UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
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 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].
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.)
As of November 16, 1998 -- approximately $286,000,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). As of November 16, 1998 -- 30,419,359.
Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934.
<PAGE>
PART I
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ITEM 1 - BUSINESS
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BUSINESS
THE COMPANY
Griffon is a diversified manufacturing company with operations in three
business segments: Building Products; Specialty Plastic Films; and Electronic
Information and Communication Systems. The company's Building Products segment
designs and manufactures garage doors for use in the residential housing and
commercial building markets. The Building Products segment also sells and
installs garage doors, garage door openers, manufactured fireplaces and a range
of related building products primarily for the 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 and provides logistical support for communication systems, sensor
systems, information and command and control systems and custom mixed-signal
large scale integrated circuits used in the defense, and other government
programs and commercial markets.
The company has made successful strategic investments in each of its
business segments to enhance its market position, expand into new markets and
further accelerate growth. Building Products has 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 1998 Specialty Plastic Films
acquired a manufacturer of plastic packaging and specialty films located in
Germany, expanding its markets, and is adding additional production capacity in
its European joint venture in connection with multi-year contracts from a major
international consumer products company. The Electronic Information and
Communication Systems segment has been awarded a number of new contracts
including its largest order to date, which have resulted in substantially
increased order backlog.
BUILDING PRODUCTS
The company believes that its wholly-owned subsidiary, Clopay, is the
largest manufacturer and marketer of residential garage doors and among the
largest manufacturers of commercial garage doors in the United States. The
company's building products are sold under the Clopay, Atlas and other brand
names through an extensive distribution network throughout the United States.
The company estimates that the majority of Building Products' net sales are from
sales of garage doors to the home remodeling market, with the balance from the
new housing and commercial construction markets. Sales into the home remodeling
market are being driven by the continued aging of the housing stock and the
conversion by homeowners from wood doors to lighter weight, easier to maintain
steel doors. The company also operates an extensive network of service
operations that sell and install garage doors, garage door openers, manufactured
fireplaces and a range of related building products. The company provides its
installation services to residential builders and consumers from 37 locations in
24 cities located throughout the Southeast, Southwest, Midwest and West Coast.
The company believes that it is one of the leading installing dealers of
manufactured fireplaces in the United States.
<PAGE>
Industry
According to industry sources, the garage door market for 1997 was
estimated to be $1.4 billion, comprised of residential and commercial/industrial
garage doors. Over the past decade there have been several key trends driving
the garage door industry including the shift from wood to steel doors and the
growth of the home center channel of distribution. The company estimates that
over 90% of the total garage door market today is steel doors. Superior
strength, reduced weight and low maintenance have favored the steel door. Other
product innovations during this period include insulated double-sided steel
doors and new springing systems.
The growth of the home center channel of distribution in the United States
has resulted in a shift from traditional channels, including professional
installers and wholesalers. Over the past decade, an increasing number of garage
doors have been sold through home center retail chains such as The Home Depot,
Inc. These home centers offer garage doors primarily for the do-it-yourself
market, 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, point-of-sale merchandising and special
packaging are all important to the retailer.
The market for the installation and service of garage doors, manufactured
fireplaces and other building products is highly fragmented. It is primarily
characterized by small operations that typically focus on the installation of a
single type of building product in one market.
Key Competitive Strengths
The company believes that the following strengths will continue to enhance
the market position of Building Products:
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 45 distribution centers. 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. The company has also developed a substantial network
of its own building products installation services operations. These 37
locations in 24 markets, covering many of the key new single family home markets
in the United States, offer an increasing variety of building products and
services to the residential construction and remodeling industries.
Strong Brand Franchise. The company's brand names, particularly Clopay
residential doors and Atlas commercial doors, are widely recognized in the
building products industry. The company believes that it has earned a reputation
among installing dealers, retailers and wholesalers for producing a broad range
of high-quality doors. The company's market leadership and strong brand
recognition are key marketing tools for expanding its customer base, leveraging
its distribution network and increasing its market share.
<PAGE>
Low-Cost Manufacturing Capabilities. The company believes it has low-cost
manufacturing capabilities as a result of its automated, continuous production
manufacturing facilities and its reduced costs for raw materials based on volume
purchases. These manufacturing facilities produce a broad line of high quality
garage doors for distribution to professional installer, retail and wholesale
channels.
Strategy
The company intends to increase its market share in Building Products by
capitalizing on what it believes to be its leadership position as the largest
manufacturer and marketer of residential garage doors and one of the largest
manufacturers of commercial garage doors in the United States. Specifically, the
company intends to: (i) expand its dealer network and add additional
distribution centers in existing and new markets; (ii) increase brand awareness
through continued product development, merchandising programs and trade and
consumer advertising, (iii) leverage its extensive distribution network by
selling additional products to professional installers and to major home center
retail chains; and (iv) expand its production and presence nationally through
continued strategic acquisitions.
The company seeks to promote the continued growth of Building Products'
installation services business by adding new operations in high growth
construction markets. The company anticipates that these operations will be
capable of installing multiple building products, providing the company with a
competitive advantage. The company expects to expand its installation services
operations through continued strategic acquisitions as well as by adding new
products and increasing cross-selling of its products to its existing customers.
Products and Services
The company manufactures a broad line of residential garage doors,
commercial sectional and coiling doors and related products with a variety of
options at varying prices. The company's primary manufactured product lines
include residential garage doors and commercial/industrial doors. The company
also sells related products such as garage door openers and doors and components
for the self-storage market. The company offers garage doors made from several
materials, including steel and wood. Steel doors accounted for over 90% of
garage doors sold by the company in fiscal 1998.
The company markets its line 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 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 that desire exceptional strength, durability, high insulation value,
quiet operation, and a finished interior appearance. The company also markets
garage door openers that are manufactured by a third party.
The company markets a line of commercial doors in three basic categories:
sectional doors, sheet steel roll-up doors and slatted steel coiling doors.
Commercial sectional doors are similar to residential garage doors, but are
designed to meet more demanding specifications. Commercial sheet roll-up doors
offer a lower cost alternative to sectional doors for lighter duty commercial
applications. Slatted coiling steel doors are generally utilized in more
demanding commercial and industrial applications, providing an attractive
combination of flexibility and durability. In this category the company provides
service doors, thermal doors, and fire doors which can be found in warehouses,
manufacturing and military installations as well as in public and other
institutional buildings. The company also provides (i) counter shutters, fire
shutters and grilles that are used in shopping malls, schools, hospitals and the
concession areas of large arenas and convention centers, (ii) commercial door
openers that are marketed with slatted door products, and (iii) sectional door
openers that are manufactured by a third party.
<PAGE>
Building Products' installation services business sells and installs a variety
of building products, including manufactured fireplaces with decorative facings
and mantels, garage doors and garage door openers. The company provides its
installation services through 37 locations in 24 markets covering many of the
key new single family home markets in the United States. The company provides
these services for both newly constructed and remodeled homes.
Sales and Marketing
The company sells residential and commercial doors for professional
installation directly to a national network of professional installing dealers.
The company also sells garage doors to retailers such as The Home Depot Inc.,
Menards, Inc. and Lowe's Companies, Inc. The company distributes its garage
doors directly from its manufacturing facilities to customers and through its
network of 45 company-owned distribution centers throughout the United States
and in Canada. This network allows the company to maintain an inventory of
garage doors near installing dealers and to provide quick-ship service to the
retail customers it services.
Acquisitions
The company has completed a number of acquisitions within Building
Products. Since 1992, the company has completed three acquisitions of garage
door manufacturing and installation companies as well as eight stand-alone
installation companies.
In 1997, the company acquired Holmes-Hally Industries, a West Coast
manufacturer and installer of residential garage doors and related hardware.
This acquisition has increased the company's manufacturing, distribution and
installation presence in the West Coast and Southwestern markets. In 1995, the
company acquired the Atlas Roll-lite Corporation, a manufacturer and installer
of heavy duty coiling steel doors, grilles and counter shutters for industrial
and commercial markets, sectional garage doors for residential applications, and
doors and components for the self-storage market. Through Atlas Roll-lite the
company entered into the coiling steel door business and self-storage market. In
1992, the company acquired Ideal Door Company, which manufactured sectional
garage doors for residential and commercial applications and also provided the
company with entry into the installation services business.
Since 1992, the company has expanded its presence in the installation
services market through acquisitions. The company typically enters new markets
through a primary acquisition and then expands within that market through
internal growth and smaller fill-in acquisitions. The company believes that the
installation and service industry is highly fragmented, primarily with small
organizations that present a large number of acquisition opportunities.
Manufacturing and Raw Materials
The company currently operates seven manufacturing facilities for building
products. A key aspect of Building Products' research and development efforts is
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 enable the company to efficiently manufacture
products in large volume and meet changing customer needs. The company's
facilities use proprietary manufacturing processes to produce the majority of
its products. Certain of the company's equipment and machinery are internally
modified to achieve its manufacturing objectives.
During 1998 Building Products' profitability was impacted by capacity
constraints and related manufacturing inefficiencies due to delay in
implementing an additional production line. In 1999, this additional line plus a
number of other plant capacity projects are planned which should ease the
shortage of capacity experienced in 1998.
<PAGE>
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 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.
Competition
The garage door industry is characterized by several large national
manufacturers, and many smaller regional and local manufacturers. Several of the
national garage door manufacturers, including the company, have been
consolidating the industry through the acquisition of regional and local
manufacturers. During 1998, Building Products experienced continued competitive
pricing pressures, resulting in selling price reductions that narrowed margins.
The installation services industry is fragmented, primarily among small regional
and local companies. The company competes on the basis of product line
diversity, quality, service, price and brand awareness.
SPECIALTY PLASTIC FILMS
The company believes that, through Clopay, it is a leading developer and
producer of plastic films and laminates for a variety of hygienic, health care
and industrial uses in domestic and certain international markets. Specialty
Plastic Films' products include thin gauge embossed and printed films,
elastomeric films and laminates of film and non-woven fabrics. These products
are used primarily as moisture barriers in disposable infant diapers, adult
incontinence products and feminine hygiene products, as protective barriers in
single-use surgical and industrial gowns, drapes, equipment covers, and as
packaging for hygienic products. Specialty Plastic Films' products are sold
through the company's direct sales force primarily to multinational consumer and
medical products companies.
Industry
The specialty plastic films industry has been affected by several key
trends over the past five years. These trends include the increased use of
disposable products in emerging countries and favorable demographics in most
countries, such as high birth rates in third world countries and the aging of
the population. Other key trends representing significant opportunities for
manufacturers include the continued demand for new advanced products such as
breathable and laminated products and the need of major customers for global
supply partners.
Key Competitive Strengths
The company believes that the following strengths will continue to enhance
the market position of Specialty Plastic Films:
Technological Expertise and Product Development. The company believes that,
as a result of ongoing research and development activities and continued capital
investment, it is a leader in new product development for specialty plastic
films and laminates. The company has developed technologically advanced embossed
films, elastomeric films, breathable films, laminates and cloth-like barrier
products for diapers, feminine hygiene products and disposable health care
products. The company believes that its technical expertise and product
development capabilities enhance its market position and customer relationships.
<PAGE>
Long-Term Customer Relationships and Expanding International Presence. The
company has developed strong, long-term relationships with leading consumer and
medical products companies. The company believes that these relationships,
combined with its technological expertise, product development and production
capabilities, have positioned it to meet changing customer needs, which the
company expects will drive growth. In addition, the company believes its strong,
long-term relationships provide it with increasing opportunities to enter new
international markets, such as the Pacific Rim and Latin America.
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 increase its domestic sales and
substantially expand internationally through continued product development and
enhancement and by marketing its technologically advanced breathable films and
laminates for use in all of its markets. The company believes that its Finotech
joint venture and 1998 acquisition of Bohme (see European Operations) provide a
strong platform for additional sales growth in certain international markets.
Products
Specialty Plastic Films manufactures a wide variety of embossed and printed
specialty films and laminates for the hygiene, healthcare and other markets.
Specialty Plastic Films' products are used as moisture barriers for disposable
infant diapers, adult incontinence and feminine hygiene products and as
protective barriers in single-use surgical and industrial gowns, drapes,
equipment covers and packaging. A specialty plastic film is a thin-gauge film
(typically 0.0005" to 0.003") that is manufactured from polyolefin resins and
engineered to provide certain performance characteristics. A laminate is the
combination of a plastic film onto 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 products
typically provide a unique combination of performance characteristics that meet
specific, proprietary customer needs. Examples of such characteristics include
strength, breathability, barrier properties, processibility and aesthetic
appeal.
Sales and Marketing
The company sells its products primarily in the United States and Europe
with sales also in Canada, Latin America and the Pacific Rim. The company
utilizes an internal direct sales force and manufacturer representatives,
organized by customer accounts. Senior management actively participates by
developing and maintaining close contacts with customers.
The company's largest customer is Procter & Gamble, which has accounted for
a substantial portion of Specialty Plastic Films' sales over the last five
years. The loss of this customer would have a material adverse effect on the
company's business. Specialty plastic films also are sold to a diverse group of
other leading consumer and health care companies.
Research and Development
The company believes it is an industry leader in the research, design and
development of specialty plastic films and laminate products. The company
operates a technical center where approximately 30 chemists, scientists and
engineers work independently and in strategic partnerships with the company's
customers to develop new technologies, products and product applications.
Currently, the company is engaged in several joint efforts with the research and
development departments of its specialty plastic film customers.
<PAGE>
The company's research and development efforts have resulted in several
inventions covering embossing patterns, improved processing methods, product
applications and other proprietary technology. Recent new products include
microporous breathable films and cost-effective cloth-like films and laminates.
Microporous breathability provides for air flow while maintaining barrier
properties resulting in improved comfort and skin care. Cloth-like films and
laminates provide consumer preferred aesthetics such as softness and visual
appeal.
European Operations
In 1996, the company formed Finotech, a joint venture with Corovin GmbH,
which is a manufacturer of non-woven fabrics headquartered in Germany and a
subsidiary of BBA Group PLC, a publicly owned diversified U.K. manufacturer. The
joint venture was created to develop, manufacture and market specialty plastic
film and laminate products for use in the infant diaper, healthcare and other
markets. Finotech, which is 60% owned by the company, focuses on selling its
products in Europe.
In 1997, Finotech constructed and began to operate a manufacturing facility
in Germany, the cost of which was approximately $9 million. In 1998, Finotech
had capital expenditures of approximately $22 million for new production lines.
This expansion, which is being financed primarily by joint venture borrowings,
is designed to meet anticipated demand under multi-year contracts with a major
international consumer products company, and will increase Finotech's
manufacturing capacity by approximately 200%.
In July 1998, the company acquired Bohme Verpackungsfolien GmbH & Co., a
German manufacturer of high-quality printed and conventional plastic packaging
and specialty films with annual sales of approximately $35 million. The
acquisition provides a platform to further expand Specialty Plastic Films'
European operations and the opportunity to broaden the segment's product line by
bringing Bohme technology and products to domestic and other international
markets. These products include printed and unprinted film and flexible
packaging for hygienic products.
Manufacturing and Raw Materials
The company manufactures its specialty plastic film and laminate products
on high-speed equipment designed to meet stringent tolerances. The manufacturing
process consists of melting a mixture of polyolefin resins (primarily
polyethylene) and additives, and forcing this mixture through a computer
controlled die and rollers to produce embossed films. In addition, the
lamination processes involve extruding the melted plastic films directly onto a
non-woven fabric and adhesively bonding these materials to form a laminate.
Through statistical process control methods, company personnel monitor and
control the entire production process.
Plastic resins, such as polyethylene and polypropylene, and non-woven
fabrics are the basic raw materials used in the manufacture of substantially all
of Specialty Plastic Films' products. The company currently purchases its
plastic resins in pellet form from several suppliers. The purchases are made
under annual supply agreements that do not specify fixed pricing terms. The
non-woven fabrics are available from several suppliers.
Competition
The market for the company's specialty plastic film and laminate products
is highly competitive. The company has a number of competitors in the specialty
plastic films and laminates market, some of which are larger and have greater
resources than the company. Over the past several years the specialty plastic
films industry has experienced periods of selling price reductions due to
competitive pressures in connection with excess industry manufacturing capacity
for commodity products. The company competes primarily on the basis of technical
expertise, quality, service and price.
<PAGE>
ELECTRONIC INFORMATION AND COMMUNICATION SYSTEMS
The company, through its wholly-owned subsidiary, Telephonics, specializes
in advanced electronic information and communication systems for defense,
aerospace, civil, industrial and commercial markets worldwide. The company
designs, manufactures, and provides logistical support for aircraft
communication systems, radars, air traffic management systems, identification
friend or foe ("IFF") equipment, transit communications and custom mixed-signal
large scale integrated circuits. The company believes that it has a significant
presence in the markets for airborne maritime surveillance radar and aircraft
communication systems, two of the segment's largest product lines. In addition
to its continued focus on defense applications, in recent years the company has
adapted its technology to expand its presence in non-military government,
commercial and international markets. As a result, approximately 50% of the
Electronic Information and Communication Systems segment's fiscal 1998 net sales
were to customers other than the United States government and its prime
contractors and subcontractors on defense programs, as compared to approximately
30% in fiscal 1992.
Some of the major programs in which the company currently participates
include:
<TABLE>
<CAPTION>
Description Customer Products
- ----------- -------- --------
<S> <C> <C>
SH-60R Lockheed Martin Multi-mode radar,
(U.S. Navy Multi-mission intercommunication and
Helicopter) radio management and IFF
systems
NIMROD 2000 (U.K. Royal British Aerospace Integration of
Maritime Patrol Aircraft) communications and radio
management systems
C-17 (U.S. Air Force Boeing Integrated radio
Cargo Transport) management and wireless
communication systems
AWACS (U.S. Air Boeing/NATO IFF and radio management
Force/NATO Airborne systems
Warning and Control
System)
Joint-STARS (U.S. Air Lockheed Martin Intercommunication and
Force Airborne radio management systems
Surveillance System)
Maritime Patrol Radars Sikorsky/Kaman Airborne coastal
surveillance radars
Rail Transit Kawasaki, Bombardier Car-borne communications
Communications and others and vehicle health
monitoring systems for
rail cars
</TABLE>
<PAGE>
Industry
The segment's market is comprised of defense and non-military government
and commercial customers, both domestically and internationally.
In recent years, the Electronic Information and Communication Systems
segment has expanded its customer base with increasing emphasis on non-military
government, commercial, industrial and new international markets. For example,
sales to customers other than the U.S. Department of Defense and its contractors
and subcontractors increased from approximately 30% of the segment's net sales
in fiscal 1992 to approximately 50% of net sales in fiscal 1998.
Although the United States defense budget has remained relatively constant
in the last several years, the electronics procurement portion of the budget is
expected to grow approximately 14% per year over the next 10 years, according to
the Electronics Industry Association. This is due in part to the government's
plan to upgrade the technology in existing weapon systems platforms rather than
purchase entirely new platforms and systems.
One of the major non-defense markets for the segment's products in the
United States is the mass transit market. The company believes that both federal
and local governments will increase funding over the next few years to upgrade
the infrastructure of their mass transit systems. This market is serviced by a
limited number of manufacturers who are capable of providing the required
electronics and logistics support.
Electronic Information and Communication Systems' commercial projects
include contracts with Kawasaki, Bombardier, Breda and other rail suppliers for
rail communications systems as well as with Boeing for aircraft
intercommunication systems and audio products.
In recent years, the segment has significantly expanded its customer base
in international markets. The company's international projects include a
contract with British Aerospace PLC as part of the United Kingdom's upgrade of
the NIMROD surveillance aircraft and several contracts with the Civil Aviation
Authority of China for air traffic management systems. The international market
for custom mixed-signal large scale integrated circuits has continued to benefit
from the increasing complexity of circuits needed for commercial electronic
applications throughout the world. As a result of these and other developments,
the segment's sales to international markets increased from 8% of net sales in
fiscal 1992 to 44% of net sales in fiscal 1998.
Key Competitive Strengths
The company believes that the following strengths will continue to enhance
the market position of Electronic Information and Communication Systems:
Innovative Design and Engineering Capability. The company believes that its
reputation for innovative product design and engineering capabilities has
enhanced its ability to secure, retain and expand key contracts in its markets.
In addition, the company is capable of meeting a full range of customer
requirements including product conceptual design, engineering, production and
logistical support. As a result, the company has been successful in increasing
its presence in both domestic and international markets and in applying its
defense technologies in non-military markets.
Broad Base of Long-Life Programs. 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. The company believes that its recent awards of
significant contracts will add to its installed base and further enhance its
ability to generate recurring revenues.
<PAGE>
Strategy
The company intends to increase the market penetration of Electronic
Information and Communication Systems' products in the defense and non-military
government markets both domestically and internationally by leveraging its
design and engineering capabilities. For example, the company has applied such
capabilities to develop an advanced imaging radar used in the U.S. Navy's SH-60R
multi-mission helicopter. As a result, the company expects substantial sales
growth as it transitions from development to the production phase of the SH-60R
helicopter program, which is expected to occur in 2000. In addition, the company
intends to continue to capitalize on the technology it has developed for defense
programs by entering into new non-military government markets, as exemplified by
contracts to provide car-borne communications systems for trains and subway
cars.
Products
The company manufactures specialized electronic products for a variety of
niche applications. Electronic Information and Communication Systems products
include communication systems, sensor systems, information and command and
control systems, and custom mixed-signal 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 SH-60R multi-mission helicopter, the United
Kingdom's NIMROD surveillance aircraft, U.S. Air Force C-17 cargo transport and
AWACS. The company has expanded its communications expertise into the mass
transit rail market and its communication systems have been selected for
installation by several major mass transit authorities, including the New York
City Transit Authority, Long Island Railroad, Southeastern Pennsylvania Transit
Authority, Massachusetts Bay Transit Authority and California Transit Authority.
The company also manufactures audio products for commercial aircraft, such as
headsets, microphones and handsets.
The company's information and command and control systems include airborne
maritime surveillance radar, air traffic management systems and landing systems.
The company provides both the expertise and the equipment for detecting and
tracking targets in a maritime environment and flight path management systems
for air traffic control applications. Its maritime radar systems, which are used
in more than 20 countries, are fitted aboard helicopters, fixed-wing aircraft
and aerostats for use at sea. The company's aerospace electronic systems include
IFF systems used by the U.S. Air Force and NATO on the AWACS aircraft and
microwave landing systems used by NASA and other customers for ground and ship
based applications.
The company also manufactures custom mixed-signal large scale integrated
circuits primarily for customers in the security, automotive and
telecommunications industries, as well as for customers in the defense industry.
Security applications include smoke and motion detectors as well as intrusion
alarm systems. Major 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. In addition, the company's custom
integrated circuits are important components in various computer peripheral
devices.
Backlog
The company's funded backlog for Electronic Information and Communication
Systems was approximately $189 million on September 30, 1998, compared to $182
million on September 30, 1997.
<PAGE>
Sales and Marketing
Telephonics has approximately 15 technical business development personnel
who act as the focal point for its marketing activities and approximately 30
sales representatives who introduce its products and systems to customers
worldwide.
Research and Development
A portion of Electronic Information and Communication Systems' product
development activities are generally performed under government contracts. The
segment also regularly updates its core technologies through internally funded
research and development. The selection of these projects is based on available
opportunities in the marketplace as well as input from the company's customers.
These projects usually represent an evolution of existing products rather than
entirely new pursuits. The company's recent internally funded research and
development activities are exemplified by the development of a next generation
airborne radar system and an all digital interior communication system.
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.
EMPLOYEES
The company has approximately 5,400 employees located throughout the United
States and in Europe. Approximately 100 of its employees are covered by
collective bargaining agreements, primarily with affiliates of the AFL-CIO. The
company believes its relationships with its employees are satisfactory.
OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Served as Positions and
Name Age Officer Since Offices
---- --- ------------- -------------
<S> <C> <C> <C>
Harvey R. Blau 63 1983 Chairman of the Board and
Chief Executive Officer
Robert Balemian 59 1976 President
Patrick L. Alesia 50 1979 Vice President and Treasurer
Edward I. Kramer 64 1997 Vice President, Administration and
Secretary
</TABLE>
<PAGE>
ITEM 2 - PROPERTIES
----------
The company occupies approximately 4,100,000 square feet of general office,
factory and warehouse space and showrooms throughout the United States and in
Germany. The following table sets forth certain information as to each of the
company's major facilities:
<TABLE>
<CAPTION>
Approximate Owned
Square or
Location Business Segment Primary Use Footage Leased
- -------- ---------------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Jericho, NY Corporate Headquarters Office 10,000 Leased
Farmingdale,NY Electronic Information Manufacturing 167,000 Owned
and Communication
Systems
Huntington, NY Electronic Information Manufacturing 89,000 Owned
and Communication
Systems
Cincinnati, OH Building Products Office 44,000 Leased
Specialty Plastic Films
Cincinnati, OH Building Products Research and 49,000 Leased
Specialty Plastic Films Development
Aschersleben, Specialty Plastic Films Manufacturing 395,000 Owned
Germany
Dombuhl, Secialty Plastic Films Manufacturing 398,000 Owned
Germany
Augusta, KY Specialty Plastic Films Manufacturing 143,000 Owned
Nashville, TN Specialty Plastic Films Manufacturing 86,000 Leased
Fresno, CA Specialty Plastic Films Manufacturing 37,000 Leased
Russia, OH Building Products Manufacturing 274,000 Leased
Baldwin, WI Building Products Manufacturing 216,000 Leased
Orlando, FL Building Products Manufacturing 196,000 Leased
Nesbitt, MS Building Products Manufacturing 40,000 Owned
Auburn, WA Building Products Manufacturing 123,000 Leased
Tempe, AZ Building Products Manufacturing 145,000 Leased
Commerce, CA Building Products Manufacturing 41,000 Leased
</TABLE>
The company also leases approximately 1,500,000 square feet of space for
the Building Products' distribution centers and installation services locations
in numerous facilities throughout the United States.
<PAGE>
The company has aggregate minimum annual rental commitments under real
estate leases of approximately $10 million. The majority of the leases have
escalation clauses related to increases in real property taxes on the leased
property and some for cost of living adjustments. Certain of the leases have
renewal and purchase options. All plants and equipment of the company are
believed to be in adequate condition and contain sufficient space for current
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.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
-------------------------------------
The company's Common Stock is listed for trading on the New York Stock
Exchange. As of November 1, 1998 there were approximately 14,000 record holders.
The following table shows for the periods indicated the quarterly range in the
high and low sales prices for the company's Common Stock.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
--------------------
<S> <C> <C>
December 31, 1996 $12 1/4 $ 9 3/8
March 31, 1997 14 5/8 11 7/8
June 30, 1997 14 7/8 11 7/8
September 30, 1997 16 1/4 14
December 31, 1997 17 1/2 14 3/8
March 31, 1998 17 3/8 14 11/16
June 30, 1998 15 7/16 12 3/8
September 30, 1998 13 15/16 7 15/16
</TABLE>
ITEM 6 - SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $914,874,000 $770,227,000 $655,063,000 $506,116,000 $451,166,000
============ ============ ============ ============ ============
Income from
continuing
operations $ 29,321,000 $ 33,164,000 $ 28,067,000 $ 23,245,000 $ 29,394,000
============ ============ ============ ============ ============
Per share:
Basic $ .96 $ 1.12 $ .93 $ .73 $ .83
============ ============ ============ ============ ============
Diluted $ .94 $ 1.06 $ .88 $ .69 $ .79
============ ============ ============ ============ ============
Total assets $487,938,000 $384,759,000 $311,169,000 $285,616,000 $293,215,000
============ ============ ============ ============ ============
Long-term
obligations $112,829,000 $ 53,854,000 $ 32,458,000 $ 16,074,000 $ 15,538,000
============ ============ ============ ============ ============
</TABLE>
No dividends on Common Stock were declared or paid during the five years
ended September 30, 1998.
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
---------------------------------------
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Net sales by business segment were as follows:
<TABLE>
<CAPTION>
Percentage
1998 1997 Increase
---- ---- --------
(millions)
<S> <C> <C> <C>
Building products $590.5 $479.2 23.2%
Specialty plastic films 167.5 163.7 2.3%
Electronic information
and communication systems 156.9 127.3 23.2%
------ ------
$914.9 $770.2 18.8%
====== ======
</TABLE>
Net sales of the building products segment increased by $111.3 million
compared to 1997. Companies acquired during 1997 that are included in 1998
operating results for a full year accounted for approximately $75 million of the
sales increase. Higher unit sales of garage doors resulting from continued
strong demand in the residential and related retail markets contributed
approximately $18 million of the increase. Sales increases in the segment's
installation services business stemming from geographic expansion and internal
growth, partly offset by the effect of competitive pricing on the segment
accounted for the balance of the increase.
Net sales of the specialty plastic films segment increased by $3.8 million
compared to 1997. In July 1998 the specialty plastic films segment acquired a
plastic packaging manufacturer located in Germany which accounted for a sales
increase of $7.6 million. Lower than anticipated sales from new programs in the
infant diaper market contributed to a modest increase in unit volume, the
effects of which were offset by price competition in the commodity end of the
segment's business, and a pass-through to customers of lower resin prices.
Net sales of the electronic information and communication systems segment
increased by $29.6 million, principally because of new program awards and
increased funding levels on several programs in the segment's defense and
international business. Included were sales of approximately $22 million, a $10
million increase compared to the prior year, under a contract to provide
integrated radio management and communication systems for a United Kingdom
coastal surveillance aircraft program that is projected to extend through 2003.
Operating income by business segment was as follows:
<TABLE>
<CAPTION>
Percentage
1998 1997 Increase/Decrease
---- ---- -----------------
(millions)
<S> <C> <C> <C>
Building products $35.0 $40.7 (14.1%)
Specialty plastic films 6.9 8.5 (18.6%)
Electronic information
and communication systems 13.4 11.8 13.9%
----- -----
$55.3 $61.0 (9.3)%
===== =====
</TABLE>
Operating income of the building products segment decreased by $5.7 million
compared to 1997. The effect of the sales growth was offset by competitive
pricing pressures, capacity constraints and related manufacturing inefficiencies
due to delay in implementing an additional production line, increased operating
expenses associated with new distribution centers and certain manufacturing
inefficiencies related to production of commercial doors. Orders in the garage
door business remain strong. However, capacity constraints and continued
competitive pricing impacted this segment's operating earnings. Additional
capacity is being implemented and is expected to be in place early in fiscal
1999.
<PAGE>
Operating income of the specialty plastic films segment declined by $1.6
million compared to last year. The segment experienced decreased earnings in the
first nine months of fiscal 1998 due to lower than anticipated sales from new
programs and price competition in the commodity end of the segment's business.
These decreases were partly offset by improving operating results in the last
quarter of the year due to increased unit sales volume from new infant diaper
programs and earnings from an acquired company. Although specialty plastic films
continues to be affected by pricing pressures, it is anticipated that continued
volume growth, principally in the segment's European operations, plus earnings
from the acquired company for a full year will result in improved operating
results in this segment.
Operating income of the electronic information and communication systems
segment increased by $1.6 million due to the increased sales.
Net interest expense increased by $1.2 million compared to 1997 due to
higher levels of outstanding debt in 1998 from acquisitions in 1997 and 1998,
from borrowings to finance new production lines for specialty plastic films'
joint venture and from lower investable balances in 1998.
Fiscal 1997 Compared to Fiscal 1996
Net sales by business segment were as follows:
<TABLE>
<CAPTION>
Percentage
1997 1996 Increase
---- ---- ----------
(millions)
<S> <C> <C> <C>
Building products $479.2 $404.8 18.4%
Specialty plastic films 163.7 127.4 28.5%
Electronic information
and communication systems 127.3 122.9 3.6%
------ ------ -----
$770.2 $655.1 17.6%
====== ====== =====
</TABLE>
Net sales of the building products segment increased by $74.4 million
compared to 1996. Acquired companies accounted for $34.2 million of the sales
increase. Higher unit sales of garage doors resulting from continued strong
demand in the residential and related retail markets, along with sales increases
in the installation services business stemming from geographic expansion and
internal growth, aggregated $38.8 million of the increase.
Net sales of the specialty plastic films segment increased by $36.3 million
over 1996, principally because of increased unit sales from growth in new
programs for its major customer for the infant diaper market.
Net sales of the electronic information and communication systems segment
increased by $4.4 million compared to 1996, principally because of new program
awards and increased funding levels on several programs in the segment's defense
and international business.
Operating income by business segment was as follows:
<TABLE>
<CAPTION>
Percentage
1997 1996 Increase/Decrease
---- ---- -----------------
(millions)
<S> <C> <C> <C>
Building products $40.7 $33.1 23.2%
Specialty plastic films 8.5 9.0 (5.5%)
Electronic information
and communication systems 11.8 11.0 7.5%
----- ----- -----
$61.0 $53.1 15.1%
===== =====
</TABLE>
Operating income of the building products segment increased by $7.6 million
over 1996. Higher garage door unit sales, growth in the installation services
business, earnings of acquired companies, operating efficiencies and lower raw
material costs all contributed to the increase.
Operating income of the specialty plastic films segment declined by $.5
million compared to 1996. New product development and start-up costs, increased
<PAGE>
raw material costs and price competition in the commodity end of the segment's
business were the principal reasons for the decrease.
Operating income of the electronic information and communication systems
segment increased by $.8 million due to the increased sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations for 1998 was $20.8 million, and working
capital was $168.5 million at September 30, 1998.
During 1998, the specialty plastic films segment acquired a plastic
packaging manufacturer located in Dombuhl, Germany with annual sales of
approximately $35 million whose purchase price of approximately $28 million was
substantially financed by borrowings under a subsidiary's bank credit agreement.
During the year, $5.6 million was used to acquire approximately 563,000
shares of the company's Common Stock. Since 1993, approximately 8.4 million
shares of capital stock have been purchased for $76.7 million under the
company's stock repurchase program.
The company rents various real property and equipment through
noncancellable operating leases. Related future minimum lease payments due in
1999 approximate $21 million and are expected to be funded through operating
cash flows.
In 1998 the company had fixed asset additions of $48 million, including
construction and equipment costs of approximately $22 million for new production
lines for its specialty plastic films joint venture in Germany, and
approximately $10 million to upgrade and enhance strategic business systems. The
balance of capital expenditures were principally made in connection with
increasing production capacity and to improve manufacturing efficiency in the
building products segment. During 1999 the company anticipates capital
expenditures of approximately $40 to $45 million, primarily in the building
products and specialty plastic films segments in connection with additional
production capacity and manufacturing improvements, and the continuing systems
upgrade program. There are no other significant commitments for future capital
expenditures or investments, although it is likely that cash outflows for
business acquisitions, capital expenditures and leases will continue.
Anticipated cash flows from operations, together with existing cash, bank
lines of credit and lease line availability, should be adequate to finance
presently anticipated working capital and capital expenditure requirements and
to repay long-term debt as it matures.
Year 2000
The company had previously initiated programs to upgrade and enhance
strategic business systems in order to replace aging technologies and provide
the infrastructure to support growth in each of its business segments. In
addition to other benefits that are anticipated from these upgrades and
enhancements, the new systems are designed to be Year 2000 compliant, and play
an important role in the company's overall Year 2000 strategy. The strategy is
designed to address the company's application software, hardware and related
operating platforms ("IT Systems"), embedded technology such as microcontrollers
in production equipment or products, and third parties, principally suppliers
and customers. Due to the diverse nature of the company's operations and other
factors such as the number of facilities and degree of information systems
centralization, these efforts are at varying stages of completion.
In each of the company's business segments, identification of critical IT
Systems was generally performed as a part of the segment's upgrade and
enhancement program for strategic business systems. Assessment of identified,
critical IT Systems for Year 2000 compliance for each business segment was also
<PAGE>
completed as a part of the segment's upgrade and enhancement program.
Inventories and assessments of remaining systems are expected to be completed by
the beginning of 1999.
Within the electronic information and communication systems segment, most
of the critical IT Systems have been replaced with systems that are Year 2000
compliant. Remediation efforts for the remaining critical IT Systems are
underway and the replacement process is expected to be completed by June 1999.
Remediation of non-critical IT Systems is anticipated to be completed by the
beginning of 1999.
The specialty plastic films segment has replaced all critical IT Systems
with new systems that are Year 2000 compliant. Replacement of non-critical IT
Systems is anticipated to be completed by March 1999.
The building products segment initially estimated that Year 2000 issues
would be addressed within the context of its existing upgrade and enhancement
program. This program however, is running behind schedule, and alternative plans
have been developed and are being implemented in order to remediate identified
Year 2000 issues. These plans call for the application of software modifications
to existing systems, though efforts to implement previously planned upgrades and
enhancements are expected to continue. The inability of the company to timely
implement the modifications due to the complexities and uncertainties inherent
in developing, testing and implementing software, would adversely affect the
segment's profitability due to increased operating costs and related
inefficiencies.
With respect to embedded technology, inventories and assessments in each of
the company's business segments are in process and are expected to be completed
in the beginning of 1999. Until the inventories and assessments are complete, it
is not possible to determine what action, if any, will be required to be taken,
or the likely result of inability to timely implement any required corrective
action.
In evaluating the impact of Year 2000 on significant third parties, each
business segment will identify any such relationships and contact the parties
involved or otherwise attain an understanding of such third parties' Year 2000
readiness. This process is underway and it is expected that significant third
parties will be identified and contacted by the beginning of 1999. Until this
process is completed, it is not possible to predict the likely outcome of any
significant third parties' failure to attain Year 2000 compliance.
The company estimates that aggregate capital expenditures for systems
upgrade and enhancement programs will be approximately $40 million. Through
September 30, 1998 the company had incurred approximately $21 million of such
costs with the balance to be incurred through fiscal 2000. In addition, the
company estimates that approximately $2 to $5 million will be expended for Year
2000 consulting costs. The company has not separately tracked all costs for Year
2000 efforts since such compliance was expected to be achieved as an ancillary
benefit of budgeted systems upgrade and enhancement programs, or principally
consist of payroll and related costs for information systems personnel.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
annual report, including without limitation statements regarding the company's
financial position, business strategy, Year 2000 readiness and the plans and
objectives of the company's management for future operations, are
forward-looking statements. When used in this annual report, words such as
"anticipate", "believe", "estimate", "expect", "intend" and similar expressions,
as they relate to the company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
company's management, as well as assumptions made by and information currently
available to the company's management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
<PAGE>
factors, including but not limited to, business and economic conditions,
competitive factors and pricing pressures, capacity and supply constraints and
the impact of any disruption or failure in normal business activities at the
company and its customers and suppliers as a consequence of Year 2000 related
problems. 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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Management does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments that would require
disclosure under this item.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements of the company and its subsidiaries and the report
thereon of Arthur Andersen LLP, dated November 5, 1998 are included herein:
- Report of Independent Public Accountants.
- Consolidated Balance Sheets at September 30, 1998 and 1997.
- Consolidated Statements of Income, Cash Flows and Shareholders' Equity
for the years ended September 30, 1998, 1997, 1996.
- Notes to Consolidated Financial Statements.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Griffon Corporation:
We have audited the accompanying consolidated balance sheets of Griffon
Corporation (a Delaware corporation) and subsidiaries as of September 30, 1998
and 1997 and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements and schedules is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
November 5, 1998
<PAGE>
GRIFFON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 19,326,000 $ 15,414,000
Marketable securities --- 1,379,000
Accounts receivable, less allowance
for doubtful accounts of $7,476,000
in 1998 and $6,627,000 in 1997
(Note 1) 114,784,000 105,050,000
Contract costs and recognized income
not yet billed (Note 1) 47,324,000 40,465,000
Inventories (Note 1) 104,517,000 88,123,000
Prepaid expenses and other current
assets 20,675,000 13,676,000
------------ ------------
Total current assets 306,626,000 264,107,000
------------ ------------
Property, Plant and Equipment, at
cost, net of depreciation and
amortization (Note 1) 132,214,000 77,080,000
------------ ------------
Other Assets:
Costs in excess of fair value of
net assets of businesses acquired,
net (Note 1) 38,359,000 35,948,000
Other 10,739,000 7,624,000
------------ ------------
49,098,000 43,572,000
------------ ------------
$487,938,000 $384,759,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of
long-term debt $ 9,414,000 $ 5,229,000
Accounts payable 62,542,000 50,634,000
Accrued liabilities (Note 1) 63,178,000 65,760,000
Federal income taxes (Note 1) 3,010,000 7,477,000
------------ ------------
Total current liabilities 138,144,000 129,100,000
------------ ------------
Long-Term Debt (Note 2) 107,458,000 47,689,000
------------ ------------
Minority Interest and Other (Note 2) 12,247,000 6,165,000
------------ ------------
Commitments and Contingencies (Note 4)
Shareholders' Equity (Note 3):
Preferred stock, par value $.25 per share,
authorized 3,000,000 shares, no shares issued --- ---
Common stock, par value $.25 per share,
authorized 85,000,000 shares, issued
31,706,362 shares in 1998 and
31,278,830 shares in 1997 7,927,000 7,820,000
Capital in excess of par value 40,053,000 34,564,000
Retained earnings 197,985,000 168,664,000
------------ ------------
245,965,000 211,048,000
Less--
Deferred compensation (2,053,000) (2,621,000)
Treasury shares, at cost, 1,287,002
common shares in 1998 and 603,700
common shares in 1997 (13,823,000) (6,622,000)
------------ ------------
Total shareholders' equity 230,089,000 201,805,000
------------ ------------
$487,938,000 $384,759,000
============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
<PAGE>
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $914,874,000 $770,227,000 $655,063,000
Cost of sales 685,230,000 571,132,000 489,460,000
------------ ------------ ------------
229,644,000 199,095,000 165,603,000
Selling, general and administrative
expenses 180,211,000 144,663,000 118,085,000
------------ ------------ ------------
49,433,000 54,432,000 47,518,000
------------ ------------ ------------
Other income (expense):
Interest expense (3,934,000) (3,475,000) (3,409,000)
Interest income 627,000 1,377,000 1,180,000
Other, net 416,000 699,000 668,000
------------ ------------ ------------
(2,891,000) (1,399,000) (1,561,000)
------------ ------------ ------------
Income from continuing operations
before income taxes 46,542,000 53,033,000 45,957,000
------------ ------------ ------------
Provision for income taxes (Note 1):
State and foreign 4,027,000 3,102,000 2,663,000
Federal 13,194,000 16,767,000 15,227,000
------------ ------------ ------------
17,221,000 19,869,000 17,890,000
------------ ------------ ------------
Income from continuing operations 29,321,000 33,164,000 28,067,000
------------ ------------ ------------
Discontinued operations, net of
income tax effect --- --- (5,244,000)
------------ ------------ ------------
Net income $ 29,321,000 $ 33,164,000 $ 22,823,000
============ ============ ============
Basic earnings per share (Note 1):
Income from continuing operations $ .96 $ 1.12 $ .93
Discontinued operations --- --- (.18)
------------ ------------ ------------
Net income $ .96 $ 1.12 $ .75
============ ============ ============
Diluted earnings per share (Note 1):
Income from continuing operations $ .94 $ 1.06 $ .88
Discontinued operations --- --- (.16)
------------ ------------ ------------
Net income $ .94 $ 1.06 $ .72
============ ============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
<PAGE>
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,321,000 $ 33,164,000 $ 22,823,000
Adjustments to reconcile net income ------------ ------------ ------------
to net cash provided by operating
activities:
Depreciation and amortization 16,255,000 11,452,000 10,317,000
Provision for losses on accounts
receivable 1,907,000 1,312,000 1,166,000
Deferred income taxes (1,039,000) 2,942,000 (2,557,000)
Loss from discontinued operations --- --- 8,244,000
Change in assets and liabilities:
Increase in accounts receivable
and contract costs and recognized
income not yet billed (15,070,000) (15,750,000) (13,422,000)
(Increase) decrease in inventories (14,058,000) (21,000) 8,741,000
(Increase) decrease in prepaid
expenses and other assets (5,587,000) (7,120,000) 1,050,000
Increase in accounts payable,
accrued liabilities and
Federal income taxes 4,393,000 12,975,000 1,400,000
Other changes, net 4,677,000 2,321,000 (1,092,000)
------------ ------------ ------------
Total adjustments (8,522,000) 8,111,000 13,847,000
------------ ------------ ------------
Net cash provided by operating
activities 20,799,000 41,275,000 36,670,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in marketable securities 1,379,000 2,918,000 7,900,000
Acquisition of property, plant and
equipment (48,002,000) (25,793,000) (9,359,000)
Proceeds from sales of discontinued
operations --- 10,518,000 ---
Acquired businesses (26,445,000) (40,953,000) (23,148,000)
(Increase) decrease in equipment lease
deposits and other 2,142,000 (585,000) 2,180,000
------------ ------------ ------------
Net cash used in
investing activities (70,926,000) (53,895,000) (22,427,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares (5,580,000) (4,223,000) (21,727,000)
Proceeds from issuance of long-term debt 60,600,000 41,183,000 34,000,000
Payments of long-term debt (1,062,000) (24,004,000) (16,537,000)
Increase (decrease) in short-term borrowings 65,000 (3,968,000) (1,500,000)
Other, net 16,000 1,200,000 (289,000)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 54,039,000 10,188,000 (6,053,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,912,000 (2,432,000) 8,190,000
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 15,414,000 17,846,000 9,656,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,326,000 $ 15,414,000 $ 17,846,000
============ ============ ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
<PAGE>
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED DEFERRED TREASURY SHARES
SHARES PAR VALUE PAR VALUE EARNINGS COMPENSATION SHARES COST
---------- ----------- ----------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 30, 1995 31,081,499 $7,770,000 $52,149,000 $113,101,000 $ 424,000 162,796 $ 1,277,000
Amortization of deferred
compensation --- --- --- --- (345,000) --- ---
Cash dividend on Second
Preferred Stock, Series I
(Note 3) --- --- --- (416,000) --- --- ---
Purchase of treasury shares
(Note 3) --- --- --- --- --- 2,189,100 21,727,000
Exercise of stock options
(Note 3) 148,750 37,000 364,000 --- --- --- ---
Retirement of treasury shares (2,000,000) (500,000) (19,649,000) --- --- (2,017,000) (20,153,000)
Other 23,599 6,000 (100,000) --- 100,000 --- ---
Net income --- --- --- 22,823,000 --- --- ---
---------- ---------- ----------- ------------ ---------- ---------- ------------
Balances, September 30, 1996 29,253,848 7,313,000 32,764,000 135,508,000 179,000 334,896 2,851,000
ESOP purchase of Common Stock
(Note 3) --- --- --- --- 3,000,000 --- ---
Amortization of deferred
compensation --- --- --- --- (658,000) --- ---
Conversion of Second
Preferred Stock, Series I
(Note 3) 1,573,679 394,000 --- --- --- --- ---
Purchase of treasury shares
(Note 3) --- --- --- --- --- 313,969 4,223,000
Exercise of stock options
(Note 3) 443,627 111,000 2,094,000 --- --- --- ---
Retirement of treasury shares --- --- (441,000) --- --- (45,165) (452,000)
Other 7,676 2,000 147,000 (8,000) 100,000 --- ---
Net income --- --- --- 33,164,000 --- --- ---
---------- ---------- ----------- ------------ ---------- ---------- ------------
Balances, September 30, 1997 31,278,830 7,820,000 34,564,000 168,664,000 2,621,000 603,700 6,622,000
Amortization of deferred
compensation --- --- --- --- (668,000) --- ---
Purchase of treasury shares
(Note 3) --- --- --- --- --- 562,700 5,580,000
Exercise of stock options
(Note 3) 426,786 107,000 4,427,000 --- --- --- ---
Retirement of treasury shares (5,717) (2,000) (96,000) --- --- (5,717) (98,000)
Other 6,463 2,000 1,158,000 --- 100,000 126,319 1,719,000
Net income --- --- --- 29,321,000 --- --- ---
---------- ---------- ----------- ------------ ---------- ---------- ------------
Balances, September 30, 1998 31,706,362 $7,927,000 $40,053,000 $197,985,000 $2,053,000 1,287,002 $13,823,000
========== ========== =========== ============ ========== ========= ============
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
<PAGE>
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 a
maturity of three months or less to be cash equivalents. Cash payments for
interest were approximately $5,353,000, $3,325,000 and $3,372,000 in 1998, 1997
and 1996, respectively.
A substantial portion of the company's trade receivables are from customers
of the building products segment whose financial condition is dependent on the
construction and related retail sectors of the economy.
Foreign currency translation
The financial statements of all foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. Dollars based on the
current exchange rate at the end of the period for the balance sheet and average
exchange rates for results of operations. Adjustments resulting from translation
of foreign currency financial statements are not material.
Accounting for long-term contracts
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.
"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.
<PAGE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
------------ -----------
<S> <C> <C>
Finished goods $ 58,176,000 $43,722,000
Work in process 27,011,000 21,228,000
Raw materials and supplies 19,330,000 23,173,000
------------ -----------
$104,517,000 $88,123,000
============ ===========
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
Land, buildings and building
improvements $ 31,359,000 $ 28,568,000
Machinery and equipment 153,066,000 93,461,000
Leasehold improvements 10,518,000 8,724,000
------------ ------------
194,943,000 130,753,000
Less--Accumulated
depreciation and
amortization 62,729,000 53,673,000
------------ ------------
$132,214,000 $ 77,080,000
============ ============
</TABLE>
Acquisitions and costs in excess of fair value of net assets of businesses
acquired ("Goodwill")
In July 1998 the company acquired Bohme Verpackungsfolien GmbH & Co., a
German plastic packaging manufacturer with annual sales of approximately
$35,000,000. The purchase price of approximately $28,000,000 was substantially
financed by borrowings under a subsidiary's bank credit agreement.
In July 1997 the company acquired Holmes-Hally Industries, a manufacturer
and installer of residential garage doors and related hardware with annual sales
of approximately $80,000,000. The purchase price of approximately $35,000,000
was financed through borrowings under existing lines of credit. Also acquired
during 1997 in cash transactions were several other companies involved in the
installation of building products.
<PAGE>
The above acquisitions have been accounted for as purchases and resulted in
an increase in goodwill of $3,883,000 in 1998 and $14,158,000 in 1997. Goodwill
is being amortized on a straight-line basis over a period of forty years. At
September 30, 1998 and 1997, accumulated amortization of goodwill was $7,505,000
and $6,032,000, respectively. The operating results of acquired businesses have
been included in the consolidated statements of income since the dates of
acquisition.
Income taxes
The provision for income taxes included in continuing operations is
comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Current $18,260,000 $16,927,000 $17,447,000
Deferred (1,039,000) 2,942,000 443,000
----------- ----------- -----------
$17,221,000 $19,869,000 $17,890,000
=========== =========== ===========
</TABLE>
The deferred taxes result primarily from differences in the reporting of
depreciation, the allowance for doubtful accounts and other nondeductible
accruals.
Cash payments for income taxes were $19,670,000, $15,328,000 and
$16,525,000 in 1998, 1997 and 1996, respectively.
The following table indicates the significant elements contributing to the
difference between the U.S. Federal statutory tax rate and the company's
effective tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Federal statutory
tax rate 35.0% 35.0% 35.0%
State and foreign
income taxes 5.6 3.8 3.8
Other (3.6) (1.3) .1
---- ---- ----
Effective tax rate 37.0% 37.5% 38.9%
==== ==== ====
</TABLE>
Research and development costs
Research and development costs not recoverable under contractual
arrangements are charged to expense as incurred. Approximately $11,900,000,
$7,700,000 and $5,500,000 in 1998, 1997 and 1996, respectively, was incurred on
such research and development.
Accrued liabilities
At September 30, 1998 and 1997, accrued liabilities included $17,960,000
and $17,845,000, respectively, for payroll and other employee benefits.
<PAGE>
Earnings per share
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
which became effective for fiscal 1998, establishes new standards for computing
and presenting earnings per share (EPS). The new standard requires the
presentation of basic EPS and diluted EPS and the restatement of previously
reported EPS amounts.
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. Income available to common shareholders used in determining basic EPS
($29,321,000 in 1998, $33,157,000 in 1997 and $27,651,000 in 1996) reflects
deductions for Preferred Stock dividends ($7,000 in 1997 and $416,000 in 1996).
The weighted average number of shares of common stock used in determining basic
EPS was 30,553,000 in 1998, 29,664,000 in 1997 and 29,728,000 in 1996.
Diluted EPS is calculated by dividing income available to common
shareholders, adjusted to add back dividends or interest on convertible
securities, by the weighted average number of shares of common stock outstanding
plus additional common shares that could be issued in connection with
potentially dilutive securities. Income available to common shareholders used in
determining diluted EPS was $29,321,000 in 1998, $33,164,000 in 1997 and
$28,067,000 in 1996. The weighted average number of shares of common stock used
in determining diluted EPS was 31,316,000 in 1998, 31,231,000 in 1997 and
31,915,000 in 1996 and reflects additional shares in connection with convertible
Preferred Stock (642,000 shares in 1997 and 1,663,000 shares in 1996) and stock
option and other stock-based compensation plans (763,000 shares in 1998, 925,000
shares in 1997, and 524,000 shares in 1996).
Start-up costs
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which becomes effective for the fiscal year ended
September 30, 2000, sets accounting standards in connection with accounting and
financial reporting related to costs of start-up activities. This SOP requires
that, at the effective date of adoption, costs of start-up activities previously
capitalized be reported as a cumulative effect of a change in accounting
principle, and further requires that such costs incurred subsequent to adoption
be expensed. Management anticipates that adoption of SOP 98-5 will not have a
material effect on financial position or results of operations.
2. LONG-TERM DEBT:
The company has a loan agreement with two banks which provides for up to
$80,000,000 of revolving credit through 2000, after which outstanding borrowings
may be converted into a five-year term loan. Borrowings bear interest at rates
(7.2% as of September 30, 1998) based upon LIBOR or at the prime rate and are
secured by the capital stock of certain of the company's subsidiaries. This
credit agreement was utilized to finance acquisitions (see Note 1) and to
finance purchases of the company's Common Stock. As of September 30, 1998,
$50,500,000 was outstanding under this agreement.
In April 1998 the company's German joint venture entered into a credit
agreement with a bank to finance new production lines. The agreement provides
for borrowings of approximately $28,000,000, payable in installments through
2001, and bears interest at rates (4.5% as of September 30, 1998) based upon
LIBOR. As of September 30, 1998 approximately $22,460,000 was outstanding under
the agreement.
<PAGE>
In connection with an acquisition in July 1998 (see Note 1), a subsidiary
of the company entered into a credit agreement with a bank for borrowings of
approximately $20,000,000, payable in installments through 2005. Outstanding
borrowings under the agreement bear interest at rates (4.4% as of September 30,
1998) based upon LIBOR.
The balance of the company's long-term debt outstanding at September 30,
1998 relates primarily to real estate mortgages, with interest rates ranging
from 8.5% to 8.9% and maturities through 2006.
The following are the maturities of long-term debt outstanding at September
30, 1998 for each of the succeeding five years:
<TABLE>
<S> <C>
1999 $ 6,651,000
2000 10,622,000
2001 27,067,000
2002 20,037,000
2003 13,601,000
</TABLE>
3. SHAREHOLDERS' EQUITY:
During 1997 the company called for redemption its Second Preferred Stock at
the redemption price of $10.00 per share plus accrued and unpaid dividends.
Holders of 1,524,429 shares of Second Preferred Stock converted their shares
into an equal number of shares of Common Stock, and 45,165 shares were redeemed
for cash.
The company has an Employee Stock Ownership Plan ("ESOP") which covers most
of the company's nonunion employees. In 1997 the ESOP borrowed $3,000,000 which
was used to purchase equity securities of the company. The outstanding balance
of the loan is guaranteed by the company and is reflected as a liability in the
consolidated balance sheet with a like amount of deferred compensation recorded
as a reduction of shareholders' equity.
The company has stock option plans under which options for an aggregate of
5,850,000 shares of Common Stock may be granted. As of September 30, 1998
options for 1,085,500 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:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at September 30,
1995 2,296,750 $ 6.60
Granted 618,000 $ 8.84
Exercised (148,750) $ 2.70
Terminated (22,000) $ 8.13
---------
Outstanding at September 30,
1996 2,744,000 $ 7.30
Granted 776,500 $13.44
Exercised (217,214) $ 7.36
Terminated (3,250) $ 8.04
---------
Outstanding at September 30,
1997 3,300,036 $ 8.74
Granted 2,061,500 $13.35
Exercised (426,786) $ 4.06
Terminated (43,250) $13.10
---------
Outstanding at September 30,
1998 4,891,500 $11.05
=========
</TABLE>
<PAGE>
At September 30, 1998 option groups outstanding and exercisable are as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------
Weighted Weighted
Average Average
Range of Number of Remaining Exercise
Exercise Price Options Life Price
-------------- --------- --------- --------
<S> <C> <C> <C>
$11.125 to $15.75 2,767,000 9.2 years $13.37
$6.625 to $9.375 2,124,500 6.2 8.03
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options
-------------------------------------
Weighted
Average
Range of Number of Exercise
Exercise Price Options Price
-------------- --------- --------
<S> <C> <C>
$13.50 363,250 $13.50
$6.625 to $9.375 2,118,500 8.03
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", became effective for the fiscal year beginning October 1,
1996, and permits an entity to continue to account for employee stock-based
compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees", or adopt a fair value based method of accounting for such
compensation. The company has elected to continue to account for stock-based
compensation under Opinion No. 25. Accordingly, no compensation expense has been
recognized in connection with options granted. Had compensation expense for
options granted been determined based on the fair value at the date of grant in
accordance with Statement No. 123, the company's net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $29,321,000 $33,164,000 $22,823,000
Pro forma 24,902,000 31,099,000 22,209,000
Earnings per share
As reported -
Basic $.96 $1.12 $.75
Diluted .94 1.06 .72
Pro forma -
Basic $.82 $1.05 $.73
Diluted .80 1.00 .70
</TABLE>
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option pricing model. The weighted average fair values of
options granted in fiscal 1998, 1997 and 1996 were $6.52, $6.96 and $4.58,
respectively, based upon the following weighted average assumptions: expected
volatility (.350 in 1998, .372 in 1997 and .397 in 1996), risk-free interest
rate (5.67% in 1998, 6.40% in 1997 and 5.57% in 1996), expected life (7 years in
1998, 1997 and 1996), and expected dividend yield (0% in 1998, 1997 and 1996).
<PAGE>
The company has an Outside Director Stock Award Plan (the "Outside Director
Plan"), which was approved by the shareholders in 1994, under which 300,000
shares may be issued to non-employee directors. Annually, each eligible director
is awarded shares of the company's Common Stock having a value of $10,000 which
vests over a three-year period. For shares issued under the Outside Director
Plan, the fair market value of the shares at the date of issuance will be
amortized to compensation expense over the vesting period. The related deferred
compensation has been reflected as a reduction of shareholders' equity. In 1998,
1997 and 1996, 6,660, 7,690 and 10,740 shares, respectively, were issued under
the Outside Director Plan.
As of September 30, 1998, a total of approximately 6,700,000 shares of the
company's authorized Common Stock were reserved for issuance primarily in
connection with stock option plans.
The company has a shareholder rights plan which provides for one right to
be attached to each share of Common Stock. The rights are currently not
exercisable or transferable apart from the Common Stock, and have no voting
power. Under certain circumstances, each right entitles the holder to purchase,
for $34, one one-thousandth 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 one
one-thousandth of a share of a new series of participating preferred stock. The
rights expire on May 9, 2006, and can be redeemed at $.01 per right at any time
prior to becoming exercisable.
4. COMMITMENTS AND CONTINGENCIES:
The company and its subsidiaries rent real property and equipment under
operating leases expiring at various dates. Most of the real property leases
have escalation clauses related to increases in real property taxes.
Future minimum payments under noncancellable operating leases consisted of
the following at September 30, 1998:
<TABLE>
<S> <C>
1999 $20,600,000
2000 14,400,000
2001 9,700,000
2002 5,200,000
2003 3,400,000
Later years 5,700,000
</TABLE>
Rent expense for all operating leases, net of subleases, totaled
approximately $24,500,000, $19,800,000 and $19,000,000 in 1998, 1997 and 1996,
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.
<PAGE>
5. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly results of operations for the years ended September 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales $256,577,000 $229,407,000 $199,859,000 $229,031,000
Gross profit 65,847,000 57,113,000 48,761,000 57,923,000
Net income 10,935,000 6,753,000 3,118,000 8,515,000
Earnings per share of
common stock:
Basic $.36 $.22 $.10 $.28
Diluted $.35 $.22 $.10 $.27
QUARTERS ENDED
----------------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
------------ ------------ ------------ -------------
Net sales $234,556,000 $193,120,000 $160,807,000 $181,744,000
Gross profit 62,015,000 50,810,000 40,287,000 45,983,000
Net income 12,379,000 8,882,000 4,383,000 7,520,000
Earnings per share of
common stock:
Basic $.41 $.29 $.15 $.26
Diluted $.40 $.29 $.14 $.24
</TABLE>
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.
6. BUSINESS SEGMENTS:
The company's principal business segments are as follows -- Building
Products (manufacture, sale and installation of garage doors and other building
products); Electronic Information and Communication Systems (communication and
information systems for government and commercial markets); and Specialty
Plastic Films (manufacture and sale of plastic films and film laminates for baby
diapers, adult incontinence care products and disposable surgical and patient
care products).
<PAGE>
Information on the company's business segments is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales --
Building products $590,507,000 $479,211,000 $404,781,000
Electronic information and
communication systems 156,864,000 127,298,000 122,880,000
Specialty plastic films 167,503,000 163,718,000 127,402,000
------------ ------------ ------------
$914,874,000 $770,227,000 $655,063,000
============ ============ ============
Operating income --
Building products $ 34,956,000 $ 40,708,000 $ 33,051,000
Electronic information and
communication systems 13,425,000 11,785,000 10,959,000
Specialty plastic films 6,953,000 8,541,000 9,035,000
------------ ------------ ------------
Total operating income 55,334,000 61,034,000 53,045,000
General corporate expenses (5,485,000) (5,903,000) (4,859,000)
Interest expense, net (3,307,000) (2,098,000) (2,229,000)
------------ ------------ ------------
Income from continuing operations
before income taxes $ 46,542,000 $ 53,033,000 $ 45,957,000
============ ============ ============
Identifiable assets --
Building products $219,038,000 $201,365,000 $136,429,000
Electronic information and
communication systems 114,723,000 104,059,000 97,781,000
Specialty plastic films 136,744,000 63,686,000 47,370,000
Corporate 17,433,000 15,649,000 29,589,000
------------ ------------ ------------
$487,938,000 $384,759,000 $311,169,000
============ ============ ============
Capital expenditures --
Building products $ 15,274,000 $ 8,709,000 $ 3,962,000
Electronic information and
communication systems 3,889,000 3,817,000 2,082,000
Specialty plastic films 28,765,000 13,247,000 3,160,000
Corporate 74,000 20,000 155,000
------------ ------------ ------------
$ 48,002,000 $ 25,793,000 $ 9,359,000
============ ============ ============
Depreciation and amortization --
Building products $ 7,577,000 $ 5,986,000 $ 4,964,000
Electronic information and
communication systems 2,698,000 2,222,000 2,402,000
Specialty plastic films 5,466,000 2,680,000 2,461,000
Corporate 514,000 564,000 490,000
------------ ------------ ------------
$ 16,255,000 $ 11,452,000 $ 10,317,000
============ ============ ============
</TABLE>
Sales to the United States Government and its agencies, either as a prime
contractor or subcontractor, aggregated approximately $79,000,000 for 1998,
$65,000,000 for 1997 and $69,000,000 for 1996, all of which are included in the
electronic information and communication systems segment. Sales to a customer of
the specialty plastic films segment were approximately 10%, 11% and 7% of
consolidated net sales in 1998, 1997 and 1996, respectively. Sales between
business segments are not material. In computing operating income, none of the
following have been added or deducted -- general corporate expenses, net
interest income or expense, income taxes and minority interest. Assets by
business segment are those identifiable assets that are used in the company's
operations in each segment.
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
------------------------------------------------------------
None.
PART III
--------
The information required by Part III is incorporated by reference to the
company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in February, 1999, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
company's fiscal year ended September 30, 1998. Information relating to the
officers of the Registrant appears under Item 1 of this report.
PART IV
-------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
----------------------------------------
The following consolidated financial statements of Griffon Corporation and
subsidiaries are included in Item 8:
Page
----
(a) 1. Financial Statements
--------------------
Consolidated Balance Sheets at September 30,
1998 and 1997............................................... 21
Consolidated Statements of Income for the Years
Ended September 30, 1998, 1997 and 1996..................... 22
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1998, 1997 and 1996............... 23
Consolidated Statements of Shareholders' Equity
for the Years Ended September 30, 1998, 1997
and 1996.................................................... 24
Notes to Consolidated Financial Statements....................... 25
<PAGE>
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 By-laws as amended (Exhibit 3 of Current Report on Form 8-K dated November
8, 1994)
4.1 Rights Agreement dated as of May 9, 1996 between 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 June 8, 1995 between the Registrant and lending
institutions (Exhibit 4.2 of Annual Report on Form 10-K for the year ended
September 30, 1995)
4.3 Amendment effective as of October 31, 1997 to Loan Agreement dated June 8,
1995 between the Registrant and lending institutions (Exhibit 4.3 of Annual
Report on Form 10-K for the year ended September 30, 1997)
10.1 Employment Agreement dated as of October 1, 1998 between the Registrant and
Harvey R. Blau (Exhibit 10.1 of Current Report on Form 8-K dated
November 5, 1998)
10.2 Employment Agreement dated as of October 1, 1998 between the Registrant and
Robert Balemian (Exhibit 10.2 of Current Report on Form 8-K dated
November 5, 1998)
<PAGE>
10.3 Form of Trust Agreement between the Registrant and U.S. Trust Company of
California, N.A., as Trustee, relating to the company's Employee Stock
Ownership Plan (Exhibit 10.3 of Annual Report on Form 10-K for the year
ended September 30, 1994)
10.4 1992 Non-Qualified Stock Option Plan (Exhibit 10.10 of Annual Report on
Form 10-K for the year ended September 30, 1993)
10.5 Non-Qualified Stock Option Plan (Exhibit 10.12 of Annual Report on Form
10-K for the year ended September 30, 1988)
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 1998 Stock Option Plan (Exhibit 4.1 of Form S-8 Registration Statement No.
333-62319)
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)
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.
<TABLE>
<CAPTION>
State of
Name of Subsidiary Incorporation
------------------ -------------
<S> <C>
Clopay Corporation Delaware
Telephonics Corporation Delaware
</TABLE>
23* Consent of Arthur Andersen LLP
27* Financial Data Schedule (for electronic submission only)
- ----
* Filed herewith. All other exhibits are incorporated herein by reference
to the exhibit indicated in the parenthetical references.
<PAGE>
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 and 333-62319).
(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, 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.
<PAGE>
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 10th day of December, 1998.
GRIFFON CORPORATION
By: /s/ Harvey R. Blau
------------------------------
Harvey R. Blau
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on December 10, 1998 by the following persons in
the capacities indicated:
/s/ Harvey R. Blau Chairman of the Board
Harvey R. Blau (Principal Executive Officer)
/s/ Robert Balemian President and Director
Robert Balemian (Principal Operating and Financial Officer)
/s/ Patrick L. Alesia Vice President and Treasurer
Patrick L. Alesia (Chief Accounting Officer)
/s/ Henry A. Alpert Director
Henry A. Alpert
/s/ Bertrand M. Bell Director
Bertrand M. Bell
/s/ Robert Bradley Director
Robert Bradley
/s/ Abraham M. Buchman Director
Abraham M. Buchman
/s/ Clarence A. Hill, Jr. Director
Clarence A. Hill, Jr.
/s/ Ronald J. Kramer Director
Ronald J. Kramer
/s/ James W. Stansberry Director
James W. Stansberry
/s/ Martin S. Sussman Director
Martin S. Sussman
/s/ William H. Waldorf Director
William H. Waldorf
/s/ Lester L. Wolff Director
Lester L. Wolff
<PAGE>
SCHEDULE II
GRIFFON CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
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
- ----------- --------- ---------- ------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1998:
Allowance for doubtful accounts $6,627,000 $1,907,000 $ 243,000 $1,301,000 $ --- $7,476,000
========== ========== ========== ========== ========= ==========
FOR THE YEAR ENDED SEPTEMBER 30, 1997:
Allowance for doubtful accounts $4,519,000 $1,312,000 $1,719,000 (1) $ 923,000 $ --- $6,627,000
========== ========== ========== ========== ========= ==========
FOR THE YEAR ENDED SEPTEMBER 30, 1996:
Allowance for doubtful accounts $3,727,000 $1,166,000 $2,530,000 (1) $2,213,000 $ 691,000 (2) $4,519,000
========== ========== ========== ========== ========= ==========
<FN>
(1) Principally related to acquired businesses.
(2) Represents reclassification of amounts related to discontinued operations.
</FN>
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report, dated November 5, 1998, included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (Nos. 33-39090, 33-62966,
33-52319, 33-57683, 333-21503 and 333-62319).
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Roseland, New Jersey
December 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the period ended September 30, 1998 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,326,000
<SECURITIES> 0
<RECEIVABLES> 169,584,000
<ALLOWANCES> 7,476,000
<INVENTORY> 104,517,000
<CURRENT-ASSETS> 306,626,000
<PP&E> 194,943,000
<DEPRECIATION> 62,729,000
<TOTAL-ASSETS> 487,938,000
<CURRENT-LIABILITIES> 138,144,000
<BONDS> 107,458,000
0
0
<COMMON> 7,927,000
<OTHER-SE> 222,162,000
<TOTAL-LIABILITY-AND-EQUITY> 487,938,000
<SALES> 914,874,000
<TOTAL-REVENUES> 914,874,000
<CGS> 685,230,000
<TOTAL-COSTS> 685,230,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,907,000
<INTEREST-EXPENSE> 3,934,000
<INCOME-PRETAX> 46,542,000
<INCOME-TAX> 17,221,000
<INCOME-CONTINUING> 29,321,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,321,000
<EPS-PRIMARY> .96
<EPS-DILUTED> .94
</TABLE>
