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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
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 EXCHANGE ON
TITLE OF EACH CLASS WHICH 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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether this registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes[X] No[ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within 60
days prior to the date of filing. As of December 16, 2002 - approximately
$425,658,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of December 16,
2002 - 32,756,784.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III - (Items 10, 11, 12 and 13). Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934.
PART I
ITEM 1 - BUSINESS
THE COMPANY
Griffon is a diversified manufacturing company with operations in four
business segments: Garage Doors; Installation Services; Specialty Plastic Films;
and Electronic Information and Communication Systems. The company's Garage Doors
segment designs, manufactures and sells garage doors for use in the residential
housing and commercial building markets. The Installation Services segment
sells, installs and services 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 communications, radar,
information, command and control systems and large-scale integrated circuits for
defense and commercial markets.
The company has made strategic investments in each of its business
segments to enhance its market position, expand into new markets and further
accelerate growth. Garage 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 subsequently added additional
production capacity in its European joint venture in connection with multi-year
contracts from a major international consumer products company. In 2002,
Specialty Plastic Films acquired 60% ownership of a Brazilian manufacturer of
plastic hygienic and specialty films, further expanding its markets and global
supply capabilities. In 2000, the Electronic Information and Communication
Systems segment acquired a search and weather radar business.
The company was incorporated on May 18, 1959 under the laws of the State
of New York. It was reincorporated in Delaware in 1970 and its name was changed
to Griffon Corporation in 1995. The company makes available, free of charge
through its website at www.griffoncorp.com, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after such material is
filed with the Securities and Exchange Commission.
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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 sectional doors in the United States. The
company's building products are sold under Clopay(R), Ideal Door(R) and
Holmes(R) brand names through an extensive distribution network throughout the
United States. The company estimates that the majority of 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 building 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.
Industry
According to industry sources, the residential and commercial/industrial
garage door market for 2001 was estimated to be $1.5 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, new springing 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 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.
Key Competitive Strengths
The company believes that the following strengths will continue to enhance
the market position of 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 46 distribution centers including a large regional distribution
center 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 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.
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Strong Brand Franchise. The company's brand names, particularly Clopay(R),
Holmes(R) and Ideal Door(R) residential 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.
Strategy
The company intends to increase its market share in Garage Doors by
capitalizing on what it believes to be its leadership position as the largest
manufacturer and marketer of residential garage doors. Specifically, the company
intends to: (i) continue sales growth through its dealer network and penetration
of the retail market; (ii) increase brand awareness through merchandising
programs and advertising; (iii) maintain a leadership position in new product
development; and (iv) expand its production and presence nationally through
continued strategic acquisitions.
Products and Services
The company manufactures a broad line of residential and commercial
sectional garage doors with a variety of options at varying prices. The company
also sells related products such as garage door openers. The company offers
garage doors made from several materials, including steel and wood.
The company generally markets its lines 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 who desire exceptional strength, durability, high
insulation value, quiet operation, and a finished interior appearance.
The company also markets commercial sectional doors. Commercial sectional
doors are similar to residential garage doors, but are designed to meet more
demanding performance specifications.
In 2002, the company announced that it was discontinuing its Atlas(R) brand
commercial/industrial product line, which included slatted steel coiling doors,
service doors, thermal doors, fire doors and counter shutters, fire shutters and
grilles. See Note 1 of Notes to Consolidated Financial Statements.
Sales by Garage Doors have provided approximately 35% of the company's
consolidated revenue in 2002, 35% in 2001 and 36% in 2000.
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. The company is 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 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,
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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. The company also has 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, through its network of 46 company-owned distribution
centers, throughout the United States and in Canada. These distribution centers
allow the company to maintain an inventory of garage doors near installing
dealers and to provide quick-ship service to retail customers.
Manufacturing and Raw Materials
The company currently operates four garage door manufacturing facilities. A
key aspect of Garage Doors' research and development efforts has 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 has 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.
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. 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. Its network of locations cover
many of the key new single family home markets in the United States and 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 18
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 24% 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
that its multi-product offering provides strategic marketing advantages over
traditional, single product competitors, and provides the company with
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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.
Sales by Installation Services have provided approximately 23% of the
company's consolidated revenue in 2002, 2001 and 2000.
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 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,
price and brand awareness.
6
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.
The segment's major customer is Procter & Gamble, with whom the company
enjoys a long and growing relationship. Specialty Plastic Films supplies Procter
& Gamble with a variety of products used primarily for its infant diapers, both
domestically and internationally, and expects to continue to expand the
relationship in the future. See "Strategy".
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 developing countries and favorable demographics, such as
the aging of the 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, laminated, and
printed 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 and commercialization of
specialty plastic films and laminates for its markets. The company has developed
technologically advanced embossed films, elastomeric films, breathable films,
laminates and cloth-like barrier products for diapers, feminine hygiene
products, 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
health 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 expand and
enter new international markets, such as South America and 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 North
American sales and expand internationally through ongoing product development
7
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, the 1998 acquisition of Bohme (see "European
Operations") and the 2002 acquisition of Clopay do Brasil (see "South American
Operations") provide a strong platform for additional sales growth in certain
international markets.
This segment is implementing a significant capital expansion program in
fiscal 2003 to support new opportunities with its major customers and to
increase capacity throughout its operations. We anticipate that revenues from
such opportunities will commence in the latter part of fiscal 2003 and ramp up
substantially in 2004. Equipment and plant additions over the next two years are
anticipated to aggregate $60-70 million. This is approximately $15-20 million
per year higher than this segment has expended over the past few years.
Products
Specialty Plastic Films manufactures a wide variety of embossed and printed
specialty films and laminates for the 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 surgical and industrial gowns and drapes, equipment
covers, flexible packaging, house wrap and other products. 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 and 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 by Specialty Plastic Films have provided approximately 25% of the
company's consolidated revenue in 2002, 26% in 2001 and 23% in 2000.
Sales and Marketing
The company sells its products primarily in the United States and Europe
with sales also in Canada, Central and South America and Asia Pacific. The
company utilizes an internal direct sales force, 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, 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 50 chemists, scientists and
engineers work independently and in strategic partnerships with the company's
customers to develop new technologies, products, processes and product
applications. Currently, the company is engaged in several joint efforts with
the research and development departments of its customers.
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The company's research and development efforts have resulted in many
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 moisture vapor
transmission and airflow while maintaining barrier properties resulting in
improved comfort and skin care. Cloth-like films and laminates provide consumers
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. The company believes its patents are a less
significant factor in its 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, a
manufacturer of non-woven fabrics headquartered in Germany and a subsidiary of
BBA Group PLC, a publicly owned diversified U.K. manufacturer. The joint venture
was created to develop, manufacture and market specialty plastic film based
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 art
production lines. This expansion was designed to meet demand under multi-year
contracts with a major international consumer products 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. 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 North
American and other international markets. These products include printed and
unprinted film and flexible packaging for hygienic products.
South American Operations
In June 2002, the company acquired 60% ownership in Isofilme Ltda, a
Brazilian manufacturer of plastic hygienic and specialty films which will
operate under the name Clopay do Brasil. The acquisition provides a platform to
broaden participation in South American markets and strengthen the company's
position as a global supplier.
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 process involves extruding the melted plastic films directly onto a
non-woven fabric and 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
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under supply agreements that do not specify fixed pricing terms. The company's
sources for raw materials are 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. The company competes primarily on the basis of
technical expertise, quality, service and price.
ELECTRONIC 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, radar, air traffic management systems,
identification friend or foe ("IFF") equipment, transit communications and
custom, mixed-signal, application specific integrated circuits. The company is a
leading supplier of airborne maritime surveillance radar and aircraft
intercommunication management systems, two of the segment's largest product
lines. In addition to its traditional defense products used predominantly by the
United States Government, in recent years the company has successfully adapted
its core technologies to products used in military and commercial applications
worldwide and has expanded its presence in both non-defense government and
commercial markets.
Industry
The United States defense electronics procurement budget is expected to
grow faster than the overall defense budget. Growth in this budget area reflects
the trend in recent years for the United States' Department of Defense to opt
for the installation of new electronic systems and equipment in existing
aircraft rather than develop totally new weapons systems. Conflicts involving
the country's military have also tended in recent years to require deployment
and significant 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.
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The table below lists some of the major programs the company currently
participates in:
Customer Product Description
-------- ------- -----------
The Boeing Company Intercommunications Management U.S. Air Force C-17A Cargo Transport
Systems
U.S. Air Force C-130 Hercules Air Transport
Airborne Warning and Control System (AWACS)
U.S. Navy F/A-18E/F Fighter/Attack Aircraft
Identification Friend or Foe System AWACS
BAE Systems Intercommunications System UK NIMROD Royal Maritime Patrol Aircraft
Integration
Northrop Grumman Intercommunications Management Joint-STARS Surveillance Aircraft
Systems
Maritime Surveillance Radar U.S. Coast Guard HU-25 Aircraft
Lockheed Martin Corporation Intercommunications Management U.S. Navy MH-60S/MH-60R Helicopters
Systems U.S. Navy P-3 Aircraft
Maritime Surveillance Radar and U.S. Navy MH-60R Helicopter
Identification Friend or Foe System
Sikorsky Aircraft Company Maritime Surveillance Radar S-70B Maritime Surveillance Helicopter
Intercommunications SH-60B Maritime Surveillance Helicopter
Management Systems UH-60M Blackhawk Helicopter Upgrade Program
Telephonics is generally a first tier supplier to prime contractors in the
defense industry such as Boeing, Lockheed Martin, Northrop Grumman and BAE
Systems. With the significant contraction and consolidation that has occurred in
the U.S. and international 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 cost of major systems and
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 BAE Systems as part of the United Kingdom's upgrade of the NIMROD
surveillance aircraft and increasing number of contracts with the Civil Aviation
Authority of China for air traffic management systems for Mainland China.
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Some of the major non-defense related programs in 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
Telephonics' market 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 its participation in defense
programs and commercial undertakings. The company is capable of meeting a full
range of customer requirements including system requirements definition, product
design and development, manufacturing and test, integration and installation,
and logistical support. As a result, the company has been successful in
developing a number of relationships as an important strategic partner and first
tier supplier to various prime contractors.
Broad Base of Long-Life 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
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 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 core
markets and intends to pursue new growth opportunities by leveraging its systems
design and engineering 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 expects to introduce the newly designed equipment on future
C-17As and to upgrade the existing fleet of C-17As with the new equipment. In
September 2002, Telephonics was awarded the first contract related to the
12
production phase of this program. The company also expects substantial sales
growth as it transitions from development to the production phase of the MH-60R
helicopter program, which is now expected to commence in 2004.
Telephonics' objective is to anticipate the needs of its core markets
and to invest in research and development in an effort to provide solutions 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. For
example, the segment is leveraging its extensive electronic systems design
capability 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. Additionally, TLSI, Telephonics'
integrated circuit design subsidiary, 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
and 2002, TLSI introduced a series of high precision Clock Generator chips which
are used to sequence and synchronize electronic signals. These products are
designed into fiber optic network applications addressing communication products
for the home and office.
Products
The company manufactures specialized electronic products for a variety of
applications. Electronic Information and Communication Systems' products include
communication systems, radar systems, information and command and control
systems, and mixed-signal application specific large-scale integrated circuits
used in defense, non-military government, and commercial markets.
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's MH-60R multi-mission and MH-60S utility
helicopters, the United Kingdom's NIMROD surveillance aircraft, U.S. Air Force
C-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.
The company's command and control systems include airborne maritime
surveillance and weather and search radar systems, air traffic management
systems and tactical instrument landing systems. The company provides both the
expertise and 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
13
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.
Through TLSI the company manufactures custom and standard, mixed-signal,
application specific large-scale integrated circuits for customers in the
security, automotive and telecommunications industries and for the military.
Security applications include smoke and motion detectors as well as intrusion
alarm systems. Suppliers 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.
Sales by Electronic Information and Communication Systems provided
approximately 16% of the company's consolidated revenue in 2002, 17% in 2001 and
17% in 2000.
Backlog
The funded backlog for Electronic Information and Communication Systems was
approximately $147 million on September 30, 2002, compared to $176 million on
September 30, 2001.
Sales and Marketing
Telephonics has approximately 18 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 this segment's research and development activities are
generally performed under government contracts and the segment 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 have
generally represented an evolution of existing products rather than entirely new
pursuits. Recent internally funded research and development has resulted in the
development of a next generation airborne imaging maritime surveillance radar
system and an all digital, totally secure intercommunication management system.
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 $4-5 million for fiscal 2003 with the objective of
generating incremental revenue commencing in 2004.
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.
14
EMPLOYEES
The company has approximately 5,600 employees located throughout the United
States, in Europe and Brazil. Approximately 150 of its employees are covered by
a collective bargaining agreement, primarily with an affiliate of the AFL-CIO.
The company believes its relationships with its employees are satisfactory.
SEASONALITY
Historically the company's revenues and earnings are lowest in the second
quarter and highest in the fourth quarter.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Revenues, based on the customers' locations, and property, plant and
equipment attributed to the United Sates and all other countries are as follows:
2002 2001 2000
REVENUES BY GEOGRAPHIC AREA-
United States $ 936,704,000 $ 921,046,000 $ 879,729,000
Germany 41,366,000 51,179,000 72,266,000
United Kingdom 35,650,000 36,247,000 41,487,000
Canada 23,405,000 24,925,000 23,431,000
Poland 31,176,000 27,494,000 3,319,000
All other countries 124,303,000 99,234,000 98,154,000
-------------- -------------- --------------
$1,192,604,000 $1,160,125,000 $1,118,386,000
============== ============== ==============
PROPERTY, PLANT AND
EQUIPMENT BY GEOGRAPHIC AREA-
United States $ 107,248,000 $ 108,291,000 $ 107,266,000
Germany 39,929,000 37,640,000 35,678,000
All other countries 1,076,000 --- ---
-------------- -------------- -------------
$ 148,253,000 $ 145,931,000 $ 142,944,000
============== ============== =============
RESEARCH 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 $17,000,000 in 2002, $13,790,000 in
2001, and $10,700,000 in 2000.
OFFICERS OF THE REGISTRANT
Served as Positions and
Name Age Officer Since Offices
---- --- ------------- -------
Harvey R. Blau 67 1983 Chairman of the Board and
Chief Executive Officer
Robert Balemian 63 1976 President and Chief Financial
Officer
Patrick L. Alesia 54 1979 Vice President and Treasurer
Edward I. Kramer 68 1997 Vice President,
Administration and Secretary
15
ITEM 2 - PROPERTIES
The company occupies approximately 3,700,000 square feet of general office,
factory and warehouse space and showrooms throughout the United States, in
Germany and in Brazil. The following table sets forth certain information
related to the company's major facilities:
Approximate
Square Owned or
Location Business Segment Primary Use Footage Leased
- -------- ---------------- ----------- ------- ------
Jericho, NY Corporate Headquarters Office 11,000 Leased
Farmingdale, NY Electronic Information and Manufacturing and 167,000 Owned
Communication research and
Systems development
Huntington, NY Electronic Information and Manufacturing 89,000 Owned
Communication
Systems
Aschersleben, Germany Specialty Plastic Films Manufacturing 143,000 Owned
Mason, OH Garage Doors Office and research 131,000 Leased
Installation Services and development
Specialty Plastic Films
Dombuhl, Germany Specialty Plastic Films Manufacturing 124,000 Owned
Augusta, KY Specialty Plastic Films Manufacturing 232,000 Owned
Nashville, TN Specialty Plastic Films Manufacturing 126,000 Leased
Sao Paulo, Brazil Specialty Plastic Films Manufacturing 22,000 Leased
Russia, OH Garage Doors Manufacturing 339,000 Owned
Baldwin, WI Garage Doors Manufacturing 116,000 Leased
Los Angeles, CA Garage Doors Garage door 40,000 Leased
hardware
manufacturing
Auburn, WA Garage Doors Manufacturing 123,000 Leased
Tempe, AZ Garage Doors Manufacturing 100,000 Leased
The company also leases approximately 1,800,000 square feet of space for
the Garage Doors distribution centers and Installation Services locations in
numerous facilities throughout the United States. The company has aggregate
minimum annual rental commitments under real estate leases of approximately
$11.4 million. The majority of the leases have escalation clauses related to
16
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.
The specialty plastic films segment intends to implement a significant
capital expansion program in fiscal 2003 to support new opportunities with its
major customers and to increase capacity throughout its operations. Equipment
and plant additions for this segment over the next two years are anticipated to
aggregate $60-70 million. This is approximately $15-20 million per year higher
than this segment has expended over the past few years. The other plants and
equipment of the company are believed to 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.
17
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. The following table shows for the periods indicated the
quarterly range in the high and low sales prices for the company's Common Stock
adjusted for the 10% Common Stock dividend issued in 2001:
FISCAL QUARTER ENDED HIGH LOW
-------------------- ---- ---
December 31, 2000 $ 7.27 $5.63
March 31, 2001 7.27 6.14
June 30, 2001 10.00 6.98
September 30, 2001 12.20 9.12
December 31, 2001 15.08 10.75
March 31, 2002 19.40 14.30
June 30, 2002 20.00 16.24
September 30, 2002 18.40 10.65
(b) As of November 22, 2002, there were approximately 14,500
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 fiscal years ended September 30, 2002.
(d) Equity Compensation Plan Information
Number of securities to be
issued upon exercise of Weighted average exercise Number of securities remaining
outstanding options, price of outstanding available for future issuance
warrants and rights options, warrants and under equity compensation plans
(Column a) rights [excluding securities reflected in
(Column b) Column (a)]
Plan Category (Column c)
Equity compensation plans
approved by security
holders 5,104,300 $10.12 661,350
Equity compensation plans
not approved by security
holders 1,523,175 $10.11 161,300
Total 6,627,475 $10.11 822,650
The company's 1998 Employee and Director Stock Option Plan (the "Employee
and Director Plan") is the only option plan which was not approved by the
company's stockholders. Eligible participants in the Employee and Director Plan
include directors, officers and employees of, and consultants to, the company or
any of its subsidiaries and affiliates. Under the terms of the Employee and
Director Plan, the purchase price of the shares subject to each option granted
will not be less than 100% of the fair market value at the date of grant. The
terms of each option shall be determined at the time of grant by the Board of
Directors or its Compensation Committee.
18
ITEM 6 - SELECTED FINANCIAL DATA
YEARS ENDED SEPTEMBER 30,
-------------------------
2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- ------------
Net sales $1,192,604,000 $1,160,125,000 $1,118,386,000 $1,032,697,000 $914,874,000
============== ============== ============== ============== ============
Income before cumulative
effect of a change in
accounting principle $ 34,054,000(1) $ 30,593,000 $ 24,880,000 $ 20,211,000 $ 29,321,000
Cumulative effect of a
change in accounting
principle (24,118,000) --- (5,290,000) --- ---
-------------- -------------- -------------- -------------- ------------
Net income $ 9,936,000(1) $ 30,593,000 $ 19,590,000 $ 20,211,000 $ 29,321,000
============== ============== ============== ============== ============
Per share:
Basic $ .30 $ .93 $ .59 $ .60 $ .87
============== ============== ============== ============== ============
Diluted $ .28 $ .92 $ .59 $ .60 $ .85
============== ============== ============== ============== ============
Net income, as adjusted(2) $ 42,971,000 $ 32,880,000 $ 28,378,000 $ 21,890,000 $ 30,201,000
============== ============== ============== ============== ============
Per share:
Basic $ 1.29 $ 1.00 $ .86 $ .65 $ .90
============== ============== ============== ============== ============
Diluted $ 1.23 $ .98 $ .85 $ .65 $ .88
============== ============== ============== ============== ============
Total assets $ 587,694,000 $ 584,993,000 $ 582,026,000 $ 533,440,000 $487,938,000
============== ============== ============== ============== ============
Long-term obligations $ 91,397,000 $ 117,943,000 $ 134,942,000 $ 135,284,000 $112,829,000
============== ============== ============== ============== ============
(1) Operating results for 2002 include a pre-tax charge of $10,200,000 for the
divestiture of an unprofitable peripheral operation (Note 1 of Notes to
Consolidated Financial Statements).
(2) Excludes the operating results of a divested operation, the $10,200,000
pre-tax charge in 2002 associated with the divestiture and the cumulative
effect of changes in accounting principle in years 2002 and 2000.
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, 2002.
19
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
In the fourth quarter of fiscal 2002 the company adopted a plan to
divest an unprofitable peripheral operation that sells slatted steel coiling
doors and related products for commercial users. Consequently, the company
recorded a pre-tax charge of $10.2 million in connection with the divestiture.
The divested unit, which was included in the garage doors segment, had net sales
of $28.5 million in 2002, $28.7 million in 2001 and $25.9 million in 2000.
Operating losses of this unit were $4.4 million in 2002, $3.7 million in 2001
and $5.7 million in 2000. The segment results discussed below exclude the
divested operation.
FISCAL 2002 COMPARED TO FISCAL 2001
Operating results (in thousands) by business segment were as follows:
Net Sales Operating Profit
-------------------------- ----------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Garage doors $ 415,971 $ 399,924 $ 29,591 $ 21,915
Installation services 278,831 268,758 7,736 6,099
Specialty plastic films 299,585 297,100 40,278 41,772
Electronic information
and communication systems 195,430 191,782 15,156 16,076
Intersegment revenues (25,685) (26,116) -- --
----------- ----------- ----------- -----------
$ 1,164,132 $ 1,131,448 $ 92,761 $ 85,862
=========== =========== =========== ===========
GARAGE DOORS
Net sales of the garage doors segment increased by $16.0 million
compared to 2001, principally due to higher unit sales of $11.0 million driven
by increased market share and improved service levels. Improved pricing of $1.5
million also contributed to the sales increase.
Operating profit of the garage doors segment increased $7.7 million
compared to last year. Gross margin percentage increased to 31.9%, up from
28.6%. The increased margin was due primarily to lower raw material costs and
increased manufacturing efficiencies. Selling, general and administrative
expenses as a percentage of sales increased to 24.8%, up from 23.1% last year,
with higher distribution and product development costs partly offsetting the
gross margin increase.
In the latter part of 2002, steel suppliers to the garage doors segment
began to raise prices. Such increases did not have a significant effect on 2002
operating profit; while we cannot predict the amount and timing of future raw
material price increases and any related selling price adjustments, it is
anticipated that such changes will not have a material impact on operating
results in 2003.
INSTALLATION SERVICES
Net sales of the installation services segment increased by $10.1
million compared to last year. The increase was principally due to the segment's
expanded product offering, stronger new construction markets and increased
market share.
20
Operating profit of the installation services segment increased $1.6
million compared to last year. Gross margin percentage increased to 27.6%, up
from 26.4% last year. The increased margin was due to the sales increase and
improved product mix. Selling, general and administrative expenses as a
percentage of sales increased to 24.8% compared to 24.2% last year to support
the sales growth and due to costs associated with systems upgrades.
SPECIALTY PLASTIC FILMS
Net sales of the specialty plastic films segment increased $2.5 million
compared to 2001. The segment experienced increased unit sales amounting to $6.8
million due primarily to increased demand for its breathable hygienic products
used in infant diapers. Also contributing to the sales increase was $4.3 million
from the effect of a weaker U.S. dollar on translated foreign sales, and net
sales of $3.9 million from a Brazilian operation acquired during the year. These
increases were partly offset by selling price adjustments of $7.3 million made
to pass through raw material cost decreases to customers and lower average
selling prices amounting to $5.2 million.
Excluding the fiscal 2001 pension curtailment gain described in Note 4
of Notes to Consolidated Financial Statements which was evenly divided between
the specialty plastic films and garage doors segments, operating profit of the
specialty plastic films segment was approximately the same as in the prior year.
Gross margin percentage held steady at 25.4% in 2002 and 2001. The effect of
selling price adjustments, lower pricing and costs associated with a production
line installed during the first quarter in one of the segment's European
operations was offset by lower raw material costs and improved manufacturing
efficiencies. Selling, general and administrative expenses as a percentage of
sales were 12.1% in 2002, up from 11.1% last year due to costs associated with
settled litigation and increased distribution and information technology costs.
This segment experienced upward pressure on raw material (resin) costs
in the latter part of fiscal 2002. The segment is generally able to pass price
increases on to certain customers. Although there could be some effect on future
operating results due to the extent of raw material price increases and the
timing and amount of resultant selling price adjustments, we do not expect such
impact to be significant.
As discussed further in Liquidity and Capital Resources, this segment
is implementing a significant capital expansion program in fiscal 2003 to
support new opportunities with its major customers and to increase capacity
throughout its operations. We anticipate that revenues from such opportunities
will commence in the latter part of fiscal 2003 and ramp up substantially in
2004.
ELECTRONIC INFORMATION AND COMMUNICATION SYSTEMS
Net sales of the electronic information and communication systems
segment increased $3.6 million compared to 2001. Sales growth in connection with
defense communications and systems integration programs was partly offset by
delays in anticipated awards, softness in international markets for radar
products and by lower sales in the segment's integrated circuit business.
Operating profit of the electronic information and communication
systems segment decreased $0.9 million compared to last year. Gross margin
percentage was 24.2% in 2002 compared to 24.0% last year. The effect of
increased sales in the segment's core business was offset by increased costs
associated with the segment's technology initiatives. These development efforts
are focused on designing equipment that will increase the speed, capacity and
quality of service of existing wireless cellular networks. These expenditures
amount to approximately $4-$5 million per year, and are expected to continue
through fiscal 2003.
21
NET INTEREST EXPENSE
Net interest expense decreased by $5.4 million compared to last year
due to the effect of debt repayments and lower interest rates.
Income Tax Expense
The company's provision for income taxes for fiscal 2002 includes a
$2.0 million tax benefit to reflect the resolution of certain previously
recorded tax liabilities.
Fiscal 2001 Compared to Fiscal 2000
Operating results (in thousands) by business segment were as follows:
Net Sales Operating Profit
------------------------ ----------------
2001 2000 2001 2000
---------- ---------- ------- -------
Garage doors $ 399,924 $ 405,317 $21,915 $22,684
Installation services 268,758 268,398 6,099 6,842
Specialty plastic films 297,100 262,075 41,772 20,315
Electronic information
and communication systems 191,782 186,592 16,076 19,097
Intersegment revenues (26,116) (29,892) - -
---------- ---------- ------- -------
$1,131,448 $1,092,490 $85,862 $68,938
========== ========== ======= =======
GARAGE DOORS
Net sales of the garage doors segment decreased by $5.4 million
compared to 2000 due to lower unit sales. Unit sales decreases occurred in the
first half of the year primarily due to competitive markets and economic
conditions. Operating results strengthened and unit sales increased in the
second half reflecting the effect of improved service levels and market
conditions.
Operating profit of the garage doors segment decreased $0.8 million
compared to the prior year. Gross margin percentage was essentially unchanged.
Lower gross profit margins (approximately 26.7% in 2001 compared to 28.7% in
2000) and operating profit in the first six months of the year were offset in
the second half by improved gross profit margins (approximately 30.2% in 2001
compared to 28.5% in 2000). Operating profit trended up during the year due
primarily to the sales growth, increased manufacturing efficiencies and lower
expense levels. Selling, general and administrative expenses decreased by
approximately $1.1 million primarily due to the effect in the second half of the
year of cost reduction programs.
INSTALLATION SERVICES
Net sales of the installation services segment were approximately the
same as the prior 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 2000. Gross margin percentage increased from approximately
25.9% in 2000 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% in 2000 to 24.2% in 2001
due to higher selling costs, offsetting the margin improvement.
22
SPECIALTY PLASTIC FILMS
Net sales of the specialty plastic films segment increased $35.0
million compared to 2000. 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 2000 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 increased $21.5
million compared to 2000 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
favorable product mix resulted in the gross margin percentage increasing from
approximately 20.0% in 2000 to 25.4% in 2001. Also contributing to the
profitability improvement in 2001 was reduced selling, general and
administrative expenses as a percentage of sales, which decreased from
approximately 11.9% in 2000 to 11.1% in 2001.
ELECTRONIC INFORMATION AND 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 lower sales in the segment's integrated circuit
business.
Operating profit of the electronic information and communication
systems segment decreased $3.0 million compared to 2000. 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 technology initiatives.
NET INTEREST EXPENSE
Net interest expense decreased in 2001 by $1.6 million compared to 2000
due to the effect of debt repayments and lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations for 2002 was $82.7 million, and
working capital was $193.2 million at September 30, 2002.
Net cash used in investing activities during 2002 was $29.9 million.
The company had capital expenditures of $24.3 million, principally made in
connection with increasing production capacity and to improve manufacturing
efficiencies. The company also expended $4.5 million to acquire a Brazilian
manufacturer of plastic hygienic and specialty films. The unpaid balance of the
purchase price, approximately $13 million, was paid in fiscal 2003.
Equipment and plant additions to the specialty plastic films segment's
production capacity in connection with capital programs to support new
opportunities with its major customers and to increase capacity throughout its
operations over the next two years are anticipated to aggregate $60-$70 million.
23
This is approximately $15-$20 million per year higher than this segment has
expended over the past few years. It is expected that such property additions
will be funded primarily by internal cash flows and through operating leases.
Net cash used for financing activities during 2002 was $47.1 million,
consisting primarily of notes payable and long-term debt reductions of $36.2
million and treasury stock purchases of $11.9 million. Additional purchases of
the company's Common Stock under its stock buyback program will be made,
depending upon market conditions, at prices deemed appropriate by management.
The company rents various real property and equipment through
noncancellable operating leases. Related future minimum lease payments due in
2003 approximate $21.5 million and are expected to be funded through operating
cash flows. At September 30, 2002, future minimum payments under noncancellable
operating leases and payments to be made for notes payable and maturities of
long-term debt over the next five years are as follows (000's omitted):
Operating Debt
Year Leases Repayments Total
---- ------ ---------- -----
2003 $21,500 $6,200 $27,700
2004 17,800 5,600 23,400
2005 13,300 6,600 19,900
2006 8,600 7,000 15,600
2007 5,700 4,900 10,600
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.
ACCOUNTING POLICIES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING POLICIES
The company's significant accounting policies are set forth in Note 1
of Notes to Consolidated Financial Statements. The following discussion of
critical accounting policies addresses those policies that require management
judgment and estimates and are most important in determining the company's
operating results and financial condition.
The company recognizes revenues for most of its operations when title
and the risks of ownership pass to its customers. Provisions for estimated
losses resulting from the inability of our customers to remit payments are
recorded in the company's consolidated financial statements. Judgment is
required to estimate the ultimate realization of receivables.
The company's electronic information and communication systems segment
does a significant portion of its business under long-term contracts with
government agencies. This unit generally recognizes contract-related revenue and
profit using the percentage of completion method of accounting, which relies
primarily on estimates of total expected contract costs. The company follows
this method since reasonably dependable estimates of costs applicable to various
elements of a contract can be made. Since the financial reporting of these
contracts depends on estimates, recognized revenues and profit are subject to
revisions as contracts progress to completion. Contract cost estimates are
generally updated quarterly. Revisions in revenue and profit estimates are
reflected in the period in which the circumstances requiring the revision become
known. Provisions are made currently for anticipated losses on uncompleted
contracts.
24
Inventory is stated at the lower of cost (principally first-in,
first-out) or market. Inventory valuation requires the company to use judgment
to estimate any necessary allowances for excess, slow-moving and obsolete
inventory, which estimates are based on assessments about future demands, market
conditions and management actions.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2001, the company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 142 addresses accounting and reporting for acquired goodwill. It eliminates
the previous requirement to amortize goodwill and establishes new requirements
with respect to evaluating goodwill for impairment. With the assistance of a
third-party valuation expert, the company ascertained the fair value of its
reporting units as part of adopting SFAS 142 and determined that goodwill of the
installation services segment was impaired pursuant to the new standard. The
fair value of the installation services segment used in computing the impairment
loss was determined through a combination of market-based approaches and present
value techniques. Results for fiscal 2002 include the related cumulative effect
of a change in accounting principle in the amount of $24.1 million (net of an
income tax benefit of $2.5 million) to reflect the impairment. Prior year
operating results included goodwill amortization of approximately $2.4 million.
The Financial Accounting Standards Board has also issued a number of
other Financial Accounting Standards which become effective in fiscal 2003. The
company does not anticipate that adopting these pronouncements will have a
material effect on results of operations or financial condition.
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, 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. 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, 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.
25
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management does not believe that there is any material market risk
exposure with respect to foreign currency, derivatives 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 Pricewaterhouse Coopers LLP, dated November 6, 2002 for the
fiscal year ended September 30, 2002 and of Arthur Andersen LLP, dated November
6, 2001 for the fiscal years ended September 30, 2001 and 2000 are included
herein:
- Reports of Independent Public Accountants.
- Consolidated Balance Sheets at September 30, 2002 and 2001.
- Consolidated Statements of Income, Cash Flows and Shareholders'
Equity for the years ended September 30, 2002, 2001 and 2000.
- Notes to Consolidated Financial Statements.
26
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders of Griffon Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 48 present fairly, in all material
respects, the financial position of Griffon Corporation and its Subsidiaries
(the "Company") at September 30, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) on page 49 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of September 30, 2001 and for each of the two years in the period
ended September 30, 2001, were audited by other independent accountants who have
ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated November 6, 2001. As
discussed in Note 1, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of Statement of Financial
Accounting Standards No. 142 ("SFAS 142") "Goodwill and Other Intangible
Assets", on October 1, 2001.
As discussed above, the financial statements of the Company as of September 30,
2001, and for each of the two years in the period ended September 30, 2001, were
audited by other independent accountants who have ceased operations. As
described in Note 1, these financial statements have been revised to include the
transitional disclosures required by SFAS 142. We audited the transitional
disclosures described in Note 1. In our opinion, the transitional disclosures
for 2001 and 2000 in Note 1 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2001 or 2000 financial statements
of the Company other than with respect to such disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the 2001 or 2000
financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
November 6, 2002
27
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen, LLP.
REPORT OF PREVIOUS INDEPENDENT ACCOUNTANTS
To Griffon Corporation:
We have audited the accompanying consolidated balance sheets of Griffon
Corporation (a Delaware corporation) and subsidiaries as of September 30, 2001
and 2000 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 2001. These financial statements and the schedule referred to below are the
responsibility of the company'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 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, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001 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 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.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
November 6, 2001
28
GRIFFON CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30,
--------------------------------
2002 2001
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 45,749,000 $ 40,096,000
Accounts receivable, less allowance
for doubtful accounts of $8,734,000 in 2002 and
$10,572,000 in 2001 (Note 1) 147,890,000 146,425,000
Contract costs and recognized income
not yet billed (Note 1) 58,440,000 66,116,000
Inventories (Note 1) 104,792,000 98,044,000
Prepaid expenses and other current assets 25,470,000 18,148,000
------------- -------------
Total current assets 382,341,000 368,829,000
------------- -------------
Property, Plant and Equipment, at cost, net
of depreciation and amortization (Note 1) 148,253,000 145,931,000
------------- -------------
Other Assets:
Costs in excess of fair value of net assets
of businesses acquired, net (Note 1) 44,978,000 60,232,000
Other 12,122,000 10,001,000
------------- -------------
57,100,000 70,233,000
------------- -------------
$ 587,694,000 $ 584,993,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term
debt (Note 2) $ 10,036,000 $ 8,346,000
Accounts payable 62,023,000 59,206,000
Accrued liabilities (Note 1) 101,496,000 72,537,000
Income taxes (Note 1) 15,592,000 22,862,000
------------- -------------
Total current liabilities 189,147,000 162,951,000
------------- -------------
Long-Term Debt (Note 2) 74,640,000 108,615,000
------------- -------------
Minority Interest and Other 30,938,000 19,574,000
------------- -------------
Commitments and Contingencies (Note 5)
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 36,337,192
shares in 2002 and 35,023,437 shares in 2001 9,084,000 8,756,000
Capital in excess of par value 94,777,000 79,761,000
Retained earnings 241,604,000 231,668,000
Treasury shares, at cost, 3,266,983 common
shares in 2002 and 2,284,802 common shares
in 2001 (36,201,000) (19,230,000)
Accumulated other comprehensive income (Note 1) (12,246,000) (4,573,000)
Deferred compensation (4,049,000) (2,529,000)
------------- -------------
Total shareholders' equity 292,969,000 293,853,000
------------- -------------
$ 587,694,000 $ 584,993,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Net sales $ 1,192,604,000 $ 1,160,125,000 $ 1,118,386,000
Cost of sales:
Products 854,881,000 849,436,000 833,404,000
Divested operation inventory charge (Note 1) 3,200,000 -- --
--------------- --------------- ---------------
858,081,000 849,436,000 833,404,000
--------------- --------------- ---------------
334,523,000 310,689,000 284,982,000
Selling, general and administrative
expenses (Note 1) 260,006,000 239,275,000 230,060,000
Loss on divestiture (Note 1) 7,000,000 -- --
--------------- --------------- ---------------
67,517,000 71,414,000 54,922,000
--------------- --------------- ---------------
Other income (expense):
Interest expense (4,569,000) (11,065,000) (11,785,000)
Interest income 866,000 1,959,000 1,092,000
Other, net 589,000 (581,000) (780,000)
--------------- --------------- ---------------
(3,114,000) (9,687,000) (11,473,000)
--------------- --------------- ---------------
Income before income taxes 64,403,000 61,727,000 43,449,000
Provision for income taxes (Note 1) 22,506,000 25,308,000 17,380,000
--------------- --------------- ---------------
Income before minority interest and
cumulative effect of a change in
accounting principle 41,897,000 36,419,000 26,069,000
Minority interest (7,843,000) (5,826,000) (1,189,000)
--------------- --------------- ---------------
Income before cumulative effect of a
change in accounting principle 34,054,000 30,593,000 24,880,000
Cumulative effect of a change in
accounting principle, net of income
taxes (Note 1) (24,118,000) -- (5,290,000)
--------------- --------------- ---------------
Net income $ 9,936,000 $ 30,593,000 $ 19,590,000
=============== =============== ===============
Basic earnings per share of common stock (Note 1):
Income before cumulative effect of a
change in accounting principle $ 1.03 $ .93 $ .75
Cumulative effect of a change in
accounting principle (.73) -- (.16)
--------------- --------------- ---------------
$ .30 $ .93 $ .59
=============== =============== ===============
Diluted earnings per share of common stock (Note 1):
Income before cumulative effect of a
change in accounting principle $ .97 $ .92 $ .75
Cumulative effect of a change in
accounting principle (.69) -- (.16)
--------------- --------------- ---------------
$ .28 $ .92 $ .59
=============== =============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
30
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,936,000 $ 30,593,000 $ 19,590,000
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 22,637,000 24,204,000 23,703,000
Gain on sale of real estate (1,974,000) -- --
Loss on divestiture 10,200,000 -- --
Minority interest 7,843,000 5,826,000 1,189,000
Pension curtailment gain -- (3,156,000) --
Cumulative effect of a change in
accounting principle 24,118,000 -- 5,290,000
Provision for losses on accounts receivable 1,407,000 4,836,000 3,276,000
Deferred income taxes (3,275,000) 4,268,000 (1,798,000)
Change in assets and liabilities:
(Increase) decrease in accounts receivable
and contract costs and recognized
income not yet billed 4,214,000 4,767,000 (36,940,000)
(Increase) decrease in inventories (8,673,000) 625,000 (1,045,000)
(Increase) decrease in prepaid expenses and
other assets 1,951,000 (304,000) (2,433,000)
Increase in accounts payable, accrued liabilities
and income taxes payable 8,637,000 22,384,000 12,042,000
Other changes, net 5,631,000 4,736,000 6,309,000
------------ ------------ ------------
Total adjustments 72,716,000 68,186,000 9,593,000
------------ ------------ ------------
Net cash provided by operating activities 82,652,000 98,779,000 29,183,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and
equipment (24,300,000) (26,678,000) (37,366,000)
Proceeds from sale of real estate 2,638,000 -- --
Acquired businesses (4,598,000) -- (19,841,000)
(Increase) decrease in equipment lease deposits (2,816,000) 1,469,000 3,917,000
Other, net (789,000) (315,000) 4,271,000
------------ ------------ ------------
Net cash used in investing activities (29,865,000) (25,524,000) (49,019,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares (11,874,000) (97,000) (4,585,000)
Proceeds from issuance of long-term debt 4,000,000 1,406,000 26,585,000
Payments of long-term debt (39,217,000) (52,052,000) (17,060,000)
Increase (decrease) in short-term borrowings (963,000) (5,548,000) 22,540,000
Exercise of stock options 6,788,000 646,000 --
Other, net (5,868,000) (4,130,000) (2,270,000)
------------ ------------ ------------
Net cash provided (used) by financing activities (47,134,000) (59,775,000) 25,210,000
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,653,000 13,480,000 5,374,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 40,096,000 26,616,000 21,242,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 45,749,000 $ 40,096,000 $ 26,616,000
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
For the Years Ended September 30, 2002, 2001 and 2000
CAPITAL
COMMON STOCK IN TREASURY SHARES
------------------------- EXCESS OF RETAINED ------------------------
SHARES PAR VALUE PAR VALUE EARNINGS SHARES COST
------ --------- --------- -------- ------ ----
Balances, September 30, 1999 31,735,349 $7,934 $41,232 $218,196 1,387,402 $14,548
Foreign currency translation
adjustment -- -- -- -- -- --
Minimum pension liability
adjustment -- -- -- -- -- --
Net income -- -- -- 19,590 -- --
Comprehensive income (Note 1) -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- 680,600 4,585
Other 13,850 3 935 -- -- --
---------- ------ ------- -------- --------- -------
Balances, September 30, 2000 31,749,199 7,937 42,167 237,786 2,068,002 19,133
Foreign currency translation
adjustment -- -- -- -- -- --
Minimum pension liability
adjustment -- -- -- -- -- --
Net income -- -- -- 30,593 -- --
Comprehensive income (Note 1) -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
ESOP purchase of Common Stock -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- 10,000 97
Exercise of stock options 77,000 19 627 -- -- --
10% stock dividend 3,183,028 796 35,904 (36,711) 206,800 --
Other 14,210 4 1,063 -- -- --
---------- ------ ------- -------- --------- -------
Balances, September 30, 2001 35,023,437 8,756 79,761 231,668 2,284,802 19,230
Foreign currency translation
adjustment -- -- -- -- -- --
Minimum pension liability
adjustment -- -- -- -- -- --
Net income -- -- -- 9,936 -- --
Comprehensive income (Note 1) -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
ESOP purchase of Common Stock -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- 982,181 16,971
Exercise of stock options 1,307,025 327 9,608 -- -- --
Tax benefit from exercise of
stock options -- -- 4,661 -- -- --
Other 6,730 1 747 -- -- --
---------- ------ ------- -------- --------- -------
Balances, September 30, 2002 36,337,192 $9,084 $94,777 $241,604 3,266,983 $36,201
========== ====== ======= ======== ========= =======
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
For the Years Ended September 30, 2002, 2001 and 2000
ACCUMULATED
OTHER
COMPREHENSIVE DEFERRED COMPREHENSIVE
INCOME COMPENSATION INCOME
------ ------------ ------
Balances, September 30, 1999 $ (1,074) $1,519
Foreign currency translation
adjustment (2,582) -- $(2,582)
Minimum pension liability
adjustment (113) -- (113)
Net income -- -- 19,590
-------
Comprehensive income (Note 1) -- -- $16,895
=======
Amortization of deferred
compensation -- (592)
Purchase of treasury shares -- --
Other -- 100
------- -----
Balances, September 30, 2000 (3,769) 1,027
Foreign currency translation
adjustment 999 -- $ 999
Minimum pension liability
adjustment (1,803) -- (1,803)
Net income -- -- 30,593
-------
Comprehensive income (Note 1) -- -- $29,789
=======
Amortization of deferred
compensation -- (598)
ESOP purchase of Common Stock -- 2,000
Purchase of treasury shares -- --
Exercise of stock options -- --
10% stock dividend -- --
Other -- 100
------- -----
Balances, September 30, 2001 (4,573) 2,529
Foreign currency translation
adjustment (4,660) -- $(4,660)
Minimum pension liability
adjustment (3,013) -- (3,013)
Net income -- -- 9,936
-------
Comprehensive income (Note 1) -- -- $ 2,263
=======
Amortization of deferred
compensation -- (580)
ESOP purchase of Common Stock -- 2,000
Purchase of treasury shares -- --
Exercise of stock options -- --
Tax benefit from exercise of
stock options -- --
Other -- 100
-------- ------
Balances, September 30, 2002 ($12,246) $4,049
======== ======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
32
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 an
initial maturity of three months or less to be cash equivalents. Cash payments
for interest were approximately $5,522,000, $13,577,000 and $11,853,000 in 2002,
2001 and 2000, respectively.
A substantial portion of the company's trade receivables are from
customers of the garage 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,
2002 were a foreign currency translation adjustment of $6,873,000 and a minimum
pension liability adjustment, net of tax, of $5,373,000.
FOREIGN CURRENCY
The financial statements of 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.
REVENUE RECOGNITION
Sales are generally recorded as products are shipped and title and risk of
ownership have 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.
33
"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. Substantially all such amounts will be billed and
collected within one year.
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,
-----------------------------
2002 2001
------------ ------------
Finished goods $ 45,288,000 $ 53,613,000
Work in process 37,870,000 27,809,000
Raw materials and supplies 21,634,000 16,622,000
------------ ------------
$104,792,000 $ 98,044,000
============ ============
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,
-----------------------------
2002 2001
------------ ------------
Land, buildings and building
improvements $ 47,805,000 $ 45,166,000
Machinery and equipment 214,701,000 193,371,000
Leasehold improvements 12,307,000 11,625,000
------------ ------------
274,813,000 250,162,000
Less -- Accumulated depreciation
and amortization 126,560,000 104,231,000
------------ ------------
$148,253,000 $145,931,000
============ ============
ACQUISITIONS AND COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS OF BUSINESSES
ACQUIRED ("GOODWILL")
In June 2002, the company acquired a 60% interest in Isofilme Ltda., a
Brazilian manufacturer of plastic hygienic and specialty films for approximately
$17,000,000. The unpaid balance of the purchase price, approximately
$13,000,000, was paid in fiscal 2003. The acquired company's sales in the most
recent year were approximately $15,000,000.
In fiscal 2000 the company acquired a search and weather radar business
for approximately $15,000,000 and an operation which installs residential garage
doors and fireplaces for approximately $2,500,000.
The above acquisitions have been accounted for as purchases and resulted
in increases in goodwill of $15,797,000 in 2002 and $13,977,000 in 2000.
Currency translation adjustments related to specialty plastic films' foreign
operations decreased goodwill $4,500,000 in 2002.
34
INCOME TAXES
The provision for income taxes is comprised of the following:
2002 2001 2000
------------ ------------ ------------
Current $ 25,781,000 $ 21,040,000 $ 19,178,000
Deferred (3,275,000) 4,268,000 (1,798,000)
------------ ------------ ------------
$ 22,506,000 $ 25,308,000 $ 17,380,000
============ ============ ============
2002 2001 2000
------------ ------------ ------------
Federal $ 9,193,000 $ 13,114,000 $ 8,585,000
Foreign 12,206,000 9,939,000 6,610,000
State and local 1,107,000 2,255,000 2,185,000
------------ ------------ ------------
$ 22,506,000 $ 25,308,000 $ 17,380,000
============ ============ ============
The components of income before income taxes are as follows:
2002 2001 2000
------------ ------------ ------------
Domestic $ 34,586,000 $ 38,022,000 $ 27,764,000
Foreign 29,817,000 23,705,000 15,685,000
------------ ------------ ------------
$ 64,403,000 $ 61,727,000 $ 43,449,000
============ ============ ============
The deferred taxes result primarily from differences in the reporting of
depreciation, the allowance for doubtful accounts and other nondeductible
accruals. Prepaid expenses and Other Assets at September 30, 2002 include
deferred income tax assets aggregating $9,300,000 attributable primarily to
nondeductible accruals and allowances. The company has not recorded deferred
income taxes on the undistributed earnings of its foreign subsidiaries because
of management's intent to indefinitely reinvest such earnings. At September 30,
2002, the company's share of the undistributed earnings of the foreign
subsidiaries amounted to approximately $15,000,000. Upon distribution of these
earnings in the form of dividends or otherwise, the company may be subject to
U.S. income taxes and foreign withholding taxes. It is not practical, however,
to estimate the amount of taxes that may be payable in the event that such
earnings are remitted.
Cash payments for income taxes were $31,500,000, $10,350,000 and
$10,295,000 in 2002, 2001 and 2000, respectively.
The company's provision for income taxes for fiscal 2002 includes a
$2,000,000 tax benefit to reflect the resolution of certain previously recorded
tax liabilities. 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:
2002 2001 2000
------ ------ ------
U.S. Federal statutory
tax rate 35.0% 35.0% 35.0%
State and foreign
income taxes 5.0 5.0 5.7
Resolution of contingencies (3.1) -- --
Other (2.0) 1.0 (.7)
------ ------ ------
Effective tax rate 34.9% 41.0% 40.0%
====== ====== ======
35
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 $17,000,000,
$13,790,000 and $10,700,000 in 2002, 2001 and 2000, respectively, was incurred
on such research and development.
Selling, general and administrative expenses include shipping and handling
costs of $29,000,000 in 2002, $34,400,000 in 2001 and $37,200,000 in 2000.
ACCRUED LIABILITIES
Accrued liabilities included the following at September 30:
2002 2001
------------ ------------
Payroll and other employee benefits $ 33,900,000 $ 27,900,000
Balance of acquisition purchase price 13,000,000 --
Insurance and related accruals 10,300,000 8,700,000
EARNINGS PER SHARES (EPS)
Earnings per share amounts and the weighted average number of 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 Stock
outstanding during the period. The weighted average number of shares of Common
Stock used in determining basic EPS was 33,250,000 in 2002, 32,965,000 in 2001
and 33,079,000 in 2000.
Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of shares of Common Stock
outstanding plus additional common shares that could be issued in connection
with potentially dilutive securities. The weighted average number of shares of
Common Stock used in determined diluted EPS was 34,951,000 in 2002, 33,406,000
in 2001 and 33,268,000 in 2000 and reflects additional shares in connection with
stock option and other stock-based compensation plans.
Options to purchase approximately 1,790,000 and 4,587,000 shares were not
included in the computation of diluted earnings per share for the years 2001 and
2000, respectively, because the effects would be anti-dilutive.
DIVESTED OPERATION
In the fourth quarter of fiscal 2002 the company adopted a plan to divest
an unprofitable peripheral garage door operation that sells slatted steel
coiling doors and related products for commercial users. Consequently, the
company recorded a pre-tax charge of $10,200,000 in connection with the
divestiture. The charge includes inventory write-downs of $3,200,000, other
asset write-downs aggregating $4,200,000 and accruals for severance and facility
costs of $2,800,000.
The accompanying consolidated statements of income include the divested
unit, which had net sales of $28,500,000 in 2002, $28,700,000 in 2001 and
$25,900,000 in 2000. Operating losses of this unit were $4,400,000 in 2002,
$3,700,000 in 2001 and $5,700,000 in 2000.
36
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 1999 the company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position No.
98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities." SOP 98-5
requires that, at the date of adoption, costs of start-up activities previously
capitalized be written-off as a cumulative effect of a change in accounting
principle, and that after adoption, such costs are to be expensed as incurred.
Consequently, in fiscal 2000, the company's 60%-owned joint venture wrote
off costs that were previously capitalized in connection with the start-up of
the 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.
Effective October 1, 2001, the company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS
142). SFAS 142 addresses accounting and reporting for acquired goodwill. It
eliminates the previous requirement to amortize goodwill and establishes new
requirements with respect to evaluating goodwill and impairment. With the
assistance of a third-party valuation expert, the company ascertained the fair
value of its reporting units as part of adopting SFAS 142 and determined that
goodwill of the installation services segment was impaired pursuant to the new
standard. The fair value of the installation services segment used in computing
the impairment loss was determined through a combination of market based
approaches and present value techniques. Results for the year ended September
30, 2002 include the related cumulative effect of a change in accounting
principle in the amount of $24,118,000 (net of an income tax benefit of
$2,457,000) to reflect the impairment.
Had SFAS 142 been in effect for the years ended September 30, 2001 and
2000, the related elimination of goodwill amortization would have increased the
company's net income and earnings per share as follows:
2001 2000
-------------------------------------------- --------------------------------------------
As Reported Increase Pro Forma As Reported Increase Pro Forma
----------- ---------- ----------- ----------- ---------- -----------
Income before
cumulative effect
of a change in
accounting principle $30,593,000 $1,833,000 $32,426,000 $24,880,000 $1,716,000 $26,596,000
=========== ========== =========== =========== ========== ===========
Basic earnings per
share of common stock $ .93 $ .98 $ .75 $ .80
=========== =========== =========== ===========
Diluted earnings per
share of common stock $ .92 $ .97 $ .75 $ .80
=========== =========== =========== ===========
Net income $30,593,000 $1,833,000 $32,426,000 $19,590,000 $1,716,000 $21,306,000
=========== ========== =========== =========== ========== ===========
Basic earnings per
share of common stock $ .93 $ .98 $ .59 $ .64
=========== =========== =========== ===========
Diluted earnings per
share of common stock $ .92 $ .97 $ .59 $ .64
=========== =========== =========== ===========
37
The Financial Accounting Standards Board has also issued Statement of
Financial Accounting Standards Nos. 143, "Accounting for Asset Retirement
Obligations"; 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"; and 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs, and will become effective in fiscal 2003. SFAS 144
addresses accounting and reporting for the impairment or disposal of long-lived
assets and also becomes effective in fiscal 2003. SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
The company does not anticipate that adopting these pronouncements will have a
material effect on results of operations or financial condition.
2. NOTES PAYABLE AND LONG-TERM DEBT:
In October 2001 the company and a subsidiary entered into a six-year
$160,000,000 credit agreement with several banks. This agreement provides
revolving credit for four years after which the credit facility may be
converted, at the option of the company, into a reducing revolving credit for
two years. Borrowings under the agreement bear interest at rates (3.0% at
September 30, 2002) based upon LIBOR or the prime rate, and are secured by the
capital stock of a subsidiary. At September 30, 2002, $45,800,000 was
outstanding under this loan agreement, and the weighted average interest rate
was 3.2%.
The company's European operations have bank agreements which provide for a
term loan of approximately $13,000,000 with maturities through 2004 and
revolving credits for up to approximately $20,000,000. Outstanding borrowings
($16,296,000 as of September 30, 2002) under these agreements bear interest at
rates (4.7% at September 30, 2002) based upon the prime rate or Euribor.
The balance of the company's long-term debt outstanding at September 30,
2002 relates primarily to real estate mortgages and industrial revenue bond
financing, with interest rates ranging from 1.8% to 8.9% and maturities through
2014.
The following are the maturities of long-term debt outstanding at
September 30, 2002, for each of the succeeding five years:
2003 $6,227,000
2004 5,617,000
2005 6,542,000
2006 7,015,000
2007 4,867,000
3. SHAREHOLDERS' EQUITY:
On August 6, 2001 the company's Board of Directors authorized a 10% Common
Stock dividend that was paid on September 4, 2001 to holders of record on August
20, 2001.
38
The company has stock option plans under which options for an aggregate of
8,750,000 shares of Common Stock may be granted. As of September 30, 2002
options for 822,650 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
UNDER OPTION EXERCISE PRICE
------------ ----------------
Outstanding at September 30, 1999 5,702,950 $ 9.97
Granted 759,000 $ 6.47
Terminated (211,475) $ 9.17
----------
Outstanding at September 30, 2000 6,250,475 $ 9.57
Granted 1,158,850 $ 7.58
Exercised (84,700) $ 7.63
Terminated (85,250) $ 8.91
----------
Outstanding at September 30, 2001 7,239,375 $ 9.28
Granted 709,200 $13.85
Exercised (1,307,025) $ 7.60
Terminated (14,075) $ 4.89
----------
Outstanding at September 30, 2002 6,627,475 $10.11
==========
At September 30, 2002 option groups outstanding and exercisable are as
follows:
Outstanding Options
-------------------------------------------
Weighted Weighted
Average Average
Range of Number of Remaining Exercise
Exercise Prices Options Life Price
- ---------------- --------- --------- --------
$12.00 to $15.29 2,368,975 6.1 years $13.49
$ 6.82 to $10.11 3,466,100 5.6 8.65
$ 5.46 to $ 6.65 792,400 6.1 6.43
Exercisable Options
-------------------------------------------
Weighted
Average
Range of Number of Exercise
Exercise Prices Options Price
- ---------------- --------- --------
$12.27 to $14.32 1,668,975 $13.33
$ 6.82 to $10.11 2,919,400 8.84
$ 5.46 to $ 6.65 784,150 6.43
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", 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.
39
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:
2002 2001 2000
------------ ------------ ------------
Net income
As reported $ 9,936,000 $ 30,593,000 $ 19,590,000
Pro forma 7,313,000 28,354,000 16,214,000
Earnings per share
As reported -
Basic $ .30 $ .93 $ .59
Diluted .28 .92 .59
Pro forma -
Basic $ .22 $ .86 $ .49
Diluted .21 .85 .49
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 2002, 2001 and 2000 were $6.46, $3.98 and $3.36,
respectively, based upon the following weighted average assumptions: expected
volatility (.336 in 2002, .338 in 2001 and .324 in 2000), risk-free interest
rate (4.59% in 2002, 5.57% in 2001 and 6.24% in 2000), expected life (7 years in
2002, 2001 and 2000), and expected dividend yield (0% in 2002, 2001 and 2000).
The company has an Outside Director Stock Award Plan (the "Outside
Director Plan"), which was approved by the shareholders in 1994, under which
330,000 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 is amortized to compensation expense over the vesting period. The
related deferred compensation has been reflected as a reduction of shareholders'
equity. In 2002, 2001 and 2000 6,730, 15,631 and 15,235 shares, respectively,
were issued under the Outside Director Plan.
As of September 30, 2002, a total of approximately 8,230,000 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, 11 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 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 11
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.
40
4. PENSION PLANS
The company has pension plans that cover substantially all employees, most
of which are defined contribution plans. Company contributions to the defined
contribution plans are generally based upon various percentages of compensation,
and aggregated $7,400,000 in 2002, $5,900,000 in 2001 and $3,900,000 in 2000.
The company also has defined benefit pension plans covering certain employees.
Pursuant to the provision of Statement of Financial Accounting Standards
No. 88, "Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits", modifications to certain subsidiary
employee benefits and related benefit freezes resulted in the recognition of a
pretax curtailment gain of $3,156,000 in 2001.
Plan assets and benefit obligations of the defined benefit plans at
September 30, 2002 are as follows:
Change in benefit obligation
Projected benefit obligation, beginning of year $ 23,100,000
Service cost 952,000
Interest cost 1,801,000
Amendments 58,000
Actuarial loss 1,932,000
Benefit payments (476,000)
------------
Projected benefit obligation, end of year 27,367,000
------------
Change in plan assets
Fair value of plan assets, beginning of year 12,135,000
Actual return on plan assets (1,248,000)
Contributions 49,000
Benefits paid (476,000)
------------
Fair value of plan assets, end of year 10,460,000
------------
Reconciliation of funded status
Projected benefit obligation in excess of plan assets (16,907,000)
Unrecognized net loss 8,540,000
Unrecognized prior service cost 88,000
Unrecognized net transition asset 2,973,000
------------
Net amount recognized $ (5,306,000)
============
Balance sheet amounts
Accumulated other comprehensive income $ 8,265,000
Intangible asset 3,066,000
Accrued pension liabilities (16,637,000)
------------
Net amount recognized $ (5,306,000)
============
41
Net periodic pension cost for the defined benefit plans was as follows:
2002 2001 2000
------------ ------------ ------------
Service cost $ 1,050,000 $ 894,000 $ 1,494,000
Interest cost 1,844,000 1,661,000 1,674,000
Expected return on plan
assets (1,305,000) (1,097,000) (1,173,000)
Amortization of net actuarial
loss (gain) 35,000 155,000 (16,000)
Amortization of prior service
cost 26,000 8,000 87,000
Amortization of transition
obligation 312,000 312,000 312,000
------------ ------------ ------------
$ 1,962,000 $ 1,933,000 $ 2,378,000
============ ============ ============
The following actuarial assumptions were used for the company's defined
benefit pension plans:
2002 2001 2000
------------ ------------ ------------
Discount rate 7.25% - 8.00% 7.75% - 8.00% 7.75% - 8.00%
Expected return on plan assets 9.20% 9.20% 9.20%
Compensation rate increase 3.00% - 5.50% 3.00% - 5.50% 3.00% - 5.50%
The company has an Employee Stock Option Plan ("ESOP") that covers
substantially all employees. The ESOP has a loan agreement the proceeds of which
were used to purchase equity securities of the company. Borrowings under the
loan agreement are guaranteed by the company and bear interest (approximately 3%
at September 30, 2002) based upon LIBOR. The outstanding balance of the loan
($4,000,000 at September 30, 2002 and $2,500,000 at September 30, 2001) has been
reflected as a liability in the accompanying consolidated balance sheets. Shares
of the ESOP which have been allocated to employee accounts are charged to
expense based on the fair value of the shares transferred and are treated as
outstanding in earnings per share calculations. Compensation expense under the
ESOP was $718,000 in 2002, $384,000 in 2001 and $281,000 in 2000. The cost of
shares held by the ESOP and not yet allocated to employees is reported as a
reduction of shareholders' equity.
42
5. 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, 2002:
2003 $21,432,000
2004 17,789,000
2005 13,333,000
2006 8,568,000
2007 5,737,000
Later years 1,263,000
Rent expense for all operating leases, net of subleases, totalled
approximately $30,500,000, $31,800,000 and $29,900,000 in 2002, 2001 and 2000,
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.
6. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly results of operations for the years ended September 30, 2002 and
2001 are as follows:
QUARTERS ENDED
------------------------------------------------------------------
September 30, June 30, March 31, December 31,
2002 2002 2002 2001
------------ ------------ ------------ ------------
Net sales $326,059,000 $297,335,000 $267,308,000 $301,902,000
Gross profit 90,800,000 85,108,000 74,775,000 83,840,000
Net income 7,220,000(2) 11,437,000(3) 4,815,000 10,582,000(4)
Earnings per share
of common stock(1):
Basic $ .22 $ .34 $ .14 $ .32
Diluted $ .21 $ .32 $ .14 $ .31
43
QUARTERS ENDED
----------------------------------------------------------------
September 30, June 30, March 31, December 31,
2001 2001 2001 2000
------------ ------------ ------------ ------------
Net sales $318,357,000 $289,384,000 $264,189,000 $288,195,000
Gross profit 92,253,000 75,916,000 67,319,000 75,201,000
Net income 12,382,000 7,731,000 2,977,000(5) 7,503,000
Earnings per share
of common stock(1):
Basic $ .38 $ .23 $ .09 $ .23
Diluted $ .37 $ .23 $ .09 $ .23
(1) Earnings per share are computed independently for each of the quarters
presented on the basis described in Note 1. The sum of the quarters may
not be equal to the full year earnings per share amounts.
(2) Includes a pre-tax charge of $10,200,000 for the divestiture of an
unprofitable peripheral operation (see Note 1).
(3) Includes a $2,000,000 tax benefit to reflect the resolution of certain
previously recorded tax liabilities.
(4) Excludes the cumulative effect of a change in accounting principle (see
Note 1) in the amount of $24,118,000 ($.73 per basic share and $.70 per
diluted share).
(5) Includes a $3,156,000 pre-tax pension curtailment gain (see Note 4).
7. BUSINESS SEGMENTS:
The company's reportable business segments are as follows - 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 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, disposable surgical and patient care 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.
44
Information on the company's business segments is as follows:
Electronic
Information
and Specialty
Garage Installation Communication Plastic
Doors Services Systems Films Totals
-------------- -------------- -------------- -------------- --------------
REVENUES FROM EXTERNAL
CUSTOMERS -
2002 $ 418,979,000 $ 278,610,000 $ 195,430,000 $ 299,585,000 $1,192,604,000
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
INTERSEGMENT REVENUES -
2002 $ 25,464,000 $ 221,000 $ -- $ -- $ 25,685,000
2001 25,813,000 303,000 -- -- 26,116,000
2000 29,426,000 466,000 -- -- 29,892,000
SEGMENT PROFIT -
2002 $ 25,414,000 $ 7,736,000 $ 15,156,000 $ 40,278,000 $ 88,584,000
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
SEGMENT ASSETS -
2002 $ 149,844,000 $ 67,066,000 $ 159,516,000 $ 145,458,000 $ 521,884,000
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
SEGMENT CAPITAL EXPENDITURES -
2002 $ 4,553,000 $ 1,236,000 $ 4,736,000 $ 12,650,000 $ 23,175,000
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
DEPRECIATION AND
AMORTIZATION EXPENSE -
2002 $ 6,652,000 $ 1,085,000 $ 3,721,000 $ 10,641,000 $ 22,099,000
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
Goodwill at September 30, 2002 includes $12,900,000 attributable to the
garage doors segment, $14,300,000 in the electronic information and
communication systems segment and $17,800,000 in the specialty plastic films
segment.
45
Following are reconciliations of segment profit, assets, capital
expenditures and depreciation and amortization expense to amounts reported in
the consolidated financial statements:
2002 2001 2000
-------------- -------------- --------------
PROFIT -
Profit for all segments $ 88,584,000 $ 82,170,000 $ 63,256,000
Unallocated amounts (10,278,000 (11,337,000) (9,114,000)
Loss on divistiture (Note 1) (10,200,000) -- --
Interest expense, net (3,703,000) (9,106,000) (10,693,000)
-------------- -------------- --------------
Income before income taxes $ 64,403,000 $ 61,727,000 $ 43,449,000
============== ============== ==============
ASSETS -
Total for all segments $ 521,884,000 $ 533,578,000 $ 542,065,000
Unallocated amounts 68,518,000 54,305,000 42,589,000
Intersegment eliminations (2,708,000) (2,890,000) (2,628,000)
-------------- -------------- --------------
Total consolidated assets $ 587,694,000 $ 584,993,000 $ 582,026,000
============== ============== ==============
CAPITAL EXPENDITURES -
Total for all segments $ 23,175,000 $ 26,628,000 $ 37,231,000
Unallocated amounts 1,125,000 50,000 135,000
-------------- -------------- --------------
Total consolidated capital expenditures $ 24,300,000 $ 26,678,000 $ 37,366,000
============== ============== ==============
DEPRECIATION AND AMORTIZATION EXPENSE -
Total for all segments $ 22,099,000 $ 23,728,000 $ 23,188,000
Unallocated amounts 538,000 476,000 515,000
-------------- -------------- --------------
Total consolidated depreciation and amortization $ 22,637,000 $ 24,204,000 $ 23,703,000
============== ============== ==============
Revenues, based on the customers' locations, and property, plant and equipment
attributed to the United States and all other countries are as follows:
2002 2001 2000
-------------- -------------- --------------
REVENUES BY GEOGRAPHIC AREA -
United States $ 936,704,000 $ 921,046,000 $ 879,729,000
Germany 41,366,000 51,179,000 72,266,000
United Kingdom 35,650,000 36,247,000 41,487,000
Canada 23,405,000 24,925,000 23,431,000
Poland 31,176,000 27,494,000 3,319,000
All other countries 124,303,000 99,234,000 98,154,000
-------------- -------------- --------------
Consolidated net sales $1,192,604,000 $1,160,125,000 $1,118,386,000
============== ============== ==============
PROPERTY,PLANT AND
EQUIPMENT BY GEOGRAPHIC AREA -
United States $ 107,248,000 $ 108,291,000 $ 107,266,000
Germany 39,929,000 37,640,000 35,678,000
All other countries 1,076,000 -- --
-------------- -------------- --------------
Consolidated property,
plant and equipment $ 148,253,000 $ 145,931,000 $ 142,944,000
============== ============== ==============
Sales to a customer of the specialty plastic films segment were
approximately $214,000,000 in 2002, $209,000,000 in 2001 and $182,000,000 in
2000. Sales to the United States Government and its agencies, either as a prime
contractor or subcontractor, aggregated approximately $102,000,000 in 2002,
$100,000,000 in 2001 and $91,000,000 in 2000, all of which are included in the
electronic information and communication systems segment. Unallocated amounts
include general corporate expenses and assets, which consist mainly of cash,
investments, and other assets not attributable to any reportable segment.
46
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 30, 2002, the company dismissed Arthur Andersen LLP as its
independent public accountants and, as of May 1, 2002, engaged
PricewaterhouseCoopers LLP as its independent public accountants for the fiscal
year ending September 30, 2002, as previously disclosed in the company's Report
on Form 8-K dated April 30, 2002.
47
PART III
The information required by Part III (Items 10, 11, 12 and 13) 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, 2003, to be filed with the Securities and Exchange Commission within
120 days following the end of the company's fiscal year ended September 30,
2002. Information relating to the officers of the Registrant appears under Item
1 of this report.
ITEM 14 - CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO") the company's
disclosure controls and procedures were evaluated as of a date within 90 days
prior to the filing of this report. Based on that evaluation, the company's CEO
and CFO concluded that the company's disclosure controls and procedures were
effective.
(b) There were no significant changes in the company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
ITEM 15 - 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,
2002 and 2001.......................................... 29
Consolidated Statements of Income for the Years
Ended September 30, 2002, 2001 and 2000................ 30
Consolidated Statements of Cash Flows for the
Years Ended September 30, 2002, 2001 and 2000.......... 31
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 2002, 2001
and 2000............................................... 32
Notes to Consolidated Financial Statements................ 33
48
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 (Exhibit 3 of Current Report on Form
8-K dated 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)
4.2 Loan Agreement dated as of October 25, 2001 among Registrant and
lending institutions. (Exhibits 4.2 of Annual Report on Form 10-K
for the year ended September 30, 2001)
10.1 Employment Agreement dated as of July 1, 2001 between the Registrant
and Harvey R. Blau (Exhibit 10.1 of Current Report on Form 8-K dated
May 2, 2001)
10.2 Employment Agreement dated as of July 1, 2001 between the Registrant
and Robert Balemian (Exhibit 10.2 of Current Report on Form 8-K
dated 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, 1998)
49
10.6 Form of Indemnification Agreement between the Registrant and its
officers and directors (Exhibit 28 to Current Report on form 8-K
dated May 3, 1990)
10.7 Outside Director Stock Award Plan (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 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, and Exhibit
4.1 of Form S-8 Registration Statement No. 333-84409 and Exhibit 4.1
of Form S-8 Registration Statement No. 333-88422)
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
23.1* Consent of Arthur Andersen LLP
23.2** Consent of PricewaterhouseCoopers LLP
99.1** Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley Act
- ----------
* Not required pursuant to Rule 437a.
** Filed herewith. All other exhibits are incorporated herein by reference to
the exhibit indicated in the parenthetical references.
50
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, 333-67760 and
333-88422.
(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.
(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,
51
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.
52
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 20th
day of December 2002.
GRIFFON CORPORATION
By: /s/ Harvey R. Blau
---------------------------
Harvey R. Blau, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on December 20, 2002 by the following persons
in the capacities indicated:
/s/ Harvey R. Blau Chairman of the Board and Chief Executive Officer
- ------------------------- (Principal Executive Officer)
Harvey R. Blau
/s/ Robert Balemian President and Director
- ------------------------- (Chief Operating and Financial Officer)
Robert Balemian
/s/ Patrick L. Alesia Vice President and Treasurer
- ------------------------- (Chief Accounting Officer)
Patrick L. Alesia
/s/ Henry A. Alpert Director
- -------------------------
Henry A. Alpert
/s/ Bertrand M. Bell Director
- -------------------------
Bertrand M. Bell
/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
53
CERTIFICATION
I, Harvey R. Blau, Chairman of the Board and Chief Executive Officer of
Griffon Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Griffon Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 20, 2002 /s/ Harvey R. Blau
----------------------------
Harvey R. Blau
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
54
CERTIFICATION
I, Robert Balemian, President and Chief Financial Officer of Griffon
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Griffon Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 20, 2002 /s/ Robert Balemian
----------------------------
Robert Balemian
President and Chief Financial Officer
(principal financial officer)
55
GRIFFON CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
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, 2002:
Allowance for doubtful accounts $10,572,000 $1,407,000 $ 631,000 $3,128,000 $ 748,000 $ 8,734,000
=========== ========== ========== ========== =========== ============
FOR THE YEAR ENDED SEPTEMBER 30, 2001:
Allowance for doubtful accounts $ 9,494,000 $4,836,000 $ 758,000 $2,574,000 $ 1,942,000(1) $ 10,572,000
=========== ========== ========== ========== =========== ============
FOR THE YEAR ENDED SEPTEMBER 30, 2000:
Allowance for doubtful accounts $ 8,068,000 $3,276,000 $ 765,000(2) $2,615,000 $ -- $ 9,494,000
=========== ========== ========== ========== =========== ============
(1) Reclassified to other balance sheet accounts
(2) Includes acquired businesses and other
S-1