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

 
FORM 8-K

 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
Date of Report (Date of earliest event reported): February 3, 2010
 
GRIFFON CORPORATION
(Exact Name of Registrant as Specified in Charter)
 
Delaware	 	1-6620	 	11-1893410	
(State or Other Jurisdiction of
Incorporation or Organization)	 	(Commission
File Number)	 	(I.R.S. Employer
Identification No.)	
 
712 Fifth Avenue, 18th Floor
New York, New York	 	10019	
(Address of Principal Executive Offices)	 	(Zip Code)	
 
(212) 957-5000
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17CFR 240.14a-12)
 
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 
Item 8.01 Other Events
 
Griffon Corporation (the “Company” or “Griffon”) is filing this Current Report on Form 8-K to update historical financial statements included in its Annual Report on Form 10-K for the fiscal year ended September 30, 2009, filed on November 24, 2009, to reflect changes in the Company’s accounting for convertible debt as described below.
 
As previously disclosed in the Company’s 2009 Annual Report on Form 10-K, in May 2008, the Financial Accounting Standards Board issued new guidance to clarify that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) must be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The new guidance was effective for the Company as of October 1, 2009 and must be applied retrospectively.
 
In July 2003, the Company issued $130 million, 4% convertible subordinated notes due 2023 (the “Notes”).  As of September 30, 2009, $79.4 million was outstanding. Holders may convert the Notes at a conversion price of $22.41 per share, as adjusted pursuant to the rights offering and subject to possible further adjustment, as defined, which is equal to a conversion rate of approximately 44.6229 shares per $1,000 principal amount of Notes. The Company has irrevocably elected to pay noteholders at least $1,000 in cash for each $1,000 principal amount of Notes presented for conversion. The excess of the value of the Company’s Common Stock that would be issuable upon conversion over the cash delivered will be paid to Noteholders in shares of the Company’s Common Stock.  The Notes are subject to the new guidance since the Notes upon conversion will be settled using a combination of cash and stock.
 
The Company adopted this new guidance on October 1, 2009.  The Company concluded that the fair value of the equity component of the Notes at the time of issuance was $30.4 million.  As of September 30, 2009, the outstanding balance of the notes was $79.4 million.  With the retrospective application of the guidance, as of September 30, 2009, the Notes had an unamortized discount balance of $0.3 million, a net carrying value of $79.1 million and a capital in excess of par value component balance, net of tax, of $18.1 million.  The Company used 8.5% as the nonconvertible debt borrowing rate to discount the Notes and will amortize the debt discount through July, 2010.
 
Accordingly, the Company is filing this Current Report on Form 8-K to reflect the impact of the adoption of the new guidance on previously issued financial statements.  This will permit the Company to incorporate these financial statements by reference in future SEC filings.  The impact of the adoption of this guidance is reflected in the following sections of Part II of the Company’s 2009 Annual Report on Form 10-K, which as revised, are included as Exhibits 99.1, 99.2, 99.3 and 99.4 to this Current Report:
 
 	·	Item 6.	 	Selected Financial Data	
 	·	Item 7.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 	·	Item 8.	 	Financial Statements and Supplementary Data	
 	·	Item 9A.	 	Controls and Procedures	
 	 	 	 	 	
 	The financial statement footnotes and supplementary data affected by the adoption of the new guidance include:	
 	 	
 	Note 1	 	 	Description of Business and Summary of Significant Accounting Policies	
 	Note 2	 	 	Adoption of New Accounting Pronouncements	
 	Note 10	 	 	Notes Payable, Capitalized Leases and Long-Term Debt	
 	Note 12	 	 	Income Taxes	
 	Note 18	 	 	Quarterly Financial Information (UNAUDITED)	
 	Note 19	 	 	Business Segments	
 	Note 22	 	 	Subsequent Events in Connection with Reissuance (UNAUDITED)	
 	Schedule I	 	 	Condensed Financial Information of Registrant	

The impact of the adoption on the Consolidated Statements of Operations for the fiscal 2009 quarters is included in exhibit 99.5 to this Current Report.
 
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Item 9.01.              Financial Statements and Exhibits
 
Exhibit
Number	 	Description	
 	 	 	
23.1	 	Consent of Independent Registered Public Accounting Firm	
 	 	 	
99.1	 	Item 6. Selected Financial Detail	
 	 	 	
99.2	 	Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations	
 	 	 	
99.3	 	Item 8. Financial Statements and Supplementary Data	
 	 	 	
99.4	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	
 	 	 	
99.5	 	Effect of New Guidance on Convertible Notes on Statements of Operations	
 
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SIGNATURE
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: February 3, 2010	GRIFFON CORPORATION	

 	By:	/s/ Douglas J. Wetmore	
 	 	 	
 	Name:	Douglas J. Wetmore	
 	 	 	
 	Title:	Executive Vice President and Chief Financial officer	
 
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Exhibit Index
 
Exhibit
Number	 	Description	
 	 	 	
23.1	 	Consent of Independent Registered Public Accounting Firm	
 	 	 	
99.1	 	Item 6. Selected Financial Detail	
 	 	 	
99.2	 	Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations	
 	 	 	
99.3	 	Item 8. Financial Statements and Supplementary Data	
 	 	 	
99.4	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	
 	 	 	
99.5	 	Effect of New Guidance on Convertible Notes on Statements of Operations	
 
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EXHIBIT 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We have issued our report dated November 24, 2009 (except for Note 2, as to which the date is February 3, 2010), with respect to the consolidated financial statements and financial statement schedules, and our report dated November 24, 2009 with respect to internal control over financial reporting included in the Current Report of Griffon Corporation and subsidiaries on Form 8-K dated February 3, 2010.  We hereby consent to the incorporation by reference of said reports in the Registration Statements of Griffon Corporation on Form S-3 (File No. 333-158273, effective May 18, 2009), Form S-4 (File No. 333-158274, effective May 18, 2009) and Forms S-8 (File No. 33-39090, effective February 22, 1991, File No. 33-62966, effective May 19, 1993, File No. 33-52319, effective February 18, 1994, File No. 333-21503, effective February 10, 1997, File No. 333-62319, effective August 26, 1998, File No. 333-84409, effective August 3, 1999, File No. 333-67760, effective August 17, 2001, File No. 333-88422, effective May 16, 2002, File No. 333-102742, effective January 27, 2003, File No. 333-131737, effective February 10, 2006, File No. 333-133833, effective May 5, 2006, File No. 333-149811, effective March 19, 2008, and File No. 333-157190, effective February 9, 2009).

GRANT THORNTON LLP
 
New York, New York
February 3, 2010
 
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Exhibit 99.1
 
Item 6.  Selected Financial Detail
 
 	 	For the Years Ended September 30,	 	
(in thousands, except per share figures)	 	2009	 	2008	 	2007	 	2006	 	2005	 	
Revenue	 	$	1,194,050	 	$	1,269,305	 	$	1,365,729	 	$	1,327,735	 	$	1,132,382	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Income before taxes, minority interestand discontinued operations	 	19,605	 	(182	)	37,249	 	65,305	 	67,404	 	
Provision for income taxes	 	1,687	 	2,651	 	11,764	 	21,907	 	22,262	 	
Income (loss) from continuing operationsbefore minority interest	 	17,918	 	(2,833	)	25,485	 	43,398	 	45,142	 	
Minority interest	 	—	 	—	 	—	 	—	 	(4,415	)	
Income (loss) from continuing operations	 	17,918	 	(2,833	)	25,485	 	43,398	 	40,727	 	
Income (loss) from discontinued operations	 	790	 	(40,591	)	(6,086	)	5,930	 	5,833	 	
Net Income (loss)	 	$	18,708	 	$	(43,424	)	$	19,399	 	$	49,328	 	$	46,560	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	
Continuing operations	 	$	0.31	 	$	(0.09	)	$	0.79	 	$	1.34	 	$	1.26	 	
Discontinued operations	 	0.01	 	(1.24	)	(0.19	)	0.18	 	0.18	 	
Net Income (loss)	 	0.32	 	(1.33	)	0.60	 	1.52	 	1.44	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	58,699	 	32,667	 	32,405	 	32,388	 	32,263	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	
Continuing operations	 	$	0.30	 	$	(0.09	)	$	0.76	 	$	1.29	 	$	1.20	 	
Discontinued operations	 	0.01	 	(1.24	)	(0.18	)	0.17	 	0.17	 	
Net Income (loss)	 	0.32	 	(1.32	)	0.58	 	1.46	 	1.38	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	59,002	 	32,836	 	33,357	 	33,746	 	33,827	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	32,697	 	$	53,116	 	$	29,737	 	$	41,653	 	$	39,448	 	
Depreciation and amortization	 	42,346	 	42,923	 	39,458	 	33,974	 	31,397	 	
Total assets	 	1,143,891	 	1,167,486	 	959,415	 	927,614	 	850,671	 	
Total debt, excluding debt discount	 	179,804	 	233,188	 	232,830	 	217,320	 	213,165	 	
 
Notes:	2008 includes a $12,913 goodwill impairment charge that is not deductible for income taxes.
Due to rounding, the sum of earnings per share of Continuing operations and Discontinued operations may not equal earnings per share of Net Income.	
 
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Exhibit 99.2
 
Item 7.                          Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
(Unless otherwise indicated, all references to years or year-end refer to the Company’s fiscal period ending September 30)
 
OVERVIEW
 
The Company
 
Griffon Corporation (the “Company” or “Griffon”), is a diversified management and holding company that conducts business through wholly-owned subsidiaries.  The Company oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures.  The Company provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures.  Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital to further diversify itself.
 
Headquartered in New York, N.Y., the Company was incorporated in New York in 1959, and was reincorporated in Delaware in 1970.  It changed its name to Griffon Corporation in 1995.
 
Griffon currently conducts its operations through Telephonics Corporation, Clopay Building Products Company and Clopay Plastic Products Company.
 
·                 Telephonics Corporation (“Telephonics”) high-technology engineering and manufacturing capabilities provide integrated information, communication and sensor system solutions to military and commercial markets worldwide. Telephonics’ revenue was 32% of the Company’s consolidated revenue in 2009, 29% in 2008 and 34% in 2007.
 
·                 Clopay Building Products Company (“Building Products”) is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains. Building Products’ revenue was 33% of the Company’s consolidated revenue in 2009, 34% in 2008 and 36% in 2007.
 
·                 Clopay Plastic Products Company (“Plastics”) is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.  Plastics’ revenue was 35% of the Company’s consolidated revenue in 2009, 37% in 2008 and 30% in 2007.
 
Telephonicsrevenue increased $21.6 million, or 6%, compared to the prior year. In 2008, Telephonics was awarded contracts of more than $400 million for the MH-60R program, a multi-mode radar and identification friend or foe interrogator system; $109 million was recognized in 2009 with the balance expected to be incrementally funded over the next several years, generating annual revenue approximating $100 million.  Telephonics backlog at September 30, 2009 was $393 million, approximately 75% of which is expected to be fulfilled in 2010.
 
Building Products results continued to be impacted by the sustained downturn in the residential housing and credit markets, with revenue and operating profits decreasing from the prior year. The segment remains committed to retaining its customer base and, where possible, growing market share.  Additionally, Building Products’ ongoing review of, and changes to, its cost structure resulted in a Segment profit for 2009.
 
As part of it cost structure review, in June 2009, the Company announced plans to consolidate its Building Products facilities.  On completion, the consolidation is expected to produce annual cost savings of $10 million; the plan is scheduled to be completed in early calendar 2011.  The Company estimates that it will incur pre-tax exit and restructuring costs of $12 million, substantially all of which will be cash charges, including $2 million for one-time termination benefits and other personnel costs, $1 million for excess facilities and related costs, and $9 million in other exit costs primarily in connection with production realignment.  In addition, the Company expects to invest
 
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approximately $11 million in capital expenditures in order to effectuate the restructuring plan.  Building Products recorded $1.2 million in charges in 2009 and $2.0 million in related capital expenditures, and expects to record the balance of the charges and expenditures in 2010 and 2011.
 
Plastics’ revenue decreased $54.9 million, or 12%, from the prior year due to lower volume in Europe, translation of European results into a stronger U.S dollar and the effect of the pass through of lower resin costs on customer selling prices; however, Segment operating profit increased 17% and profit margin increased 140 basis points to 5.8% primarily as a result of cost-savings initiatives, which more than offset the impact of lower volume. Over the past several years, the segment has successfully diversified its customer portfolio. The segment remains optimistic that progress on cost reduction programs and product mix should result in continued financial performance improvement.
 
CONSOLIDATED RESULTS OF OPERATIONS
 
2009 Compared to 2008
 
Revenue for the year ended September 30, 2009 was $1.19 billion, compared to $1.27 billion in the prior year; the decline was due to lower revenue at both Building Products and Plastics, partially offset by increased revenue at Telephonics.  2009 gross profit was $257.1 million compared to $273.0 million in the prior year with gross margin of 21.5% remaining flat with 2008.
 
Selling, General and Administrative (“SG&A”) expenses decreased $14.7 million to $230.7 million in 2009 from $245.4 million in 2008 as a result of cost saving measures undertaken across all of the segments, particularly in Building Products and Plastics, to offset the impact of lower revenue.  SG&A expenses as a percent of revenue for 2009 remained flat to 2008 at 19.3%.
 
Interest expense in 2009 decreased by $3.5 million compared to the prior year, principally due to lower levels of outstanding borrowings and lower average borrowing rates.
 
During 2009, the Company recorded a non-cash pre-tax gain from extinguishment of debt of $4.5 million, net of a proportionate write-off of deferred financing costs, which resulted from the purchase of $50.6 million of its outstanding convertible notes at a discount.
 
Other income of $1.5 million in 2009 and $2.7 million in 2008 consists primarily of currency exchange transaction gains and losses from receivables and payables held in non functional currencies.
 
The Company’s effective tax rate for continuing operations for 2009 was a provision of 8.6% compared to the prior year which had an income tax provision of $2.7 million on a loss of $0.2 million.  The 2009 tax rate benefitted from tax planning with respect to U.S. foreign tax credits and discrete tax benefits related to the reversal of previously recorded tax liabilities principally due to the closing of certain statutes for prior year returns.  The 2008 rate was impacted by a non-deductible goodwill impairment charge, an increase in the valuation allowance regarding deferred tax assets and taxes on a non-U.S. dividend partially offset by discrete tax benefits related to the reversal of previously recorded tax liabilities principally due to the closing of certain statutes for prior year returns.
 
Income from continuing operations was $17.9 million, or $0.30 per diluted share, for 2009 compared to a loss of $2.8 million, or $0.09 per diluted share, in the prior year. The 2008 results were impacted by a $12.9 million impairment charge related to the write-off of all of Building Products’ goodwill.  Excluding the impairment charge, income from continuing operations would have been $10.1 million, or $0.31 per diluted share, in 2008.  Income from discontinued operations for 2009 was $0.8 million, or $0.01 per diluted share, compared to a loss of $40.6 million, or $1.24 per diluted share in the prior year. Net income for 2009 was $18.7 million, or $0.32 per diluted share, compared to a loss of $43.4 million, or $1.33 per diluted share, in 2008.  The 2009 diluted shares used for the earnings per share calculations were 59,002,000 shares in 2009 compared to 32,836,000 shares in 2008 primarily due to the 2008 rights offering.
 
9

 
2008 Compared to 2007
 
Total revenue in 2008 was $1.27 billion, compared to $1.37 billion in the prior year; the decline was due to lower revenue at both Telephonics and Building Products, partially offset by revenue growth in Plastics.  Gross profit in 2008 was $273.0 million compared to $294.6 million in the prior year, with gross margin decreasing 10 basis points from the prior year; the decline in gross profit was mainly attributable to the decline in revenue.
 
Selling, General and Administrative (“SG&A”) expenses in 2008 increased to $245.4 million from $242.5 million in 2007 primarily due to increased research and development expenditures at Telephonics, and an increase in unallocated corporate expenses, partially offset by a $5.0 million decrease from cost savings initiatives at Building Products.  SG&A expenses as a percent of revenue increased 150 basis point to 19.3% in 2008 compared to 17.8% in 2007; this increase was mainly due to the sales decline as reductions in SG&A expenses were not sufficient to offset the decline in revenue.
 
Other income (expense) of $2.7 million in 2008, compared to $2.9 million in 2008, consists primarily of currency exchange transaction gains and losses from receivables and payables held in non functional currencies.
 
The Company’s had a $2.7 million income tax provision on a loss of $0.2 million in 2008 compared to an effective tax rate for continuing operations of 31.6% in the prior year. The 2008 rate was impacted by a non-deductible goodwill impairment charge, an increase in the valuation allowance relating to deferred tax assets and taxes on a non-U.S. dividend partially offset by discrete tax benefits related to the reversal of previously recorded tax liabilities principally due to the closing of certain statutes for prior year returns.  The 2007 rate benefitted from discrete tax benefits related to the reversal of previously recorded tax liabilities principally due to the closing of certain statutes for prior year returns.
 
Loss from continuing operations was $2.8 million, or $0.9 per diluted share, for 2008 compared to $25.5 million, or $0.76 per diluted share in the prior year. The 2008 results were impacted by a $12.9 million impairment charge related to the write-off of all of Building Product’s goodwill.  Excluding the impairment charge, income would have been $10.1 million or $0.31 per diluted share in 2008.  The loss from discontinued operations for 2008 was $40.6 million, or $1.24 per diluted share, compared to a loss of $6.1 million, or $0.19 per diluted share in the prior year. The 2008 net loss was $43.4 million, or $1.33 per diluted share, compared to net income of $19.4 million, or $0.57 per diluted share in 2007.
 
BUSINESS SEGMENTS
 
Telephonics
 
 	 	Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	387,881	 	 	 	$	366,288	 	 	 	$	472,549	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Segment operating profit	 	34,883	 	9.0	%	32,862	 	9.0	%	45,888	 	9.7	%	
Depreciation and amortization	 	6,657	 	 	 	6,753	 	 	 	5,800	 	 	 	
Segment profit beforedepreciation and amortization	 	$	41,540	 	10.7	%	$	39,615	 	10.8	%	$	51,688	 	10.9	%	
 
2009 Compared to 2008
 
In 2009, Telephonics’ revenue increased $21.6 million, or 6%, compared to the prior year, mainly due to higher sales in the Radar Systems division.
 
Segment operating profit increased $2 million to $34.9 million in 2008; segment operating profit margin remained at 9.0%, due to the strong sales performance and favorable program mix being offset by higher
 
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SG&A expenses. The increase in SG&A expenses was resulted from higher research and development expenditures and additional administrative expenses to support revenue growth.
 
2008 Compared to 2007
 
Telephonics 2008 revenue decreased $106.3 million, or 22%, compared to the prior year. The decrease was due to the scheduled completion of the SRC contract, for which related revenue decreased $173 million; the SRC contract effect was partially offset by core business revenue growth of $66.4 million, or 24%, related to new and expanded programs.
 
Segment operating profit of $32.9 million decreased $13.0 million, or 28%, due to the completion of the SRC contract, partially offset by increased core business growth.  The Segment operating profit margin decreased 70 basis points due to higher SG&A expenses from research and development, and increased sales and marketing efforts, partially offset by improved gross margin due to product mix, principally from the decline in lower margin SRC sales.
 
Building Products
 
 	 	Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	393,414	 	 	 	$	435,321	 	 	 	$	486,606	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Segment operating profit (loss)	 	(11,326	)	 	 	(17,444	)(a)	 	 	7,117	 	1.5	%	
Depreciation and amortization	 	13,223	 	 	 	12,071	 	 	 	11,041	 	 	 	
Goodwill impairment	 	—	 	 	 	12,913	 	 	 	—	 	 	 	
Restructuring charges	 	1,240	 	 	 	2,610	 	 	 	—	 	 	 	
Segment profit before depreciation, amortization, restructuring and impairment	 	$	3,137	 	0.8	%	$	10,150	 	2.3	%	$	18,158	 	3.7	%	

(a) 2008 includes a $12.9 million goodwill impairment charge.
 
2009 Compared to 2008
 
In 2009, Building Products revenue decreased $41.9 million, or 10%, compared to the prior year, primarily due to the continuing effects of the weak housing market.  The revenue decline was principally due to reduced unit volume, partially offset by a favorable shift in mix to higher priced products.
 
Segment operating loss for 2009 was $11.3 million, an improvement of $6.1 million compared to the prior year. The 2008 result included the goodwill impairment charge of $12.9 million; excluding this charge, the 2008 operating results would have been a $4.5 million loss.  Excluding the goodwill impairment charge from the 2008 comparative, the increased loss in 2009 was mainly due to the sharp decline in volume, and the resultant unfavorable impact on absorption of fixed operating expenses.  Notwithstanding the total loss for 2009, Building Products segment operating profit improved sequentially during 2009, reaching $0.6 million and $4.3 million in the third and fourth quarters, respectively, a significant improvement over the segment operating losses incurred in the first two quarters of 2009.
 
2008 Compared to 2007
 
Building Products revenue in 2008 decreased by $51.3 million, or 10.5%, compared to the prior year, primarily due to the effects of the weak residential housing market. The decline in unit sales was partially offset by higher selling prices to pass through rising material and freight costs, and favorable product mix.
 
Segment operating loss of $17.4 million decreased $24.6 million compared to the prior year operating income of $7.1 million due to lower sales volume and the associated plant absorption impact of the weaker sales, and a goodwill
 
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impairment charge of $12.9 million, partially offset by a $5 million reduction in SG&A expenses due to operating efficiencies derived from the closure of the Tempe, AZ facility, and other headcount and cost reductions.
 
Plastics
 
 	 	Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	412,755	 	 	 	$	467,696	 	 	 	$	406,574	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Segment operating profit	 	24,072	 	5.8	%	20,620	 	4.4	%	17,263	 	4.2	%	
Depreciation and amortization	 	21,930	 	 	 	22,638	 	 	 	20,986	 	 	 	
Segment profit beforedepreciation and amortization	 	$	46,002	 	11.1	%	$	43,258	 	9.2	%	$	38,249	 	9.4	%	
 
2009 Compared to 2008
 
In 2009, Plastics’ revenue decreased $54.9 million, or 12%, compared to the prior year. The decrease was principally due to lower volume in Plastics’ European business, translation of the European results into a stronger U.S. dollar and the pass through of lower resin costs in customer selling prices.
 
Segment operating profit increased $3.5 million, or 17%, primarily due to the Company’s cost-cutting initiatives and favorable product mix, partially offset by lower unit volume.  Segment operating profit margin increased 140 basis points.
 
2008 Compared to 2007
 
Plastics’ 2008 revenue increased $61.1 million, or 15%, compared to the prior year. The increase was principally due to favorable product mix in North America, the benefit of increased selling prices due to the pass through of higher resin costs in customer selling prices and the favorable currency impact on translation of European results into a weaker U.S. dollar, partially offset by lower selling prices to a major customer associated with a multi-year contract and lower overall volumes in Europe.
 
Segment operating profit increased $3.4 million, or 19%, compared to the prior year due to the factors affecting the revenue increase. Segment operating profit margin of 4.4% increased 20 basis points over the prior year due to SG&A expenses remaining flat and favorable product mix, partially offset by the effect of higher resin costs, and lower unit volumes and the related impact on plant absorption.
 
DISCONTINUED OPERATIONS — Installation Services
 
As a result of the downturn in the residential housing market, in 2008, the Company exited substantially all of the operating activities of its Installation Services segment; this segment sold, installed and serviced garage doors, garage door openers, fireplaces, floor coverings, cabinetry and a range of related building products primarily for the new residential housing market. Operating results of substantially all of the segment has been reported as discontinued operations in the Consolidated Statements of Operations for all periods presented herein; the Installation Services segment is excluded from segment reporting.
 
In May 2008, the Company’s Board of Directors approved a plan to exit substantially all operating activities of the Installation Services segment in 2008. In the third quarter of 2008, the Company sold nine units to one buyer, closed one unit and merged two units into Building Products. In the fourth quarter of 2008, the Company sold its two remaining units in Phoenix and Las Vegas. The Company recorded aggregate disposal costs of $43.7 million in 2008.
 
The Company substantially concluded its remaining disposal activities in the second quarter of 2009. There was no reported revenue in 2009. Revenue in 2008 was $109.4 million compared to $250.9 million in 2007; the sharp decline resulted from the overall weakness in the residential construction market and closure or sale of operating
 
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units during 2008. Installation Services Operating loss was $62.4 million and $9.8 million for 2008 and 2007, respectively.
 
The Company does not expect to incur significant expenses in the future. Future net cash outflows to satisfy liabilities related to disposal activities that were accrued as of September 30, 2009 are estimated to be $4.9 million. Substantially all of such liabilities are expected to be paid during 2010. Certain of the Company’s subsidiaries are also contingently liable for approximately $3.3 million related to certain facilities leases with varying terms through 2011 that were assigned to the respective purchasers of certain of the Installation Services businesses. The Company does not believe it has a material exposure related to these contingencies.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities.  Significant factors affecting liquidity are: cash flows from operating activities, capital expenditures, acquisitions, dispositions, bank lines of credit and the ability to attract long-term capital with satisfactory terms.  The Company remains in a strong financial position with sufficient liquidity available for reinvestment in existing businesses and strategic acquisitions while managing its capital structure on both a short-term and long-term basis.
 
The following table is derived from the Consolidated Statements of Cash Flows:
 
Cash Flows from Continuing Operations	 	Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	
 	 	 	 	 	 	
Net Cash Flows Provided by (Used In):	 	 	 	 	 	
Operating activities	 	$	84,100	 	$	86,049	 	
Investing activities	 	(32,833	)	(49,352	)	
Financing activities	 	(43,202	)	231,406	 	

Cash flows generated by operating activities for 2009 decreased $1.9 million to $84.1 million compared to $86.0 million in the prior year. Current assets net of current liabilities excluding short-term debt and cash decreased $23.4 million to $229.1 million at September 30, 2009 compared to $252.5 million at the prior year end, primarily due to lower inventory on hand at Building Products due to the restructuring and lower sales volumes.
 
During 2009, the Company used cash from investing activities of $32.8 million compared to $49.4 million in the prior year. The Company had capital expenditures of $32.7 million; $20.4 million lower than the prior year.
 
During 2009, cash used in financing activities was $43.2 million.  The principal financing usage was for the repurchase of $50.6 million face value of convertible notes for $42.7 million and the purchase of common stock by the Company’s Employee Stock Ownership Plan (“ESOP”) of $4.4 million; these uses were partially offset by $7.3 million of rights offering proceeds (see below). Approximately 1.4 million shares of common stock are available for purchase pursuant to the Company’s stock buyback program and additional purchases, including those pursuant to a 10b5-1 plan, may be made, depending upon market conditions and other factors, at prices deemed appropriate by management.
 
Payments from revenue derived from the Telephonics segment are received in accordance with the terms of development and production subcontracts to which the Company is a party. Certain of the payments received in this segment are progress payments. Customers in the Plastics segment are generally substantial industrial companies whose payments have been steady, reliable and made in accordance with the terms governing such sales; sales in this segment are made to satisfy orders that are received in advance of production, where payment terms are established in advance of such production and sale. With respect to the Building Products segment, there have been no material adverse impacts on payment for sales.
 
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A small number of customers have accounted for a substantial portion of historical revenue, and the Company expects that a limited number of customers will continue to represent a substantial portion of revenue for the foreseeable future. Approximately 19% and 21% of total revenue for 2009 and 2008, and 54% and 56% of Plastics’ revenue for 2009 and 2008, is from Procter & Gamble, which is Plastics largest customer. Home Depot and Menards are significant customers of Building Products and Lockheed Martin Corporation and the Boeing Company are significant customers of Telephonics. Future operating results will continue to substantially depend on the success of large customers and the Company’s relationships with them. Orders from these customers are subject to fluctuation and may be reduced materially. The loss of all or a portion of the sales volume from any one of these customers would likely have an adverse affect on the Company’s liquidity and operations.
 
At September 30, 2009, the Company had cash and equivalents, net of debt, as follows:
 
Cash and Equivalents, and Debt	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
 	 	 	 	 	 	 	 	
Cash and equivalents	 	$	320,833	 	$	311,921	 	
 	 	 	 	 	 	 	 	
Notes payables and current portion of long-term debt	 	78,590	 	2,258	 	
Long-term debt, net of current maturities	 	98,394	 	221,200	 	
Debt discount	 	2,820	 	9,730	 	
Total debt outstanding, excluding debt discount	 	179,804	 	233,188	 	
 	 	 	 	 	 	
Cash and equivalents, net of debt	 	$	141,029	 	$	78,733	 	
 
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In August 2008, the Company’s Board of Directors authorized a 20 million share common stock rights offering to its shareholders in order to raise equity capital for general corporate purposes and to fund future growth. The rights had an exercise price of $8.50 per share. In conjunction with the offering, GS Direct agreed to back stop the rights offering by purchasing, on the same terms, any and all shares not subscribed through the exercise of rights. GS Direct also agreed to purchase additional shares of common stock at the rights offering price if it did not acquire a minimum of 10 million shares of common stock as a result of its back stop commitment. The Company received $248.6 million in gross proceeds from the rights offering as follows:  (i) in September 2008, the Company received $241.3 million of gross proceeds from the first closing of its rights offering and related investments by GS Direct and by the Company’s Chief Executive Officer; (ii) in October 2008, an additional $5.3 million of proceeds were received in connection with the second closing of the rights offering; (iii) and in April 2009, $2.0 million of rights offering proceeds were received.
 
In March 2008, Telephonics entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which the lenders agreed to provide a five-year, revolving credit facility of $100 million (the “Telephonics Credit Agreement”). At September 30, 2009, $38.0 million was outstanding under the Telephonics Credit Agreement and approximately $57.0 million was available for borrowing.
 
In June 2008, Building Products and Plastics entered into a credit agreement for their domestic operations with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which the lenders agreed to provide a five-year, senior secured revolving credit facility of $100 million (the “Clopay Credit Agreement”). At September 30, 2009, $35.9 million was outstanding under the Clopay Credit Agreement and approximately $32.4 million was available for borrowing.
 
The Telephonics Credit Agreement and the Clopay Credit Agreement include various sublimits for standby letters of credit. At September 30, 2009, there were approximately $16.7 million of aggregate standby letters of credit outstanding under these credit facilities. These credit agreements limit dividends and advances that these subsidiaries may pay to the parent. The agreements permit the payment of income taxes, overhead and expenses, with dividends or advances in excess of these amounts being limited based on (a) with respect to the Clopay Credit Agreement, maintaining certain minimum availability under the loan agreement or (b) with respect to the Telephonics Credit Agreement, compliance with certain conditions and limited to an annual maximum. At September 30, 2009, the Company was not, nor was it reasonably likely to be, in breach of covenants under its respective credit facilities. The Clopay Credit Agreement provides for credit availability primarily based on working capital assets and imposes only one ratio compliance requirement, which becomes operative only in the event that utilization of that facility were to reach a defined level significantly beyond the September 30, 2009 level. The Telephonics Credit Agreement is a “cash flow based” facility and compliance with required ratios at September 30, 2009 was well within the parameters set forth in that agreement. Further, the covenants within such credit facilities do not materially affect the Company’s ability to undertake additional debt or equity financing for Griffon, the parent company, as such credit facilities are at the subsidiary level and are not guaranteed by Griffon.
 
The Company had $79.4 million outstanding of 4% convertible subordinated notes due 2023 (the “Notes”) as of September 30, 2009. Holders of the Notes may require the Company to repurchase all or a portion of their Notes on July 18, 2010, 2013 and 2018, as well as upon a change in control. If Griffon’s common stock price is below the conversion price of the Notes on the earliest of these dates, management anticipates that noteholders will require Griffon to repurchase their outstanding Notes.  As such, these notes, and the related debt discount of $2.8 million, are classified under Notes payable and current portion of long-term debt in the fourth quarter of 2009.  The fair value of the Notes was approximately $79 million, based on quoted market price (level 1 input).
 
During 2009, the Company purchased $50.6 million face value of the Notes from certain noteholders for $42.7 million. The Company recorded a pre-tax gain from debt extinguishment of approximately $4.8 million, offset by a $0.3 million proportionate reduction in the related deferred financing costs for a net gain of $4.5 million.
 
At September 30, 2008, the Company had $130 million outstanding of Notes.
 
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The Company’s ESOP has a loan agreement, guaranteed by the Company, which requires payments of principal and interest through the expiration date of September 2012 at which time the $3.9 million balance of the loan, and any outstanding interest, will be payable.  The primary purpose of this loan, and its predecessor loans which were refinanced by this loan in October 2008, was to purchase 547,605 shares of the Company’s stock in October 2008.  The loan bears interest at rates based upon the prime rate or LIBOR. The loan balance was $5.6 million as of September 30, 2009, and the outstanding balance approximates fair value.
 
During the year ended September 30, 2009, the Company used cash for discontinued operations of $1.3 million related to settling remaining Installation Services liabilities.
 
Contractual Obligations
 
At September 30, 2009, payments to be made pursuant to significant contractual obligations are as follows:
 
 	 	Payments Due by Period	 	
 	 	 	 	Less Than 1	 	 	 	 	 	More than 5	 	 	 	
(in thousands)	 	Total	 	Year	 	1-3 Years	 	4-5 Years	 	Years	 	Other	 	
Long-term debt (a)	 	$	179,803	 	$	81,409	 	$	7,074	 	$	77,686	 	$	13,634	 	$	—	 	
Interest expense	 	17,246	 	6,485	 	7,757	 	2,807	 	197	 	—	 	
Rental commitments	 	56,000	 	20,000	 	23,000	 	10,000	 	3,000	 	—	 	
Purchase obligations (b)	 	122,758	 	118,939	 	3,819	 	—	 	—	 	—	 	
Capital leases	 	17,526	 	1,588	 	2,874	 	2,868	 	10,196	 	—	 	
Capital expenditures	 	5,681	 	5,681	 	—	 	—	 	—	 	—	 	
Supplemental & post-retirement benefits (c)	 	40,339	 	7,698	 	7,796	 	7,796	 	17,049	 	—	 	
Uncertain tax positions (d)	 	7,951	 	—	 	—	 	—	 	—	 	7,951	 	
Total obligations	 	$	447,304	 	$	241,800	 	$	52,320	 	$	101,157	 	$	44,076	 	$	7,951	 	

(a)      At September 30, 2009, the Company had outstanding $79.4 million of the Notes due 2023. Holders of the Notes may require the Company to repurchase all or a portion of their Notes on July 18, 2010, 2013 and 2018, and upon a change in control. The Company is presenting the $79.4 million outstanding on the Notes in the “Less than 1 Year” category above because the Noteholders can require the Company to repurchase the Notes in July 2010.
 
(b)         The purchase obligations are generally for the purchase of goods and services in the ordinary course of business. The Company uses blanket purchase orders to communicate expected requirements to certain of its vendors. Purchase obligations reflect those purchase orders where the commitment is considered to be firm. Purchase obligations that extend beyond 2009 are principally related to long-term contracts received from customers of Telephonics.
 
(c)          The Company expects to contribute $3.8 million to the qualified defined benefit plan in 2010, which is included in the “Less Than 1 Year” column above.  There are no amounts related to the qualified defined benefit plan for subsequent periods.  The Company funds required payouts under the non-qualified supplemental defined benefit plan from its general assets and the expected payments are included in each period, as applicable.
 
(d)           Due to the uncertainty of the potential settlement of future uncertain tax positions, management is unable to estimate the timing of related payments, if any, that will be made subsequent to 2009.  These amounts do not include any potential indirect benefits resulting from deductions or credits for payments made to other jurisdictions.
 
Off-Balance Sheet Arrangements
 
Except for operating leases and purchase obligations as disclosed herein, the Company is not a party to any off-balance sheet arrangements.
 
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ACCOUNTING POLICIES AND PRONOUNCEMENTS
 
Critical Accounting Policies
 
The preparation of Griffon’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on assets, liabilities, revenue and expenses.  These estimates can also affect supplemental information contained in public disclosures of the Company, including information regarding contingencies, risk and its financial condition. These estimates, assumptions and judgments are evaluated on an ongoing basis and based on historical experience, current conditions and various other assumptions, and form the basis for estimating the carrying values of assets and liabilities, as well as identifying and assessing the accounting treatment for commitments and contingencies. Actual results may materially differ from these estimates.
 
An estimate is considered to be critical if it is subjective and if changes in the estimate using different assumptions would result in a material impact on the Company’s financial position or results of operations.  The following have been identified as the most critical accounting policies and estimates:
 
Revenue Recognition
 
Revenue is recognized when the following circumstances are satisfied: a) persuasive evidence of an arrangement exists, b) delivery has occurred or services are rendered, c) price is fixed and determinable and d) collectability is reasonably assured. Goods are sold on terms which transfer title and risk of loss at a specified location, typically shipping point. Revenue recognition from product sales occurs when all factors are met, including transfer of title and risk of loss, which occurs either upon shipment or upon receipt by customers at the location specified in the terms of sale. Other than standard product warranty provisions, sales arrangements provide for no other significant post-shipment obligations. From time to time and for certain customers rebates and other sales incentives, promotional allowances or discounts are offered, typically related to customer purchase volumes, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale. Griffon provides for sales returns allowances based upon historical returns experience.
 
Telephonics earns a substantial portion of its revenue as either a prime or subcontractor from contract awards with the U.S. Government, as well as non-U.S. governments and other commercial customers. These formal contracts are typically long-term in nature, usually greater than one year. Revenue and profits from these long-term fixed price contracts are recognized under the percentage-of-completion method of accounting.  Revenue and profits on fixed-price contracts that contain engineering as well as production requirements are recorded based on the ratio of total actual incurred costs to date to the total estimated costs for each contract (cost-to-cost method). Using the cost-to-cost method, revenue is recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by the total estimated contract revenue, less the cumulative revenue recognized in prior periods. The profit recorded on a contract using this method is equal to the current estimated total profit margin multiplied by the cumulative revenue recognized, less the amount of cumulative profit previously recorded for the contract in prior periods. As this method relies on the substantial use of estimates, these projections may be revised throughout the life of a contract. Components of this formula and ratio that may be estimated include gross profit margin and total costs at completion. The cost performance and estimates to complete on long-term contracts are reviewed, at a minimum, on a quarterly basis, as well as when information becomes available that would necessitate a review of the current estimate. Adjustments to estimates for a contract’s estimated costs at completion and estimated profit or loss often are required as experience is gained, and as more information is obtained, even though the scope of work required under the contract may or may not change, or if contract modifications occur. The impact of such adjustments or changes to estimates is made on a cumulative basis in the period when such information has become known. Gross profit is affected by a variety of factors, including the mix of products, systems and services, production efficiencies, price competition and general economic conditions.
 
Revenue and profits on cost-reimbursable type contracts are recognized as allowable costs are incurred on the contract, at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a
 
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cost-reimbursable contract may be fixed or variable based on the contractual fee arrangement. Incentive and award fees on these contracts are recorded as revenue when the criteria under which they are earned are reasonably assured of being met and can be estimated.
 
For contracts whose anticipated total costs exceed the total expected revenue, an estimated loss is recognized in the period when identifiable. A provision for the entire amount of the estimated loss is recorded on a cumulative basis.
 
Amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable, and are determined on a percentage-of-completion basis measured by the cost-to-cost method.
 
Warranty Accruals
 
Direct customer and end-user warranties are provided on certain products. These warranties cover manufacturing defects that would prevent the product from performing in line with its intended and marketed use. The terms of these warranties vary by product line and generally provide for the repair or replacement of the defective product. Warranty claims data is collected and analyzed with a focus on the historical amount of claims, the products involved, the amount of time between the warranty claims and the products’ respective sales and the amount of current sales.  Based on these analyses, warranty accruals are recorded as an increase to cost of sales and regularly reviewed for adequacy.
 
Stock-based Compensation
 
Griffon has issued stock-based compensation to certain employees, officers and directors in the form of stock options and non-vested restricted stock. For stock option grants made on or after October 1, 2005, expense is recognized over the awards’ expected vesting period based on their fair value as calculated using the Black-Scholes pricing model.  The Black-Scholes pricing model uses estimated assumptions for a forfeiture rate, the expected life of the options and a volatility rate using historical data.
 
Compensation expense for non-vested restricted stock is recognized ratably over the service period based on the fair value of the grant calculated as the number of shares granted multiplied by the stock price on the date of grant.
 
Allowances for Discount, Doubtful Account and Returns
 
Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful accounts and returns. The allowances represent estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency), discounts related to early payment of accounts receivables by customers and estimates for returns. The allowance for doubtful accounts includes amounts for certain customers where a risk of default has been specifically identified, as well as an amount for customer defaults based on a general formula when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers.  Allowance for discounts and returns are recorded as a reduction of revenue and the provision related to the allowance for doubtful accounts is recorded in Selling, general and administrative expenses.
 
Goodwill, Long-Lived Intangible and Tangible Assets, and Impairment
 
Griffon has significant intangible and tangible long lived assets on its balance sheet which includes goodwill and other intangible assets related to acquisitions.  Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. As required under GAAP, goodwill and indefinite lived intangibles are reviewed for impairment annually, for Griffon in September, or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The testing of goodwill and indefinite lived intangibles for impairment involves the significant use of judgment and assumptions in the determination of a reporting unit’s fair market value.
 
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Long-lived amortizable intangible assets, such as customer relationships and software, and tangible assets, which are primarily made up of Property, Plant and Equipment, are amortized over their expected useful lives, which involves significant assumptions and estimates. Long-lived intangible and tangible assets are tested for impairment by comparing estimated future undiscounted cash flows to the carrying value of the asset when an impairment indicator, such as change in business, customer loss or obsolete technology, exists.
 
Fair value estimates are based on assumptions believed to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ materially from those estimates. Any changes in key assumptions or management judgment with respect to a reporting unit or its prospects, which may result from a decline in Griffon’s stock price, a change in market conditions, market trends, interest rates or other factors outside of Griffon’s control, or significant underperformance relative to historical or projected future operating results, could result in a significantly different estimate of the fair value of Griffon’s reporting units, which could result in an impairment charge in the future.
 
Restructuring reserves
 
From time to time, the Company will establish restructuring reserves at an operation.  These reserves for both termination and other exit costs require the use of estimates. Though Griffon believes the estimates made are reasonable, they could differ materially from the actual costs.
 
Income Taxes
 
Griffon’s effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. For interim financial reporting, the annual tax rate is estimated based on projected taxable income for the full year and a quarterly income tax provision is recorded in accordance with the anticipated annual rate. As the year progresses, the estimates are refined based on the year’s taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to the effective tax rate throughout the year. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
 
Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. The likelihood that the deferred tax asset balance will be recovered from future taxable income is assessed at least quarterly, and the valuation allowance, if any, is adjusted accordingly.
 
Tax benefits are recognized for an uncertain tax position when, in management’s judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. A number of years may elapse before a particular matter for which Griffon has recorded a liability related to an unrecognized tax benefit is audited and finally resolved. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, Griffon believes its liability for unrecognized tax benefits is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in Griffon’s tax provision and effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax benefit could increase the tax provision and effective tax rate and may require the use of cash in the period of resolution. The liability for unrecognized tax benefits is generally presented as noncurrent. However, if it is anticipated that a cash settlement will occur within
 
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one year, that portion of the liability is presented as current. Interest and penalties recognized on the liability for unrecognized tax benefits is recorded as income tax expense.
 
Pension Benefits
 
Griffon sponsors two defined benefit pension plans for certain employees and retired employees. Annual amounts relating to these plans are recorded based on actuarial projections, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and turnover rates. The actuarial assumptions used to determine pension liabilities and assets, as well as pension expense, are reviewed on an annual basis when modifications to assumptions are made based on current economic conditions and trends. The expected return on plan assets is determined based on the nature of the plans’ investments and expectations for long-term rates of return. The discount rate used to measure obligations is based on a corporate bond spot-rate yield curve that matches projected future benefit payments with the appropriate spot rate applicable to the timing of the projected future benefit payments. The assumptions utilized in recording the Company’s obligations under the defined benefit pension plans are believed to be reasonable based on experience and advice from independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect Griffon’s financial position or results of operations.
 
The qualified defined benefit plan has been frozen to new entrants since December 2000.  Certain employees who were part of the plan prior to December 2000 continue to accrue a service benefit for an additional 10 years, at which time all plan participants will stop accruing service benefits.
 
Newly issued but not yet effective accounting pronouncements
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to the accounting for business combinations. The purpose of the new guidance is to better represent the economic value of a business combination transaction. The new guidance retains the fundamental requirement of the old guidance where the acquisition method of accounting is to be used for all business combinations and for an acquirer to be identified for each business combination.  In general the new guidance 1) broadens the existing guidance by extending its applicability to all events where one entity obtains control over one or more businesses, 2) broadens the use of the fair value measurements used to recognize the assets acquired and liabilities assumed, 3) changes the accounting for acquisition related fees and restructuring costs incurred in connection with an acquisition and 4) increases required disclosure. The Company anticipates that the adoption of the new guidance, effective for Griffon for any business combinations that occur after October 1, 2009, will have an impact on the way in which business combinations are accounted for; however, the impact can only be assessed as each acquisition is consummated.
 
In December 2007, the FASB issued new accounting guidance related to the accounting for noncontrolling interests in consolidated financial statements. The new guidance was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the consolidated financial statements. Moreover, the new guidance eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. This new guidance is effective for the Company as of October 1, 2009. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.
 
In March 2008, the FASB issued new guidance which enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: 1) an entity uses derivative instruments, 2) derivative instruments and related hedged items are accounted and 3) derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Although early adoption is encouraged, the new guidance is effective for the Company as of October 1, 2009. The Company is evaluating the potential impact, if any, of the new guidance on its consolidated financial statements.
 
In April 2008, the FASB issued new guidance which amends the factors that should be considered in developing renewal or extension assumptions that are used to determine the useful life of a recognized intangible asset and
 
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requires enhanced related disclosures. The new guidance must be applied prospectively to all intangible assets acquired as of and subsequent to years beginning after December 15, 2008, which is the Company’s 2010. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.
 
In October 2009, the FASB issued new guidance on accounting for multiple-deliverable arrangements to enable vendors to account for products and services separately rather than as a combined unit.  The guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The new guidance will be effective as of the beginning of the annual reporting period commencing after June 15, 2010, and will be adopted by the Company as of October 1, 2010. Early adoption is permitted. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.
 
Recently issued effective accounting pronouncements
 
In May 2008, the FASB issued new guidance to clarify that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) must be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company adopted the new guidance on October 1, 2009 and applied it retrospectively, as required, to the financial statements for the adjustments related to the Company’s Notes.  See the Adoption of New Accounting Pronouncements footnote in the Notes to Consolidated Financial Statements in item 8 for additional information on the adoption of this new guidance.
 
In April 2009, the FASB issued new guidance which requires disclosure about fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements.  This statement was effective for the Company starting with the interim period ending June 30, 2009, and was applied prospectively as required.  The Company has included the required disclosure in this Form 8-K. The adoption of this guidance did not have a material effect on Griffon’s consolidated financial statements.
 
In June 2009, the FASB issued new guidance which establishes principles and requirements for subsequent events regarding: 1) the period after the balance sheet date during which management shall evaluate events and transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosure that an entity shall make about events or transactions that occurred after the balance sheet date.  This statement was effective for the Company starting with the interim period ending June 30, 2009, and was applied prospectively as required.  The Company has included the required disclosure in this Form 8-K. The adoption of this guidance did not have a material effect on Griffon’s consolidated financial statements.
 
In June 2009, the FASB issued new guidance which established the FASB Accounting Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  The new guidance became effective for financial statements issued for interim periods ended after September 15, 2009, and were adopted by the Company for this Form 8-K.  The adoption of this guidance did not have a material effect on Griffon’s consolidated financial statements.
 
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Exhibit 99.3
 
Item 8.                          Financial Statements and Supplementary Data
 
The financial statements of the Company and its subsidiaries and the report thereon of Grant Thornton LLP are included herein:
 
·       Report of Independent Registered Public Accounting Firm.
 
·       Consolidated Balance Sheets at September 30, 2009 and 2008.
 
·       Consolidated Statements of Operations for the years ended September 30, 2009, 2008 and 2007.
 
·       Consolidated Statements of Cash Flows for the years ended September 30, 2009, 2008 and 2007.
 
·       Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the years ended September 30, 2009, 2008 and 2007.
 
·       Notes to Consolidated Financial Statements.
 
·       Schedule I – Condensed Financial Information of Registrant.
 
·       Schedule II – Valuation and Qualifying Accounts.
 
22

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders
Griffon Corporation
 
We have audited the accompanying consolidated balance sheets of Griffon Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended September 30, 2009.  Our audits of the basic financial statements included the financial statement schedules listed in the index appearing under Item 8.  These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Griffon Corporation and subsidiaries as of September 30, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2009 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
As discussed in Note 1 of the notes to the consolidated financial statements, effective October 1, 2007, the Company adopted new accounting guidance related to the accounting for uncertainty in income tax reporting.
 
As discussed in Note 2 of the notes to the consolidated financial statements, effective October 1, 2009, the Company adopted new accounting guidance with respect to convertible debt, which has been retrospectively applied to all periods presented.
 
As discussed in Note 11 of the notes to the consolidated financial statements, the Company adopted accounting amendments on September 30, 2007 related to the recognition of the funded status of defined benefit postretirement plans in the consolidated balance sheets.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Griffon Corporation and subsidiaries’ internal control over financial reporting as of September 30, 2009 based on criteria established in  Internal Control - Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 24, 2009 expressed an unqualified opinion thereon.

GRANT THORNTON LLP
 
New York, New York
November 24, 2009 (except for Note 2,
as to which the date is February 3, 2010)
 
23

 
GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(as retrospectively adjusted, See Note 2)
 
 	 	At September 30,	 	At September 30,	 	
 	 	2009	 	2008	 	
 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	
Cash and equivalents	 	$	320,833	 	$	311,921	 	
Accounts receivable, net of allowances of $4,457 and $5,609	 	164,619	 	163,586	 	
Contract costs and recognized income not yet billed,net of progress payments of $14,592 and $8,863	 	75,536	 	69,001	 	
Inventories, net	 	139,170	 	167,158	 	
Prepaid and other current assets	 	39,261	 	52,430	 	
Assets of discontinued operations	 	1,576	 	9,495	 	
Total Current Assets	 	740,995	 	773,591	 	
PROPERTY, PLANT AND EQUIPMENT, net	 	236,019	 	239,003	 	
GOODWILL	 	97,657	 	93,782	 	
INTANGIBLE ASSETS, net	 	34,211	 	34,777	 	
OTHER ASSETS	 	29,132	 	17,987	 	
ASSETS OF DISCONTINUED OPERATIONS	 	5,877	 	8,346	 	
Total Assets	 	$	1,143,891	 	$	1,167,486	 	
 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	
Notes payable and current portion of long-term debt,net of debt discount of $2,820 in 2009	 	$	78,590	 	$	2,258	 	
Accounts payable	 	125,027	 	129,823	 	
Accrued liabilities	 	61,120	 	64,450	 	
Liabilities of discontinued operations	 	4,932	 	14,917	 	
Total Current Liabilities	 	269,669	 	211,448	 	
LONG-TERM DEBT,net of debt discount of $9,370 in 2008	 	98,394	 	221,200	 	
OTHER LIABILITIES	 	78,837	 	59,460	 	
LIABILITIES OF DISCONTINUED OPERATIONS	 	8,784	 	10,048	 	
Total Liabilities	 	455,684	 	502,156	 	
COMMITMENTS AND CONTINGENCIES	 	 	 	 	 	
SHAREHOLDERS’ EQUITY	 	 	 	 	 	
Preferred stock, par value $0.25 per share, authorized3,000 shares, no shares issued	 	—	 	—	 	
Common stock, par value $0.25 per share, authorized85,000 shares, issued 72,040 shares and 71,095 shares	 	18,010	 	17,774	 	
Capital in excess of par value	 	438,843	 	433,862	 	
Retained earnings	 	421,992	 	403,284	 	
Treasury shares, at cost, 12,466 common sharesand 12,440 common shares	 	(213,560	)	(213,310	)	
Accumulated other comprehensive income	 	28,170	 	25,469	 	
Deferred compensation	 	(5,248	)	(1,749	)	
Total Shareholders’ Equity	 	688,207	 	665,330	 	
Total Liabilities and Shareholders’ Equity	 	$	1,143,891	 	$	1,167,486	 	
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
24

 
GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(as retrospectively adjusted, See Note 2)
 
 	 	Years Ended September 30,	 	
 	 	2009	 	2008	 	2007	 	
Revenue	 	$	1,194,050	 	$	1,269,305	 	$	1,365,729	 	
Cost of goods and services	 	936,927	 	996,308	 	1,071,173	 	
Gross profit	 	257,123	 	272,997	 	294,556	 	
 	 	 	 	 	 	 	 	
Selling, general and administrative expenses	 	230,736	 	245,430	 	242,502	 	
Impairment of goodwill	 	—	 	12,913	 	—	 	
Restructuring and other related charges	 	1,240	 	2,610	 	2,501	 	
Total operating expenses	 	231,976	 	260,953	 	245,003	 	
 	 	 	 	 	 	 	 	
Income from operations	 	25,147	 	12,044	 	49,553	 	
 	 	 	 	 	 	 	 	
Other income (expense)	 	 	 	 	 	 	 	
Interest expense	 	(13,091	)	(16,909	)	(17,593	)	
Interest income	 	1,539	 	1,970	 	2,397	 	
Gain from debt extinguishment, net	 	4,488	 	—	 	—	 	
Other, net	 	1,522	 	2,713	 	2,892	 	
Total other income (expense)	 	(5,542	)	(12,226	)	(12,304	)	
 	 	 	 	 	 	 	 	
Income (loss) before taxes and discontinued operations	 	19,605	 	(182	)	37,249	 	
Provision for income taxes	 	1,687	 	2,651	 	11,764	 	
Income (loss) from continuing operations	 	17,918	 	(2,833	)	25,485	 	
 	 	 	 	 	 	 	 	
Discontinued operations:	 	 	 	 	 	 	 	
Income (loss) from operations of thediscontinued Installation Services business	 	1,230	 	(62,447	)	(9,804	)	
Provision (benefit) for income taxes	 	440	 	(21,856	)	(3,718	)	
Income (loss) from discontinued operations	 	790	 	(40,591	)	(6,086	)	
Net income (loss)	 	$	18,708	 	$	(43,424	)	$	19,399	 	
 	 	 	 	 	 	 	 	
Basic earnings (loss) per common share:	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.31	 	$	(0.09	)	$	0.79	 	
Income (loss) from discontinued operations	 	0.01	 	(1.24	)	(0.19	)	
Net income (loss)	 	0.32	 	(1.33	)	0.60	 	
Weighted-average shares outstanding	 	58,699	 	32,667	 	32,405	 	
 	 	 	 	 	 	 	 	
Diluted earnings (loss) per common share:	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.30	 	$	(0.09	)	$	0.76	 	
Income (loss) from discontinued operations	 	0.01	 	(1.24	)	(0.18	)	
Net income (loss)	 	0.32	 	(1.32	)	0.58	 	
Weighted-average shares outstanding	 	59,002	 	32,836	 	33,357	 	
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
25

 
GRIFFON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(as retrospectively adjusted, See Note 2)
 
 	 	Years Ended September 30,	 	
 	 	2009	 	2008	 	2007	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	
Net income (loss)	 	$	18,708	 	$	(43,424	)	$	19,399	 	
 	 	 	 	 	 	 	 	
Adjustments to reconcile net income (loss) tonet cash provided by operating activities:	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Loss (income) from discontinued operations	 	(790	)	40,591	 	6,086	 	
Depreciation and amortization	 	42,346	 	42,923	 	39,458	 	
Impairment of goodwill	 	—	 	12,913	 	—	 	
Stock-based compensation	 	4,145	 	3,327	 	2,412	 	
Provision for losses on account receivable	 	628	 	1,089	 	649	 	
Amortization/write-off of deferred financing costs and debt discounts	 	5,209	 	5,966	 	4,187	 	
Gain from debt extinguishment, net	 	(4,488	)	—	 	—	 	
Deferred income taxes	 	(3,144	)	(1,431	)	(11,511	)	
Change in assets and liabilities:	 	 	 	 	 	 	 	
(Increase) decrease in accounts receivable and contract costsand recognized income not yet billed	 	(6,690	)	13,585	 	20,174	 	
(Increase) decrease in inventories	 	28,498	 	(23,500	)	3,651	 	
(Increase) decrease in prepaid and other assets	 	11,130	 	(12,524	)	(141	)	
Increase (decrease) in accounts payable,accrued liabilities and income taxes payable	 	(8,627	)	53,095	 	(27,560	)	
Other changes, net	 	(2,825	)	(6,561	)	2,894	 	
Net cash provided by operating activities	 	84,100	 	86,049	 	59,698	 	
 	 	 	 	 	 	 	 	
CASH FLOWS FROM INVESTING ACTIVITIES:	 	 	 	 	 	 	 	
Acquisition of property, plant and equipment	 	(32,697	)	(53,116	)	(29,737	)	
Acquired businesses	 	—	 	(1,829	)	(818	)	
Proceeds from sale of assets	 	200	 	1,000	 	—	 	
(Increase) decrease in equipment lease deposits	 	(336	)	4,593	 	(6,092	)	
Funds restricted for capital projects	 	—	 	—	 	(4,521	)	
Net cash used in investing activities	 	(32,833	)	(49,352	)	(41,168	)	
 	 	 	 	 	 	 	 	
CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	
Proceeds from issuance of shares from rights offering	 	7,257	 	241,344	 	—	 	
Purchase of shares for treasury	 	—	 	(579	)	(4,355	)	
Proceeds from issuance of long-term debt	 	11,431	 	89,235	 	47,891	 	
Payments of long-term debt	 	(56,676	)	(87,785	)	(27,650	)	
Decrease in short-term borrowings	 	(866	)	(924	)	(5,834	)	
Financing costs	 	(597	)	(10,027	)	—	 	
Purchase of ESOP shares	 	(4,370	)	—	 	—	 	
Exercise of stock options	 	—	 	—	 	2,588	 	
Tax benefit from vesting of restricted stock and stock options	 	217	 	3	 	1,346	 	
Other, net	 	402	 	139	 	271	 	
Net cash provided by (used in) financing activities	 	(43,202	)	231,406	 	14,257	 	
 	 	 	 	 	 	 	 	
CASH FLOWS FROM DISCONTINUED OPERATIONS:	 	 	 	 	 	 	 	
Net cash provided by (used in) discontinued operations	 	(1,305	)	(5,410	)	5,963	 	
Net cash provided by (used in) investing activities	 	—	 	5,496	 	(17,184	)	
Net cash provided by (used in) discontinued operations	 	(1,305	)	86	 	(11,221	)	
 	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and equivalents	 	2,152	 	(1,015	)	792	 	
 	 	 	 	 	 	 	 	
NET INCREASE IN CASH AND EQUIVALENTS	 	8,912	 	267,174	 	22,358	 	
CASH AND EQUIVALENTS AT BEGINNING OF YEAR	 	311,921	 	44,747	 	22,389	 	
CASH AND EQUIVALENTS AT END OF YEAR	 	$	320,833	 	$	311,921	 	$	44,747	 	
 	 	 	 	 	 	 	 	
Supplemental Disclosure of Cash Flow Information:	 	 	 	 	 	 	 	
Cash paid for interest	 	$	7,065	 	$	8,303	 	$	9,230	 	
Cash paid for taxes	 	7,602	 	6,207	 	22,943	 	
Stock subscriptions receivable pursuant to rights offering	 	—	 	5,274	 	—	 	
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
26

 
GRIFFON CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(as retrospectively adjusted, See Note 2)
 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	ACCUMULATED	 	 	 	 	 	 	 	
 	 	 	 	 	 	CAPITAL IN	 	 	 	 	 	 	 	OTHER	 	DEFERRED	 	 	 	COMPREHENSIVE	 	
 	 	COMMON STOCK	 	EXCESS OF	 	RETAINED	 	TREASURY SHARES	 	COMPREHENSIVE	 	ESOP	 	 	 	INCOME	 	
(in thousands)	 	SHARES	 	PAR VALUE	 	PAR VALUE	 	EARNINGS	 	SHARES	 	COST	 	INCOME (LOSS)	 	COMPENSATION	 	Total	 	(LOSS)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at 9/30/2006	 	41,628	 	$	10,407	 	$	185,603	 	$	431,978	 	11,780	 	$	(201,844	)	$	(406	)	$	(2,042	)	$	423,696	 	 	 	
Net income	 	—	 	—	 	—	 	19,399	 	—	 	—	 	—	 	—	 	19,399	 	$	19,399	 	
Common stock issued for options exercised	 	628	 	157	 	8,731	 	—	 	411	 	(6,532	)	—	 	—	 	2,356	 	 	 	
Tax benefit from the exercise of stock options	 	—	 	—	 	1,346	 	—	 	—	 	—	 	—	 	—	 	1,346	 	 	 	
Amortization of deferred compensation	 	—	 	—	 	—	 	—	 	—	 	—	 	—	 	543	 	543	 	 	 	
Common stock acquired	 	—	 	—	 	—	 	—	 	208	 	(4,355	)	—	 	—	 	(4,355	)	 	 	
Restricted stock vesting	 	73	 	18	 	(18	)	—	 	 	 	 	 	—	 	—	 	—	 	 	 	
ESOP distribution of common stock	 	—	 	—	 	307	 	—	 	—	 	—	 	—	 	—	 	307	 	 	 	
Stock-based compensation	 	—	 	—	 	2,410	 	—	 	—	 	—	 	—	 	(120	)	2,290	 	 	 	
Translation of foreign financial statements	 	—	 	—	 	—	 	—	 	—	 	—	 	28,477	 	—	 	28,477	 	28,477	 	
Adoption of pension guidance	 	—	 	—	 	—	 	—	 	—	 	—	 	(1,521	)	—	 	(1,521	)	 	 	
Pension OCI amortization, net of tax	 	—	 	—	 	—	 	—	 	—	 	—	 	2,972	 	—	 	2,972	 	2,972	 	
Balance at 9/30/2007	 	42,329	 	10,582	 	198,379	 	451,377	 	12,399	 	(212,731	)	29,522	 	(1,619	)	475,510	 	$	50,848	 	
Net loss	 	—	 	—	 	—	 	(43,424	)	—	 	—	 	—	 	—	 	(43,424	)	(43,424	)	
Tax benefit from the exercise of stock options	 	—	 	—	 	3	 	—	 	—	 	—	 	—	 	—	 	3	 	 	 	
Amortization of deferred compensation	 	—	 	—	 	—	 	—	 	—	 	—	 	—	 	(221	)	(221	)	 	 	
Common stock acquired	 	—	 	—	 	—	 	—	 	41	 	(579	)	—	 	—	 	(579	)	 	 	
Restricted stock vesting	 	373	 	94	 	(94	)	—	 	—	 	—	 	—	 	—	 	—	 	 	 	
ESOP distribution of common stock	 	—	 	—	 	(71	)	—	 	—	 	—	 	—	 	—	 	(71	)	 	 	
Stock-based compensation	 	—	 	—	 	3,236	 	—	 	—	 	—	 	—	 	91	 	3,327	 	 	 	
Issuance of common stock pursuant to rights offering, net of financing costs	 	28,393	 	7,098	 	232,409	 	—	 	—	 	—	 	—	 	—	 	239,507	 	 	 	
Translation of foreign financial statements	 	—	 	—	 	—	 	—	 	—	 	—	 	(6,061	)	—	 	(6,061	)	(6,061	)	
Adoption of uncertain tax position guidance	 	—	 	—	 	—	 	(4,669	)	—	 	—	 	—	 	—	 	(4,669	)	 	 	
Pension OCI amortization, net of tax	 	—	 	—	 	—	 	—	 	—	 	—	 	2,008	 	—	 	2,008	 	2,008	 	
Balance at 9/30/2008	 	71,095	 	17,774	 	433,862	 	403,284	 	12,440	 	(213,310	)	25,469	 	(1,749	)	665,330	 	$	(47,477	)	
Net income	 	—	 	—	 	—	 	18,708	 	—	 	—	 	—	 	—	 	18,708	 	$	18,708	 	
Common stock issued for options exercised	 	33	 	7	 	(7	)	—	 	—	 	—	 	—	 	—	 	—	 	 	 	
Tax benefit from the exercise of stock options	 	—	 	—	 	217	 	—	 	—	 	—	 	—	 	—	 	217	 	 	 	
Amortization of deferred compensation	 	—	 	—	 	—	 	—	 	—	 	—	 	—	 	818	 	818	 	 	 	
Common stock acquired	 	—	 	—	 	—	 	—	 	26	 	(250	)	—	 	—	 	(250	)	 	 	
Restricted stock vesting	 	58	 	15	 	(747	)	—	 	—	 	—	 	—	 	—	 	(732	)	 	 	
ESOP purchase of common stock	 	—	 	—	 	—	 	—	 	—	 	—	 	—	 	(4,370	)	(4,370	)	 	 	
ESOP distribution of common stock	 	—	 	—	 	(22	)	—	 	—	 	—	 	—	 	—	 	(22	)	 	 	
Stock-based compensation	 	—	 	—	 	4,092	 	—	 	—	 	—	 	—	 	53	 	4,145	 	 	 	
Issuance of common stock pursuant to rights offering, net of financing costs	 	854	 	214	 	1,711	 	—	 	—	 	—	 	—	 	—	 	1,925	 	 	 	
Repurchase of convertible debt	 	—	 	—	 	(263	)	—	 	—	 	—	 	—	 	—	 	(263	)	 	 	
Translation of foreign financial statements	 	—	 	—	 	—	 	—	 	—	 	—	 	11,836	 	—	 	11,836	 	11,836	 	
Pension OCI amortization, net of tax	 	—	 	—	 	—	 	—	 	—	 	—	 	(9,135	)	—	 	(9,135	)	(9,135	)	
Balance at 9/30/2009	 	72,040	 	$	18,010	 	$	438,843	 	$	421,992	 	12,466	 	$	(213,560	)	$	28,170	 	$	(5,248	)	$	688,207	 	$	21,409	 	
 
The accompanying notes to consolidated financial statements are an integral part of these statements.
 
27

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
(Unless otherwise indicated, all references to years or year-end refer to the Company’s fiscal period ending September 30)
 
NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Description of Business
 
Griffon Corporation (the “Company” or “Griffon”), is a diversified management and holding company that conducts business through wholly-owned subsidiaries.  The Company oversees the operations of its subsidiaries, allocates resources among them and manages their capital structures.  The Company provides direction and assistance to its subsidiaries in connection with acquisition and growth opportunities as well as in connection with divestitures.  Griffon also seeks out, evaluates and, when appropriate, will acquire additional businesses that offer potentially attractive returns on capital to further diversify itself.
 
Headquartered in New York, N.Y., the Company was incorporated in New York in 1959, and was reincorporated in Delaware in 1970.  It changed its name to Griffon Corporation in 1995.
 
Griffon currently conducts its operations through Telephonics Corporation, Clopay Building Products Company and Clopay Plastic Products Company.
 
·                 Telephonics Corporation (“Telephonics”) high-technology engineering and manufacturing capabilities provide integrated information, communication and sensor system solutions to military and commercial markets worldwide.
 
·                 Clopay Building Products Company (“Building Products”) is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.
 
·                 Clopay Plastic Products Company (“Plastics”) is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.
 
Consolidation
 
The consolidated financial statements include the accounts of Griffon Corporation and all subsidiaries (the “Company” or “Griffon”). Intercompany accounts and transactions have been eliminated in consolidation.
 
Earnings Per Share
 
Due to rounding, the sum of earnings per share of Continuing operations and Discontinued operations may not equal earnings per share of Net income.
 
Discontinued Operations – Installation Services
 
As a result of the downturn in the residential housing market, in 2008, the Company exited substantially all of the operating activities of its Installation Services segment; this segment sold, installed and serviced garage doors, garage door openers, fireplaces, floor coverings, cabinetry and a range of related building products primarily for the new residential housing market. Operating results of substantially the entire Installation Services segment have been reported as discontinued operations in the Consolidated
 
28

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Statements of Operations for all periods presented herein, and the segment is excluded from segment reporting
 
Reclassifications
 
Certain amounts in prior years have been reclassified to conform to the current year presentation.
 
Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 amounts of revenue and expenses during the reporting periods.  These estimates may be adjusted due to changes in economic, industry or customer financial conditions, as well as, changes in technology or demand.  Significant estimates include allowances for doubtful accounts receivable and returns, net realizable value of inventories, restructuring reserves, valuation of goodwill and intangible assets, pension assumptions, useful lives associated with depreciation and amortization of intangible and fixed assets, warranty reserves, sales incentive accruals, stock based compensation assumptions, income taxes and tax valuation reserves, environmental reserves, legal reserves, insurance reserves and the valuation of discontinued assets and liabilities, and the accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions Griffon may undertake in the future. Actual results may ultimately differ from these estimates.
 
Cash and equivalents
 
The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents primarily consist of overnight commercial paper, highly-rated liquid money market funds backed by U.S. Treasury securities and U.S. Agency securities, as well as insured bank deposits. The Company had cash in non-U.S. bank accounts of approximately $39,007 and $22,850 at September 30, 2009 and 2008, respectively. The majority of these amounts are covered by government insurance or backed by government securities.  The Company evaluates all institutions and funds that hold its cash and equivalents.
 
Fair value of financial instruments
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued new guidance, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. For financial assets and liabilities, this statement, which was effective for the Company on October 1, 2008, did not require any new fair value measurements. The adoption of this new guidance did not have a material impact on Griffon’s consolidated financial statements. In February 2008, the FASB delayed the effective date of the new guidance for the Company to October 1, 2009, for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
 
In February 2007, the FASB issued new guidance to provide companies the option to report selected financial assets and liabilities at fair value. Upon adoption of this new guidance on October 1, 2008, the Company did not elect the fair value option to report its financial assets and liabilities at fair value. Accordingly, the adoption of this new guidance did not have an impact on the Company’s financial position or results of operations.
 
29

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The carrying values of cash and equivalents, accounts receivable, accounts and notes payable and revolving credit debt approximate fair value due to either the short-term nature of such instruments or the fact that the interest rate of the revolving credit debt is based upon current market rates.
 
The Company’s 4% convertible notes’ fair value was approximately $79 million on September 30, 2009, which was based upon quoted market price (level 1 input).
 
Items Measured at Fair Value on a Recurring Basis
 
Insurance contracts with a value of $4,803 at September 30, 2009, are measured and recorded at fair value based upon quoted prices in active markets for identical assets (level 1 input).
 
Non-U.S. currency translation
 
Assets and liabilities of non-U.S. subsidiaries, where the functional currency is not the U.S. dollar, have been translated at year-end exchange rates and profit and loss accounts have been translated using weighted average exchange rates. Adjustments resulting from currency translation have been recorded in the equity section of the balance sheet as cumulative translation adjustments. Assets and liabilities of an entity that are denominated in currencies other than an entity’s functional currency are remeasured into the functional currency using end of period exchange rates, or historical rates where applicable to certain balances. Gains and losses related to these remeasurements are recorded within the Statement of Operations as a component of Other income (expense).
 
Revenue recognition
 
Revenue is recognized when the following circumstances are satisfied: a) persuasive evidence of an arrangement exists, b) delivery has occurred or services are rendered, c) price is fixed and determinable and d) collectability is reasonably assured. Goods are sold on terms which transfer title and risk of loss at a specified location, typically shipping point. Revenue recognition from product sales occurs when all factors are met, including transfer of title and risk of loss, which occurs either upon shipment or upon receipt by customers at the location specified in the terms of sale. Other than standard product warranty provisions, sales arrangements provide for no other significant post-shipment obligations. From time to time and for certain customers rebates and other sales incentives, promotional allowances or discounts are offered, typically related to customer purchase volume, all of which are fixed or determinable and are classified as a reduction of revenue and recorded at the time of sale. Griffon provides for sales returns allowances based upon historical returns experience.
 
Telephonics earns a substantial portion of its revenue as either a prime or subcontractor from contract awards with the U.S. Government, as well as non-U.S. governments and other commercial customers. These formal contracts are typically long-term in nature, usually greater than one year. Revenue and profits from these long-term fixed price contracts are recognized under the percentage-of-completion method of accounting.  Revenue and profits on fixed-price contracts that contain engineering as well as production requirements are recorded based on the ratio of total actual incurred costs to date to the total estimated costs for each contract (cost-to-cost method). Using the cost-to-cost method, revenue is recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion, multiplied by the total estimated contract revenue, less the cumulative revenue recognized in prior periods. The profit recorded on a contract using this method is equal to the current estimated total profit margin multiplied by the cumulative revenue recognized, less the amount of cumulative profit previously recorded for the contract in prior periods. As this method relies on the substantial use of estimates, these projections may be revised throughout the life of a contract. Components of this formula and ratio that may be estimated include gross profit margin and total costs at completion. The cost
 
30

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
performance and estimates to complete on long-term contracts are reviewed, at a minimum, on a quarterly basis, as well as when information becomes available that would necessitate a review of the current estimate. Adjustments to estimates for a contract’s estimated costs at completion and estimated profit or loss often are required as experience is gained, and as more information is obtained, even though the scope of work required under the contract may or may not change, or if contract modifications occur. The impact of such adjustments or changes to estimates is made on a cumulative basis in the period when such information has become known. Gross profit is affected by a variety of factors, including the mix of products, systems and services, production efficiencies, price competition and general economic conditions.
 
Revenue and profits on cost-reimbursable type contracts are recognized as allowable costs are incurred on the contract, at an amount equal to the allowable costs plus the estimated profit on those costs. The estimated profit on a cost-reimbursable contract may be fixed or variable based on the contractual fee arrangement. Incentive and award fees on these contracts are recorded as revenue when the criteria under which they are earned are reasonably assured of being met and can be estimated.
 
For contracts whose anticipated total costs exceed the total expected revenue, an estimated loss is recognized in the period when identifiable. A provision for the entire amount of the estimated loss is recorded on a cumulative basis.
 
Amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable, and are determined on a percentage-of-completion basis measured by the cost-to-cost method.
 
Accounts receivable, allowance for doubtful accounts and concentrations of credit risk
 
Accounts receivable is composed principally of trade accounts receivable that arise primarily from the sale of goods or services on account and is stated at historical cost. A substantial portion of the Company’s trade receivables are from customers of Building Products whose financial condition is dependent on the construction and related retail sectors of the economy. In addition, a significant portion of the Company’s trade receivables are from one Plastics customer, P&G, whose financial condition is dependent on the consumer products and related sectors of the economy. Telephonics sells its products to domestic and international government agencies, as well as commercial customers. The Company performs continuing evaluations of the financial condition of its customers, and although the Company generally does not require collateral, letters of credit may be required from customers in certain circumstances.
 
Trade receivables are recorded at the stated amount, less allowance for doubtful accounts. The allowance represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations (usually due to customers’ potential insolvency). The allowance for doubtful accounts includes amounts for certain customers where a risk of default has been specifically identified, as well as an amount for customer defaults based on a formula when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers.  The provision related to the allowance for doubtful accounts was recorded in Selling, general and administrative expenses.
 
Contract costs and recognized income not yet billed
 
Contract costs and recognized income not yet billed consists of amounts accounted for under the percentage of completion method of accounting, recoverable costs and accrued profit that cannot yet be invoiced under the terms of certain long-term contracts. Amounts will be invoiced when applicable contract terms such as the achievement of specified milestones or product delivery, are met.
 
31

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Inventories
 
Inventories, stated at the lower of cost (first-in, first-out or average) or market, include material, labor and manufacturing overhead costs.
 
Griffon’s businesses typically do not require inventory that is susceptible to becoming obsolete or dated.  In general, Telephonics sells products in connection with programs authorized and approved under contracts awarded by the U.S. Government or agencies thereof, either as prime or subcontractor, and in accordance with customer specifications.  Plastics primarily produces fabricated materials used by customers in the production of their products and these materials are produced against orders by those customers.  Building Products produces garage doors in response to orders from customers of retailers and dealers.
 
Property, plant and equipment
 
Property, plant and equipment includes the historic cost of land, buildings, equipment and significant improvements to existing plant and equipment.  Expenditures for maintenance, repairs and minor renewals are expensed as incurred.  When property or equipment is sold or otherwise disposed of, the related cost and accumulated depreciation is removed from the respective accounts and the gain or loss is realized in income.
 
Depreciation expense, which includes amortization of assets under capital leases, was $40,919, $42,061 and $39,333 for the years ended September 30, 2009, 2008 and 2007, respectively, and was calculated on a straight-line basis over the estimated useful lives of the assets.  Estimated useful lives for property, plant and equipment are as follows: buildings and building improvements, 25 to 40 years; machinery and equipment, 2 to 15 years and leasehold improvements, over the term of the lease or life of the improvement, whichever is shorter.
 
Capitalized interest costs included in property, plant and equipment were $331, $511 and $454 for the years ended September 30, 2009, 2008 and 2007, respectively. The original cost of fully-depreciated property, plant and equipment remaining in use at September 30, 2009 was approximately $182,000.
 
Goodwill and indefinite-lived intangibles
 
Goodwill is the excess of the acquisition cost of business over the fair value of the identifiable net assets acquired.  Goodwill is not amortized, but is subject to an annual impairment test unless during an interim period, impairment indicators, such as a significant change in the business climate, exist.
 
The Company performs its annual impairment testing of goodwill in September. The performance of the test involves a two-step process. The first step involves comparing the fair value of the Company’s reporting units with the reporting unit’s carrying amount, including goodwill. The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the present value of expected future cash flows. This method uses the Company’s own market assumptions.  If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.  In 2009, all reporting units passed step one, and therefore step two was not performed.
 
The Company defines its reporting units as its three segments.
 
32

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The Company used five year projections and a 3% terminal value to which discount rates between 11.75% and 12.50% were applied to calculate each unit’s fair value. To substantiate the fair values derived from the income approach methodology of valuation, the implied fair value was reconciled to the Company’s market capitalization, the results of which supported the implied fair values.  Any changes in key assumptions or management judgment with respect to a reporting unit or its prospects, which may result from a decline in Griffon’s stock price, a change in market conditions, market trends, interest rates or other factors outside Griffon’s control, or significant underperformance relative to historical or project future operating results, could result in a significantly different estimate of the fair value of the reporting units, which could result in a future impairment charge.
 
In 2008, based on the results of the annual goodwill impairment testing, all of the goodwill of Building Products was written down due to impairment resulting in a charge of $12.9 million.
 
Similar to Goodwill, the Company tests indefinite-lived intangible assets at least annually unless indicators of impairment exist.  The Company uses a discounted cash flow method to calculate and compare the fair value of the intangible to its book value.  This method uses the Company’s own market assumptions which are reasonable and supportable.  If the fair value is less than the book value of the indefinite-lived intangibles, an impairment charge would be recognized.  There was no impairment related to any indefinite-lived intangible assets in 2009 or 2008.
 
Definite-lived long-lived assets
 
Amortizable intangible assets are carried at cost less accumulated amortization. For financial reporting purposes, definite lived intangible assets are amortized on a straight-line basis over their useful lives, generally eight to twenty-five years. Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.
 
The goodwill impairment in 2008 was deemed an indicator of potential impairment of the definite-lived long-lived assets of Building Products.  As a result, these assets were tested as a group for impairment in 2008, and again in 2009.  For both periods, the future undiscounted cash flows expected to be generated from the use of these assets were substantially greater than the carrying value of the assets, and as such, there was no impairment.
 
Income taxes
 
Income taxes are accounted for under the liability method.  Deferred taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts.  The carrying value of the company’s deferred tax assets is dependent upon the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions.  Should the Company determine that it is more likely than not that some portion of the deferred tax assets will not be realized, a valuation allowance against the deferred tax assets would be established in the period such determination was made.
 
Effective October 1, 2007, the Company adopted FASB guidance which prescribes the way companies are to account for uncertainty in income tax reporting, and prescribes methodology for recognizing, reversing and measuring the tax benefits of a tax position expected to be taken, in a tax return.  The Company provides for uncertain tax positions and any related interest and penalties based upon Management’s assessment of whether a tax benefit is more likely than not of being sustained upon examination by tax authorities.  At September 30, 2009 the Company believes that it has appropriately accounted for all
 
33

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
unrecognized tax benefits.  As a result of adopting this new guidance effective October 1, 2007, the Company recorded a $4,669 increase to reserves as a “cumulative effect” decrease to opening retained earnings.  As of September 30, 2009, 2008 and 2007, the Company has recorded unrecognized tax benefits in the amount of $8,138, $11,634 and $21,646, respectively.  Accrued interest and penalties related to income tax matters are recorded in the provision for income taxes.
 
Research and development costs, shipping and handling costs and advertising costs
 
Research and development costs not recoverable under contractual arrangements are charged to selling, general and administrative expense as incurred and amounted to $17,800, $17,500 and $16,400 in 2009, 2008 and 2007, respectively.
 
Selling, general and administrative expenses include shipping and handling costs of $30,500 in 2009, $37,700 in 2008 and $38,900 in 2007 and advertising costs, which are expensed as incurred, of $15,200 in 2009, $17,800 in 2008 and $17,500 in 2007.
 
Risk, Retention and Insurance
 
The Company’s property and casualty insurance programs contain various deductibles that, based on the Company’s experience, are typical and customary for a company of its size and risk profile. The Company generally maintains deductibles for claims and liabilities related primarily to workers’ compensation, health and welfare claims, general commercial, product and automobile liability and property damage, and business interruption resulting from certain events. The Company does not consider any of the deductibles to represent a material risk to the Company. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. Insurance is maintained to transfer risk beyond the level of self-retention and provides protection on both an individual claim and annual aggregate basis.
 
In the U.S., the Company currently self-assumes its product and commercial general liability claims up to $500 per occurrence, its workers’ compensation claims up to $350 per occurrence, and automobile liability claims up to $250 per occurrence. Third-party insurance provides primary level coverage in excess of these deductible amounts up to certain specified limits. In addition, the Company has excess liability insurance from third-party insurers on both an aggregate and an individual occurrence basis substantially in excess of the limits of the primary coverage.
 
The Company has local insurance coverage in Germany and Brazil which is subject to reasonable deductibles.  The Company has worldwide excess coverage above these local programs.
 
Pension Benefits
 
Griffon sponsors two defined benefit pension plans for certain employees and retired employees. Annual amounts relating to these plans are recorded based on actuarial projections, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases and turnover rates. The actuarial assumptions used to determine pension liabilities and assets, as well as pension expense, are reviewed on an annual basis when modifications to assumptions are made based on current economic conditions and trends. The expected return on plan assets is determined based on the nature of the plans’ investments and expectations for long-term rates of return. The discount rate used to measure obligations is based on a corporate bond spot-rate yield curve that matches projected future benefit payments with the appropriate spot rate applicable to the timing of the projected future benefit payments. The assumptions utilized in recording Griffon’s obligations under the defined benefit pension plans are believed to be reasonable based on experience and advice from independent actuaries; however, differences in actual
 
34

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
experience or changes in the assumptions may materially affect Griffon’s financial position or results of operations.
 
The qualified defined benefit plan has been frozen to new entrants since December 2000.  Certain employees who were part of the plan prior to December 2000 continue to accrue a service benefit for an additional 10 years, at which time all plan participants will stop accruing service benefits.
 
Newly issued but not yet effective accounting pronouncements
 
In December 2007, the FASB issued new accounting guidance related to the accounting for business combinations. The purpose of the new guidance is to better represent the economic value of a business combination transaction. The new guidance retains the fundamental requirement of the old guidance where the acquisition method of accounting is to be used for all business combinations and for an acquirer to be identified for each business combination.  In general the new guidance 1) broadens the old guidance by extending its applicability to all events where one entity obtains control over one or more businesses, 2) broadens the use of the fair value measurements used to recognize the assets acquired and liabilities assumed, 3) changes the accounting for acquisition related fees and restructuring costs incurred in connection with an acquisition and 4) increases required disclosure. The Company anticipates that the adoption of the new guidance, effective for Griffon for any business combinations that occur after October 1, 2009, will have an impact on the way in which business combinations are accounted for, however, the impact can only be assessed as each acquisition is consummated.
 
In December 2007, the FASB issued new accounting guidance related to the accounting for noncontrolling interests in consolidated financial statements. The new guidance was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the consolidated financial statements. Moreover, the new guidance eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. This new guidance is effective for the Company as of October 1, 2009. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.
 
In March 2008, the FASB issued new guidance which enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: 1) an entity uses derivative instruments, 2) derivative instruments and related hedged items are accounted and 3) derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Although early adoption is encouraged, the new guidance is effective for the Company as of October 1, 2009. The Company is evaluating the potential impact, if any, of the new guidance on its consolidated financial statements.
 
In April 2008, the FASB issued new guidance which amends the factors that should be considered in developing renewal or extension assumptions that are used to determine the useful life of a recognized intangible asset and requires enhanced related disclosures. The new guidance must be applied prospectively to all intangible assets acquired as of and subsequent to years beginning after December 15, 2008, which is the Company’s year 2010. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.
 
In October 2009, the FASB issued new guidance on accounting for multiple-deliverable arrangements to enable vendors to accounts for products and services separately rather than as a combined unit.  The guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The new guidance will be effective as of the beginning of
 
35

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
the annual reporting period commencing after June 15, 2010, and will be adopted by the Company as of October 1, 2010. Early adoption is permitted. The Company is evaluating the potential impact, if any, of the adoption of the new guidance on its consolidated financial statements.
 
NOTE 2 — ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
 
In April 2009, the FASB issued new guidance which requires disclosure about fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements.  This statement was effective for the Company starting with the interim period ending June 30, 2009, and was applied prospectively as required.  The Company has included the required disclosure in this Form 8-K. The adoption of this guidance did not have a material effect on Griffon’s consolidated financial statements.
 
In June 2009, the FASB issued new guidance which establishes principles and requirements for subsequent events regarding: 1) the period after the balance sheet date during which management shall evaluate events and transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosure that an entity shall make about events or transactions that occurred after the balance sheet date.  This statement was effective for the Company starting with the interim period ending June 30, 2009, and was applied prospectively as required.  The Company has included the required disclosure in this Form 8-K. The adoption of this guidance did not have a material effect on Griffon’s consolidated financial statements.
 
In June 2009, the FASB issued new guidance which established the FASB Accounting Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  The new guidance became effective for financial statements issued for interim periods ended after September 15, 2009, and were adopted by the Company for this Form 8-K.  The adoption of this guidance did not have a material effect on Griffon’s consolidated financial statements.
 
Retrospective Adjustment for Adoption of Convertible Debt Guidance
 
In May 2008, the FASB issued new guidance to clarify that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) must be separately accounted for in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company adopted the new guidance on October 1, 2009 and applied it retrospectively, as required, to the financial statements for the adjustments related to the Company’s 4% convertible subordinated notes due 2023 (the “Notes”).
 
The Company concluded that the fair value of the equity component of the Notes, using a comparable yield of 8.5%, as obtained from an independent financial institution, at the time of issuance in July 2003 was $30,393, or $18,357 net of tax.  On September 30, 2009, the 2023 Notes had an outstanding balance of 79,380, an unamortized debt discount of $2,820, a net carrying value of $76,560 and the related capital paid in excess of par value component, net of deferred tax, was $18,094.  On September 30, 2008, the 2023 Notes had an outstanding balance of $130,000, an unamortized debt discount of $9,730, a net carrying value of $120,270 and the related capital paid in excess of par value component, net of deferred tax, was $18,357.  The financial statements and the following footnotes: Notes 10, 12, 18, 19 and 22 throughout this Form 8-K have been updated, retrospectively, for the adoption of the new guidance on convertible debt.  In addition, Schedule I, Condensed Financial Information of Registrant, has also been updated as such schedule has been adjusted by similar amounts as the financial statements.  The debt discount will be amortized through July, 2010.
 
36

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The following table details the effect of the retrospective application of the new guidance regarding convertible debt instruments on the Consolidated Balance Sheets and the Consolidated Statements of Operations as follows:
 
Consolidated Balance Sheet	 	As of September 30, 2009	 	As of September 30, 2008	 	
(in thousands)	 	Reported	 	As Adjusted	 	Reported	 	As Adjusted	 	
 	 	 	 	 	 	 	 	 	 	
Other Assets	 	$	30,648	 	$	29,132	 	$	22,067	 	$	17,987	 	
All other assets	 	1,114,759	 	1,114,759	 	1,149,499	 	1,149,499	 	
Total Assets	 	$	1,145,407	 	$	1,143,891	 	$	1,171,566	 	$	1,167,486	 	
 	 	 	 	 	 	 	 	 	 	
Notes payable & current portion of LT debt	 	$	81,410	 	$	78,590	 	$	2,258	 	$	2,258	 	
Long-term debt	 	98,394	 	98,394	 	230,930	 	221,200	 	
All other liabilities	 	278,700	 	278,700	 	278,698	 	278,698	 	
Total liabilities	 	458,504	 	455,684	 	511,886	 	502,156	 	
Capital in excess of par value	 	420,749	 	438,843	 	415,505	 	433,862	 	
Retained earnings	 	438,782	 	421,992	 	415,991	 	403,284	 	
All other shareholders’ equity	 	(172,628	)	(172,628	)	(171,816	)	(171,816	)	
Total Shareholders’ Equity	 	686,903	 	688,207	 	659,680	 	665,330	 	
Total Liabilities and shareholders’ equity	 	$	1,145,407	 	$	1,143,891	 	$	1,171,566	 	$	1,167,486	 	
 
Consolidated Statement of Operations	 	September 30, 2009	 	September 30, 2008	 	September 30, 2007	 	
(in thousands)	 	Reported	 	As adjusted	 	Reported	 	As adjusted	 	Reported	 	As adjusted	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	 	$	25,147	 	$	25,147	 	$	12,044	 	$	12,044	 	$	49,553	 	$	49,553	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense)	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	(9,562	)	(13,091	)	(12,345	)	(16,909	)	(13,406	)	(17,593	)	
Interest income	 	1,539	 	1,539	 	1,970	 	1,970	 	2,397	 	2,397	 	
Gain from debt extinguishment, net	 	7,360	 	4,488	 	—	 	—	 	—	 	—	 	
Other, net	 	1,522	 	1,522	 	2,713	 	2,713	 	2,892	 	2,892	 	
Total other income (expense)	 	859	 	(5,542	)	(7,662	)	(12,226	)	(8,117	)	(12,304	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) before taxes and discontinued operations	 	26,006	 	19,605	 	4,382	 	(182	)	41,436	 	37,249	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision (benefit) for income taxes	 	4,005	 	1,687	 	4,294	 	2,651	 	13,271	 	11,764	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	22,001	 	17,918	 	88	 	(2,833	)	28,165	 	25,485	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from discontinued operations	 	790	 	790	 	(40,591	)	(40,591	)	(6,086	)	(6,086	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	22,791	 	$	18,708	 	$	(40,503	)	$	(43,424	)	$	22,079	 	$	19,399	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings (loss) per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.37	 	$	0.31	 	$	0.00	 	$	(0.09	)	$	0.87	 	$	0.79	 	
Income (loss) from discontinued operations	 	0.01	 	0.01	 	(1.24	)	(1.24	)	(0.19	)	(0.19	)	
Net income (loss)	 	0.39	 	0.32	 	(1.24	)	(1.33	)	0.68	 	0.60	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	58,699	 	58,699	 	32,667	 	32,667	 	32,405	 	32,405	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings (loss) per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.37	 	$	0.30	 	$	0.00	 	$	(0.09	)	$	0.84	 	$	0.76	 	
Income (loss) from discontinued operations	 	0.01	 	0.01	 	(1.24	)	(1.24	)	(0.19	)	(0.18	)	
Net income (loss)	 	0.39	 	0.32	 	(1.24	)	(1.32	)	0.65	 	0.58	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	59,002	 	59,002	 	32,836	 	32,836	 	33,357	 	33,357	 	
 
37

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
NOTE 3 — INVENTORIES
 
The following table details the components of inventory:
 
 	 	At September 30,	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
Raw materials and supplies	 	$	38,943	 	$	45,583	 	
Work in process	 	66,741	 	70,716	 	
Finished goods	 	33,486	 	50,859	 	
Total	 	$	139,170	 	$	167,158	 	
 
NOTE 4 — PROPERTY, PLANT AND EQUIPMENT
 
The following table details the components of property, plant and equipment, net:
 
 	 	At September 30,	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
Land, building and building improvements	 	$	110,617	 	$	108,344	 	
Machinery and equipment	 	423,742	 	390,282	 	
Leasehold improvements	 	23,390	 	21,832	 	
 	 	557,749	 	520,458	 	
Accumulated depreciation and amortization	 	(321,730	)	(281,455	)	
Total	 	$	236,019	 	$	239,003	 	
 
NOTE 5 — GOODWILL AND OTHER INTANGIBLES
 
The following table provides changes in carrying value of goodwill by segment through the year ended September 30, 2009:
 
 	 	 	 	 	 	Other	 	 	 	Other	 	 	 	
 	 	 	 	 	 	adjustments	 	 	 	adjustments	 	 	 	
 	 	 	 	 	 	including	 	 	 	including	 	 	 	
 	 	At September	 	Goodwill	 	currency	 	At September	 	currency	 	At September	 	
(in thousands)	 	30, 2007	 	Impaired in 2008	 	translations	 	30, 2008	 	translations	 	30, 2009	 	
Telephonics	 	$	18,545	 	$	—	 	$	—	 	$	18,545	 	$	—	 	$	18,545	 	
Clopay Building Products	 	12,913	 	(12,913	)	—	 	—	 	—	 	—	 	
Clopay Plastic Products	 	76,959	 	—	 	(1,722	)	75,237	 	3,875	 	79,112	 	
Total	 	$	108,417	 	$	(12,913	)	$	(1,722	)	$	93,782	 	$	3,875	 	$	97,657	 	
 
38

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset:
 
 	 	At September 30, 2009	 	Average	 	At September 30, 2008	 	
 	 	Gross Carrying	 	Accumulated	 	Life	 	Gross Carrying	 	Accumulated	 	
(dollar amounts in thousands)	 	Amount	 	Amortization	 	(Years)	 	Amount	 	Amortization	 	
Customer relationships	 	$	30,650	 	$	5,628	 	25	 	$	29,507	 	$	4,162	 	
Unpatented technology	 	2,990	 	349	 	15	 	2,990	 	150	 	
Total amortizable intangible assets	 	33,640	 	5,977	 	24	 	32,497	 	4,312	 	
Trademark	 	590	 	—	 	 	 	590	 	—	 	
Unpatented technology	 	5,958	 	—	 	 	 	6,002	 	—	 	
Total intangible assets	 	$	40,188	 	$	5,977	 	 	 	$	39,089	 	$	4,312	 	
 
In December 2007, Telephonics acquired certain assets and assumed certain liabilities of a video surveillance systems integration business.  The purchase price was $1,750 in cash plus performance-based cash payments over a three-year period up to $1,750.  On the date of acquisition, a total of $2,990, which included the purchase price and an estimate for contingent performance-based cash payments, was recorded to Unpatented Technology.  Since the acquisition, performance-based cash payments of $18 and zero were paid in 2009 and 2008, respectively.
 
Amortization expense for intangible assets subject to amortization was $1,427, $1,574 and $1,764 for the years ended September 30, 2009, 2008 and 2007, respectively.  Amortization expense for each of the next five years, based on current intangible balances and classifications, is estimated as follows: 2010 - $1,480; 2011 - $1,448; 2012 - $1,413; 2013 - $1,406 and 2014 - $1,399.
 
NOTE 6 — DISCONTINUED OPERATIONS
 
As a result of the downturn in the residential housing market and the impact on the Installation Services segment, the Company’s management originally initiated a plan during 2008 to exit certain markets within the Installation Services segment through the sale or disposition of business units. As part of the decision to exit certain markets, the Company closed three units of the Installation Services segment in 2008.
 
Subsequently, the Company’s Board of Directors approved a plan to exit all other operating activities of the Installation Services segment in 2008, with the exception of two units which were merged into Building Products. As part of this plan, the Company closed one additional unit during the third quarter of 2008, sold nine units to one buyer in the third quarter of 2008 and sold its two remaining units in Phoenix and Las Vegas in the fourth quarter of 2008. The plan met the criteria for discontinued operations classification in accordance with GAAP. Operating results of substantially all of the Installation Services segment have been reported as discontinued operations in the consolidated statements of operations for all periods presented and the Installation Services segment is excluded from segment reporting.
 
The following amounts related to the Installation Services segment have been segregated from the Company’s continuing operations and are reported as assets and liabilities of discontinued operations in the consolidated balance sheets:
 
39

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
 	 	At September 30, 2009	 	At September 30, 2008	 	
(in thousands)	 	current	 	Long-term	 	Current	 	Long-term	 	
Assets of discontinued operations:	 	 	 	 	 	 	 	 	 	
Accounts receivable	 	$	—	 	$	—	 	$	3,414	 	$	—	 	
Prepaid and other current assets	 	1,576	 	 	 	6,081	 	 	 	
Other long-term assets	 	 	 	5,877	 	 	 	8,346	 	
Total assets of discontinued operations	 	$	1,576	 	$	5,877	 	$	9,495	 	$	8,346	 	
 	 	 	 	 	 	 	 	 	 	
Liabilities of discontinued operations:	 	 	 	 	 	 	 	 	 	
Accounts payable	 	$	13	 	$	—	 	$	340	 	$	—	 	
Accrued liabilities	 	4,919	 	—	 	14,577	 	—	 	
Other long-term liabilities	 	 	 	8,784	 	 	 	10,048	 	
Total liabilities of discontinued operations	 	$	4,932	 	$	8,784	 	$	14,917	 	$	10,048	 	
 
Installation Services’ revenue was $109,400 and $250,900 for 2008 and 2007, respectively. There was no reported revenue in 2009.  Disposal costs related to the Installation Services segment of $43,100 were included in discontinued operations in 2008.
 
NOTE 7 — ACCRUED LIABILITIES
 
The following table details the components of accrued liabilities:
 
 	 	At September 30,	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
Compensation	 	$	31,088	 	$	29,638	 	
Warranties and rebates	 	7,040	 	6,894	 	
Insurance	 	5,024	 	5,232	 	
Non income taxes	 	5,738	 	4,996	 	
Other	 	12,230	 	17,690	 	
Total	 	$	61,120	 	$	64,450	 	
 
NOTE 8 — RESTRUCTURING AND OTHER RELATED CHARGES
 
In 2009, the Company announced plans to consolidate facilities in its Building Products segment, actions for which are scheduled to be completed in early calendar 2011.  The consolidation is expected to produce annual savings of $10 million.  The Company estimates that it will incur pre-tax exit and restructuring costs of approximately $12 million, substantially all of which will be cash charges, including approximately $2 million for one-time termination benefits and other personnel costs, $1 million for excess facilities and related costs, and $9 million in other exit costs primarily in connection with production realignment.  These charges are expected to be incurred primarily in 2010 and 2011.
 
In the latter part of 2007, as a result of the downturn in the residential housing market and the impact on the Building Products segment, a plan, which was substantially completed in 2008, was initiated to restructure operations. This plan included charges for workforce reductions, closure or consolidation of excess facilities and other costs for the closure and relocation of its Tempe, AZ manufacturing facility to Troy, OH.
 
A summary of the restructuring and other related charges included in the line item “Restructuring and other related charges” in the Consolidated Statements of Operations recognized for 2007, 2008 and 2009 were as follows:
 
40

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
 	 	Workforce	 	Facilities &	 	Other related	 	 	 	
(in thousands)	 	Reduction	 	Exit Costs	 	Costs	 	Total	 	
Amounts incurred in:	 	 	 	 	 	 	 	 	 	
Year ended September 30, 2007	 	$	677	 	$	922	 	$	902	 	$	2,501	 	
 	 	 	 	 	 	 	 	 	 	
Year ended September 30, 2008	 	$	647	 	$	(11	)	$	1,974	 	$	2,610	 	
 	 	 	 	 	 	 	 	 	 	
Year ended September 30, 2009	 	$	207	 	$	672	 	$	361	 	$	1,240	 	
 
The activity in the restructuring accrual recorded in Accrued liabilities consisted of the following:
 
 	 	Workforce	 	Facilities &	 	Other related	 	 	 	
(in thousands)	 	Reduction	 	Exit Costs	 	Costs	 	Total	 	
 	 	 	 	 	 	 	 	 	 	
Accrued liability at September 30, 2007	 	$	639	 	$	727	 	$	177	 	$	1,543	 	
Charges	 	647	 	(11	)	1,974	 	2,610	 	
Payments	 	(1,286	)	(485	)	(2,151	)	(3,922	)	
Accrued liability at September 30, 2008	 	—	 	231	 	—	 	231	 	
Charges	 	207	 	672	 	361	 	1,240	 	
Payments	 	—	 	(903	)	(361	)	(1,264	)	
Accrued liability at September 30, 2009	 	$	207	 	$	—	 	$	—	 	$	207	 	
 
NOTE 9 —WARRANTY LIABILITY
 
The Company offers warranties against product defects for periods ranging from six months to three years, with certain products having a limited lifetime warranty, depending on the specific product and terms of the customer purchase agreement. Typical warranties require the Company to repair or replace the defective products during the warranty period at no cost to the customer. At the time revenue is recognized, Building Products records a liability for warranty costs, estimated based on historical experience. Building Products periodically assesses its warranty obligations and adjusts the liability as necessary. While the Company believes that its liability for product warranties is adequate, the ultimate liability for product warranties could differ materially from estimated warranty costs.
 
Changes in the Company’s warranty liability, included in Accrued liabilities, were as follows:
 
(in thousands)	 	2009	 	2008	 	
Balance, beginning of fiscal year	 	$	5,328	 	$	7,868	 	
Warranties issued and charges inestimated pre-existing warranties	 	5,968	 	898	 	
Actual warranty costs incurred	 	(5,589	)	(3,438	)	
Balance, end of fiscal period	 	$	5,707	 	$	5,328	 	
 
41

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
NOTE 10 — NOTES PAYABLE, CAPITALIZED LEASES AND LONG-TERM DEBT
 
The present value of the net minimum payments on capitalized leases as of September 30, 2009 is as follows:
 
 	 	At September 30,	 	
(in thousands)	 	2009	 	
Total minimum lease payments	 	$	17,526	 	
Less amount representing interest	 	(4,398	)	
Present value of net minimum lease payments	 	13,128	 	
Current Portion	 	(946	)	
Capitalized lease obligation, less current portion	 	$	12,182	 	
 
Minimum payments under current capital leases for the next five years are as follows: $1,588 in 2010, $1,436 in 2011, $1,438 in 2012, $1,432 in 2013 and $1,436 in 2014.
 
Included in the consolidated balance sheet at September 30, 2009 under property, plant and equipment are cost and accumulated depreciation subject to capitalized leases of $10,450 and $1,268, respectively, and included in other assets are restricted cash and deferred interest charges of $4,629 and $308, respectively. At September 30, 2008, the amounts subject to capitalized leases were $10,450 and $979, respectively, and included in other assets were restricted cash and deferred interest charges of $4,521 and $333, respectively. The capitalized leases carry interest rates from 5.04% to 5.85% and mature from 2010 through 2022.
 
In October 2006, a subsidiary of the Company entered into a capital lease totaling $14,290 for real estate it occupies in Troy, Ohio. Approximately $10,000 was used to acquire the building and the remaining amount is restricted for improvements. The lease matures in 2021, bears interest at a fixed rate of 5.1%, is secured by a mortgage on the real estate and is guaranteed by the Company.
 
Debt at September 30 2009 and 2008 consisted of the following:
 
 	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
4% convertible subordinated debt	 	$	79,380	 	$	130,000	 	
Debt discount on 4% convertible subordinated debt	 	(2,820	)	(9,730	)	
Note payable to banks - revolving credit	 	73,925	 	79,143	 	
Capital lease - real estate	 	12,978	 	13,698	 	
Real estate mortgages	 	7,746	 	8,175	 	
ESOP loan	 	5,625	 	1,880	 	
Capital lease - equipment	 	150	 	292	 	
Total debt	 	176,984	 	223,458	 	
less: Current portion	 	(78,590	)	(2,258	)	
Long-term debt	 	$	98,394	 	$	221,200	 	
 
Minimum payments under debt agreements for the next five years are as follows: $81,409 in 2010, $1,955 in 2011, $5,119 in 2012, $75,770 in 2013 and $1,916 in 2014.
 
In June 2008, Building Products and Plastics entered into a credit agreement for their domestic operations with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which the lenders agreed to provide a five-year, senior secured revolving credit facility of $100,000 (the “Clopay Credit Agreement”). Borrowings under the Clopay Credit Agreement bear interest (3.3% at September 30, 2009) at rates based upon LIBOR or the prime rate and are collateralized by the U.S. stock and assets of
 
42

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Building Products and Plastics.  At September 30, 2009 and September 30, 2008, $35,925 and $33,900, respectively, were outstanding under the Clopay Credit Agreement and approximately $32,448 was available for borrowing at September 30, 2009. The Company has been in compliance with all financial covenants under the Clopay Credit Agreement since its inception. The balance of the debt approximates its fair value.
 
In March 2008, Telephonics entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, pursuant to which the lenders agreed to provide a five-year, revolving credit facility of $100,000 (the “Telephonics Credit Agreement”). Borrowings under the Telephonics Credit Agreement bear interest (1.9% at September 30, 2009) at rates based upon LIBOR or the prime rate and are collateralized by the stock and assets of Telephonics. At September 30, 2009 and September 30, 2008, $38,000 and $44,500, respectively, were outstanding under the Telephonics Credit Agreement and approximately $56,973 was available for borrowing at September 30, 2009. The Company has been in compliance with all financial covenants under the Telephonics Credit Agreement since its inception. The balance of the debt approximates its fair value.
 
The Telephonics Credit Agreement and the Clopay Credit Agreement include various sublimits for standby letters of credit. At September 30, 2009, there was approximately $16,722 of aggregate standby letters of credit outstanding under these credit facilities.  Additionally, these agreements limit dividends and advances that these subsidiaries may pay to the parent.
 
At September 30, 2009, the Company had outstanding $79,380 of Notes, a related debt discount of $2,820, a net carry value of $76,560 and a related capital in excess of par value component of $18,094, net of deferred tax. Holders may convert the Notes at a conversion price of $22.41 per share, as adjusted pursuant to the rights offering and subject to possible further adjustment, as defined, which is equal to a conversion rate of approximately 44.6229 shares per $1 principal amount of Notes. The Company has irrevocably elected to pay noteholders at least $1 in cash for each $1 principal amount of Notes presented for conversion. The excess of the value of the Company’s Common Stock that would have been issuable upon conversion over the cash delivered will be paid to Noteholders in shares of the Company’s Common Stock.  The fair value is approximately $79 million, which is based upon quoted market price (level 1 input). If the stock price remains below the conversion price, it is likely that these notes will be put to the Company in July of 2010, as such they have been classified as a component of Notes payable and current portion of long-term debt in the September 2009 Consolidated Balance Sheet.
 
During 2009, the Company purchased $50,620 face value of the Notes from certain noteholders for $42,741. The Company recorded a pre-tax gain from debt extinguishment of $4,808, offset by a $320 proportionate reduction in the related deferred financing costs for a net gain of $4,488.
 
At September 30, 2008, the Company had outstanding $130,000 of Notes, a related debt discount of $9,730, a net carry value of $120,270 and a related capital in excess of par value component of $18,357, net of deferred tax.
 
For the 2023 Notes, the effective interest rate for the years ending September 30, 2009, 2008 and 2007 was 9.0%, 8.9% and 9.0%, respectively.  The interest expense on the 2023 Notes for the year ending September 30, 2009 was $7,578 consisting of $3,472 for the coupon, $3,576 for the amortization of the discount and $530 for the amortization of deferred issuance costs. The interest expense on the 2023 Notes for the year ending September 30, 2008 was $10,521 consisting of $5,200 for the coupon, $4,720 for the amortization of the discount and $601 for the amortization of deferred issuance costs. The interest expense on the 2023 Notes for the year ending September 30, 2007 was $10,144 consisting of $5,200 for the coupon, $4,343 for the amortization of the discount and $601 for the amortization of deferred issuance costs.
 
43

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The Company’s Employee Stock Ownership Plan (“ESOP”) has a loan agreement, guaranteed by the Company, which requires payments of principal and interest through the expiration date of September 2012 at which time the balance of the loan, and any outstanding interest, will be payable.  The primary purpose of this loan and its predecessor loans was to purchase 547,605 shares of the Company’s stock in October 2008. The loan bears interest (1.54% at September 30, 2009) at rates based upon the prime rate or LIBOR. The balance of the loan was $5,625 as of September 30, 2009, and the outstanding balance approximates fair value.
 
Real estate mortgages bear interest at rates from 6.3% to 6.6% with maturities extending through 2016 and are collateralized by real property whose carrying value at September 30, 2009 aggregated approximately $11,200.  These mortgages approximate fair value.
 
NOTE 11 — EMPLOYEE BENEFIT PLANS
 
The Company offers defined contribution plans to most of its U.S. employees.  In addition to employee contributions to the plans, the Company makes contributions based upon various percentages of compensation and/or employee contributions, which were $5,800 in 2009, $9,800 in 2008 and $10,300 in 2007.
 
The Company also has a qualified and a non-qualified defined benefit plan covering certain employees with benefits based on years of service and employee compensation.  Griffon adopted the FASB amendments on September 30, 2007, which required the Company to recognize the funded status of its defined benefit plans in the Consolidated Balance Sheets with a corresponding adjustment to Accumulated other comprehensive income, net of tax.  Over time, these amounts will be recognized as part of net periodic pension costs in the Consolidated Statements of Operations.
 
Griffon is responsible for overseeing the management of the investments of the qualified defined benefit plan and uses the service of an investment manager to manage these assets based on agreed upon risk profiles set by Griffon management.  The primary objective of the qualified defined benefit plan is to secure participant retirement benefits.  As such, the key objective in this plan’s financial management is to promote stability and, to the extent appropriate, growth in the funded status.  Financial objectives are established in conjunction with a review of current and projected plan financial requirements.  The fair value of a majority of the plan assets were determined by the plans’ trustee using quoted market prices identical instruments (level 1 input) as of September 30, 2009.  The fair value of various other investments were determined by the plan’s trustee using direct observable market corroborated inputs, including quoted market prices for similar assets (level 2 inputs).
 
The qualified defined benefit plan has been frozen to new entrants since December 2000.  Certain employees who were part of the plan prior to December 2000 continue to accrue a service benefit for an additional 10 years, at which time all plan participants will stop accruing service benefits.  A 10% change in the discount rate, average wage increase or return on assets would not have a material effect on the financial statements of the Company.
 
The non-qualified supplemental executive retirement plan is supported by the general assets of Griffon.
 
Griffon uses judgment to estimate the assumptions used in determining the future liability of the plan, as well as the investment returns on the assets invested for the plan.  The expected return on assets assumption used for pension expense was developed through analysis of historical market returns, current market conditions and the past experience of plan asset investments.  The discount rate assumption is determined by developing a yield curve based on high quality bonds with maturities matching the plans’ expected
 
44

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
benefit payment stream.  The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates.
 
Net periodic costs were as follows:
 
 	 	Defined Benefits for the Years	 	Supplemental Benefits for the Years	 	
 	 	Ended September 30,	 	Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	2009	 	2008	 	2007	 	
Net periodic benefit costs	 	 	 	 	 	 	 	 	 	 	 	 	 	
Service cost	 	$	425	 	$	520	 	$	626	 	$	22	 	$	137	 	$	621	 	
Interest cost	 	1,638	 	1,571	 	1,528	 	2,586	 	2,432	 	2,200	 	
Expected return on plan assets	 	(1,723	)	(2,081	)	(1,794	)	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Prior service costs	 	9	 	9	 	9	 	328	 	328	 	313	 	
Actuarial (gain) loss	 	325	 	135	 	522	 	596	 	821	 	1,988	 	
Transition obligation	 	(1	)	(1	)	(1	)	—	 	—	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total net periodic benefit costs	 	$	673	 	$	153	 	$	890	 	$	3,532	 	$	3,718	 	$	5,122	 	
 
The tax benefits in 2009, 2008 and 2007 for the amortization of pension costs in other comprehensive income were $117, $50 and $186, respectively.
 
The estimated net actuarial loss and prior service cost that will be amortized from Accumulated other comprehensive income into net periodic pension cost during 2010 are $2,050 and $337, respectively.
 
The weighted-average assumptions used in determining the net periodic benefit costs were as follows:
 
 	 	Defined Benefits for the Years Ended	 	Supplemental Benefits for the Years	 	
 	 	September 30,	 	Ended September 30,	 	
 	 	2009	 	2008	 	2007	 	2009	 	2008	 	2007	 	
Discount rate	 	7.50	%	6.30	%	5.85	%	7.50	%	6.30	%	5.85	%	
Average wage increase	 	3.50	%	3.50	%	3.50	%	5.00	%	5.00	%	5.00	%	
Expected return on assets	 	8.50	%	8.50	%	8.50	%	—	 	—	 	—	 	
 
45

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Plan assets and benefit obligation of the defined benefit plans were as follows:
 
 	 	Defined Benefits at	 	Supplemental Benefits at	 	
 	 	September 30,	 	September 30,	 	
(in thousands)	 	2009	 	2008	 	2009	 	2008	 	
Change in benefit obligation	 	 	 	 	 	 	 	 	 	
Benefit obligation at beginning of fiscal year	 	$	22,263	 	$	25,283	 	$	36,429	 	$	40,368	 	
Benefits earned during the year	 	425	 	520	 	22	 	137	 	
Interest cost	 	1,638	 	1,571	 	2,586	 	2,432	 	
Benefits paid	 	(1,251	)	(1,041	)	(3,899	)	(2,849	)	
Actuarial (gain) loss	 	6,728	 	(4,070	)	6,494	 	(3,659	)	
Benefit obligation at end of fiscal year	 	29,803	 	22,263	 	41,632	 	36,429	 	
 	 	 	 	 	 	 	 	 	 	
Change in Plan Assets	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at beginning of fiscal year	 	20,442	 	24,325	 	—	 	—	 	
Actual return on plan assets	 	(365	)	(3,851	)	—	 	—	 	
Company contributions	 	1,051	 	1,009	 	3,899	 	2,849	 	
Benefits paid	 	(1,251	)	(1,041	)	(3,899	)	(2,849	)	
Fair value of plan assets at end of fiscal year	 	19,877	 	20,442	 	—	 	—	 	
Projected benefit obligation in excess of plan assets	 	$	(9,926	)	$	(1,821	)	$	(41,632	)	$	(36,429	)	
 	 	 	 	 	 	 	 	 	 	
Amounts recognized in the statement offinancial position consist of:	 	 	 	 	 	 	 	 	 	
Accrued liabilities	 	$	(876	)	$	(853	)	$	(3,898	)	$	(3,904	)	
Other liabilities (long-term)	 	(9,050	)	(968	)	(37,734	)	(32,525	)	
Total Liabilites	 	(9,926	)	(1,821	)	(41,632	)	(36,429	)	
 	 	 	 	 	 	 	 	 	 	
Net actuarial losses	 	14,189	 	5,698	 	18,833	 	12,935	 	
Prior service cost	 	33	 	43	 	939	 	1,266	 	
Net asset at transition, other	 	—	 	(1	)	—	 	—	 	
Deferred taxes	 	(4,978	)	(2,009	)	(6,920	)	(4,970	)	
Total Accumulated other comprehensive(earnings) loss, net of tax	 	9,244	 	3,731	 	12,852	 	9,231	 	
Net amount recognized at September 30,	 	$	(682	)	$	1,910	 	$	(28,780	)	$	(27,198	)	
 	 	 	 	 	 	 	 	 	 	
Accumulated benefit obligations	 	$	29,674	 	$	22,153	 	$	41,317	 	$	36,113	 	
 	 	 	 	 	 	 	 	 	 	
Information for plans with accumulated benefit obligations in excess of plan assets:	 	 	 	 	 	 	 	 	 	
ABO	 	$	29,674	 	$	22,153	 	$	41,317	 	$	36,113	 	
PBO	 	29,803	 	22,263	 	41,632	 	36,429	 	
Fair value of plan assets	 	19,877	 	20,442	 	—	 	—	 	
 
The weighted-average assumptions used in determining the benefit obligations were as follows:
 
 	 	Defined Benefits at	 	Supplemental Benefits at	 	
 	 	September 30,	 	September 30,	 	
 	 	2009	 	2008	 	2009	 	2008	 	
Discount rate	 	5.60	%	7.50	%	5.00	%	7.50	%	
Average wage increase	 	3.50	%	3.50	%	5.00	%	5.00	%	
 
46

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The actual and weighted-average assets allocation for qualified benefit plans were as follows:
 
 	 	At September 30,	 	 	 	
 	 	2009	 	2008	 	Target	 	
Equity securities	 	0.0	%	58.0	%	54.0	%	
Fixed income	 	91.7	%	33.0	%	44.0	%	
Other	 	8.3	%	9.0	%	2.0	%	
Total	 	100.0	%	100.0	%	100.0	%	
 
Estimated future benefit payments to retirees, which reflect expected future service, are as follows:
 
(in thousands)	 	Defined	 	Supplemental	 	
For the fiscal years ending September 30,	 	Benefits	 	Benefits	 	
2010	 	$	876	 	$	3,898	 	
2011	 	940	 	3,898	 	
2012	 	1,115	 	3,898	 	
2013	 	1,262	 	3,898	 	
2014	 	1,378	 	3,898	 	
2015 through 2019	 	8,422	 	17,049	 	

The Company expects to contribute $3,800 to the Defined Benefit plan in 2010, in addition to the $3,898 in payments related to the Supplemental Benefits that will be funded from the general assets of Griffon.
 
The Company has an ESOP that covers substantially all domestic employees.  Shares of the ESOP which have been allocated to employee accounts are charged to expense based on the fair value of the shares transferred and are treated as outstanding in earnings per share.  Compensation expense under the ESOP was $796 in 2009, $338 in 2008 and $740 in 2007.  The cost of the shares held by the ESOP and not yet allocated to employees is reported as a reduction of Shareholders’ Equity.  In connection with the rights offering in September 2008, the ESOP purchased 74,100 shares underlying rights associated with the unallocated shares of the ESOP.  The ESOP shares were as follows:
 
 	 	At September 30,	 	
 	 	2009	 	2008	 	
Allocated shares	 	2,126,058	 	2,169,523	 	
Unallocated shares	 	780,697	 	190,832	 	
 	 	2,906,755	 	2,360,355	 	
 
NOTE 12 — INCOME TAXES
 
Income taxes have been based on the following components of Income before taxes and discontinued operations:
 
 	 	For the Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	
Domestic	 	$	10,260	 	$	(18,583	)	$	21,817	 	
Non-U.S.	 	9,345	 	18,401	 	15,432	 	
 	 	$	19,605	 	$	(182	)	$	37,249	 	
 
47

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Provision (benefit) for income taxes on income from continuing operations was comprised of the following:
 
 	 	For the Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	
Current	 	$	4,831	 	$	4,082	 	$	23,275	 	
Deferred	 	(3,144	)	(1,431	)	(11,511	)	
Total	 	$	1,687	 	$	2,651	 	$	11,764	 	
 	 	 	 	 	 	 	 	
U.S. Federal	 	$	984	 	$	5,527	 	$	7,563	 	
State and local	 	1,543	 	1,105	 	2,465	 	
Non-U.S.	 	(840	)	(3,981	)	1,736	 	
Total provision	 	$	1,687	 	$	2,651	 	$	11,764	 	
 
The Company’s income tax provision (benefit) included benefits of $1,387 in 2009, $11,422 in 2008 and $1,426 in 2007 reflecting the reversal of previously recorded tax liabilities primarily due to the resolution of various tax audits and due to the closing of certain statutes for prior years’ tax returns.
 
Included in Prepaids and other current assets are tax receivable amounts of $6,074 and $18,035 at September 30, 2009 and 2008, respectively.
 
Differences between the effective income tax rate applied to income from continuing operations and U.S. Federal income statutory rate were as follows:
 
 	 	For the Years Ended September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	
U.S. Federal income tax rate	 	35.0	%	35.0	%	35.0	%	
State and local taxes, net of Federal benefit	 	4.8	 	191.6	 	3.0	 	
Non-U.S. taxes	 	(21.0	)	(513.4	)	(5.2	)	
German income tax rate adjustment	 	—	 	—	 	(2.6	)	
Settlement of tax contingencies	 	(1.0	)	5,020.3	 	(3.0	)	
Non-deductible goodwill	 	—	 	(2,483.3	)	—	 	
Non-U.S. dividends	 	4.3	 	(1,028.0	)	5.3	 	
Valuation allowance	 	(14.9	)	(2,307.1	)	—	 	
Meals and entertainment	 	1.0	 	(141.3	)	0.8	 	
Non-U.S. purchase price adjustment	 	—	 	(233.0	)	—	 	
Other	 	0.4	 	2.6	 	(1.7	)	
Effective tax rate from continuing operations	 	8.6	%	(1,456.6	)%	31.6	%	
 
48

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
The tax effect of temporary differences that give rise to future deferred tax assets and liabilities are as follows:
 
 	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
 	 	 	 	 	 	
Deferred tax assets:	 	 	 	 	 	
Bad debt reserves	 	$	1,323	 	2,704	 	
Inventory reserves	 	5,469	 	5,532	 	
Deferred compensation	 	23,361	 	17,690	 	
Compensation benefits	 	281	 	2,690	 	
Insurance reserve	 	3,263	 	4,122	 	
Interest carryforward	 	—	 	2,154	 	
Restructuring reserve	 	578	 	2,532	 	
Warranty reserve	 	2,665	 	2,646	 	
Net operating loss and foreign tax credit	 	12,154	 	13,284	 	
Other reserves and accruals	 	1,197	 	1,589	 	
 	 	50,291	 	54,943	 	
Valuation allowance	 	(4,726	)	(8,040	)	
Total deferred tax assets	 	45,565	 	46,903	 	
 	 	 	 	 	 	
Deferred tax liabilities:	 	 	 	 	 	
Deferred income	 	(3,350	)	(513	)	
Goodwill	 	(6,770	)	(5,942	)	
Depreciation and amortization	 	(14,841	)	(16,651	)	
Interest	 	(11,906	)	(17,174	)	
Other	 	(1,424	)	(1,302	)	
Total deferred tax liabilities	 	(38,291	)	(41,582	)	
Net deferred tax assets	 	$	7,274	 	$	5,321	 	

During 2009 the valuation allowance decreased $3,314 due to the use and expected future benefit of foreign tax credits.
 
The components of the net deferred tax asset (liability), by balance sheet account, were as follows:
 
 	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	
 	 	 	 	 	 	
Prepaid and other current assets	 	$	10,024	 	$	6,139	 	
Other assets	 	7,115	 	—	 	
Other liabilities	 	(11,475	)	(8,123	)	
Assets of discontinued operations	 	1,610	 	7,305	 	
Net deferred tax assets	 	$	7,274	 	$	5,321	 	
 
The Company has not recorded deferred income taxes on the undistributed earnings of its non-U.S. subsidiaries because of management’s ability and intent to indefinitely reinvest such earnings outside the U.S. At September 30, 2009, the Company’s share of the undistributed earnings of the non-U.S. subsidiaries amounted to approximately $43,000.
 
49

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
At September 30, 2009 and 2008, the Company had no loss carryforwards for federal tax purposes and had loss carryforwards for non-U.S. tax purposes of $17,141 and $15,303, respectively. The non-U.S. loss carryforwards of $17,141 are available for carryforward indefinitely.
 
The Company had State and local loss carryforwards at September 30, 2009 and 2008 of $2,900 and $1,800, respectively, which expire in varying amounts through 2029.
 
The Company had foreign tax credit carryforwards of $6,326 and $8,040 at September 30, 2009 and 2008, respectively, which are available for use through 2018.
 
The Company files U.S. Federal, state and local tax returns, as well as Germany, Canada, Brazil and Sweden non-U.S. jurisdiction tax returns.  The Company’s U.S. federal income tax returns are no longer subject to income tax examination for years before 2006, the Company’s German income tax returns are no longer subject to income tax examination for years before 2006 and the Company’s major U.S. state and other non-U.S. jurisdictions are no longer subject to income tax examinations for years before 2000. Various U.S. state and non-U.S. statutory tax audits are currently underway.  The Company does not believe that its unrecognized tax benefits will materially change within the next twelve months.
 
The following is a roll forward of the unrecognized tax benefits activity:
 
(in thousands)	 	 	 	
Balance at October 1, 2007	 	$	21,646	 	
Additions based on tax positions related to the current year	 	1,244	 	
Reductions based on tax positions related to prior years	 	(10,086	)	
Lapse of statutes	 	(1,066	)	
Settlements	 	(104	)	
Balance at September 30, 2008	 	11,634	 	
 	 	 	 	
Additions based on tax positions related to the current year	 	1,395	 	
Reductions based on tax positions related to prior years	 	(358	)	
Lapse of statutes	 	(895	)	
Settlements	 	(3,638	)	
Balance at September 30, 2009	 	$	8,138	 	
 
If recognized, the amount of potential tax benefits net of federal benefit that would impact the Company’s effective tax rate is $6,580.  The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2009 and 2008, the combined amount of accrued interest and penalties related to tax positions taken or to be taken on Griffon’s tax returns and recorded as part of the reserves for uncertain tax positions was $1,407 and $1,982, respectively.
 
NOTE 13 — STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION
 
In August 2008, the Company’s Board of Directors authorized a 20 million share common stock rights offering to its shareholders in order to raise equity capital for general corporate purposes and to fund future growth. The rights had an exercise price of $8.50 per share. In conjunction with the rights offering, GS Direct, L.L.C. (“GS Direct”), an affiliate of Goldman Sachs, agreed to back stop the rights offering by purchasing, on the same terms, any and all shares not subscribed through the exercise of rights. GS Direct also agreed to purchase additional shares of common stock at the rights offering price if it did not acquire a minimum of 10 million shares of common stock as a result of its back stop commitment. The Company received a total of $248.6 million in gross proceeds from the rights offering and issued 29.2 million shares
 
50

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
as follows:  In September 2008, the Company received $241.3 million of gross proceeds, and issued 28.4 million shares, from the first closing of its rights offering and the closing of the related investments by GS Direct and by the Company’s Chief Executive Officer; in October 2008, an additional $5.3 million of rights offering proceeds were received, and 620,486 shares were issued, in connection with the second closing of the rights offering; and in April 2009, $2.0 million of rights offering proceeds were received, and 233,298 shares were issued, in connection with the rights offering.
 
The Company expenses the fair value of equity compensation grants over the related vesting period. Compensation cost related to stock-based awards with graded vesting are amortized using the straight-line attribution method. Options for an aggregate of 1,375,000 shares of Common Stock were previously authorized for grant under the Company’s 2001 Stock Option Plan at September 30, 2009. As of September 30, 2009, options for 89,774 shares remain available for future grants under this plan. The plan provides for the granting of options at an exercise price of not less than 100% of the fair market value at the date of grant. Options generally expire ten years after date of grant and become exercisable in equal installments over two to four years.
 
During 2006, shareholders approved the Griffon Corporation 2006 Equity Incentive Plan (“Incentive Plan”) under which awards of performance shares, performance units, stock options, stock appreciation rights, restricted shares and deferred shares may be granted. Options under the Incentive Plan generally expire ten years after the date of grant and are granted at an exercise price of not less than 100% of the fair market value at the date of grant.  The shareholders approved an amendment to the Incentive Plan in 2009. The maximum number of shares of common stock available for award under the Incentive Plan is 7,750,000. The number of shares available under the Incentive Plan is reduced by a factor of two-to-one for awards other than stock options. If the remaining shares available under the Incentive Plan at September 30, 2009 were awarded through stock options, 3,720,440 shares would be issued or if the remaining shares were awarded as restricted stock, 1,860,220 shares would be issued.
 
51

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
A summary of stock option activity for the years ended September 30, 2009, 2008 and 2007 is as follows:
 
 	 	Options	 	
 	 	 	 	Weighted	 	 	 	Weighted	 	
 	 	 	 	Average	 	Aggregated	 	Average	 	
 	 	 	 	Exercise	 	Intrinsic	 	Contractual	 	
($ in thousands, except per share data)	 	Shares	 	Price	 	Value	 	Term (Years)	 	
 	 	 	 	 	 	 	 	 	 	
Outstanding at October 1, 2006	 	2,845,586	 	$	13.74	 	 	 	 	 	
Granted	 	34,000	 	15.92	 	 	 	 	 	
Exercised	 	(628,307	)	14.15	 	$	2,665	 	 	 	
Forfeited/expired	 	(42,506	)	22.48	 	 	 	 	 	
Outstanding at September 30, 2007	 	2,208,773	 	13.49	 	7,483	 	4.0	 	
Exercisable at September 30, 2007	 	2,050,460	 	12.76	 	7,483	 	3.6	 	
 	 	 	 	 	 	 	 	 	 	
Outstanding at October 1, 2007	 	2,208,773	 	13.49	 	 	 	 	 	
Granted	 	25,000	 	14.19	 	 	 	 	 	
Exercised	 	—	 	 	 	 	 	 	 	
Forfeited/expired	 	(832,882	)	11.08	 	 	 	 	 	
Outstanding at September 30, 2008	 	1,400,891	 	13.87	 	670	 	4.5	 	
Exercisable at September 30, 2008	 	1,329,066	 	13.40	 	670	 	4.3	 	
 	 	 	 	 	 	 	 	 	 	
Outstanding at October 1, 2008	 	1,400,891	 	13.87	 	 	 	 	 	
Granted	 	350,000	 	20.00	 	 	 	 	 	
Exercised	 	(33,000	)	6.12	 	109	 	 	 	
Forfeited/expired	 	(27,552	)	20.55	 	 	 	 	 	
Outstanding at September 30, 2009	 	1,690,339	 	15.18	 	980	 	4.6	 	
 	 	 	 	 	 	 	 	 	 	
Exercisable at September 30, 2009 through:	 	 	 	 	 	 	 	 	 	
September 30, 2010	 	550	 	 	 	 	 	 	 	
September 30, 2011	 	386,650	 	 	 	 	 	 	 	
September 30, 2012	 	232,500	 	 	 	 	 	 	 	
September 30, 2013	 	202,726	 	 	 	 	 	 	 	
September 30, 2014	 	163,000	 	 	 	 	 	 	 	
September 30, 2015	 	225,038	 	 	 	 	 	 	 	
September 30, 2016	 	78,500	 	 	 	 	 	 	 	
September 30, 2017	 	14,750	 	 	 	 	 	 	 	
September 30, 2018	 	116,667	 	 	 	 	 	 	 	
Total Exercisable	 	1,420,381	 	$	14.21	 	$	980	 	3.9	 	
 
($ in thousands, except per share data)
 
 	 	Options Outstanding	 	Options Exercisable	 	
 	 	 	 	Weighted	 	 	 	Weighted	 	 	 	Weighted	 	 	 	Weighted	 	
 	 	 	 	Average	 	Aggregated	 	Average	 	 	 	Average	 	Aggregated	 	Average	 	
Range of	 	 	 	Exercise	 	Intrinsic	 	Contractual	 	 	 	Exercise	 	Intrinsic	 	Contractual	 	
Exercises Prices	 	Shares	 	Price	 	Value	 	Term (Years)	 	Shares	 	Price	 	Value	 	Term (Years)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
$6.17 to $6.33	 	57,200	 	6.33	 	$	214	 	1.1	 	57,200	 	6.33	 	$	214	 	1.1	 	
$7.75 to $11.14	 	505,000	 	8.92	 	766	 	1.8	 	505,000	 	8.92	 	766	 	1.8	 	
$12.39 to $17.23	 	475,764	 	14.73	 	—	 	4.5	 	464,014	 	14.73	 	—	 	4.4	 	
$19.49 to $26.06	 	652,375	 	21.13	 	—	 	7.3	 	394,167	 	21.51	 	—	 	6.4	 	
Totals	 	1,690,339	 	 	 	$	980	 	 	 	1,420,381	 	 	 	$	980	 	 	 	
 
52

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Unrecognized compensation expense related to non-vested options was $506 at September 30, 2009 and will be recognized over a weighted average vesting period of 1.1 years.  The fair value of options vested during the years ended September 30, 2009, 2008 and 2007 were $631, $775 and $801, respectively.
 
A summary of restricted stock activity for the years ended September 30, 2009, 2008 and 2007 is as follows:
 
 	 	Restricted Stock	 	
 	 	 	 	 	 	 	 	Weighted	 	
 	 	 	 	Weighted	 	Aggregated	 	Average	 	
 	 	 	 	Average	 	Intrinsic	 	Contractual	 	
($ in thousands, except per share data)	 	Shares	 	Grant Price	 	Value*	 	Term (Years)	 	
 	 	 	 	 	 	 	 	 	 	
Outstanding at October 1, 2006	 	309,326	 	$	23.96	 	$	58	 	4.5	 	
Granted	 	15,704	 	15.92	 	250	 	 	 	
Fully Vested	 	(67,775	)	23.84	 	1,180	 	 	 	
Forfeited	 	—	 	—	 	—	 	 	 	
Outstanding at September 30, 2007	 	257,255	 	23.51	 	97	 	3.4	 	
Granted	 	300,000	 	8.98	 	2,694	 	 	 	
Fully Vested	 	(98,255	)	22.38	 	3,252	 	 	 	
Forfeited	 	—	 	—	 	—	 	 	 	
Outstanding at September 30, 2008	 	459,000	 	14.25	 	11	 	2.8	 	
Granted	 	1,202,500	 	8.38	 	10,077	 	 	 	
Fully Vested	 	(53,000	)	24.20	 	511	 	 	 	
Forfeited	 	(6,000	)	9.30	 	56	 	 	 	
Outstanding at September 30, 2009	 	1,602,500	 	9.53	 	$	2,414	 	3.1	 	

*Aggregated intrinsic value at the date the shares were outstanding, granted, vested or forfeited, as applicable.
 
Unrecognized compensation expense related to non-vested shares of restricted stock was $12,211 at September 30, 2009 and will be recognized over a weighted average vesting period of 3.0 years.
 
In connection with the September 2008 rights offering, the Company was obligated under certain anti-dilution provisions within its stock option plans to reduce the exercise price of the then-outstanding options and recorded stock-based compensation expense of approximately $354. Also in September 2008, in connection with an investment in conjunction with the rights offering, the Company’s Chief Executive Officer purchased 578,151 shares of Common Stock at $8.50 per share, representing a discount to the fair value of such shares at closing. The Company recorded stock-based compensation expense related to this transaction of approximately $104.
 
The Company has an Outside Director Stock Award Plan (the “Outside Director Plan”), which was approved by the shareholders in 1994, under which 330,000 shares may be issued to non-employee directors. Annually, each eligible director is awarded shares of the Company’s Common Stock having a value of $10, which vests over a three-year period. For shares issued under the Outside Director Plan, the fair market value of the shares at the date of issuance is recognized as compensation expense over the vesting period. In 2009, 2008 and 2007, 12,732, 12,155 and 4,680 shares, respectively, were issued under the Outside Director Plan.
 
At September 30, 2009, a total of approximately 7,282 shares of the Company’s authorized Common Stock were reserved for issuance in connection with stock compensation plans.
 
53

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
In accordance with the terms of an employment agreement, in October 2008, the Company’s Chief Executive Officer received a restricted stock grant of 75,000 shares of Common Stock, which vests in April 2011. The fair value of the restricted stock on the date of grant was $675. In addition, the Company’s Chief Executive Officer received a ten-year option to purchase 350,000 shares of Common Stock at an exercise price of $20 per share. The closing stock price on date of grant was $9.00 and the grant vests in three equal annual installments beginning April 2009. The fair value of the options on the date of grant was $721 or $2.06 per share.
 
In March 2009, the Company’s Chief Executive Officer received a restricted stock grant of 675,000 shares of Common Stock, which vests in March 2013. The fair value of the restricted stock on the date of grant was $5,063 or $7.50 per share.
 
In addition to the above 2009 grants, the Company granted to employees 446,500 shares of restricted stock during 2009, each with 4 year cliff vesting, with a total fair value of $4,282, or a weighted average fair value of $9.59 per share.
 
On November 18, 2009, the Company granted to employees 237,500 shares of restricted stock each with 4 year cliff vesting, with a total fair value of $2,249 or a fair value of $9.47 per share.
 
The fair value of restricted stock and option grants is amortized over the respective vesting periods.
 
Using historical data as of the grant dates, the fair value of the 2009, 2008 and 2007 option grants was estimated as of the grant dates using the Black-Scholes option pricing model with the following weighted average assumptions:
 
 	 	2009	 	2008	 	2007	 	
 	 	Grant	 	Grant	 	Grant	 	
Risk-free interest rate	 	3.04	%	4.09	%	4.59	%	
Dividend yield	 	0.00	%	0.00	%	0.00	%	
Expected life (years)	 	7.0	 	7.0	 	7.0	 	
Volatility	 	38.98	%	40.00	%	40.00	%	
Option exercise price	 	$	20.00	 	$	14.19	 	$	15.92	 	
Fair value of options granted	 	$	2.06	 	$	6.89	 	$	7.95	 	
 
For the years ended September 30, 2009, 2008 and 2007, stock based compensation expense totaled $4,415, $3,327 and $2,412, respectively.
 
NOTE 14 — ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The components of Accumulated other comprehensive income were:
 
 	 	At September 30,	 	
(in thousands)	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation adjustment	 	$	50,266	 	$	38,431	 	$	45,089	 	
Minimum pension liability	 	(22,096	)	(12,962	)	(15,567	)	
Accumulative other comprehensive income	 	$	28,170	 	$	25,469	 	$	29,522	 	
 
54

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
NOTE 15 — COMMITMENTS AND CONTINGENT LIABILITIES
 
Operating leases
 
The Company rents 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. Rent expense for all operating leases totaled approximately $24,700, $32,400 and $31,600 in 2009, 2008 and 2007, respectively. The Company has engaged in sale-leaseback transactions for various manufacturing equipment used at selected U.S. locations. Net proceeds received from these transactions, classified as operating leases, for the years ended September 30, 2009, 2008 and 2007 were zero, $4,791, and $1,751, respectively.  Aggregate future minimum lease payments for operating leases at September 30, 2009 are $20,000 in 2010, $13,000 in 2011, $10,000 in 2012, $7,000 in 2013, $3,000 in 2014 and $3,000 thereafter.
 
Legal and environmental
 
Department of Environmental Conservation of New York State (“DEC”), with ISC Properties, Inc.Lightron Corporation (“Lightron”), a wholly-owned subsidiary of the Company, once conducted operations at a location in Peekskill in the Town of Cortlandt, New York (the “Peekskill Site”) owned by ISC Properties, Inc. (“ISC”), a wholly-owned subsidiary of the Company. ISC sold the Peekskill Site in November 1982.
 
Subsequently, the Company was advised by the 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 then entered into a consent order with the DEC in 1996 (the “Consent Order”) to perform a remedial investigation and prepare a feasibility study. After completing the initial remedial investigation pursuant to the Consent Order, ISC was required by the DEC, and did conduct accordingly over the next several years, supplemental remedial investigations, including soil vapor investigations, under the Consent Order.
 
In April 2009, the DEC advised ISC’s representatives that both the DEC and the New York State Department of Health had reviewed and accepted an August 2007 Remedial Investigation Report and an Additional Data Collection Summary Report dated January 30, 2009. With the acceptance of these reports, ISC completed the Remedial Investigation required under the Consent Order and was authorized, accordingly, by the DEC to conduct the Feasibility Study required by the Consent Order.  Pursuant to the requirements of the Consent Order and its obligations thereunder, ISC, without acknowledging any responsibility to perform any remediation at the Site, submitted to the DEC in August 2009, a draft Feasibility Study which recommended for the soil, groundwater and sediment medias, remediation alternatives having a current net capital cost value, in the aggregate, of approximately $5 million. ISC will be resubmitting a revised draft to respond to comments received from the DEC on October 20, 2009.
 
U.S. Government investigations and claims
 
Defense contracts and subcontracts, including the Company’s contracts and subcontracts, are subject to audit and review by various agencies and instrumentalities of the United States government, including among others, the Defense Contract Audit Agency (“DCAA”), the Defense Contract Investigative Service (“DCIS”), and the Department of Justice which has responsibility for asserting claims on behalf of the US government.  In addition to ongoing audits, pursuant to an administrative subpoena the Company is currently providing information to the U.S. Department of Defense Office of the Inspector General.  No claim has been asserted against the Company, and the Company is unaware of any material financial exposure in connection with the Inspector General’s inquiry.
 
In general, departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to
 
55

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages.  U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company or an operating division or subdivision.  Suspension or debarment could have material adverse effect on Telephonics because of its reliance on government contracts.
 
Contingent acquisition purchase price liabilities
 
In connection with certain acquisitions, the Company has recorded contingent consideration of $2,861 and $3,461 at September 30, 2009 and 2008, respectively, included in other liabilities.
 
General legal
 
The Company is subject to various laws and regulations relating to the protection of the environment and is a party to legal proceedings arising in the ordinary course of business. Management believes, based on facts presently known to it, that the resolution of the matter above and such other matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
 
NOTE 16 – EARNINGS PER SHARE
 
Earnings per share (EPS)
 
The rights offering discussed in the Stockholders’ Equity and Equity Compensation footnote contained a bonus element to existing shareholders that required the Company to adjust the shares used in the computation of basic and fully-diluted weighted-average shares outstanding for all periods presented prior to the offering. Basic and diluted EPS from continuing operations for the years ended September 30, 2009, 2008 and 2007 were determined using the following information:
 
 	 	For the Years Ended September 30,	 	
(Shares in thousands)	 	2009	 	2008	 	2007	 	
Weighted average shares outstanding - basic	 	58,699	 	32,667	 	32,405	 	
Incremental shares from 4% convertible notes	 	—	 	—	 	22	 	
Incremental shares from stock based compensation	 	303	 	169	 	930	 	
 	 	 	 	 	 	 	 	
Weighted average shares outstanding - diluted	 	59,002	 	32,836	 	33,357	 	
 	 	 	 	 	 	 	 	
Anti-dilutive options excludedfrom diluted EPS computation	 	1,305	 	980	 	633	 	
 
NOTE 17 – RELATED PARTIES
 
Simultaneously with the closing of the September 2008 rights offering and related investment by GS Direct, two employees of GS Direct joined the Company’s Board of Directors. Prior to the rights offering, the Company had retained an affiliated entity of GS Direct, for financial advisory services, and paid or incurred expenses of approximately $2,432 and $250 during the years ended September 30, 2008 and 2007, respectively.
 
56

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
NOTE 18 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
Quarterly results of operations for the years ended September 30, 2009 and 2008 were as follows:
 
(in thousands, except per share data)
 
 	 	 	 	 	 	Continuing Operations	 	Net Income (loss)	 	
 	 	 	 	Per Share -	 	Per Share -	 	 	 	Per Share -	 	Per Share -	 	
Quarter ended	 	Revenue	 	Gross Profit	 	Income (loss)	 	Basic	 	Diluted	 	Income (loss)	 	Basic	 	Diluted	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2009	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2008	 	$	302,334	 	$	58,957	 	$	2,066	 	$	0.04	 	$	0.04	 	$	2,069	 	$	0.04	 	$	0.04	 	
March 31, 2009	 	276,087	 	53,975	 	(2,076	)	(0.04	)	(0.04	)	(1,427	)	(0.02	)	(0.02	)	
June 30, 2009	 	287,385	 	66,286	 	6,051	 	0.10	 	0.10	 	6,100	 	0.10	 	0.10	 	
September 30, 2009	 	328,244	 	77,905	 	11,877	 	0.20	 	0.20	 	11,966	 	0.20	 	0.20	 	
 	 	$	1,194,050	 	$	257,123	 	$	17,918	 	$	0.31	 	$	0.30	 	$	18,708	 	$	0.32	 	$	0.32	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2007	 	$	294,802	 	$	64,758	 	$	835	 	$	0.03	 	$	0.03	 	$	(2,059	)	$	(0.06	)	$	(0.06	)	
March 31, 2008	 	298,571	 	57,450	 	(4,871	)	$	(0.15	)	$	(0.15	)	(22,094	)	$	(0.68	)	$	(0.68	)	
June 30, 2008	 	322,267	 	73,380	 	8,621	 	0.27	 	0.26	 	(10,535	)	(0.32	)	(0.32	)	
September 30, 2008	 	353,665	 	77,409	 	(7,418	)	(0.22	)	(0.22	)	(8,736	)	(0.26	)	(0.26	)	
 	 	$	1,269,305	 	$	272,997	 	$	(2,833	)	$	(0.09	)	$	(0.09	)	$	(43,424	)	$	(1.33	)	$	(1.33	)	
 
Notes to Quarterly Financial Information (unaudited):
·                  Earnings (loss) per share are computed independently for each quarter and year presented; as such the sum of the quarters may not be equal to the full year amounts.
·                  Income (loss) from continuing operations and Net income (loss), and the related per share earnings, for the three months and year ended September 30, 2008, included a $12,913 Building Products goodwill write-off.
·                  Income (loss) from continuing operations and Net income (loss), and the related per share earnings, included restructuring and other related charges related to Building Products of $1,691, $701, $38 and $1,202 for the three-month periods ended December 31, 2007, March 31, 2008, June 30, 2009 and September 30, 2009, respectively and $2,610 and $1,240 for the years ended September 30, 2008 and 2009, respectively.
 
NOTE 19 – BUSINESS SEGMENTS
 
The Company’s reportable business segments are as follows:
 
·                 Telephonics high-technology engineering and manufacturing capabilities provide integrated information, communication and sensor system solutions to military and commercial markets worldwide.
 
·                 Building Products is a leading manufacturer and marketer of residential, commercial and industrial garage doors to professional installing dealers and major home center retail chains.
 
·                 Plastics is an international leader in the development and production of embossed, laminated and printed specialty plastic films used in a variety of hygienic, health-care and industrial applications.
 
The Company evaluates performance and allocates resources based on operating results before interest income or expense, income taxes and certain nonrecurring items of income or expense.
 
57

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Information on the Company’s business segments revenue, income and other data is as follows:
 
 	 	For the Years Ended September 30,	 	
(in  thousands)	 	2009	 	2008	 	2007	 	
REVENUE	 	 	 	 	 	 	 	
Telephonics	 	$	387,881	 	$	366,288	 	$	472,549	 	
Clopay Building Products	 	393,414	 	435,321	 	486,606	 	
Clopay Plastic Products	 	412,755	 	467,696	 	406,574	 	
Total consolidated net sales	 	$	1,194,050	 	$	1,269,305	 	$	1,365,729	 	
 	 	 	 	 	 	 	 	
INCOME BEFORE TAXES AND DISCONTINUED OPERATIONS	 	 	 	 	 	 	 	
Segment operating profit (loss):	 	 	 	 	 	 	 	
Telephonics	 	$	34,883	 	$	32,862	 	$	45,888	 	
Clopay Building Products	 	(11,326	)	(17,444	)	7,117	 	
Clopay Plastic Products	 	24,072	 	20,620	 	17,263	 	
Total segment operating profit	 	47,629	 	36,038	 	70,268	 	
Unallocated amounts	 	(20,960	)	(21,281	)	(17,823	)	
Gain from debt extinguishment, net	 	4,488	 	—	 	—	 	
Net interest expense	 	(11,552	)	(14,939	)	(15,196	)	
 	 	 	 	 	 	 	 	
Income (loss) before taxes and discontinued operations	 	$	19,605	 	$	(182	)	$	37,249	 	
 
Unallocated amounts typically include general corporate expenses not attributable to reportable segment.
 
DEPRECIATION and AMORTIZATION	 	 	 	 	 	 	 	
Segment:	 	 	 	 	 	 	 	
Telephonics	 	$	6,657	 	$	6,753	 	$	5,800	 	
Clopay Building Products	 	13,223	 	12,071	 	11,041	 	
Clopay Plastic Products	 	21,930	 	22,638	 	20,986	 	
Total segment	 	41,810	 	41,462	 	37,827	 	
Corporate	 	536	 	1,461	 	1,631	 	
Total consolidated depreciation and amortization	 	$	42,346	 	$	42,923	 	$	39,458	 	
 
CAPITAL EXPENDITURES	 	 	 	 	 	 	 	
Segment:	 	 	 	 	 	 	 	
Telephonics	 	$	7,564	 	$	5,862	 	$	5,428	 	
Clopay Building Products	 	7,560	 	8,227	 	15,596	 	
Clopay Plastic Products	 	16,801	 	38,718	 	8,634	 	
Total segment	 	31,925	 	52,807	 	29,658	 	
Corporate	 	772	 	309	 	79	 	
Total consolidated capital expenditures	 	$	32,697	 	$	53,116	 	$	29,737	 	
 
 	 	At September	 	At September	 	At September	 	
ASSETS	 	30, 2009	 	30, 2008	 	30, 2007	 	
Segment assets:	 	 	 	 	 	 	 	
Telephonics	 	$	271,809	 	$	251,016	 	$	241,639	 	
Clopay Building Products	 	169,251	 	197,740	 	217,744	 	
Clopay Plastic Products	 	364,626	 	356,635	 	351,314	 	
Total segment assets	 	805,686	 	805,391	 	810,697	 	
Corporate (principally cash and equivalents)	 	337,674	 	344,254	 	66,786	 	
Total continuing assets	 	1,143,360	 	1,149,645	 	877,483	 	
Assets from discontinued operations	 	531	 	17,841	 	76,495	 	
Consolidated total	 	$	1,143,891	 	$	1,167,486	 	$	953,978	 	
 
58

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
Segment information by geographic region was as follows:
 
 	 	For the Years Ended September 30,	 	
REVENUE BY GEOGRAPHIC AREA	 	2009	 	2008	 	2007	 	
United States	 	$	827,009	 	$	853,692	 	$	978,220	 	
Germany	 	97,879	 	110,900	 	83,446	 	
Canada	 	69,198	 	64,378	 	57,759	 	
Brazil	 	41,566	 	44,019	 	34,526	 	
United Kingdom	 	17,594	 	23,276	 	33,893	 	
All other countries	 	140,804	 	173,040	 	177,885	 	
Consolidated revenue	 	$	1,194,050	 	$	1,269,305	 	$	1,365,729	 	
 
PROPERTY, PLANT & EQUIPMENT BY GEOGRAPHIC 	 	At September	 	At September	 	At September	 	
AREA	 	30, 2009	 	30, 2008	 	30, 2007	 	
United States	 	$	150,132	 	$	151,733	 	$	128,595	 	
Germany	 	64,503	 	67,800	 	79,132	 	
All other countries	 	21,384	 	19,470	 	22,505	 	
Consolidated property, plant and equipment	 	$	236,019	 	$	239,003	 	$	230,232	 	
 
Plastics sales to P&G were approximately $224,000 in 2009, $262,000 in 2008 and $218,000 in 2007.  Telephonics’ sales to the United States Government and its agencies, either as a prime contractor or subcontractor, aggregated approximately $276,000 in 2009, $257,000 in 2008 and $375,000 in 2007.
 
NOTE 20 – OTHER INCOME (EXPENSE)
 
Other income (expense) included $(392), $(5) and $1,570 for the years ended September 30, 2009, 2008 and 2007, respectively, of currency exchange gains (losses) in connection with the translation of receivables and payables denominated in currencies other than the functional currencies of the Company and its subsidiaries.
 
NOTE 21 — SUBSEQUENT EVENTS
 
The Company evaluated events occurring subsequent to September 30, 2009 through November 24 (the date of issuance, 2009 for potential recognition and disclosure in the consolidated financial statements.
 
NOTE 22 — SUBSEQUENT EVENTS IN CONNECTION WITH REISSUANCE (unaudited)
 
As disclosed in Note 2, the Company is revising its September 30, 2009 financial statements in order to retrospectively apply new accounting guidance with respect to convertible debt for all periods presented.  In connection with the reissuance of these financial statements, the Company has considered whether there are any subsequent events that have occurred since November 24, 2009 and through February 3, 2010 (the date of reissuance) that requires recognition or disclosure in the September 30, 2009 financial statements.  As a result, the Company is disclosing the following:
 
Subsequent to the year ending September 30, 2009, the Company purchased $29,382 face value of 2023 Notes for $29,675.  The Company will record an immaterial pre-tax loss, net of the proportionate reduction in the related deferred financing costs, in 2010.
 
59

 
GRIFFON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars in thousands, except per share data)
 
On December 21, 2009, the Company issued $100 million principal of 4% convertible subordinated notes due 2017 (the “2017 Notes”).  The initial conversion rate of the 2017 Notes was 67.0799 shares of Griffon’s common stock per $1,000 principal amount of notes, corresponding to an initial conversion price of approximately $14.91 per share.
 
*****
 
60

 
SCHEDULE I
GRIFFON CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands)
(as retrospectively adjusted, See Note 2 of the notes to consolidated financial statements)
 
 	 	At September 30,	 	At September 30,	 	
 	 	2009	 	2008	 	
 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	
Cash and equivalents	 	$	223,511	 	$	247,554	 	
Prepaid and other current assets	 	2,050	 	8,171	 	
Income taxes receivable	 	—	 	16,629	 	
Total Current Assets	 	225,561	 	272,354	 	
PROPERTY, PLANT AND EQUIPMENT, net	 	837	 	745	 	
INVESTMENT IN SUBSIDIARIES	 	590,993	 	569,469	 	
OTHER ASSETS	 	36,089	 	10,112	 	
Total Assets	 	$	853,480	 	$	852,680	 	
CURRENT LIABILITIES	 	 	 	 	 	
Current portion of long-term debt, net of debt discount	 	$	77,185	 	$	188	 	
Accounts payable and accrued liabilities	 	15,191	 	16,666	 	
Total Current Liabilities	 	92,376	 	16,854	 	
CONVERTIBLE SUBORDINATED NOTES,net of debt discount	 	—	 	120,270	 	
OTHER	 	72,897	 	50,226	 	
Total Liabilities	 	165,273	 	187,350	 	
COMMITMENTS AND CONTINGENCIES	 	 	 	 	 	
 	 	 	 	 	 	
SHAREHOLDERS’ EQUITY	 	688,207	 	665,330	 	
Total Liabilities and Shareholders’ Equity	 	$	853,480	 	$	852,680	 	
 
61

 
SCHEDULE I – (Continued)
GRIFFON CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(in thousands)
(as retrospectively adjusted, See Note 2 of the notes to consolidated financial statements)
 
 	 	Years Ended September 30,	 	
 	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	
Costs and Expenses:	 	 	 	 	 	 	 	
General and administrative expenses	 	$	(20,643	)	$	(21,155	)	$	(16,094	)	
Gain from debt extinguishment, net	 	4,488	 	—	 	—	 	
Interest expense and other, net	 	(5,928	)	(9,558	)	(10,730	)	
Loss before credit for federal income taxes and equity in net	 	(22,083	)	(30,713	)	(26,824	)	
Credit for federal income taxes resulting from tax sharingarrangement with subsidiaries	 	(8,974	)	(7,606	)	(8,807	)	
Loss before equity in net income of subsidiaries	 	(13,109	)	(23,107	)	(18,017	)	
Equity in income of subsidiaries	 	31,027	 	20,274	 	43,502	 	
Income (loss) from continuing operations	 	17,918	 	(2,833	)	25,485	 	
Equity in income (loss) of discontinued operations	 	790	 	(40,591	)	(6,086	)	
Net income (loss)	 	$	18,708	 	$	(43,424	)	$	19,399	 	
 
62

 
SCHEDULE I – (Continued)
GRIFFON CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands)
(as retrospectively adjusted, See Note 2 of the notes to consolidated financial statements)
 
 	 	Years Ended September 30,	 	
 	 	2009	 	2008	 	2007	 	
 	 	 	 	 	 	 	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	
Net income (loss)	 	$	18,708	 	$	(43,424	)	$	19,399	 	
 	 	 	 	 	 	 	 	 	 	 	
Adjustments to reconcile net income (loss) tonet cash provided by operating activities:	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	
Stock-based compensation	 	4,145	 	3,327	 	2,412	 	
Amortization/write-off of deferred financing costs and debt discount	 	4,586	 	5,059	 	4,187	 	
Gain from debt extinguishment, net	 	(4,488	)	—	 	—	 	
Deferred income taxes	 	(10,174	)	2,840	 	(7,215	)	
Equity in income of subsidiaries	 	(31,027	)	(20,274	)	(43,502	)	
Equity in (income) loss of discontinued operations	 	(790	)	40,591	 	6,086	 	
Change in assets and liabilities:	 	 	 	 	 	 	 	
(Increase) decrease in prepaid and other assets	 	199	 	(120	)	204	 	
Increase (decrease) in accounts payable, accruedliabilities and income taxes payable,	 	17,640	 	4,060	 	(9,178	)	
Other changes, net	 	4,757	 	(4,036	)	7,725	 	
Net cash provided by (used in) operating activities	 	3,556	 	(11,977	)	(19,882	)	
 	 	 	 	 	 	 	 	
CASH FLOWS FROM INVESTING ACTIVITIES:	 	 	 	 	 	 	 	
Acquisition of property, plant and equipment	 	(372	)	(46	)	(67	)	
Advances (to) from subsidiaries	 	—	 	42,000	 	(6,500	)	
Distribution from subsidiaries	 	10,000	 	60,000	 	22,000	 	
Net cash provided by investing activities	 	9,628	 	101,954	 	15,433	 	
 	 	 	 	 	 	 	 	
CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	
Proceeds from issuance of shares from rights offering	 	7,257	 	241,344	 	—	 	
Purchase of shares for treasury	 	—	 	(579	)	(4,355	)	
Proceeds from issuance of long-term debt	 	4,370	 	630	 	33,601	 	
Payments of long-term debt	 	(43,885	)	(76,417	)	(27,186	)	
Financing costs	 	(541	)	(7,111	)	—	 	
Purchase of ESOP shares	 	(4,370	)	—	 	—	 	
Exercise of stock options	 	—	 	—	 	2,588	 	
Tax benefit from vesting of restricted stock	 	217	 	3	 	1,346	 	
Capital contribution	 	(676	)	(4,067	)	—	 	
Other, net	 	401	 	139	 	653	 	
Net cash provided by financing activities	 	(37,227	)	153,942	 	6,647	 	
 	 	 	 	 	 	 	 	
NET INCREASE IN CASH AND EQUIVALENTS	 	(24,043	)	243,919	 	2,198	 	
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD	 	247,554	 	3,635	 	1,437	 	
CASH AND EQUIVALENTS AT END OF PERIOD	 	$	223,511	 	$	247,554	 	$	3,635	 	
 
63

 
SCHEDULE II
 
GRIFFON CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 2009, 2008 AND 2007
(in thousands)
 
 	 	Balance at	 	Recorded to	 	Accounts	 	 	 	 	 	
 	 	Beginning of	 	Cost and	 	Written Off,	 	 	 	Balance at	 	
Description	 	Year	 	Expense	 	net	 	Other	 	End of Year	 	
 	 	 	 	 	 	 	 	 	 	 	 	
FOR THE YEAR ENDED SEPTEMBER 30, 2009	 	 	 	 	 	 	 	 	 	 	 	
Allowance for Doubtful Accounts	 	 	 	 	 	 	 	 	 	 	 	
Bad debts	 	$	3,675	 	$	628	 	$	(1,210	)	$	45	 	$	3,138	 	
Sales returns and allowances	 	1,934	 	(247	)	(385	)	17	 	1,319	 	
 	 	$	5,609	 	$	381	 	$	(1,595	)	$	62	 	$	4,457	 	
Inventory valuation	 	$	8,883	 	$	1,783	 	$	(1,827	)	$	39	 	$	8,878	 	
 	 	 	 	 	 	 	 	 	 	 	 	
FOR THE YEAR ENDED SEPTEMBER 30, 2008	 	 	 	 	 	 	 	 	 	 	 	
Allowance for Doubtful Accounts	 	 	 	 	 	 	 	 	 	 	 	
Bad debts	 	$	3,834	 	$	1,257	 	$	(1,407	)	$	(9	)	$	3,675	 	
Sales returns and allowances	 	2,503	 	(157	)	(415	)	3	 	1,934	 	
 	 	$	6,337	 	$	1,100	 	$	(1,822	)	$	(6	)	$	5,609	 	
Inventory valuation	 	$	9,489	 	$	652	 	$	(1,314	)	$	56	 	$	8,883	 	
 	 	 	 	 	 	 	 	 	 	 	 	
FOR THE YEAR ENDED SEPTEMBER 30, 2007	 	 	 	 	 	 	 	 	 	 	 	
Allowance for Doubtful Accounts	 	 	 	 	 	 	 	 	 	 	 	
Bad debts	 	$	3,683	 	$	649	 	$	(591	)	$	93	 	$	3,834	 	
Sales returns and allowances	 	2,624	 	3,478	 	(3,742	)	143	 	2,503	 	
 	 	$	6,307	 	$	4,127	 	$	(4,333	)	$	236	 	$	6,337	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Inventory valuation	 	$	8,149	 	$	1,901	 	$	(801	)	$	240	 	$	9,489	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Note: This Schedule II is for continuing operations only.	 	
 
64

Exhibit 99.4
 
Item 9.           Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Not applicable.
 
Item 9A.                 Controls and Procedures
 
Evaluation and Disclosure Controls and Procedures
 
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined by Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
 
Management’s Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management evaluates the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2009 and concluded that it is effective.
 
The Company’s independent registered public accounting firm, Grant Thornton LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of September 30, 2009, and has expressed an unqualified opinion in their report which appears in this Current Report on Form 8-K.
 
Changes in Internal Controls
 
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation referred to above that occurred during the fourth quarter of the year ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
Inherent Limitations on the Effectiveness Controls
 
The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:
 
(i)               pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
 
65

 
(ii)            provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and
 
(iii)         provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
66

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders
Griffon Corporation
 
We have audited Griffon Corporation (a Delaware corporation) and subsidiaries’ (the “Company”) internal control over financial reporting as of September 30, 2009, based on criteria established in  Internal Control — Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on criteria established in I nternal Control — Integrated Framework  issued by COSO.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Griffon Corporation and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended September 30, 2009 and our report dated November 24, 2009 (except for Note 2, as to which the date is February 3, 2010) expressed an unqualified opinion thereon.

GRANT THORNTON LLP
 
New York, New York
November 24, 2009
 
67

Exhibit 99.5
 
Griffon Corporation
Effect of New Guidance on Convertible Notes on Statement of Operations
For the four quarters of fiscal 2009
(Unaudited)
 
 	 	Fiscal Year Ending September 30, 2009	 	
 	 	1st Quarter	 	2nd Quarter	 	3rd Quarter	 	4th Quarter	 	
 	 	Reported	 	As adjusted	 	Reported	 	As adjusted	 	Reported	 	As adjusted	 	Reported	 	As adjusted	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenue	 	$	302,334	 	$	302,334	 	$	276,087	 	$	276,087	 	$	287,385	 	$	287,385	 	$	328,244	 	$	328,244	 	
Cost of goods and services	 	243,377	 	243,377	 	222,112	 	222,112	 	221,099	 	221,099	 	250,339	 	250,339	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross Profit	 	58,957	 	58,957	 	53,975	 	53,975	 	66,286	 	66,286	 	77,905	 	77,905	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling and administrative expenses	 	56,528	 	56,528	 	55,545	 	55,545	 	58,376	 	58,376	 	60,287	 	60,287	 	
Restructuring and other related charges	 	—	 	—	 	—	 	—	 	38	 	38	 	1,202	 	1,202	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	56,528	 	56,528	 	55,545	 	55,545	 	58,414	 	58,414	 	61,489	 	61,489	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations	 	2,429	 	2,429	 	(1,570	)	(1,570	)	7,872	 	7,872	 	16,416	 	16,416	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other income (expense)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	(2,714	)	(3,749	)	(2,919	)	(3,814	)	(2,157	)	(2,971	)	(1,772	)	(2,557	)	
Interest income	 	436	 	436	 	231	 	231	 	343	 	343	 	529	 	529	 	
Gain from debt extinguishment, net	 	6,714	 	4,304	 	—	 	—	 	646	 	184	 	—	 	—	 	
Other, net	 	(357	)	(357	)	(200	)	(200	)	1,174	 	1,174	 	905	 	905	 	
Total other income (expense)	 	4,079	 	634	 	(2,888	)	(3,783	)	6	 	(1,270	)	(338	)	(1,123	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before taxes and discontinued operations	 	6,508	 	3,063	 	(4,458	)	(5,353	)	7,878	 	6,602	 	16,078	 	15,293	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision (benefit) for income taxes	 	2,237	 	997	 	(2,955	)	(3,277	)	986	 	513	 	3,737	 	3,454	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	4,271	 	2,066	 	(1,503	)	(2,076	)	6,892	 	6,089	 	12,341	 	11,839	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from discontinued operations	 	3	 	3	 	649	 	649	 	49	 	49	 	89	 	89	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	4,274	 	$	2,069	 	$	(854	)	$	(1,427	)	$	6,941	 	$	6,138	 	$	12,430	 	$	11,928	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings (loss) per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.07	 	$	0.04	 	$	(0.03	)	$	(0.04	)	$	0.12	 	$	0.10	 	$	0.21	 	$	0.20	 	
Income (loss) from discontinued operations	 	0.00	 	0.00	 	0.01	 	0.01	 	0.00	 	0.00	 	0.00	 	0.00	 	
Net income (loss)	 	0.07	 	0.04	 	(0.02	)	(0.02	)	0.12	 	0.10	 	0.21	 	0.20	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	58,853	 	58,853	 	58,467	 	58,467	 	58,700	 	58,700	 	58,778	 	58,778	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings (loss) per common share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	$	0.07	 	$	0.04	 	$	(0.03	)	$	(0.04	)	$	0.12	 	$	0.10	 	$	0.21	 	$	0.20	 	
Income (loss) from discontinued operations	 	0.00	 	0.00	 	0.01	 	0.01	 	0.00	 	0.00	 	0.00	 	0.00	 	
Net income (loss)	 	0.07	 	0.04	 	(0.02	)	(0.02	)	0.12	 	0.10	 	0.21	 	0.20	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	58,918	 	58,918	 	58,467	 	58,467	 	59,097	 	59,097	 	59,420	 	59,420	 	
 
68