all or a substantial portion of goodwill attributable to the company's installation services segment, approximately $26.7 million at September 30, 2001, may be Year 2000 compliant, and play an important roleimpaired pursuant to the new requirements of SFAS 142. The new standard requires recognizing any impairment which arises at the date of adoption as a cumulative effect of a change in accounting principle in the company's overall Year 2000 strategy. The strategy is designed to address the company's application software, hardware and related operating platforms ("IT Systems"), embedded technology such as microcontrollers in production equipment or products, and third parties, principally suppliers and customers. Due to the diverse naturefirst quarter of the company's operations and other factors such as the number of facilities and degree of information systems centralization, these efforts are at varying stages of completion. In each of the company's business segments, identification of critical IT Systems was generally performed as a part of the segment's upgrade and enhancement program for strategic business systems. Assessment of identified, critical IT Systems for Year 2000 compliance for each business segment was also completed as a part of the segment's upgrade and enhancement program. Inventories and assessments of remaining systems are expected to be completed by the beginning of 1999. Within the electronic information and communication systems segment, most of the critical IT Systems have been replaced with systems that are Year 2000 compliant. Remediation efforts for the remaining critical IT Systems are underway and the replacement process is expected to be completed by June 1999. Remediation of non-critical IT Systems is anticipated to be completed by the beginning of 1999. The specialty plastic films segment has replaced all critical IT Systems with new systems that are Year 2000 compliant. Replacement of non-critical IT Systems is anticipated to be completed by March 1999. The building products segment initially estimated that Year 2000 issues would be addressed within the context of its existing upgrade and enhancement program. This program however, is running behind schedule, and alternative plans have been developed and are being implemented in order to remediate identified Year 2000 issues. These plans call for the application of software modifications to existing systems, though efforts to implement previously planned upgrades and enhancements are expected to continue. The inability of the company to timely implement the modifications due to the complexities and uncertainties inherent in developing, testing and implementing software, would adversely affect the segment's profitability due to increased operating costs and related inefficiencies. With respect to embedded technology, inventories and assessments in each of the company's business segments are in process and are expected to be completed in the beginning of 1999. Until the inventories and assessments are complete, it is not possible to determine what action, if any, will be required to be taken, or the likely result of inability to timely implement any required corrective action. In evaluating the impact of Year 2000 on significant third parties, each business segment will identify any such relationships and contact the parties involved or otherwise attain an understanding of such third parties' Year 2000 readiness. This process is underway and it is expected that significant third parties will be identified and contacted by the beginning of 1999. Until this process is completed, it is not possible to predict the likely outcome of any significant third parties' failure to attain Year 2000 compliance. The company estimates that aggregate capital expenditures for systems upgrade and enhancement programs will be approximately $40 million. Through September 30, 1998 the company had incurred approximately $21 million of such costs with the balance to be incurred through fiscal 2000. In addition, the company estimates that approximately $2 to $5 million will be expended for Year 2000 consulting costs. The company has not separately tracked all costs for Year 2000 efforts since such compliance was expected to be achieved as an ancillary benefit of budgeted systems upgrade and enhancement programs, or principally consist of payroll and related costs for information systems personnel.2002. FORWARD-LOOKING STATEMENTS All statements other than statements of historical fact included in this annual report, including without limitation statements regarding the company's financial position, business strategy, Year 2000 readiness and the plans and objectives of the company's management for future operations, are forward-looking statements. When used in this annual report, words such as "anticipate", "believe", "estimate", "expect", "intend" and similar expressions, as they relate to the company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the company's management, as well as assumptions made by and information currently available to the company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to, business and economic conditions, competitive factors and pricing pressures, capacity and supply constraints and the impact of any disruption or failure in normal business activities at the company and its customers and suppliers as a consequence of Year 2000 related problems.constraints. Such statements reflect the views of the company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, 22 growth strategy and liquidity of the company. Readers are cautioned not to place undue reliance on these forward-looking statements. The company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK --------------------------------------------------------- Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The financial statements of the company and its subsidiaries and the report thereon of Arthur Andersen LLP, dated November 5, 19986, 2001 are included herein: - Report of Independent Public Accountants. - Consolidated Balance Sheets at September 30, 19982001 and 1997.2000. - Consolidated Statements of Income, Cash Flows and Shareholders' Equity for the years ended September 30, 1998, 1997, 1996.2001, 2000, 1999. - Notes to Consolidated Financial Statements. 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To Griffon Corporation: We have audited the accompanying consolidated balance sheets of Griffon Corporation (a Delaware corporation) and subsidiaries as of September 30, 19982001 and 19972000 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1998.2001. These financial statements and the schedule referred to below are the responsibility of the Company'scompany's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted auditing standards.in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Griffon Corporation and subsidiaries as of September 30, 19982001 and 19972000 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 19982001 in conformity with accounting principles generally accepted in the United States. As explained more fully in Note 1 to the consolidated financial statements, in fiscal 2000 the company changed its method of accounting principles.for start-up costs to conform with Statement of Position 98-5. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements and schedules is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSENArthur Andersen LLP ARTHUR ANDERSEN LLP Roseland, New Jersey November 5, 19986, 2001 24 GRIFFON CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, 1998 1997 ------------ ----------------------------------------------- 2001 2000 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 19,326,00040,096,000 $ 15,414,000 Marketable securities --- 1,379,00026,616,000 Accounts receivable, less allowance for doubtful accounts of $7,476,000$10,572,000 in 19982001 and $6,627,000$9,494,000 in 19972000 (Note 1) 114,784,000 105,050,000146,425,000 144,259,000 Contract costs and recognized income not yet billed (Note 1) 47,324,000 40,465,00066,116,000 77,513,000 Inventories (Note 1) 104,517,000 88,123,00098,044,000 98,440,000 Prepaid expenses and other current assets 20,675,000 13,676,00018,148,000 18,891,000 ------------ ------------ Total current assets 306,626,000 264,107,000368,829,000 365,719,000 ------------ ------------ Property, Plant and Equipment, at cost, net of depreciation and amortization (Note 1) 132,214,000 77,080,000145,931,000 142,944,000 ------------ ------------ Other Assets: Costs in excess of fair value of net assets of businesses acquired, net (Note 1) 38,359,000 35,948,00060,232,000 62,463,000 Other 10,739,000 7,624,00010,001,000 10,900,000 ------------ ------------ 49,098,000 43,572,00070,233,000 73,363,000 ------------ ------------ $487,938,000 $384,759,000$584,993,000 $582,026,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt (Note 2) $ 9,414,0008,346,000 $ 5,229,00044,709,000 Accounts payable 62,542,000 50,634,00059,206,000 61,895,000 Accrued liabilities (Note 1) 63,178,000 65,760,000 Federal income72,537,000 59,489,000 Income taxes (Note 1) 3,010,000 7,477,00022,862,000 7,963,000 ------------ ------------ Total current liabilities 138,144,000 129,100,000162,951,000 174,056,000 ------------ ------------ Long-Term Debt (Note 2) 107,458,000 47,689,000108,615,000 125,916,000 ------------ ------------ Minority Interest and Other (Note 2) 12,247,000 6,165,00019,574,000 18,093,000 ------------ ------------ Commitments and Contingencies (Note 4) Shareholders' Equity (Note 3): Preferred stock, par value $.25 per share, authorized 3,000,000 shares, no shares issued --- --- Common stock, par value $.25 per share, authorized 85,000,000 shares, issued 31,706,36235,023,437 shares in 19982001 and 31,278,83031,749,199 shares in 1997 7,927,000 7,820,0002000 8,756,000 7,937,000 Capital in excess of par value 40,053,000 34,564,00079,761,000 42,167,000 Retained earnings 197,985,000 168,664,000 ------------ ------------ 245,965,000 211,048,000 Less-- Deferred compensation (2,053,000) (2,621,000)231,668,000 237,786,000 Treasury shares, at cost, 1,287,0022,284,802 common shares in 19982001 and 603,7002,068,002 common shares in 1997 (13,823,000) (6,622,000)2000 (19,230,000) (19,133,000) Accumulated other comprehensive income (Note 1) (4,573,000) (3,769,000) Deferred compensation (2,529,000) (1,027,000) ------------ ------------ Total shareholders' equity 230,089,000 201,805,000293,853,000 263,961,000 ------------ ------------ $487,938,000 $384,759,000$584,993,000 $582,026,000 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
25 GRIFFON CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998 1997 1996 ------------ ------------ ------------------------------------------------------------ 2001 2000 1999 -------------- -------------- -------------- Net sales $914,874,000 $770,227,000 $655,063,000$1,160,125,000 $1,118,386,000 $1,032,697,000 Cost of sales 685,230,000 571,132,000 489,460,000 ------------ ------------ ------------ 229,644,000 199,095,000 165,603,000849,436,000 833,404,000 783,505,000 -------------- -------------- -------------- 310,689,000 284,982,000 249,192,000 Selling, general and administrative expenses 180,211,000 144,663,000 118,085,000 ------------ ------------ ------------ 49,433,000 54,432,000 47,518,000 ------------ ------------ ------------(Note 1) 239,275,000 230,060,000 207,499,000 Restructuring charge (Note 1) --- --- 3,500,000 -------------- -------------- -------------- 71,414,000 54,922,000 38,193,000 -------------- -------------- -------------- Other income (expense): Interest expense (3,934,000) (3,475,000) (3,409,000)(11,065,000) (11,785,000) (7,871,000) Interest income 627,000 1,377,000 1,180,0001,959,000 1,092,000 864,000 Other, net 416,000 699,000 668,000 ------------ ------------ ------------ (2,891,000) (1,399,000) (1,561,000) ------------ ------------ ------------(581,000) (780,000) 895,000 -------------- -------------- -------------- (9,687,000) (11,473,000) (6,112,000) -------------- -------------- -------------- Income from continuing operations before income taxes 46,542,000 53,033,000 45,957,000 ------------ ------------ ------------61,727,000 43,449,000 32,081,000 -------------- -------------- -------------- Provision for income taxes (Note 1) 25,308,000 17,380,000 11,870,000 -------------- -------------- -------------- Income before minority interest and cumulative effect of a change in accounting principle 36,419,000 26,069,000 20,211,000 Minority interest (5,826,000) (1,189,000) --- -------------- -------------- -------------- Income before cumulative effect of a change in accounting principle 30,593,000 24,880,000 20,211,000 Cumulative effect of a change in accounting principle, net of income taxes (Note 1) --- (5,290,000) --- -------------- -------------- -------------- Net income $ 30,593,000 $ 19,590,000 $ 20,211,000 ============== ============== ============== Basic earnings per share of common stock (Note 1): State and foreign 4,027,000 3,102,000 2,663,000 Federal 13,194,000 16,767,000 15,227,000Income before cumulative effect of a change in accounting principle $.93 $.75 $.60 Cumulative effect of a change in accounting principle --- (.16) --- -------------- -------------- -------------- $.93 $.59 $.60 ============== ============== ============== Diluted earnings per share of common stock (Note 1): Income before cumulative effect of a change in accounting principle $.92 $.75 $.60 Cumulative effect of a change in accounting principle --- (.16) --- -------------- -------------- -------------- $.92 $.59 $.60 ============== ============== ============== The accompanying notes to consolidated financial statements are an integral part of these statements.
26 GRIFFON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, ------------------------------------------------ 2001 2000 1999 ------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 30,593,000 $ 19,590,000 $ 20,211,000 ------------ ------------ ------------ 17,221,000 19,869,000 17,890,000Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,204,000 23,703,000 23,013,000 Minority interest 5,826,000 1,189,000 --- Pension curtailment gain (3,156,000) --- --- Cumulative effect of a change in accounting principle --- 5,290,000 --- Provision for losses on accounts receivable 4,836,000 3,276,000 2,780,000 Deferred income taxes 4,268,000 (1,798,000) --- Non-cash asset write-downs from restructuring --- --- 2,150,000 Change in assets and liabilities: (Increase) decrease in accounts receivable and contract costs and recognized income not yet billed 4,767,000 (36,940,000) (22,727,000) (Increase) decrease in inventories 625,000 (1,045,000) 9,105,000 Increase in prepaid expenses and other assets (304,000) (2,433,000) (8,382,000) Increase (decrease) in accounts payable, accrued liabilities and income taxes payable 22,384,000 12,042,000 (12,854,000) Other changes, net 4,736,000 6,309,000 2,622,000 ------------ ------------ ------------ Income from continuing operations 29,321,000 33,164,000 28,067,000 ------------ ------------ ------------ Discontinued operations, net of income tax effect --- --- (5,244,000)Total adjustments 68,186,000 9,593,000 (4,293,000) ------------ ------------ ------------ Net income $ 29,321,000 $ 33,164,000 $ 22,823,000 ============ ============ ============ Basic earnings per share (Note 1): Incomecash provided by operating activities 98,779,000 29,183,000 15,918,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (26,678,000) (37,366,000) (27,697,000) Proceeds from continuing operations $ .96 $ 1.12 $ .93 Discontinued operationssale of product line --- --- (.18)4,300,000 Acquired businesses --- (19,841,000) (20,172,000) (Increase) decrease in equipment lease deposits 1,469,000 3,917,000 (1,051,000) Other, net (315,000) 4,271,000 79,000 ------------ ------------ ------------ Net income $ .96 $ 1.12 $ .75 ============ ============ ============ Diluted earnings per share (Note 1): Incomecash used in investing activities (25,524,000) (49,019,000) (44,541,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury shares (97,000) (4,585,000) (725,000) Proceeds from continuing operations $ .94 $ 1.06 $ .88 Discontinued operations --- --- (.16)issuance of long-term debt 1,406,000 26,585,000 38,629,000 Payments of long-term debt (52,052,000) (17,060,000) (10,107,000) Increase (decrease) in short-term borrowings (5,548,000) 22,540,000 3,214,000 Other, net (3,484,000) (2,270,000) (472,000) ------------ ------------ ------------ Net incomecash provided (used) by financing activities (59,775,000) 25,210,000 30,539,000 ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 13,480,000 5,374,000 1,916,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,616,000 21,242,000 19,326,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ .9440,096,000 $ 1.0626,616,000 $ .7221,242,000 ============ ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
GRIFFON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 1997 1996 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 29,321,000 $ 33,164,000 $ 22,823,000 Adjustments to reconcile net income ------------ ------------ ------------ to net cash provided by operating activities: Depreciation and amortization 16,255,000 11,452,000 10,317,000 Provision for losses on accounts receivable 1,907,000 1,312,000 1,166,000 Deferred income taxes (1,039,000) 2,942,000 (2,557,000) Loss from discontinued operations --- --- 8,244,000 Change in assets and liabilities: Increase in accounts receivable and contract costs and recognized income not yet billed (15,070,000) (15,750,000) (13,422,000) (Increase) decrease in inventories (14,058,000) (21,000) 8,741,000 (Increase) decrease in prepaid expenses and other assets (5,587,000) (7,120,000) 1,050,000 Increase in accounts payable, accrued liabilities and Federal income taxes 4,393,000 12,975,000 1,400,000 Other changes, net 4,677,000 2,321,000 (1,092,000) ------------ ------------ ------------ Total adjustments (8,522,000) 8,111,000 13,847,000 ------------ ------------ ------------ Net cash provided by operating activities 20,799,000 41,275,000 36,670,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in marketable securities 1,379,000 2,918,000 7,900,000 Acquisition of property, plant and equipment (48,002,000) (25,793,000) (9,359,000) Proceeds from sales of discontinued operations --- 10,518,000 --- Acquired businesses (26,445,000) (40,953,000) (23,148,000) (Increase) decrease in equipment lease deposits and other 2,142,000 (585,000) 2,180,000 ------------ ------------ ------------ Net cash used in investing activities (70,926,000) (53,895,000) (22,427,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury shares (5,580,000) (4,223,000) (21,727,000) Proceeds from issuance of long-term debt 60,600,000 41,183,000 34,000,000 Payments of long-term debt (1,062,000) (24,004,000) (16,537,000) Increase (decrease) in short-term borrowings 65,000 (3,968,000) (1,500,000) Other, net 16,000 1,200,000 (289,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities 54,039,000 10,188,000 (6,053,000) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,912,000 (2,432,000) 8,190,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,414,000 17,846,000 9,656,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,326,000 $ 15,414,000 $ 17,846,000 ============ ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
27 GRIFFON CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands) For the Years Ended September 30, 1998, 19972001, 2000 and 19961999
CAPITAL ACCUMULATED IN OTHER COMMON STOCK EXCESS OF RETAINED DEFERRED TREASURY SHARES COMPREHENSIVE DEFERRED COMPREHENSIVE SHARES PAR VALUE PAR VALUE EARNINGS COMPENSATION SHARES COST ---------- ----------- -----------INCOME COMPENSATION INCOME ------ --------- --------- -------- ------ ------- -------------- ------------ ------------ --------- ----------- Balances, September 30, 1995 31,081,499 $7,770,000 $52,149,000 $113,101,0001998 31,706,362 $7,927 $40,053 $197,985 1,287,002 $13,823 $ 424,000 162,796--- $ 1,277,0002,053 Foreign currency translation adjustment --- --- --- --- --- --- (631) --- $ (631) Minimum pension liability adjustment --- --- --- --- --- --- (443) --- (443) Net income --- --- --- 20,211 --- --- --- --- 20,211 ------- Comprehensive income (Note 1) --- --- --- --- --- --- --- --- $19,137 ======= Amortization of deferred compensation --- --- --- --- (345,000) --- --- Cash dividend on Second Preferred Stock, Series I (Note 3) --- --- --- (416,000) --- --- ---(634) Purchase of treasury shares (Note 3)--- --- --- --- 100,400 725 --- --- Exercise of stock options 19,400 5 156 --- --- --- --- --- 2,189,100 21,727,000 Exercise of stock options (Note 3) 148,750 37,000 364,000Other 9,587 2 1,023 --- --- --- --- Retirement of treasury shares (2,000,000) (500,000) (19,649,000)100 ---------- ------- ------- ------- --------- ------- ------- ------- Balances, September 30, 1999 31,735,349 7,934 41,232 218,196 1,387,402 14,548 (1,074) 1,519 Foreign currency translation adjustment --- --- (2,017,000) (20,153,000) Other 23,599 6,000 (100,000) --- 100,000 --- --- --- --- (2,582) --- $ (2,582) Minimum pension liability adjustment --- --- --- --- --- --- (113) --- (113) Net income --- --- --- 22,823,000 --- --- --- ---------- ---------- ----------- ------------ ---------- ---------- ------------ Balances, September 30, 1996 29,253,848 7,313,000 32,764,000 135,508,000 179,000 334,896 2,851,000 ESOP purchase of Common Stock (Note 3)19,590 --- --- --- --- 3,000,00019,590 ------- Comprehensive income (Note 1) --- --- --- --- --- --- --- --- $16,895 ======= Amortization of deferred compensation --- --- --- --- (658,000) --- --- Conversion--- (592) Purchase of Second Preferred Stock, Series I (Note 3) 1,573,679 394,000treasury shares --- --- --- --- 680,600 4,585 --- --- Other 13,850 3 935 --- --- --- --- 100 ---------- ------- ------- ------- --------- ------- ------- ------- Balances, September 30, 2000 31,749,199 7,937 42,167 237,786 2,068,002 19,133 (3,769) 1,027 Foreign currency translation adjustment --- --- --- --- --- Purchase of treasury shares (Note 3)--- 999 --- $ 999 Minimum pension liability adjustment --- --- --- --- --- 313,969 4,223,000 Exercise of stock options (Note 3) 443,627 111,000 2,094,000 --- (1,803) --- --- --- Retirement of treasury shares --- --- (441,000) --- --- (45,165) (452,000) Other 7,676 2,000 147,000 (8,000) 100,000 --- ---(1,803) Net income --- --- --- 33,164,00030,593 --- --- --- ---------- ---------- ----------- ------------ ---------- ---------- ------------ Balances, September 30, 1997 31,278,830 7,820,000 34,564,000 168,664,000 2,621,000 603,700 6,622,000--- 30,593 -------- Comprehensive income (Note 1) --- --- --- --- --- --- --- --- $ 29,789 ======== Amortization of deferred compensation --- --- --- --- (668,000) --- --- Purchase--- (598) ESOP purchase of treasury shares (Note 3)Common Stock --- --- --- --- --- 562,700 5,580,000--- --- 2,000 Purchase of treasury shares --- --- --- --- 10,000 97 --- --- Exercise of stock options (Note 3) 426,786 107,000 4,427,00077,000 19 627 --- --- --- --- Retirement of treasury shares (5,717) (2,000) (96,000) --- --- (5,717) (98,000) Other 6,463 2,000 1,158,000 --- 100,000 126,319 1,719,000 Net income10% stock dividend 3,183,028 796 35,904 (36,711) 206,800 --- --- --- 29,321,000Other 14,210 4 1,063 --- --- --- --- 100 ---------- ---------- ----------- ------------ ---------- ---------- ------------------- ------- ------- --------- ------- ------- ------- Balances, September 30, 1998 31,706,362 $7,927,000 $40,053,000 $197,985,000 $2,053,000 1,287,002 $13,823,0002001 35,023,437 $8,756 $79,761 $231,668 2,284,802 $19,230 $(4,573) $2,529 ========== ========== =========== ============ ================= ======= ======== ========= ============ The accompanying notes to consolidated financial statements are an integral part of these statements. ======= ======== ========
28 GRIFFON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consolidation The consolidated financial statements include the accounts of Griffon Corporation and all subsidiaries. All significant intercompany items have been eliminated in consolidation. 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 amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash flows, investments and credit risk The company considers all highly liquid debt instruments purchased with aan initial maturity of three months or less to be cash equivalents. Cash payments for interest were approximately $5,353,000, $3,325,000$13,577,000, $11,853,000, and $3,372,000$9,141,000 in 1998, 19972001, 2000 and 1996,1999, respectively. A substantial portion of the company's trade receivables are from customers of the building products segmentgarage doors and installation services segments whose financial condition is dependent on the construction and related retail sectors of the economy. Comprehensive income Comprehensive income is presented in the consolidated statements of shareholders' equity and consists of net income and other items of comprehensive income such as minimum pension liability adjustments and foreign currency translation adjustments. The components of accumulated other comprehensive income at September 30, 2001 were a foreign currency translation adjustment of $2,214,000 and a minimum pension liability adjustment of $2,359,000. Foreign currency translation The financial statements of all foreign subsidiaries were prepared in their respective local currencies and translated into U.S. Dollars based on the current exchange rate at the end of the period for the balance sheet and average exchange rates for results of operations. Adjustments resulting from translation of foreign currency financial statementsRevenue recognition Sales are not material. Accounting for long-term contractsgenerally recorded as products are shipped and title has passed to customers. The company records sales and gross profits on its long-term contracts on a percentage-of-completion basis. The company determines sales and gross profits by (1) relating costs incurred to current estimates of total manufacturing costs of such contracts or (2) based upon a unit of shipment basis. General and administrative expenses are expensed as incurred. Revisions in estimated profits are made in the period in which the circumstances requiring the revision become known. Provisions are made currently for anticipated losses on uncompleted contracts. 29 "Contract costs and recognized income not yet billed" consists of recoverable costs and accrued profit on long-term contracts for which billings had not been presented to the customers because the amounts were not billable at the balance sheet date. Inventories Inventories, stated at the lower of cost (first-in, first-out or average) or market, include material, labor and manufacturing overhead costs and are comprised of the following:
SEPTEMBER 30, 1998 1997 -------------------------------------- 2001 2000 ----------- ----------- Finished goods $ 58,176,000 $43,722,000$53,613,000 $58,390,000 Work in process 27,011,000 21,228,00027,809,000 20,842,000 Raw materials and supplies 19,330,000 23,173,000 ------------16,622,000 19,208,000 ----------- $104,517,000 $88,123,000 ============----------- $98,044,000 $98,440,000 =========== ===========
Property, plant and equipment Depreciation of property, plant and equipment is provided primarily on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease or life of the improvement, whichever is shorter. Property, plant and equipment consists of the following:
SEPTEMBER 30, 1998 1997 ------------ -------------------------------------- 2001 2000 ----------- ----------- Land, buildings and building improvements $ 31,359,00045,166,000 $ 28,568,00043,648,000 Machinery and equipment 153,066,000 93,461,000193,371,000 175,829,000 Leasehold improvements 10,518,000 8,724,00011,625,000 11,000,000 ------------ ------------ 194,943,000 130,753,000 Less--Accumulated250,162,000 230,477,000 Less-Accumulated depreciation and amortization 62,729,000 53,673,000104,231,000 87,533,000 ------------ ------------ $132,214,000 $ 77,080,000$145,931,000 $142,944,000 ============ ============
Acquisitions and costs in excess of fair value of net assets of businesses acquired ("Goodwill") In July 1998June 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS 141 addresses financial accounting and reporting for business combinations, requiring the use of the purchase method of accounting. SFAS 142 addresses accounting and reporting for acquired goodwill. It eliminates the previous requirement to amortize goodwill and establishes new requirements with respect to the recognition and valuation of goodwill. The company will adopt these standards for fiscal 2002. Amortization of goodwill has been approximately $2 million per year. The company is in the process of determining what impact adoption of the new standard will have on the carrying value of existing goodwill. Preliminary indications are that all or a substantial portion of goodwill attributable to the company's installation services segment, approximately $26,700,000 at September 30, 2001, may be impaired pursuant to the new requirements of SFAS 142. The new standard requires recognizing any impairment which arises at the date of adoption as a cumulative effect of a change in accounting principle in the first quarter of fiscal 2002. In fiscal 2000 the company acquired Bohme Verpackungsfolien GmbH & Co., a German plastic packaging manufacturersearch and weather radar business for approximately $15,000,000 and an operation which installs residential garage doors and fireplaces for approximately $2,500,000. 30 In February 1999 the company acquired an operation with annual sales of approximately $35,000,000.$50,000,000 that sells and installs a range of specialty products to the residential construction market. The purchase price ofwas approximately $28,000,000 was$20,000,000. The above acquisitions, substantially financed by borrowings under a subsidiary's bank credit agreement. In July 1997 the company acquired Holmes-Hally Industries, a manufacturer and installer of residential garage doors and related hardware with annual sales of approximately $80,000,000. The purchase price of approximately $35,000,000 was financed through borrowings, under existing lines of credit. Also acquired during 1997 in cash transactions were several other companies involved in the installation of building products. The above acquisitions have been accounted for as purchases and resulted in an increaseincreases in goodwill of $3,883,000$13,977,000 in 19982000 and $14,158,000$14,486,000 in 1997.1999. Goodwill is beinghas been amortized on a straight-line basis over a period of twenty to forty years. At September 30, 19982001 and 1997,2000, accumulated amortization of goodwill was $7,505,000$13,840,000 and $6,032,000,$11,413,000, respectively. The operating results of acquired businesses have been included in the consolidated statements of income since the dates of acquisition. Income taxes The provision for income taxes included in continuing operations is comprised of the following:
1998 1997 19962001 2000 1999 ----------- --------------------- ----------- Current $18,260,000 $16,927,000 $17,447,000$21,040,000 $19,178,000 $11,870,000 Deferred (1,039,000) 2,942,000 443,0004,268,000 (1,798,000) --- ----------- ----------- ----------- $17,221,000 $19,869,000 $17,890,000$25,308,000 $17,380,000 $11,870,000 =========== =========== ===========
2001 2000 1999 ----------- ----------- ----------- Federal $13,114,000 $ 8,585,000 $ 9,632,000 Foreign 9,939,000 6,610,000 191,000 State and local 2,255,000 2,185,000 2,047,000 ----------- ----------- ----------- $25,308,000 $17,380,000 $11,870,000 =========== =========== ===========
The components of income before income taxes are as follows:
2001 2000 1999 ----------- ----------- ----------- Domestic $38,022,000 $27,764,000 $31,646,000 Foreign 23,705,000 15,685,000 435,000 ----------- ----------- ----------- $61,727,000 $43,449,000 $32,081,000 =========== =========== ===========
The deferred taxes result primarily from differences in the reporting of depreciation, the allowance for doubtful accounts and other nondeductible accruals. Cash payments for income taxes were $19,670,000, $15,328,000$10,350,000, $10,295,000 and $16,525,000$16,938,000 in 1998, 19972001, 2000 and 1996,1999, respectively. The following table indicates the significant elements contributing to the difference between the U.S. Federal statutory tax rate and the company's effective tax rate:
1998 1997 19962001 2000 1999 ---- ---- ---- U.S. Federal statutory tax rate 35.0% 35.0% 35.0% State and foreign income taxes 5.6 3.8 3.85.0 5.7 4.4 Other (3.6) (1.3) .11.0 (.7) (2.4) ---- ---- ---- Effective tax rate 41.0% 40.0% 37.0% 37.5% 38.9% ==== ==== ====
31 Research and development costs and shipping and handling costs Research and development costs not recoverable under contractual arrangements are charged to expense as incurred. Approximately $11,900,000, $7,700,000$13,790,000, $10,700,000 and $5,500,000$8,900,000 in 1998, 19972001, 2000 and 1996,1999, respectively, was incurred on such research and development. Selling, general and administrative expenses include shipping and handling costs of $34,400,000 in 2001, $37,200,000 in 2000 and $37,100,000 in 1999. Accrued liabilities At September 30, 19982001 and 1997,2000, accrued liabilities included $17,960,000$27,889,000 and $17,845,000,$20,532,000, respectively, for payroll and other employee benefits. Earnings per share Statement of Financial Accounting Standards No. 128, "Earnings per Share", which became effective for fiscal 1998, establishes new standards for computing and presenting earnings(EPS) Earnings per share (EPS). The new standard requires the presentation of basic EPS and diluted EPSamounts and the restatementweighted average number of previously reported EPS amounts.shares used in their calculation have been restated to reflect the effect of a fiscal 2001 10% Common Stock dividend. (See Note 3) Basic EPS is calculated by dividing income available to common shareholders by the weighted average number of shares of common stockCommon Stock outstanding during the period. Income available to common shareholders used in determining basic EPS ($29,321,000 in 1998, $33,157,000 in 1997 and $27,651,000 in 1996) reflects deductions for Preferred Stock dividends ($7,000 in 1997 and $416,000 in 1996). The weighted average number of shares of common stockCommon Stock used in determining basic EPS was 30,553,00032,965,000 in 1998, 29,664,0002001, 33,079,000 in 19972000 and 29,728,00033,411,000 in 1996.1999. Diluted EPS is calculated by dividing income available to common shareholders adjusted to add back dividends or interest on convertible securities, by the weighted average number of shares of common stockCommon Stock outstanding plus additional common shares that could be issued in connection with potentially dilutive securities. Income available to common shareholders used in determining diluted EPS was $29,321,000 in 1998, $33,164,000 in 1997 and $28,067,000 in 1996. The weighted average number of shares of common stockCommon Stock used in determining diluted EPS was 31,316,00033,406,000 in 1998, 31,231,0002001, 33,268,000 in 19972000 and 31,915,00033,606,000 in 19961999 and reflects additional shares in connection with convertible Preferred Stock (642,000 shares in 1997 and 1,663,000 shares in 1996) and stock option and other stock-based compensation plans (763,000plans. Options to purchase approximately 1,790,000, 4,587,000 and 3,396,000, shares were not included in 1998, 925,000 sharesthe computation of diluted earnings per share for the years 2001, 2000 and 1999, respectively, because the effects would be anti- dilutive. Pension curtailment gain Pursuant to the provisions of Statement of Financial Accounting Standards No. 88, "Accounting for Settlements and Curtailments of Defined Benefits Pension Plans and for Termination Benefits," modifications to certain employee benefits and related benefit freezes resulted in 1997, and 524,000 sharesthe recognition of a pre-tax curtailment gain of $3,156,000 in 1996).the fiscal year ended September 30, 2001. Start-up costs In 1998,Effective October 1, 1999 the company adopted the provisions of the American Institute of Certified Public Accountants issuedAccountants' Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-UpStart-up Activities." SOP 98-5 which becomes effective for the fiscal year ended September 30, 2000, sets accounting standards in connection with accounting and financial reporting related to costs of start-up activities. This SOP requires that, at the effective date of adoption, costs of start-up activities previously capitalized be reportedwritten-off as a cumulative effect of a change in accounting principle, and further requires that after adoption, such costs incurred subsequentare to adoption be expensed. Management anticipatesexpensed as incurred. Consequently, in the first quarter of fiscal 2000, the company's 60%-owned joint venture wrote off costs that adoptionwere previously capitalized in connection with the start-up of SOP 98-5 will not havethe venture and the implementation of additional production capacity. The cumulative effect of this change in accounting principle was $5,290,000 (net of $3,784,000 income tax effect). The minority interest's share of the net charge was $2,116,000 and is included as an offsetting credit in "Minority interest" in the Consolidated Statement of Income for the year ended September 30, 2000. 32 Restructuring charge and sale of product line In March 1999 the company recorded a material effect on financial positionrestructuring charge aggregating $3,500,000 in connection with the closing of a garage door manufacturing facility in order to streamline operations and improve efficiency. The charge consists of the following: Non-cash asset write-downs $2,150,000 Employee severance and related benefits 900,000 Lease and related costs 450,000 ---------- $3,500,000 ==========
In the last half of 1998 and continuing into 1999 the company consolidated or resultsclosed several garage door manufacturing or distribution facilities. Also, in March 1999 the company completed the sale, at approximately book value, of operations.a peripheral product line, which was operating at a loss. As a result of these actions, facilities employed in the garage door operation were reduced by approximately 400,000 square feet and the workforce was reduced by 244 employees, including approximately 100,000 square feet and 100 manufacturing employees in connection with the March 1999 plant closure. The cash expenditures included in the restructuring charge were paid as of September 30, 2000. 2. NOTES PAYABLE AND LONG-TERM DEBT: TheIn October 2001 the company hasand a loansubsidiary entered into a six-year $160,000,000 credit agreement with two banks whichseveral banks. This agreement provides for up to $80,000,000 of revolving credit through 2000,for four years after which outstanding borrowingsthe credit facility may be converted, at the option of the company, into a five-year term loan.reducing revolving credit for two years. Borrowings under the agreement bear interest at rates (7.2%(5.4% as of September 30, 1998)the date the agreement was entered into) based upon LIBOR or at the prime rate, and are secured by the capital stock of certain of the company's subsidiaries.a subsidiary. This credit facility replaced an existing bank agreement was utilized to finance acquisitions (see Note 1) and to finance purchasescertain short-term lines of the company's Common Stock. As ofcredit. At September 30, 1998, $50,500,0002001, $79,600,000 was outstanding under this agreement.these facilities, and the weighted average interest rate was 5.8%. In April 1998June 2001 the company's German joint ventureEuropean operations entered into new bank agreements replacing then existing financing arrangements. The new agreements include a credit agreement with a bank to finance new production lines. The agreement provides for borrowingsterm loan of approximately $28,000,000, payable in installments$13 million with maturities through 2001,2004 and bears interest at rates (4.5%revolving credits for up to approximately $20 million. Outstanding borrowings ($16,406,000 as of September 30, 1998) based upon LIBOR. As of September 30, 1998 approximately $22,460,000 was outstanding2001) under the agreement. In connection with an acquisition in July 1998 (see Note 1), a subsidiary of the company entered into a credit agreement with a bank for borrowings of approximately $20,000,000, payable in installments through 2005. Outstanding borrowings under the agreementthese agreements bear interest at rates (4.4% as of(5.2% at September 30, 1998)2001) based upon LIBOR.the prime rate or Euribor. The balance of the company's long-term debt outstanding at September 30, 19982001 relates primarily to real estate mortgages and industrial revenue bond financing, with interest rates ranging from 8.5%2.5% to 8.9% and maturities through 2006.2014. 33 The following are the maturities of long-term debt outstanding at September 30, 19982001, after reflecting the October 2001 bank agreement described above, for each of the succeeding five years: 1999 $ 6,651,000 2000 10,622,000 2001 27,067,000 2002 20,037,000$3,812,000 2003 13,601,0005,730,000 2004 5,933,000 2005 8,488,000 2006 5,351,000
3. SHAREHOLDERS' EQUITY: During 1997On August 6, 2001 the company called for redemption its Second Preferred Stock at the redemption pricecompany's Board of $10.00 per share plus accrued and unpaid dividends. Holders of 1,524,429 shares of Second Preferred Stock converted their shares into an equal number of shares ofDirectors authorized a 10 percent Common Stock and 45,165 shares were redeemed for cash. The company has an Employee Stock Ownership Plan ("ESOP") which covers mostdividend that was paid on September 4, 2001 to holders of the company's nonunion employees. In 1997 the ESOP borrowed $3,000,000 which was used to purchase equity securities of the company. The outstanding balance of the loan is guaranteed by the company and is reflected as a liability in the consolidated balance sheet with a like amount of deferred compensation recorded as a reduction of shareholders' equity.record on August 20, 2001. The company has stock option plans under which options for an aggregate of 5,850,0008,250,000 shares of Common Stock may be granted. As of September 30, 19982001 options for 1,085,5001,017,775 shares remain available for future grants. The plans provide for the granting of options at an exercise price of not less than 100% of the fair market value per share at date of grant. Options generally expire ten years after date of grant and become exercisable in installments as determined by the Board of Directors. Transactions under the plans are as follows:
NUMBER OF SHARES WEIGHTED AVERAGE OF SHARESUNDER OPTION EXERCISE PRICE --------- ---------------------------- ----------------- Outstanding at September 30, 1995 2,296,7501998 5,380,650 $10.05 Granted 1,240,250 $ 6.60 Granted 618,0007.62 Exercised (21,340) $ 8.84 Exercised (148,750)7.54 Terminated (896,610) $ 2.70 Terminated (22,000) $ 8.137.25 --------- Outstanding at September 30, 1996 2,744,0001999 5,702,950 $ 7.309.97 Granted 776,500 $13.44 Exercised (217,214)759,000 $ 7.366.47 Terminated (3,250)(211,475) $ 8.049.17 --------- Outstanding at September 30, 1997 3,300,0362000 6,250,475 $ 8.749.57 Granted 2,061,500 $13.351,158,850 $ 7.58 Exercised (426,786)(84,700) $ 4.067.63 Terminated (43,250) $13.10(85,250) $ 8.91 --------- Outstanding at September 30, 1998 4,891,500 $11.052001 7,239,375 $ 9.28 =========
34 At September 30, 19982001 option groups outstanding and exercisable are as follows:
Outstanding Options ------------------------------------------------------------------------------------- Weighted Weighted Average Average Range of Number of Remaining Exercise Exercise PricePrices Options Life Price --------------- ------------------ --------- --------- ----------------- $11.125$9.89 to $15.75 2,767,000 9.2$14.32 2,961,200 6.3 years $13.37 $6.625$12.05 $5.45 to $9.375 2,124,500 6.2 8.03$ 8.52 4,278,175 6.7 7.21
Exercisable Options ------------------------------------------------------------------------------------- Weighted Average Range of Number of Exercise Exercise PricePrices Options Price --------------- ----------------- --------- ----------------- $13.50 363,250 $13.50 $6.625$9.89 to $9.375 2,118,500 8.03$14.32 2,961,200 $12.05 $5.45 to $ 8.52 2,830,988 7.13
Statement of Financial Accounting Standards No. 123, "Accounting for Stock- BasedStock-Based Compensation", became effective for the fiscal year beginning October 1, 1996, and permits an entity to continue to account for employee stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued to Employees", or adopt a fair value based method of accounting for such compensation. The company has elected to continue to account for stock-based compensation under Opinion No. 25. Accordingly, no compensation expense has been recognized in connection with options granted. Had compensation expense for options granted been determined based on the fair value at the date of grant in accordance with Statement No. 123, the company's net income and earnings per share would have been as follows:
1998 1997 1996 ---- ---- ----2001 2000 1999 ----------- ----------- ----------- Net income As reported $29,321,000 $33,164,000 $22,823,000$30,593,000 $19,590,000 $20,211,000 Pro forma 24,902,000 31,099,000 22,209,00028,354,000 16,214,000 15,071,000 Earnings per share As reported - Basic $.96 $1.12 $.75$.93 $.59 $.60 Diluted .94 1.06 .72.92 .59 .60 Pro forma - Basic $.82 $1.05 $.73$.86 $.49 $.45 Diluted .80 1.00 .70.85 .49 .45
The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair values of options granted in fiscal 1998, 19972001, 2000 and 19961999 were $6.52, $6.96$3.98, $3.36 and $4.58,$3.89, respectively, based upon the following weighted average assumptions: expected volatility (.350(.338 in 1998, .3722001, .324 in 19972000 and .397.321 in 1996)1999), risk-free interest rate (5.67%(5.57% in 1998, 6.40%2001, 6.24% in 19972000 and 5.57%5.67% in 1996)1999), expected life (7 years in 1998, 19972001, 2000 and 1996)1999), and expected dividend yield (0% in 1998, 19972001, 2000 and 1996).1999) 35 The company has an Outside Director Stock Award Plan (the "Outside Director Plan"), which was approved by the shareholders in 1994, under which 300,000330,000 shares may be issued to non-employee directors. Annually, each eligible director is awarded shares of the company's Common Stock having a value of $10,000 which vests over a three-year period. For shares issued under the Outside Director Plan, the fair market value of the shares at the date of issuance will beis amortized to compensation expense over the vesting period. The related deferred compensation has been reflected as a reduction of shareholders' equity. In 1998, 19972001, 2000 and 1996, 6,660, 7,6901999, 15,631, 15,235 and 10,74010,681 shares, respectively, were issued under the Outside Director Plan. As of September 30, 1998,2001, a total of approximately 6,700,0009,043,000 shares of the company's authorized Common Stock were reserved for issuance primarily in connection with stock option plans. The company has a shareholder rights plan which provides for one right to be attached to each share of Common Stock. The rights are currently not exercisable or transferable apart from the Common Stock, and have no voting power. Under certain circumstances, each right entitles the holder to purchase, for $34, one one-thousandth11 ten-thousandths of a share of a new series of participating preferred stock, which is substantially equivalent to one share of Common Stock. These rights would become exercisable if a person or group acquires 10% or more of the company's Common Stock or announces a tender offer which would increase the person's or group's beneficial ownership to 10% or more of the company's Common Stock, subject to certain exceptions. After a person or group acquires 10% or more of the company's Common Stock, each right (other than those held by the acquiring party) will entitle the holder to purchase Common Stock having a market price of two times the exercise price. If the company is acquired in a merger or other business combination, each exercisable right entitles the holder to purchase common stockCommon Stock of the acquiring company or an affiliate having a market price of two times the exercise price of the right. In certain events the Board of Directors may exchange each right (other than those held by an acquiring party) for one share of the company's Common Stock or one one-thousandth11 ten-thousandths of a share of a new series of participating preferred stock. The rights expire on May 9, 2006 and can be redeemed at $.01 per right at any time prior to becoming exercisable. 4. COMMITMENTS AND CONTINGENCIES: The company and its subsidiaries rent real property and equipment under operating leases expiring at various dates. Most of the real property leases have escalation clauses related to increases in real property taxes. Future minimum payments under noncancellable operating leases consisted of the following at September 30, 1998:2001:
1999 $20,600,000 2000 14,400,000 2001 9,700,000 2002 5,200,000$19,897,000 2003 3,400,00015,153,000 2004 11,629,000 2005 8,612,000 2006 4,949,000 Later years 5,700,0002,767,000
36 Rent expense for all operating leases, net of subleases, totaledtotalled approximately $24,500,000, $19,800,000$31,800,000, $29,900,000 and $19,000,000$27,400,000 in 1998, 19972001, 2000 and 1996,1999, respectively. The company is subject to various laws and regulations concerning the environment and is currently participating in proceedings under these laws involving sites formerly owned or occupied by the company. These proceedings are at a preliminary stage, and it is impossible to estimate with any certainty the amount of the liability, if any, of the company, or the total cost of remediation and the timing and extent of remedial actions which may ultimately be required by governmental authorities. However, management believes, based on facts presently known to it, that the outcome of such proceedings will not have a material adverse effect on the company's consolidated financial position or results of operations. 5. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): Quarterly results of operations for the years ended September 30, 19982001 and 19972000 are as follows:
QUARTERS ENDED ---------------------------------------------------------- SEPTEMBER-------------------------------------------------------------------------------- September 30, JUNEJune 30, MARCHMarch 31, DECEMBERDecember 31, 1998 1998 1998 1997 ------------ ------------ ------------2001 2001 2001 2000 ------------- ------------- ------------- ------------- Net sales $256,577,000 $229,407,000 $199,859,000 $229,031,000$318,357,000 $289,384,000 $264,189,000 $288,195,000 Gross profit 65,847,000 57,113,000 48,761,000 57,923,00092,253,000 75,916,000 67,319,000 75,201,000 Net income 10,935,000 6,753,000 3,118,000 8,515,00012,382,000 7,731,000 2,977,000 7,503,000 Earnings per share of common stock: Basic $.36 $.22 $.10 $.28$.38 $.23 $.09 $.23 Diluted $.35 $.22 $.10 $.27$.37 $.23 $.09 $.23 QUARTERS ENDED ---------------------------------------------------------- SEPTEMBER-------------------------------------------------------------------------------- September 30, JUNEJune 30, MARCHMarch 31, DECEMBERDecember 31, 1997 1997 1997 1996 ------------ ------------ ------------2000 2000 2000 1999 ------------- ------------- ------------- ------------- Net sales $234,556,000 $193,120,000 $160,807,000 $181,744,000$300,017,000 $278,719,000 $258,889,000 $280,761,000 Gross profit 62,015,000 50,810,000 40,287,000 45,983,00078,301,000 71,380,000 63,449,000 71,852,000 Net income 12,379,000 8,882,000 4,383,000 7,520,0007,597,000 6,248,000 1,303,000 4,442,000 Earnings per share of common stock: Basic $.41 $.29 $.15 $.26$.23 $.19 $.04 $.13 Diluted $.40 $.29 $.14 $.24$.23 $.19 $.04 $.13
Earnings per share are computed independently for each of the quarters presented, on the basis described in Note 1. The sumNet income for the quarter ended March 31, 2001 includes a $3,156,000 pre-tax pension curtailment gain (See Note 1). Net income for the quarter ended December 31, 1999 includes a charge of $5,290,000 for the quarters may not be equal to the full year earnings per share amounts.cumulative effect of a change in accounting principle (see Note 1). 37 6. BUSINESS SEGMENTS: The company's principalreportable business segments are as follows -- Building Products- Garage Doors (manufacture and sale of residential and commercial/industrial garage doors, and related products); Installation Services (sale and installation of building products primarily for new construction, such as garage doors, garage door openers, manufactured fireplaces and other building products)surrounds, and cabinets); Electronic Information and Communication Systems (communication and information systems for government and commercial markets); and Specialty Plastic Films (manufacture and sale of plastic films and film laminates for baby diapers, adult incontinence care products, and disposable surgical and patient care products)products and plastic packaging). The company's reportable segments are distinguished from each other by types of products and services offered, classes of customers, production and distribution methods, and separate management. The company evaluates performance and allocates resources based on operating results before interest income or expense, income taxes and certain nonrecurring items of income or expense. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales are based on prices negotiated between the segments, and intersegment sales and profits are not eliminated in evaluating performance of a segment. Information on the company's business segments is as follows:
SEPTEMBER 30, 1998 1997 1996Electronic Information and Specialty Garage Installation Communication Plastic Doors Services Systems Films Totals ------------ -------- ------- ----- ------ Revenues from external customers - 2001 $402,788,000 $268,455,000 $191,782,000 $297,100,000 $1,160,125,000 2000 401,787,000 267,932,000 186,592,000 262,075,000 1,118,386,000 1999 418,395,000 239,737,000 177,091,000 197,474,000 1,032,697,000 Intersegment revenues - 2001 $ 25,813,000 $ 303,000 $ --- $ --- $ 26,116,000 2000 29,426,000 466,000 --- --- 29,892,000 1999 29,318,000 932,000 --- --- 30,250,000 Segment profit - 2001 $ 18,223,000 $ 6,099,000 $ 16,076,000 $ 41,772,000 $ 82,170,000 2000 17,002,000 6,842,000 19,097,000 20,315,000 63,256,000 1999 27,933,000 6,518,000 15,616,000 550,000 50,617,000 Segment assets - 2001 $165,483,000 $ 89,684,000 $157,590,000 $120,821,000 $ 533,578,000 2000 171,861,000 92,282,000 164,602,000 113,320,000 542,065,000 1999 158,747,000 89,231,000 124,766,000 124,760,000 497,504,000 Segment capital expenditures - 2001 $ 6,444,000 $ 3,012,000 $ 6,653,000 $ 10,519,000 $ 26,628,000 2000 16,937,000 730,000 3,266,000 16,298,000 37,231,000 1999 15,804,000 797,000 2,728,000 8,254,000 27,583,000 Depreciation and amortization expense - 2001 $ 7,520,000 $ 1,995,000 $ 4,052,000 $ 10,161,000 $ 23,728,000 2000 7,338,000 2,293,000 3,579,000 9,978,000 23,188,000 1999 6,562,000 1,884,000 3,047,000 11,000,000 22,493,000
38 Following are reconciliations of segment profit, assets, capital expenditures and depreciation and amortization expense to amounts reported in the consolidated financial statements:
2001 2000 1999 ------------ ------------ ------------ Net sales -- Building products $590,507,000 $479,211,000 $404,781,000 Electronic information and communication systems 156,864,000 127,298,000 122,880,000 Specialty plastic films 167,503,000 163,718,000 127,402,000Profit - Profit for all segments $ 82,170,000 $ 63,256,000 $ 50,617,000 Unallocated amounts (11,337,000) (9,114,000) (8,029,000) Restructuring charge (Note 1) --- --- (3,500,000) Interest expense, net (9,106,000) (10,693,000) (7,007,000) ------------ ------------ ------------ $914,874,000 $770,227,000 $655,063,000Income before income taxes $ 61,727,000 $ 43,449,000 $ 32,081,000 ============ ============ ============ Operating income -- Building products $ 34,956,000 $ 40,708,000 $ 33,051,000 Electronic information and communication systems 13,425,000 11,785,000 10,959,000 Specialty plastic films 6,953,000 8,541,000 9,035,000Assets - Total for all segments $533,578,000 $542,065,000 $497,504,000 Unallocated amounts 54,305,000 42,589,000 38,219,000 Intersegment eliminations (2,890,000) (2,628,000) (2,283,000) ------------ ------------ ------------ Total operating income 55,334,000 61,034,000 53,045,000 General corporate expenses (5,485,000) (5,903,000) (4,859,000) Interest expense, net (3,307,000) (2,098,000) (2,229,000) ------------ ------------ ------------ Income from continuing operations before income taxes $ 46,542,000 $ 53,033,000 $ 45,957,000 ============ ============ ============ Identifiableconsolidated assets -- Building products $219,038,000 $201,365,000 $136,429,000 Electronic information and communication systems 114,723,000 104,059,000 97,781,000 Specialty plastic films 136,744,000 63,686,000 47,370,000 Corporate 17,433,000 15,649,000 29,589,000 ------------ ------------ ------------ $487,938,000 $384,759,000 $311,169,000$584,993,000 $582,026,000 $533,440,000 ============ ============ ============ Capital expenditures -- Building products- Total for all segments $ 15,274,00026,628,000 $ 8,709,00037,231,000 $ 3,962,000 Electronic information and communication systems 3,889,000 3,817,000 2,082,000 Specialty plastic films 28,765,000 13,247,000 3,160,000 Corporate 74,000 20,000 155,00027,583,000 Unallocated amounts 50,000 135,000 114,000 ------------ ------------ ------------ Total consolidated capital expenditures $ 48,002,00026,678,000 $ 25,793,00037,366,000 $ 9,359,00027,697,000 ============ ============ ============ Depreciation and amortization -- Building productsexpense - Total for all segments $ 7,577,00023,728,000 $ 5,986,00023,188,000 $ 4,964,000 Electronic information and communication systems 2,698,000 2,222,000 2,402,000 Specialty plastic films 5,466,000 2,680,000 2,461,000 Corporate 514,000 564,000 490,00022,493,000 Unallocated amounts 476,000 515,000 520,000 ------------ ------------ ------------ Total consolidated depreciation and amortization $ 16,255,00024,204,000 $ 11,452,00023,703,000 $ 10,317,00023,013,000 ============ ============ ============ ============Revenues, based on the customers' locations, and property, plant and equipment attributed to the United States and all other countries are as follows: 2001 2000 1999 ---- ---- ---- Revenues by geographic area - United States $ 921,046,000 $ 879,729,000 $ 834,057,000 Germany 51,179,000 72,266,000 64,666,000 United Kingdom 36,247,000 41,487,000 44,697,000 Canada 24,925,000 23,431,000 12,804,000 Poland 27,494,000 3,319,000 2,221,000 All other countries 99,234,000 98,154,000 74,252,000 -------------- --------------- -------------- Consolidated net sales $1,160,125,000 $1,118,386,000 $1,032,697,000 ============== ============== ============== Property,plant and equipment by geographic area - United States $ 108,291,000 $ 107,266,000 $ 90,874,000 Germany 37,640,000 35,678,000 44,008,000 -------------- --------------- -------------- Consolidated property, plant and equipment $ 145,931,000 $ 142,944,000 $ 134,882,000 ============== ============== ==============
Sales to a customer of the specialty plastic films segment were approximately $209,000,000 in 2001, $182,000,000 in 2000 and $115,000,000 in 1999. Sales to the United States Government and its agencies, either as a prime contractor or subcontractor, aggregated approximately $79,000,000 for 1998, $65,000,000 for 1997$100,000,000 in 2001, $91,000,000 in 2000 and $69,000,000 for 1996,$86,000,000 in 1999, all of which are included in the electronic information and communication systems segment. Sales to a customer of the specialty plastic films segment were approximately 10%, 11% and 7% of consolidated net sales in 1998, 1997 and 1996, respectively. Sales between business segments are not material. In computing operating income, none of the following have been added or deducted --Unallocated amounts include general corporate expenses net interest income or expense, income taxes and minority interest. Assets by business segment are those identifiable assets, that are used in the company's operations in eachwhich consist mainly of cash, investments, and other assets not attributable to any reportable segment. 39 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTSACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------------------------------------------ None.--------------------------------------------------------------- PART III -------- The information required by Part III is incorporated by reference to the company's definitive proxy statement in connection with its Annual Meeting of Stockholders scheduled to be held in February, 1999,2002, to be filed with the Securities and Exchange Commission within 120 days following the end of the company's fiscal year ended September 30, 1998.2001. Information relating to the officers of the Registrant appears under Item 1 of this report. 40 PART IV ------- ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------------- The following consolidated financial statements of Griffon Corporation and subsidiaries are included in Item 8: Page ---- (a) 1. Financial Statements -------------------- Consolidated Balance Sheets at September 30, 19982001 and 1997............................................... 212000........................................... 26 Consolidated Statements of Income for the Years Ended September 30, 1998, 19972001, 2000 and 1996..................... 221999................. 27 Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 19972001, 2000 and 1996............... 231999........... 28 Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1998, 19972001, 2000 and 1996.................................................... 241999................................................ 29 Notes to Consolidated Financial Statements....................... 25Statements................. 30 41 Page ---- (a) 2. Schedule -------- II Valuation and Qualifying Accounts.................. S-1 Schedules other than those listed are omitted because they are not applicable or because the information required is included in the consolidated financial statements. (b) Reports on Form 8-K: ------------------- None (c) Exhibits: ----------------- Exhibit No. 3.1 Restated Certificate of Incorporation (Exhibit 3.1 of Annual Report on Form 10-K for the year ended September 30, 1995) 3.2 Amended and restated By-laws as amended (Exhibit 3 of Current Report on Form 8-K dated November 8, 1994)May 2, 2001) 4.1 Rights Agreement dated as of May 9, 1996 between the Registrant and American Stock Transfer Company (Exhibit 1.1 of Current Report on Form 8-K dated May 9, 1996) 4.24.2* Loan Agreement dated June 8, 1995 between theas of October 25, 2001 among Registrant and lending institutions (Exhibit 4.2 of Annual Report on Form 10-K for the year ended September 30, 1995) 4.3 Amendment effective as of October 31, 1997 to Loan Agreement dated June 8, 1995 between the Registrant and lending institutions (Exhibit 4.3 of Annual Report on Form 10-K for the year ended September 30, 1997)institutions. 10.1 Employment Agreement dated as of OctoberJuly 1, 19982001 between the Registrant and Harvey R. Blau (Exhibit 10.1 of Current Report on Form 8-K dated November 5, 1998)May 2, 2001) 10.2 Employment Agreement dated as of OctoberJuly 1, 19982001 between the Registrant and Robert Balemian (Exhibit 10.2 of Current Report on Form 8-K dated November 5, 1998) May 2, 2001) 10.3 Form of Trust Agreement between the Registrant and U.S. Trust Company of California, N.A., as Trustee, relating to the company's Employee Stock Ownership Plan (Exhibit 10.3 of Annual Report on Form 10-K for the year ended September 30, 1994) 10.4 1992 Non-Qualified Stock Option Plan (Exhibit 10.10 of Annual Report on Form 10-K for the year ended September 30, 1993) 10.5 Non-Qualified Stock Option Plan (Exhibit 10.12 of Annual Report on Form 10-K for the year ended September 30, 1988)1998) 10.6 Form of Indemnification Agreement between the Registrant and its officers and directors (Exhibit 28 to Current Report on Formform 8-K dated May 3, 1990) 42 10.7 Outside Director Stock Award Plan(ExhibitPlan (Exhibit 4 of Form S-8 Registration Statement No. 33-52319) 10.8 1995 Stock Option Plan (Exhibit 4 of Form S-8 Registration Statement No. 33-57683) 10.9 1997 Stock Option Plan (Exhibit 4.2 of Form S-8 Registration Statement No. 333-21503) 10.10 1998 Stock Option Plan (Exhibit 4.1 of Form S-8 Registration Statement No. 333-62319) 10.10(a)2001 Stock Option Plan (Exhibit 4.1 of Form S-8 Registration Statement No. 333-67760) 10.11 Senior Management Incentive Compensation Plan (Exhibit 4.2 of Form S-8 Registration Statement No. 333-62319) 10.12 1998 Employee and Director Stock Option Plan, as amended (Exhibit 4.3 of Form S-8 Registration Statement No. 333-62319)333-62319 and Exhibit 4.1 of Form S-8 Registration Statement No. 333-84409) 21 The following lists the company's significant subsidiaries all of which are wholly-owned by the company. The names of certain subsidiaries which do not, when considered in the aggregate, constitute a significant subsidiary, have been omitted.
State of Name of Subsidiary Incorporation ------------------ ------------- Clopay Corporation Delaware Telephonics Corporation Delaware
23* Consent of Arthur Andersen LLP 27* Financial Data Schedule (for electronic submission only) - ----------- * Filed herewith. All other exhibits are incorporated herein by reference to the exhibit indicated in the parenthetical references. 43 The following undertakings are incorporated into the company's Registration Statements on Form S-8 (Registration Nos. 33-39090, 33-62966, 33-52319, 33-57683, 333-21503, 333-62319, 333-84409 and 333-62319)333-67760). (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any fact or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 44 (i) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 45 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 10th20th day of December 1998.2001. GRIFFON CORPORATION By: /s/ Harvey R. Blau ------------------------------ Harvey R. Blau, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on December 10, 199820, 2001 by the following persons in the capacities indicated: /s/ Harvey R. Blau Chairman of the Board Harvey R. Blau (Principal Executive Officer) /s/ Robert Balemian President and Director Robert Balemian (Principal(Chief Operating and Financial Officer) /s/ Patrick L. Alesia Vice President and Treasurer Patrick L. Alesia (Chief Accounting Officer) /s/ Henry A. Alpert Director Henry A. Alpert /s/ Bertrand M. Bell Director Bertrand M. Bell /s/ Robert Bradley Director Robert Bradley /s/ Abraham M. Buchman Director Abraham M. Buchman /s/ Clarence A. Hill, Jr. Director Clarence A. Hill, Jr. /s/ Ronald J. Kramer Director Ronald J. Kramer /s/ James W. Stansberry Director James W. Stansberry /s/ Martin S. Sussman Director Martin S. Sussman /s/ William H. Waldorf Director William H. Waldorf /s/ Joseph J. Whalen Director Joseph J. Whalen /s/ Lester L. Wolff Director Lester L. Wolff 46 SCHEDULE II GRIFFON CORPORATION AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1998, 19972001, 2000 AND 19961999
Additions Deductions -------------------------- ---------------------------------------------- --------------------- Balance at Charged to Charged to Accounts Balance at Beginning Profit and Other Written End Description of Period Loss Accounts Off Other of Period ------------- --------- ----------- --------- ---------- ------------- ---------- --------- --------------- ----------- FOR THE YEAR ENDED SEPTEMBER 30, 1998:2001: Allowance for doubtful accounts $6,627,000 $1,907,000 $ 243,000 $1,301,0009,494,000 $ --- $7,476,0004,836,000 $ 758,000 $ 2,574,000 $ 1,942,000(1) $10,572,000 =========== =========== ========== ========== ========== ========== ========= ===================== =========== =========== FOR THE YEAR ENDED SEPTEMBER 30, 1997:2000: Allowance for doubtful accounts $4,519,000 $1,312,000 $1,719,000 (1) $ 923,0008,068,000 $ 3,276,000 $ 765,000 (2) $ 2,615,000 $ --- $6,627,000$ 9,494,000 =========== =========== ========== ========== ========== ========== ========= ===================== =========== =========== FOR THE YEAR ENDED SEPTEMBER 30, 1996:1999: Allowance for doubtful accounts $3,727,000 $1,166,000 $2,530,000 (1) $2,213,000 $ 691,000 (2) $4,519,0007,476,000 $ 2,780,000 $ 154,000 $ 2,342,000 $ --- $ 8,068,000 =========== =========== ========== ========== ========== ========== ========= ===================== =========== =========== (1) Principally relatedReclassified to other balance sheet accounts (2) Includes acquired businesses. (2) Represents reclassification of amounts related to discontinued operations.businesses and other
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