<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1998
REGISTRATION NO.-333-59485
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
HENRY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 95-3618402
(STATE OR OTHER JURISDICTION 2952 (I.R.S. EMPLOYER
OF (PRIMARY STANDARD INDUSTRIAL IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
SEE TABLE OF ADDITIONAL REGISTRANTS
---------------------
2911 SLAUSON AVENUE
HUNTINGTON PARK, CALIFORNIA 90255
(213) 583-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
--------------------------
JEFFREY A. WAHBA
CHIEF FINANCIAL OFFICER AND SECRETARY
HENRY COMPANY
2911 SLAUSON AVENUE
HUNTINGTON PARK, CALIFORNIA 90255
(213) 583-5000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
--------------------------
COPIES TO:
ROBERT B. KNAUSS, ESQ.
JUDITH T. KITANO, ESQ.
MUNGER, TOLLES & OLSON LLP
355 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071-1560
(213) 683-9100
--------------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION PRIMARY STANDARD I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION
REGISTRANT ORGANIZATION CODE NUMBER NUMBER
- ----------------------------------------------- ------------------------ ------------------------- --------------------
<S> <C> <C> <C>
Monsey Products Co. ........................... Pennsylvania 2952 23-0887819
Kimberton Enterprises, Inc. ................... Delaware 2952 51-0341834
Monsey Products of Arizona LLC................. Arizona 2952 86-0781792
</TABLE>
--------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1998
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE
10% SERIES B SENIOR NOTES DUE 2008 (WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED)
FOR ANY AND ALL OUTSTANDING 10% SERIES A SENIOR NOTES DUE 2008
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Henry Company, a California corporation (the "Company"), hereby offers, upon
the terms and conditions set forth in this Prospectus and the accompanying
letter of transmittal (the "Letter of Transmittal," which, together with this
Prospectus, constitutes the "Exchange Offer") to exchange up to $85,000,000
aggregate principal amount of its 10% Series B Senior Notes due 2008 (the
"Exchange Notes"), in an offering that has been registered under the Securities
Act of 1933, as amended (the "Securities Act") pursuant to a Registration
Statement on Form S-4 of which this Prospectus is a part, for an equal principal
amount of its issued and outstanding 10% Series A Senior Notes due 2008 (the
"Old Notes," and collectively with the Exchange Notes, the "Notes"), of which
$85,000,000 aggregate principal amount is outstanding as of the date hereof. See
"The Exchange Offer."
The Old Notes were originally issued and sold (the "Initial Offering") to BT
Alex. Brown Incorporated (the "Initial Purchaser") pursuant to a Purchase
Agreement, dated April 15, 1998 (the "Purchase Agreement"), among the Company,
certain of the Company's subsidiaries and the Initial Purchaser, on April 22,
1998 (the "Initial Issue Date"). The Initial Purchaser later resold the Old
Notes in reliance on Rule 144A and Regulation S under the Securities Act. The
Company, the Company's subsidiaries (except for the Company's Canadian
subsidiaries) and the Initial Purchaser also entered into a Registration Rights
Agreement, dated April 22, 1998 (the "Registration Rights Agreement") pursuant
to which the Company granted certain registration rights for the benefit of the
holders of the Old Notes. The Exchange Notes are being offered for exchange in
order to satisfy certain obligations of the Company under the Registration
Rights Agreement. The Exchange Notes will be obligations of the Company
evidencing the same indebtedness as the Old Notes and will be issued under and
entitled to the benefits of the Indenture, dated as of April 22, 1998 (the
"Indenture"), between the Company, the Company's subsidiaries (except for the
Company's Canadian subsidiaries) and U.S. Trust Company, N.A., as trustee (in
such capacity, the "Trustee") pursuant to which the Old Notes were issued. The
form and terms of the Exchange Notes are substantially identical in all material
respects to the Old Notes, except that the offer and exchange of the Exchange
Notes has been registered under the Securities Act, and therefore the Exchange
Notes will not be subject to certain transfer restrictions and registration
rights provisions applicable to the Old Notes. See "Description of the Exchange
Notes" and "The Exchange Offer-- Terms of the Exchange Offer."
The Company will accept for exchange any and all Old Notes that are properly
tendered in the Exchange Offer and not withdrawn on or prior to 5:00 p.m., New
York City time, on , 1998, unless the Exchange Offer is extended by
the Company (the "Expiration Date"). The Company may, in its sole discretion,
extend the Exchange Offer indefinitely, subject to the Company's obligation to
pay liquidated damages if the Exchange Offer is not consummated by October 24,
1998 and, under certain circumstances, to file a shelf registration statement
with respect to the Old Notes. Such extension may be made in the Company's
discretion, without limitation, to allow additional holders of Old Notes to
participate in the Exchange Offer or to respond to presently unknown but
potentially material changed circumstances. See "The Exchange Offer--Expiration
Date; Extension; Amendment." Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange
Offer is not conditioned upon any minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions which may be waived by the Company. Old Notes may be
tendered only in denominations of $1,000 and any integral multiple thereof. The
Company has agreed to pay the expenses of the Exchange Offer. See "The Exchange
Offer." There will be no cash proceeds to the Company from the Exchange Offer
and no underwriter is being used in connection with this Exchange Offer. See
"Use of Proceeds."
The Exchange Notes will be available initially only in book-entry form. See
"The Exchange Offer--Book-Entry Transfer." Old Notes may be tendered only in
denominations of $1,000 and any integral multiple thereof.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 20 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER , 1998
(COVER CONTINUES ON FOLLOWING PAGE)
<PAGE>
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") the Company believes that a holder who exchanges
Old Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided, that (i) such Exchange Notes are acquired in the ordinary course
of such holder's business, (ii) such holder is not engaged in, and does not
intend to engage in, a distribution of such Exchange Notes and has no
arrangement with any person to participate in the distribution of such Exchange
Notes, and (iii) such holder is not an affiliate of the Company (as defined
under Rule 405 of the Securities Act). However, the staff of the Commission has
not considered the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other circumstances.
A holder who exchanges Old Notes for Exchange Notes pursuant to the Exchange
Offer with the intention to participate in a distribution of the Exchange Notes
may not rely on the staff's position enunciated in any no-action letter and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "The Exchange Offer" and
"Plan of Distribution." A broker-dealer may use this Prospectus, as it may be
amended or supplemented from time to time, in connection with the resale of
Exchange Notes it has received in exchange for Old Notes if the Old Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, beginning on the Expiration Date and ending on the
close of business on the 180th day following the Expiration Date, it will make
this Prospectus available to any broker-dealer to use in connection with any
such resale or for such shorter period as will terminate when all Old Notes
acquired by broker-dealers for their own accounts as a result of market-making
activities or other trading activities have been exchanged for Exchange Notes
and resold by such broker-dealers. See "Plan of Distribution." EXCEPT AS
DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER, SALE
OR OTHER TRANSFER OF EXCHANGE NOTES.
Prior to this Exchange Offer, there has been no public market for the Old
Notes or the Exchange Notes. The Old Notes have traded in the National
Association of Securities Dealers, Inc. Private Offerings, Resales and Trading
through Automated Linkages ("PORTAL") market. The Company does not intend to
list the Exchange Notes on any securities exchange or NASDAQ. There can be no
assurance that an active market for the Exchange Notes will develop. If a public
market were to develop, the Exchange Notes could trade at prices that may be
higher or lower than their principal amount at maturity. See "Risk
Factors--Absence of Public Market for the Exchange Notes."
Interest on the Exchange Notes will be payable semi-annually in arrears on
April 15 and October 15 of each year, (each an "Interest Payment Date"),
commencing on the first such date following their date of issuance. Interest on
the Exchange Notes will accrue from April 22, 1998 and interest on the Old Notes
exchanged for Exchange Notes in the Exchange Offer will cease to be payable upon
issuance of the Exchange Notes. The Exchange Notes will be redeemable, in whole
or in part, at the option of the Company on or after April 15, 2003, at the
redemption prices set forth herein, plus accrued and unpaid interest to the date
of redemption. In addition, at any time prior to April 15, 2001, the Company
may, at its option, redeem up to 35% of the sum of (i) the initial aggregate
principal amount of the Notes issued in the Initial Offering and (ii) the
respective initial aggregate principal amounts of the Notes issued under the
Indenture after the Initial Issue Date, on one or more occasions with the net
cash proceeds of one or more Public Equity Offerings (as defined in "Description
of the Exchange Notes--Redemption") at a redemption price equal to 110% of the
principal amount thereof, plus accrued and unpaid interest thereon, to the
redemption date; PROVIDED, HOWEVER, that immediately after giving effect to such
redemption, at least 65% of the sum of (i) the initial aggregate principal
amount of the Notes issued in the Initial Offering and (ii) the respective
initial aggregate principal amounts of the Notes issued under the Indenture
after the Initial Issue Date remain outstanding.
The Exchange Notes will be general unsecured senior obligations of the
Company and will rank PARI PASSU in right of payment with all unsubordinated
indebtedness of the Company and will rank senior in right of payment with all
existing and future subordinated indebtedness of the Company. The Exchange Notes
will be unconditionally guaranteed (the "Guarantees") on a senior basis, fully,
jointly and severally, by the Company's current and certain future wholly-owned
subsidiaries (the "Guarantors"), but not by its Canadian subsidiaries. The
Guarantees will be general unsecured obligations of the Guarantors and will rank
PARI PASSU in right of payment with all existing and future unsubordinated
indebtedness of the Guarantors and will rank senior in right of payment to all
existing and future subordinated obligations of the Guarantors. The Exchange
Notes will be effectively subordinated in right of payment to all secured
indebtedness of the Company to the extent of the assets secured by such
indebtedness. The Guarantees will be effectively subordinated to all secured
indebtedness of the Guarantors. The Exchange Notes will also be structurally
subordinated to all existing and future indebtedness and other liabilities of
the Company's Canadian subsidiaries.
Upon a Change of Control (as defined in "Description of the Exchange
Notes--Certain Definitions"), each holder of the Exchange Notes will have the
right to require the Company to repurchase such holder's Exchange Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. However, there can be no assurance
that the Company will have available funds sufficient to pay the Change of
Control purchase price for all the Notes that might be delivered by Holders
seeking to exchange their Notes upon a Change of Control. In addition, the
Company will be obligated to offer to repurchase the Exchange Notes at 100% of
their principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase in the event of certain Asset Sales (as defined in
"Description of the Exchange Notes--Certain Definitions"). See "Description of
the Exchange Notes."
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any securities other that those to which it
relates.
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantors have filed jointly with the Commission a
Registration Statement on Form S-4 under the Securities Act, with respect to the
Exchange Notes offered by this Prospectus. For the purposes hereof, the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. This Prospectus does not contain all of the information
set forth in the Registration Statement and the schedules and exhibits to which
reference hereby is made. Each statement made in this Prospectus concerning a
document filed as an exhibit to the Registration Statement is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions. Any interested party may inspect the Registration Statement and its
exhibits, without charge, at the public reference facilities of the Commission
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional office at 500 W. Madison St., Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th floor, New York,
New York 10007. Any interested party may obtain copies of all or any portion of
the Registration Statement and its exhibits at prescribed rates from the Public
Reference Section of the Commission at its principal office at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
Following the Effective Date of the Registration Statement, the Company will
be subject to the periodic reporting and other information requirements of the
Exchange Act. The Company has agreed that, whether or not it is required to do
so by the rules and regulations of the Commission (and within 15 days of the
date that is or would be prescribed thereby), for so long as any of the Notes
remain outstanding, it will furnish to the holders thereof and file with the
Commission (unless the Commission will not accept such a filing) (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's independent
auditors and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports. All
reports filed with the Commission will be available on the Commission's web site
at http://www.sec.gov. In addition, for so long as any of the Notes remain
outstanding, the Company has agreed to make available, upon request, to any
prospective purchaser of the Notes and beneficial owner of the Notes in
connection with the sale thereof the information required by Rule 144A(d)(4)
under the Securities Act. Information may be obtained from the Company at 2911
Slauson Avenue, Huntington Park, California 90255 (telephone number: (213)
583-5000), Attention: Corporate Secretary.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
i
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE UNITED STATES
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THE "SAFE-
HARBOR" FOR CERTAIN FORWARD-LOOKING STATEMENTS PROVIDED BY THESE SECTIONS OF THE
SECURITIES ACT AND THE EXCHANGE ACT DO NOT APPLY TO INITIAL PUBLIC OFFERINGS OF
SECURITIES, INCLUDING THE EXCHANGE OFFER. ALL STATEMENTS OTHER THAN STATEMENTS
OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING THE COMPANY'S COMPETITVE STRENGTHS, BUSINESS STRATEGY,
FUTURE FINANCIAL POSITION, BUDGETS, PROJECT COSTS AND PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "SHOULD," "INTEND,"
"ESTIMATE," "ANTICIPATE," "BELIEVE," OR "CONTINUE" OR THE NEGATIVE THEREOF OR
VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS.
ii
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE COMBINED FINANCIAL
STATEMENTS OF HENRY COMPANY AND THE CONSOLIDATED FINANCIAL STATEMENTS OF MONSEY
BAKOR, INCLUDING, IN EACH CASE, THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS OTHERWISE STATED (I) "HENRY
COMPANY" REFERS TO HENRY COMPANY PRIOR TO THE ACQUISITION (AS DEFINED IN
"SUMMARY--THE COMPANY"), "MONSEY BAKOR" REFERS TO MONSEY PRODUCTS CO. AND ITS
SUBSIDIARIES PRIOR TO THE ACQUISITION, AND THE "COMPANY" REFERS TO THE COMBINED
ENTITY FOLLOWING THE ACQUISITION, (II) ALL REFERENCES TO FINANCIAL STATEMENT
BALANCES OR OTHER AMOUNTS ARE DETERMINED IN ACCORDANCE WITH UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND (III) REFERENCES TO "PRO FORMA
BASIS" MEANS THE APPLICATION OF THE PRO FORMA ADJUSTMENTS DESCRIBED UNDER THE
HEADING "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA." THE MARKET
SHARE, MARKET POSITION AND OTHER INDUSTRY DATA CONTAINED HEREIN RELATING TO THE
ROOF PRODUCTS, ROOF COATINGS AND RELATED INDUSTRIES HAVE BEEN DERIVED FROM
INDUSTRY AND OTHER SOURCES AVAILABLE TO THE COMPANY, INCLUDING MANAGEMENT'S
INDUSTRY EXPERIENCE. WHILE MANAGEMENT BELIEVES THAT ITS ESTIMATES DERIVED FROM
SUCH DATA ARE REASONABLE, NO ASSURANCES CAN BE GIVEN AS TO THE ACCURACY THEREOF.
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
<TABLE>
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Old Notes.............................. On April 22, 1998, the Company issued and sold
$85,000,000 aggregate principal amount of its Old
Notes to BT Alex. Brown as Initial Purchaser. The
Initial Purchaser subsequently offered and resold
the Old Notes to Qualified Institutional Buyers (as
defined in Rule 144A under the Securities Act)
pursuant to Rule 144A under the Securities Act, to
a limited number of institutional investors that
are Accredited Investors (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities
Act) and in offshore transactions complying with
Rule 903 or Rule 904 of Regulation S under the
Securities Act.
Exchange Notes......................... Up to $85,000,000 aggregate principal amount of the
Company's 10% Series B Senior Notes due 2008. The
form and terms of the Exchange Notes and the Old
Notes are substantially identical in all material
respects, except that the offer of the Exchange
Notes will have been registered under the
Securities Act and therefore, the Exchange Notes
will not be subject to certain transfer
restrictions and registration rights and related
provisions requiring an increase in the interest
rate payable on the Old Notes under certain
circumstances if the Company defaults with respect
to its registration requirements under the
Registration Rights Agreement will not be
applicable to the Old Notes.
Exchange Offer......................... Pursuant to the terms and conditions of the
Exchange Offer, the Company is offering to exchange
$1,000 principal amount (and any integral multiple
thereof) of Exchange Notes for each $1,000
principal amount (and any integral multiple
thereof) of Old Notes. See "The Exchange Offer" for
a description of the procedures for tendering Old
Notes. In connection with the Initial
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Offering, the Company entered into the Registration
Rights Agreement which grants holders of the Old
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy the Company's
obligations under the Registration Rights
Agreement. The date of acceptance for exchange of
the Old Notes will be the first business day
following the Expiration Date. As of the date of
this Prospectus, $85,000,000 in aggregate principal
amount of Old Notes are outstanding.
Expiration Date........................ The Exchange Offer will expire at 5:00 p.m., New
York City time, on 1998, or such later
date
and time to which it is extended by the Company.
The Company may, in its sole discretion, extend the
Exchange Offer indefinitely, subject to the
Company's obligation to pay liquidated damages if
the Exchange Offer is not consummated by October
24, 1998 and, under certain circumstances, to file
a shelf registration statement with respect to the
Old Notes. See "The Exchange Offer-- Expiration
Date; Extension; Amendment."
Resale................................. Subject to the receipt of certain representations
by holders in the Letter of Transmittal, the
Company believes that the Exchange Notes issued
pursuant to the Exchange Offer generally will be
freely transferable by the holders thereof without
registration or any prospectus delivery requirement
under the Securities Act, except that a "dealer" or
any of the Company's affiliates, as such terms are
defined under the Securities Act, that exchanges
Old Notes held for its own account may be required
to deliver copies of this Prospectus in connection
with any resale of the Exchange Notes issued in
exchange for such Old Notes. To comply with the
securities laws of certain jurisdictions, if
applicable, the Exchange Notes may not be offered
or resold by any holder unless they have been
registered or qualified for sale in such
jurisdiction or an exemption from registration or
qualification is available and the requirements of
such exemption have been satisfied. The Company
does not currently intend to register or qualify
the resale of the Exchange Notes in any such
jurisdiction. See "The Exchange Offer--Resale of
the Exchange Notes" and "Plan of Distribution."
Consequences or Failure to Exchange Old
Notes Pursuant to the Exchange
Offer................................ Following the consummation of the Exchange Offer,
holders of Old Notes not tendered will not have any
further registration rights and the Old Notes will
continue to be subject to certain restrictions on
transfer. In general, the Old Notes may not be
offered or sold, unless registered under the
Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the
Securities Act and applicable state securities
laws. Failure to comply with such requirements in
such instance may result in such
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
holder incurring liability under the Securities Act
for which such holder is not indemnified by the
Company. See "The Exchange Offer--Consequences of
Failure to Exchange."
Accrued Interest on the Exchange Notes
and the Old Notes.................... Each Exchange Note will bear interest from the
Initial Issue Date. Holders of Old Notes whose Old
Notes are accepted for exchange will be deemed to
have waived the right to receive any payment in
respect of interest on the Old Notes accrued from
April 22, 1998 until the date of the issuance of
the Exchange Notes. Consequently, holders who
exchange their Old Notes for Exchange Notes will
receive the same interest payment on October 15,
1998 (the first interest payment date with respect
to the Old Notes and the Exchange Notes) that they
would have received had they not accepted the
Exchange Offer. Untendered Old Notes that are not
exchanged for Exchange Notes pursuant to the
Exchange Offer will continue to bear interest at a
rate of 10% per annum after the Expiration Date.
Termination............................ The Company may terminate the Exchange Offer if it
determines that its ability to proceed with the
Exchange Offer could be materially impaired due to
any legal or governmental action, any new law,
statute, rule or regulation or any interpretation
by the staff of the Commission of any existing law,
statute, rule or regulation. Holders of Old Notes
will have certain rights against the Company under
the Registration Rights Agreement should the
Company fail to consummate the Exchange Offer. See
"The Exchange Offer--Conditions."
Procedures for Tendering Old Notes..... Each Holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Old Notes and any other required
documentation to U.S. Trust Company, N.A., as
Exchange Agent (the "Exchange Agent"), at the
address set forth herein and therein, or effect a
tender of Old Notes pursuant to the procedure for
book-entry transfer as provided for herein. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such
Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other
person has an arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes and, except as otherwise disclosed
in writing to the Company, that neither the holder
nor any such other person is an
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3
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<S> <C>
"affiliate," as defined in Rule 405 under the
Securities Act, of the Company. If the tendering
holder is a broker-dealer (whether or not it is
also an "affiliate") that will receive Exchange
Notes for its own account in exchange for Old Notes
that were acquired as a result of market-making
activities or other trading activities, it will be
required to acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. See "Plan of Distribution." To
comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for
sale or register the Exchange Notes prior to
offering or selling such Exchange Notes. The
Company does not currently intend to take any
action to register or qualify the Exchange Notes
for resale in any such jurisdictions.
Special Procedures for Beneficial
Owners............................... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender such Old Notes in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering such owner's
Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's
name or obtain a properly completed bond power from
the registered holder. The transfer of record
ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
Guaranteed Delivery Procedures......... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer-- Guaranteed Delivery Procedures."
Withdrawal Rights...................... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes and Delivery of
Exchange Notes....................... Subject to certain conditions (as summarized above
in "Termination" and described more fully in "The
Exchange Offer--Conditions" and "The Exchange
Offer-- Procedures for Tendering"), the Company
will accept for exchange any and all Old Notes that
are validly tendered in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly following
the Expiration Date. Any Old Notes not accepted for
exchange for any reasons will be returned
</TABLE>
4
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without expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer--Terms of the Exchange Offer."
Use of Proceeds........................ There will be no proceeds to the Company from the
issuance of the Exchange Notes pursuant to the
Exchange Offer. Of the approximately $85.0 million
of gross proceeds received by the Company from the
sale of the Old Notes, approximately $46.0 million
was used to pay the aggregate consideration in the
Acquisition. Approximately $25.3 million was used
to repay existing bank debt of the Company and its
subsidiaries, approximately $5.0 million was used
to retire existing subordinated debt of the
Company, approximately $4.2 million was used to pay
fees and expenses in connection with the
transactions, and the remaining amounts were used
for general corporate purposes.
Exchange Agent......................... The Trustee is also the Exchange Agent. The address
of the Exchange Agent is: U.S. Trust Company,
National Association c/o United States Trust
Company of New York, P.O. Box 841, Peter Cooper
Station, New York, New York 10276-0841, Attention:
Corporate Trust and Agency Services.
The address for deliveries by overnight is:
U.S. Trust Company, National Association, c/o
United States Trust Company of New York, 770
Broadway, 13th Floor, New York, New York 10006;
Attention: Corporate Trust and Agency Services.
Hand deliveries should be made to:
U.S. Trust Company, National Association c/o United
States Trust Company of New York, 11 Broadway,
Lower Level, New York, New York 10006;
Attention: Corporate Trust and Agency Services.
For information with respect to the Exchange Offer,
the telephone number for the Exchange Agent is
(800) 548-6565 and the facsimile number for the
Exchange Agent is (212) 420-6211; Attention:
Customer Service.
Accounting Treatment................... No gain or loss for accounting purposes will be
recognized by the Company upon the consummation of
the Exchange Offer. See "The Exchange
Offer--Accounting Treatment."
Certain U.S. Federal Income Tax
Consequences......................... Generally, the exchange pursuant to the Exchange
Offer will not result in any income, gain or loss
to the holders of the Notes or the Company for
federal income tax purposes. See "Certain U.S.
Federal Income Tax Considerations."
</TABLE>
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5
<PAGE>
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
The form and terms of the Exchange Notes and the Old Notes are substantially
identical in all material respects, except that the offer of the Exchange Notes
is registered under the Securities Act and, therefore, the Exchange Notes will
not be subject to certain transfer restrictions, registration rights and related
provisions requiring an increase in the interest rate on the Old Notes under
certain circumstances if the Company defaults with respect to its registration
requirements under the Registration Rights Agreement applicable to the Old
Notes. See "Description of the Exchange Notes."
<TABLE>
<S> <C>
Exchange Notes Offered....... $85,000,000 aggregate principal amount of 10% Series B
Senior Notes due 2008.
Maturity Date................ April 15, 2008.
Interest Payment Dates....... Interest on the Exchange Notes will accrue from the last
Interest Payment Date on which interest was paid on the Old
Notes that are accepted for exchange or, if no interest has
been paid on the Old Notes, from April 22, 1998, as the case
may be, at the rate of 10% per annum payable semiannually in
arrears on each April 15 and October 15, commencing October
15, 1998. Holders of Old Notes whose Old Notes are accepted
for exchange will be deemed to have waived the right to
receive any payment in respect of interest on such Old Notes
accrued from April 22, 1998 to the date of the issuance of
the Exchange Notes. Consequently, holders who exchange their
Old Notes for Exchange Notes will receive the same interest
payment on October 15, 1998 (the first interest payment date
with respect to the Old Notes and the Exchange Notes) that
they would have received had they not accepted the Exchange
Offer.
Optional Redemption.......... The Exchange Notes will be redeemable, in whole or in part,
at the option of the Company on or after April 15, 2003, at
the redemption prices set forth herein, plus accrued and
unpaid interest to the date of redemption. In addition, at
any time on or prior to April 15, 2001, the Company may, at
its option, redeem up to 35% of the sum of (i) the initial
aggregate principal amount of the Notes issued in the
Initial Offering and (ii) the respective initial aggregate
principal amounts of the Notes issued under the Indenture
after the Initial Issue Date, on one or more occasions with
the net cash proceeds of one or more Public Equity Offerings
at a redemption price equal to 110% of the principal amount
thereof, plus accrued and unpaid interest thereon, to the
redemption date; PROVIDED, HOWEVER, that immediately after
giving effect to such redemption, at least 65% of the sum of
(i) the initial aggregate principal amount of the Notes
issued in the Initial Offering and (ii) the respective
initial aggregate principal amounts of the Notes issued
under the Indenture after the Initial Issue Date remain
outstanding. See "Description of the Exchange Notes--
Redemption."
Ranking...................... The Exchange Notes will be general unsecured senior
obligations of the Company and will rank PARI PASSU in right
of payment with all existing and future unsubordinated
indebtedness of the Company and will rank senior in right of
payment to all existing and future subordinated indebtedness
of the Company. The Exchange Notes will be effectively
subordinated in right of payment to all secured
</TABLE>
6
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<S> <C>
indebtedness of the Company to the extent of the assets
secured by such indebtedness. The Exchange Notes will also
be structurally subordinated to all existing and future
indebtedness and other liabilities of the Company's Canadian
subsidiaries. As of June 30, 1998 the Company had
approximately $0.2 million of unsecured indebtedness and
$5.2 million of secured indebtedness outstanding which
includes approximately $4.2 million (Canadian $6.0 million)
of secured indebtedness of the Company's Canadian
subsidiaries.
Change of Control............ Upon a Change of Control, each holder of Exchange Notes will
have the right, subject to certain conditions, to require
the Company to repurchase such holder's Exchange Notes at a
price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
repurchase. See "Description of the Exchange Notes-- Change
of Control."
Certain Covenants............ The Indenture governing the Exchange Notes contains certain
covenants that limit the ability of the Company and its
subsidiaries to, among other things, incur additional
indebtedness, pay dividends or make investments and certain
other restricted payments, consummate certain asset sales,
enter into certain transactions with affiliates, incur
liens, impose restrictions on the ability of a subsidiary to
pay dividends or make certain payments to the Company and
its subsidiaries, merge or consolidate with any other person
or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the
Company. In addition, under certain circumstances, the
Company is required to offer to purchase the Exchange Notes,
in whole or in part, at a purchase price equal to 100% of
the principal amount thereof plus accrued and unpaid
interest, if any, to the date of repurchase, with the
proceeds of certain Asset Sales (as defined in the
Indenture). All of such covenants are subject to certain
qualifications and exceptions. See "Description of the
Exchange Notes--Certain Covenants."
Guarantees................... The Exchange Notes will be guaranteed on a senior basis,
fully, jointly and severally, by the Guarantors. The
Guarantees will be a general unsecured obligation of the
Guarantors and will rank PARI PASSU in right of payment with
all existing and future unsubordinated indebtedness of the
Guarantors and will rank senior in right of payment to all
existing and future subordinated obligations of the
Guarantors. The Guarantees will be effectively subordinated
in right of payment to all existing and future secured
indebtedness of the Guarantors. As of June 30, 1998, the
Guarantors had approximately $0.2 million of secured
indebtedness. See "Description of the Exchange
Notes--Guarantees."
Exchange Offer; Registration
Rights..................... In the event that applicable law or interpretations of the
staff of the Commission do not permit the Company to effect
this Exchange Offer or if certain holders of the Old Notes
notify the Company that they are not permitted to
participate in, or would not receive freely transferable
Exchange Notes pursuant to, the Exchange Offer, or if the
Company has not consummated the Exchange Offer within 185
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7
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days after the Initial Issue Date, under certain
circumstances, the Company will cause to become effective a
registration statement (the "Shelf Registration Statement")
with respect to the resale of the Old Notes and to keep the
Shelf Registration Statement effective for a period of two
years from the date of original issuance of the Old Notes or
such shorter period that will terminate when Old Notes
covered by the Shelf Registration Statement have been sold
pursuant thereto or can be sold pursuant to Rule 144(k). The
interest rate on the Old Notes is subject to increase under
certain circumstances if the Company defaults with respect
to its registration obligations under the Registration
Rights Agreement. See "The Exchange Offer."
Lack of Prior Market for the
Exchange Notes............. The Old Notes are eligible for trading in the PORTAL Market.
The Exchange Notes will be new securities for which there is
currently no established trading market, and none may
develop. Although the Initial Purchaser is making a market
in the Old Notes and has indicated to the Company that it
currently intends to make a market in the Exchange Notes, as
permitted by applicable laws and regulations, it is under no
obligation to do so; and such market-making could be
discontinued at any time without notice, at the sole
discretion of the Initial Purchaser. In addition, such
market making activities may be limited during the Exchange
Offer and the pendency of a Shelf Registration Statement.
Accordingly, no assurance can be given that an active
trading market for the Exchange Notes will develop or, if
such a market develops, as to the liquidity of such market.
If the Exchange Notes are traded after their initial
issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates,
the market for similar securities, the performance of the
Company and certain other factors.
</TABLE>
For additional information regarding the Exchange Notes, see "Description of
the Exchange Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating the Exchange Offer.
8
<PAGE>
THE COMPANY
On April 22, 1998, Henry Company completed the acquisition (the
"Acquisition") of Monsey Products Co., a Pennsylvania corporation, and its
subsidiaries, d/b/a Monsey Bakor (together, "Monsey Bakor"). The Acquisition was
consummated simultaneously with the Initial Offering and the refinancing of the
Company's bank credit facilities.
Management believes that the combination of Henry Company and Monsey Bakor
has created the largest North American manufacturer and marketer of roof coating
and roof cement products. Henry Company believes that it is already the largest
manufacturer of roof coatings and roof cements in the western United States.
Monsey Bakor is currently a leading manufacturer of roof coatings, adhesives and
membranes with its strongest markets in the eastern United States and Canada.
Henry Company and Monsey Bakor have 65 and 59 years of experience in the roofing
products industry, respectively. After giving effect to the Transactions (as
defined in "Summary--The Transactions"), the Company would have had pro forma
net sales of approximately $180.6 million, pro forma combined Adjusted EBITDA
(as defined in "Summary--Notes to Summary Historical and Unaudited Pro Forma
Combined Financial Data (note 3)") of approximately $15.5 million and pro forma
combined net loss of approximately $2.7 million for the fiscal year ended
December 31, 1997 and pro forma net sales of approximately $85.9 million, pro
forma combined Adjusted EBITDA of approximately $6.6 million and pro forma
combined net loss of approximately $0.1 million for the six months ended June
30, 1998.
HENRY COMPANY. Henry Company, founded in 1933, is a construction materials
company focusing primarily on products for roofing, sealing and paving
applications. Henry Company develops, manufactures and markets three separate
but related product lines: roof and driveway coatings and paving products;
polyurethane foam for roofing and commercial uses; and sealants for construction
and marine uses. Henry Company has developed strong brand awareness and is
recognized by its customers as a quality leader in many of its product lines.
Beginning in 1988, Henry Company's management focused on expanding the Henry
brand from its Southern California base through the purchase of regional roof
coatings manufacturers and distributors in contiguous regions--the Southwest,
the Northwest, Northern California and the Rocky Mountain region. In each of
these regions Henry Company has been successful in introducing the Henry brand
and becoming a market share leader. Regional plants to support production and
distribution needs have also allowed Henry Company to become a low cost producer
in each of these regions while becoming recognized as a quality leader.
MONSEY BAKOR. Monsey Bakor has served the U.S. and Canadian building
products markets for over 50 years. Monsey Bakor is a leading manufacturer and
distributor of a broad spectrum of building products for residential and
commercial use with a product line consisting of roof coatings, adhesives and
membranes and waterproofing and air barrier systems as well as specialized
industrial emulsions. Monsey Bakor has manufactured and distributed its products
under the Monsey trade name since the founding of Monsey Products Co. in 1939.
In March 1996, Monsey Products Co. expanded its operations by acquiring a
Canadian competitor, Bakor Holdings, Inc., and thereafter has sold the majority
of its products under the "Monsey Bakor" brand. The predecessor company to Bakor
Holdings, Inc. had been founded in 1931. Monsey Bakor's headquarters is located
in Kimberton, Pennsylvania, 35 miles northwest of Philadelphia.
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will
contribute to the Company's opportunities for future growth.
9
<PAGE>
LEADING MARKET POSITIONS
The Company believes that it is the largest manufacturer of roof coatings
and roof cements in North America. Henry Company believes that it is already the
largest such manufacturer in the western United States. Monsey Bakor is a
leading manufacturer of roof coatings, adhesives and membranes in the eastern
United States and Canada. Management believes that Monsey Bakor is also the
major producer of wax-based emulsions for the gypsum board industry, with a
dominant share of the market.
ESTABLISHED BRAND NAMES AND REPUTATION
The Company has significant brand name recognition within the roofing and
building products industries across each of its core product lines, with popular
brand names such as "Henry," "Monsey," "Bakor" and
"Wet-Patch-Registered Trademark-." The Company believes that these brands have
established a reputation for reliability and high quality in the industry.
BREADTH OF GEOGRAPHIC COVERAGE
The Company has manufacturing and distribution facilities strategically
located throughout the United States and eastern Canada. This broad geographic
coverage is advantageous as roof coatings products are heavy relative to their
value, and it is therefore often uneconomic to transport such products more than
500 miles from their place of manufacture. The Company's dispersed facilities
position it to better serve national and larger regional customers. Broad
geographic product distribution capability is important to many of the Company's
customers, particularly the mass merchandisers and roofing wholesalers, which
are increasingly being consolidated into large national companies.
STRONG CUSTOMER RELATIONSHIPS IN MULTIPLE DISTRIBUTION CHANNELS
Through Henry Company's and Monsey Bakor's 65 and 59 years of operations,
respectively, the Company has developed many long-standing relationships with
key customers in multiple distribution channels. The Company intends to continue
to distribute its products through mass merchandisers such as Home Depot,
HomeBase, Lowe's Home Improvement Warehouse and Eagle Hardware and Garden;
co-ops such as Ace Hardware and True-Value Hardware; roofing wholesalers such as
ABC Supply, Allied Building Products and Cameron Ashley Building Products; and
directly to the "industrial-commercial-institutional" market. Selling through
multiple distribution channels is intended to maximize the Company's market
penetration and reduce its reliance upon the success of any one distribution
channel. As evidence of the Company's strong customer relationships, Henry
Company was named a "1997 Partner of the Year" by Home Depot.
LOW COST PRODUCER
The Company believes that it is one of the lowest cost producers in the roof
coatings and roof cements industry. Raw material costs are the single largest
portion of finished product costs. Due to the size of its manufacturing
operations relative to its competition, management believes that the Company
will be positioned to purchase raw materials more efficiently than many of its
competitors. Furthermore, management believes that its proprietary manufacturing
processes for certain of its products will generate further cost advantages.
EXPERIENCED MANAGEMENT TEAM
The Company has assembled a strong and experienced management team at both
the corporate and operating levels. More than 75% of the senior managers of the
Company have over 10 years of experience in the roofing products industry. In
addition, senior management of Henry Company has been responsible for
successfully acquiring and integrating seven companies since 1988.
10
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TECHNICAL AND FORMULA DEVELOPMENT
The Company has developed an array of products that it believes are
recognized as among the highest quality products in their segments, including
Henry 208 Wet Patch-Registered Trademark- roof cement and Monsey Bakor's
industrial wax emulsions. The Company also believes that it generally allocates
greater resources to research and development than any of its roof coatings and
roof cements competitors.
BUSINESS STRATEGY AND KEY BENEFITS OF THE ACQUISITION
The Company's business strategy is to increase its product penetration,
create national brands from its core products, further expand its roof systems
business, continue to strive to be the lowest cost producer of roof coatings and
roof cements and pursue attractive opportunities for strategic acquisitions.
INCREASED PRODUCT PENETRATION OF CUSTOMER ACCOUNTS AND CREATION OF NATIONAL
BRANDS
The Company intends to increase the depth of its product offerings to a
number of its major customers and also intends to cross-sell products to
customers of its two predecessor companies. The Company expects that roof
coatings and roof cements bearing the Henry brand will be sold to a number of
Monsey Bakor's accounts in the eastern United States, some of whom already have
a relationship with Henry Company in the western United States. Likewise,
products bearing the Monsey Bakor name will be introduced into western United
States accounts with whom Henry Company has existing relationships.
As a result, the Company will carry two national branded lines of roof
coatings and roof cements products, with "Henry" positioned as the premium line
and "Monsey Bakor" positioned as the value line. National brands are situated to
take advantage of national advertising, marketing and distribution programs with
mass merchandisers and other national customers. The Company will also continue
to support several of its regional brands that have a strong local following.
NORTH AMERICAN EXPANSION OF ROOF SYSTEMS AND BUILDING ENVELOPE SEGMENTS
Henry Company has developed a successful roof systems business in the
western United States, while Monsey Bakor has created substantial demand for its
Building Envelope System-Registered Trademark- concept, particularly in Canada.
As a result of the Acquisition, the Company believes that it has a highly
competitive product offering in the roofing systems market which it believes to
have a size in excess of $1 billion. With national manufacturing and sales
support, the Company believes that it can leverage its reputation for high
quality and expand its product offerings in this segment throughout North
America.
CONTINUED ENHANCEMENT OF LOW-COST MANUFACTURING AND DISTRIBUTION
OPPORTUNITIES
The Company will continue to strive to be the lowest cost producer of roof
coatings and roof cements, and will target purchasing and manufacturing
efficiencies.
Henry Company and Monsey Bakor purchase many of the same raw materials, some
of which are obtained from the same vendors. The Company expects that the
combination of purchasing functions will enable it to take advantage of
increased volume discounts and should reduce freight costs and produce savings
from each company's current negotiated raw material prices.
11
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The Company believes that both Henry Company and Monsey Bakor lead the roof
coatings and roof cements industry in developing high quality products with low
cost formulations. The Acquisition will allow the sharing of product formula
processes benefitting the product lines of both companies. The Company intends
to apply certain of each company's proprietary processes to the other company's
products with a view towards reducing manufacturing costs and increasing product
quality.
SELECTIVE EXPANSION THROUGH STRATEGIC ACQUISITIONS
Henry Company has pursued acquisition opportunities that have complemented
and expanded its core business or have enabled it to enter into new markets.
Over the past ten years, Henry Company has made the following acquisitions in
order to grow regionally and/or build on its core competencies in roofing and
asphalt technology:
<TABLE>
<CAPTION>
PRIMARY BENEFITS
ACQUISITION YEAR LOCATION OF THE ACQUISITION
- ---------------------------------- --------- ---------------------------------- ----------------------------------
<S> <C> <C> <C>
Resin Technology Company 1988 Ontario, California Expanded the roofing line into
polyurethane foam
Star Systems 1988 Los Angeles, California Expanded the white roof coatings
line
GEO Industries 1988 El Paso, Texas Expanded the roof coatings
business in the Southwest
K.T. Snyder Co. and related 1990 Houston, Texas Combined asphalt technology with
entities existing tape sealants business
and expanded the roof coatings
business in the Southwest
Gilsonite, Inc. 1992 Portland, Oregon and Auburn, Further expanded the roof coatings
Washington business in the Northwest
World Asphalt Company 1994 Sacramento, California Further expanded the roof coatings
business in Northern California
and established the pavings
business
American Blackline 1997 Denver, Colorado Further expanded the roof coatings
business in the Rocky Mountain
region
Monsey Products Co. 1998 Eastern United States and Canada Extension of the Company's
business into Eastern markets
</TABLE>
The Company competes in most of the larger markets within the United States
and Canada, but management believes that certain opportunities still exist for
strategic acquisitions on a smaller scale that could allow it to leverage its
well recognized brand names, achieve cost reductions and further enhance
geographic manufacturing and distribution capabilities. Strategic acquisitions
could also allow the Company to expand the depth of its product offerings
through its existing distribution network. The Company is considering further
acquisitions not expected to have a material effect on its business or market
position but which are consistent with the strategies outlined above.
12
<PAGE>
ADDITIONAL BENEFITS OF THE ACQUISITION
In addition to the potential benefits previously discussed, the Company
believes that the Acquisition will provide it with additional synergies and
opportunities to reduce costs and increase overall profitability. See
"Business--Additional Benefits of the Acquisition" for a detailed discussion of
the following potential benefits:
- Rationalization of manufacturing, research and development operations and
regulatory functions
- Reduction in overhead and administration expense
- Enhanced vertical integration opportunities
- Consolidation of sales and marketing operations
- Decreased seasonality and weather-related cyclicality
INDUSTRY OVERVIEW
The bulk of the Company's products compete in the roofing market which the
National Roofing Contractors Association estimates was a $19.6 billion market in
the United States in 1996. The largest segment of the industry is commercial
reroofing which accounts for approximately 53% of total revenues in the U.S.
roofing industry and is the primary segment in which the Company's products are
sold. Of the types of roofing systems included within this segment, the second
largest portion of sales is estimated to be generated by built-up-roofing
systems, with 29% of U.S. commercial reroofing sales, followed by modified
bitumen systems, which account for 23% of such sales. The Company's products are
focused on these two types of roofing systems. The Company also competes in the
sprayed polyurethane foam subsegment which, although still relatively small with
an estimated 1996 market size of $0.4 billion, has been one of the fastest
growing segments in the commercial reroofing market. See "Industry Overview."
THE TRANSACTIONS
On April 22, 1998, Henry Company acquired all of the outstanding stock of
Monsey Bakor for a purchase price of $42.75 million, and also paid an additional
$3.25 million to certain selling stockholders of Monsey Bakor for noncompetition
agreements. Two former Monsey Bakor executive officers entered into employment
agreements with Henry Company and now serve as officers of the Company. The
Acquisition will be accounted for using the purchase method of accounting. See
"The Transactions."
Effective at the closing of the Acquisition, Joseph T. Mooney, Jr., the
Chairman of the Board of Monsey Bakor, purchased shares of redeemable
convertible preferred stock of the Company, convertible into 22,500 shares of
common stock of the Company (the "Common Stock") (representing a 9% economic
interest in the Company on a fully diluted basis). Also effective at the closing
of the Acquisition, Frederick H. Muhs, a director of the Company, purchased
27,500 shares of Common Stock (representing an 11% economic interest in the
Company on a fully diluted basis.) In connection with the Transactions, the
Company repaid in full subordinated indebtedness of $5.0 million held by Warner
W. Henry, the Company's Chief Executive Officer. See "The Transactions" and
"Certain Transactions."
Concurrently with the closing of the Acquisition and the Initial Offering,
Henry Company's bank credit line and Monsey Bakor's U.S. bank credit line were
repaid and replaced with a $35.0 million credit facility, $25.0 million of which
is available in accordance with a borrowing base and is to be used for working
capital and $10.0 million of which may be used for capital expenditures. The
Acquisition was funded solely from the proceeds of the Initial Offering and no
amounts obtained under the New Bank Credit Facility were used therefor.
The Initial Offering, the New Bank Credit Facility, the Acquisition, the
Reinvestment (as defined in "The Transactions--The Acquisition"), the Equity
Issuance (as defined in "The Transactions--The Acquisition"), the repayment of
debt and the other transactions contemplated thereby are referred to
collectively herein as the "Transactions."
The Company is incorporated in California and has its principal executive
offices at 2911 Slauson Avenue, Huntington Park, California 90255. The Company's
telephone number is (213) 583-5000.
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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The summary historical combined statement of operations and balance sheet
data for Henry Company set forth below as of and for each of the years in the
three year period ended December 31, 1997 were derived from the Henry Company
Combined Financial Statements and notes thereto that have been audited by
Coopers & Lybrand L.L.P., independent accountants, and whose report thereon is
included elsewhere in this Prospectus. The summary interim consolidated
financial information as of June 30, 1998 and for the six months ended June 30,
1997 and 1998 has been derived from the unaudited consolidated financial
statements of Henry Company. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting only of
normal recurring accruals, necessary for the fair presentation of the financial
information for such periods. Results for the interim periods are not
necessarily indicative of the results for the full fiscal year.
The summary historical consolidated statement of operations and balance
sheet data for Monsey Bakor set forth below as of and for each of the years in
the three year period ended December 31, 1997 were derived from Monsey Bakor's
Consolidated Financial Statements and notes thereto that have been audited by
Ernst & Young LLP, independent auditors, and whose report thereon is included
elsewhere in this Prospectus. The summary interim consolidated financial
information as of March 31, 1998 and for the three months ended March 31, 1997
and 1998 has been derived from the unaudited consolidated financial statements
of Monsey Bakor. In the opinion of management, the unaudited consolidated
financial statements include all adjustments, consisting only of normal
recurring accruals, necessary for the fair presentation of the financial
information for such periods. Results for the interim periods are not
necessarily indicative of the results for the full fiscal year.
The summary unaudited pro forma combined statements of operations, other
financial data and financial ratios of the Company for the year ended December
31, 1997 and the six months ended June 30, 1998 set forth below give effect to
the Transactions as if they had occurred as of January 1, 1997 and January 1,
1998, respectively. The summary unaudited pro forma combined financial data do
not purport to represent what the Company's results of operations actually would
have been if the Transactions had occurred as of such date and are not
necessarily indicative of future operating results or of financial position.
The following summary historical combined and consolidated financial data
and unaudited pro forma combined financial data should be read in conjunction
with "Unaudited Pro Forma Condensed Combined Financial Data," "Selected
Historical Combined Financial Data of Henry Company," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Henry Company,"
"Selected Historical Consolidated Financial Data of Monsey Bakor," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Monsey Bakor" and the Consolidated and Combined Financial Statements of Henry
Company and the Consolidated Financial Statements of Monsey Bakor, including, in
each case, the notes thereto, appearing elsewhere in this Prospectus.
14
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL DATA OF HENRY COMPANY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA(1):
Net sales.............................................. $ 61,059 $ 59,186 $ 67,424 $ 25,717 $ 52,107
Cost of sales.......................................... 42,290 40,867 46,413 18,701 36,007
----------- ----------- ----------- ----------- -----------
Gross profit................................... 18,769 18,319 21,011 7,016 16,100
Operating expenses:
Selling, general and administrative................ 17,518 16,934 17,509 7,574 12,605
Amortization of intangibles........................ 703 183 137 69 622
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ 548 1,202 3,365 (627) 2,873
Interest expense....................................... 1,454 1,475 1,465 731 2,099
Interest and other income, net......................... (402) (345) (321) (176) (122)
----------- ----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for
taxes........................................ (504) 72 2,221 (1,182) 896
Provision (benefit) for income taxes(2)................ -- 1 33 -- (522)
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. $ (504) $ 71 $ 2,188 $ (1,182) $ 1,418
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
OTHER FINANCIAL DATA:
Capital expenditures................................... $ 1,389 $ 1,449 $ 801 $ 350 $ 753
Depreciation and amortization (including amortization
of intangibles)...................................... 1,907 1,645 1,469 673 1,624
EBITDA(3).............................................. 2,857 3,192 5,155 222 4,619
Cash flows provided by (used in):
Operating activities................................. 2,224 1,171 4,781 587 142
Investing activities................................. (1,342) (783) (949) (515) (44,565)
Financing activities................................. (785) (258) (4,013) (32) 53,694
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------- -----------------
1995 1996 1997 1998
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA(1):
Cash and cash equivalents.................................. $ 170 $ 300 $ 119 $ 9,483
Working capital............................................ 2,699 5,121 7,204 32,514
Total assets............................................... 30,730 31,204 30,418 130,616
Long-term debt, including current maturities, and
borrowings on line of credit............................. 17,619 17,416 13,748 90,431
Total shareholders' equity................................. 2,863 2,934 5,122 7,834
</TABLE>
15
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF MONSEY BAKOR
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,(5)
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA(4):
Net sales.............................................. $ 79,636 $ 108,584 $ 113,175 $ 21,620 $ 22,738
Cost of sales.......................................... 59,641 79,428 83,082 16,580 17,495
----------- ----------- ----------- ----------- -----------
Gross profit................................... 19,995 29,156 30,093 5,040 5,243
Operating expenses:
Selling general and administrative................. 17,818 23,513 24,444 5,693 5,679
Accounting method change--non-cash environmental
charge........................................... -- -- 3,639 3,639 --
Amortization of intangibles........................ 120 283 353 78 116
----------- ----------- ----------- ----------- -----------
Operating income (loss)........................ 2,057 5,360 1,657 (4,370) (552)
Interest expense....................................... 1,217 1,557 1,576 346 303
Other income, net...................................... (81) (564) (390) (61) (61)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.............. 921 4,367 471 (4,655) (794)
Income tax expense (benefit)........................... 385 1,537 187 (1,848) (289)
----------- ----------- ----------- ----------- -----------
Net income (loss).............................. $ 536 $ 2,830 $ 284 $ (2,807) $ (505)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
OTHER FINANCIAL DATA(4):
Capital expenditures................................... $ 1,280 $ 1,225 $ 2,610 $ 780 $ 240
Depreciation and amortization (including amortization
of intangibles)...................................... 1,873 2,482 2,566 643 629
EBITDA(3).............................................. 4,011 8,406 8,185 (27) 138
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Cash flows provided by (used in):
Operating activities................................. 1,968 4,026 6,197 (4,769) (6,911)
Investing activities................................. (1,280) (2,786) (2,905) (820) (250)
Financing activities................................. (739) (636) (4,443) 4,893 8,102
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------- -----------------
1995 1996 1997 1998
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(4):
Cash....................................................... $ 770 $ 1,375 $ 213 $ 1,169
Working capital............................................ 218 3,281 488 271
Total assets............................................... 31,052 46,192 46,217 53,803
Long-term debt, including current maturities, and
borrowings on lines of credit............................ 12,361 15,620 11,742 19,844
Total shareholders' equity................................. 10,673 18,160 17,142 16,652
</TABLE>
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................................... $ 180,599 $ 85,947
Cost of sales........................................................... 129,495 61,382
-------- --------
Gross profit.......................................................... 51,104 24,565
Operating expenses:
Selling, general and administrative..................................... 39,829 19,889
Accounting method change--non-cash environmental charge................. 3,639 --
Amortization of intangibles............................................. 2,943 1,495
-------- --------
Operating income...................................................... 4,693 3,181
Interest expense........................................................ 8,702 4,387
Interest and other income, net.......................................... (711) (122)
-------- --------
Loss before benefit for taxes......................................... (3,298) (1,084)
Benefit for income taxes................................................ (609) (967)
-------- --------
Net loss.............................................................. $ (2,689) $ (117)
-------- --------
-------- --------
OTHER FINANCIAL DATA:
Capital expenditures.................................................... $ 3,411 $ 1,020
Depreciation and amortization (including amortization of intangibles)... 6,488 3,292
Adjusted EBITDA(6)...................................................... 15,464 6,595
FINANCIAL RATIOS:
Ratio of debt to Adjusted EBITDA........................................ 5.7x 13.7x
Ratio of Adjusted EBITDA to interest expense............................ 1.8x 1.5x
</TABLE>
17
<PAGE>
NOTES TO SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) The combined financial statements of Henry Company consist of Henry Company
and Warner Development Company of Texas, both companies under common
control. All significant intercompany accounts and transactions have been
eliminated. Upon the closing of the Acquisition, Warner Development Company
of Texas was merged with and into Henry Company.
(2) Henry Company was operated as a subchapter "S" corporation under the
Internal Revenue Code (the "Code"). As a result, Henry Company did not incur
federal and state income taxes (except with respect to certain states) and,
accordingly, the provision for income taxes only includes the applicable
state income tax. Federal and state income taxes (except with respect to
certain states) on the income of Henry Company have been incurred and paid
directly by the shareholders of Henry Company. It has been the policy of
Henry Company to make periodic distributions to the shareholders in respect
of such tax liabilities. During the six months ended June 30, 1998, Henry
Company paid distributions of $800 for the shareholders' 1997 tax
liabilities. Upon completion of the Transactions, the Company converted to a
"C" Corporation under the Code and will subsequently pay all tax obligations
of the Company to the appropriate taxing authorities.
(3) EBITDA, as defined in the Indenture, represents net earnings before taking
into consideration taxes on earnings, interest expense, depreciation and
amortization, and non-recurring, non-cash charges, less any cash expended
that funds a non-recurring, non-cash charge. While EBITDA should not be
construed as a substitute for operating earnings, net earnings, or cash
flows from operating activities in analyzing operating performance,
financial position or cash flows, EBITDA has been included because it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity.
This data is relevant to an understanding of the economics of the Company's
business as it indicates cash flow available from operations (and/or trends
in cash flow available from operations) to service debt and satisfy certain
fixed obligations.
A reconciliation of net income (loss) to EBITDA for the respective years and
related interim periods for Henry Company is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss)........................... $ (504) $ 71 $ 2,188 $ (1,182) $ 1,418
Provision (benefit) for income taxes........ -- 1 33 -- (522)
Interest expense............................ 1,454 1,475 1,465 731 2,099
Depreciation and amortization............... 1,907 1,645 1,469 673 1,624
--------- --------- --------- --------- ---------
EBITDA...................................... $ 2,857 $ 3,192 $ 5,155 $ 222 $ 4,619
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
A reconciliation of net income (loss) to EBITDA for the respective years and
related interim periods for Monsey Bakor is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income (loss)............................ $ 536 $ 2,830 $ 284 $ (2,807) $ (505)
Provision (benefit) for income taxes......... 385 1,537 187 (1,848) (289)
Interest expense............................. 1,217 1,557 1,576 346 303
Depreciation and amortization................ 1,873 2,482 2,566 643 629
Non-cash environmental change................ -- -- 3,639 3,639 --
Cash paid on environmental charge............ -- -- (67) -- --
--------- --------- --------- --------- ---------
EBITDA....................................... $ 4,011 $ 8,406 $ 8,185 $ (27) $ 138
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(4) On March 15, 1996, Monsey Products Co. acquired all of the outstanding
common stock of Bakor Holdings, Inc., in exchange for $1,837 plus 1,002,000
shares of its common stock valued at $5,357. The transaction was accounted
for as a purchase. The consolidated statements of operations reflect the
results of operations of Bakor Holdings, Inc. from the date of its
acquisition. On a pro forma basis,
18
<PAGE>
assuming that the acquisition of Bakor Holdings, Inc. occurred on January 1,
1996, net sales for 1996 would have been $112,276, net income would have
been $2,486, and EBITDA, as defined, would have been $8,384.
(5) On April 22, 1998, Monsey Bakor was acquired by Henry Company and its
accounts and results of operations have been consolidated with Henry Company
since the date of acquisition.
(6) Pro forma combined Adjusted EBITDA represents EBITDA as defined in Note (3)
above, adjusted to reflect (i) reimbursement for administrative services
provided by Henry Company to an affiliate, as the Company will be reimbursed
for providing such services after January 1, 1998 pursuant to an
administrative services agreement between Henry Company and such affiliate
($1,124 on an annual basis); and (ii) a reduction in compensation paid to
shareholders and certain members of management of Monsey Bakor in excess of
the amount to be paid under new employment agreements as a result of the
Acquisition ($1,000 on an annual basis). A reconciliation of net loss to
Adjusted EBITDA for the respective periods is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -----------------
<S> <C> <C>
Net loss................................................ $ (2,689) $ (117)
Benefit for income taxes................................ (609) (967)
Interest expense........................................ 8,702 4,387
Depreciation and amortization........................... 6,488 3,292
Non-cash environmental charge........................... 3,639 --
Cash paid on environmental charge....................... (67) --
------- ------
Adjusted EBITDA......................................... $ 15,464 $ 6,595
------- ------
------- ------
</TABLE>
19
<PAGE>
RISK FACTORS
HOLDERS OF OLD NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE
PARTICIPATING IN THE EXCHANGE OFFER OR MAKING AN INVESTMENT IN THE EXCHANGE
NOTES.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to
the Securities Act and applicable state securities laws. The Company believes
that, based upon interpretations contained in letters issued to third parties by
the staff of the SEC, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by each holder thereof (other than a broker-dealer, and any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such Exchange
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes.
In the event the Exchange Offer is consummated, the Company will not be
required to register the transfer of the Old Notes under the Securities Act or
any applicable securities laws. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to the
registration requirements under such laws. The Old Notes currently may be sold
to "Qualified Institutional Buyers" and to a limited number of other
institutional "Accredited Investors" (as defined in Rule 144A and Rule 501(a)
(1) (2) (3) or (7) under the Securities Act, respectively) and in offshore
transactions complying with Rule 903 or Rule 904 of Regulation S under the
Securities Act or pursuant to another available exemption under the Securities
Act without registration under the Securities Act. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the reduction in the principal
amount of Old Notes outstanding could have an adverse effect upon, and increase
the volatility of the market price for, the untendered and tendered but
unaccepted Old Notes.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
As a result of the Transactions, the Company has consolidated indebtedness
that is substantial in relation to the book value of its shareholders' equity.
As of June 30, 1998, Henry Company had approximately $90.4 million of debt (the
sum of long-term debt, including current maturities of long-term debt, notes
payable and capitalized lease obligations) and approximately $7.8 million book
value of shareholders' equity. For the year ended December 31, 1997 and the six
months ended June 30, 1998, on a pro forma basis (after giving effect to such
assumptions), the Company's earnings would have been insufficient to cover fixed
charges. The dollar amount of the deficiency would have been $3.3 million and
$1.1 million, respectively. See "Capitalization" and "Unaudited Pro Forma
Condensed Combined Financial Data."
The significant borrowings required to finance the Acquisition have had
several important consequences for both the Company and the holders of the
Notes, including but not limited to the following: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future for working capital, acquisitions, capital
expenditures or to refinance the Notes may be significantly impaired and (iii)
the Company's substantial leverage may make it more vulnerable to economic
downturns and limit its ability to withstand competitive pressures or to take
advantage of business opportunities.
The Company's ability to make cash payments with respect to the Notes and to
satisfy its other debt obligations will depend on its future operating
performance, which will be affected by financial, business,
20
<PAGE>
competitive, general economic and other factors, many of which are beyond the
Company's control. Based upon current levels of operations and anticipated cost
savings and future growth, the Company believes that its expected cash flow from
operations, together with available borrowings under the New Bank Credit
Facility and its other sources of liquidity, will be adequate to meet its
anticipated requirements for working capital, scheduled principal and interest
payments, lease payments and capital expenditures. As of June 30, 1998, the
Company had up to $35.0 million available for borrowing under the New Bank
Credit Facility, subject to compliance with the conditions precedent thereunder
including as to borrowing base. There can be no assurance, however, that the
Company's business will continue to generate cash flow at or above current
levels or that estimated cost savings or anticipated growth can be achieved. If
the Company is unable to service its indebtedness, it will be forced to adopt an
alternative strategy that may include actions such as reducing or delaying
capital or research and development expenditures, selling assets, restructuring
or refinancing its indebtedness or seeking additional equity capital. There can
be no assurance that any of these strategies can be effected on satisfactory
terms, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Henry Company--Liquidity and Capital
Resources" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Monsey Bakor--Liquidity and Capital Resources."
CONSEQUENCES OF THE ACQUISITION
Achieving the full benefits from combining Henry Company and Monsey Bakor,
and capturing the efficiencies and cost reductions that management expects to
result from the Acquisition, will require the integration of plants and product
lines, the coordination of each company's sales efforts and the implementation
of appropriate operational, financial and managerial systems and controls.
Additionally, maximizing the benefits to be achieved from the Acquisition will
require the integration of each company's manufacturing, engineering,
administrative, finance and sales and marketing organizations. There can be no
assurance that Henry Company will be able to integrate the operations of Monsey
Bakor successfully. The combination will require substantial attention from
Henry Company's management team, which has limited or no experience integrating
the operations of companies the size of Monsey Bakor. Business, competitive,
financial, general economic and other factors, many of which will be beyond the
control of management, will affect the timing and ultimate success of the
integration of Monsey Bakor and the realization of benefits from the
Acquisition. The diversion of management's attention from day-to-day operations
to the integration of Monsey Bakor, as well as any other difficulties which may
be encountered in the transition and integration process, could adversely affect
the Company's business, financial condition or results of operations.
The Acquisition presents the Company with other business challenges
generally associated with acquisitions including the management of a much larger
enterprise. Although the Company expects that the business operations of Henry
Company and Monsey Bakor will not be adversely affected by the Acquisition,
there can be no assurance that unexpected difficulties will not arise that may
have a material adverse effect upon the Company. If the Company's management is
unable to manage growth effectively, the quality of the Company's products and
its business, financial condition or results of operations could be materially
adversely affected.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The credit agreement for the New Bank Credit Facility contains various
restrictive covenants and prohibits the Company from prepaying the Notes. The
credit agreement also requires the Company to maintain specified financial
ratios and satisfy certain financial tests. The New Bank Credit Facility
includes covenants relating to minimum current ratios, minimum tangible net
worth, minimum fixed charge ratios, maximum leverage ratio and limitations on
capital expenditures, investments, indebtedness, liens, dividends, sales of
assets, guarantee obligations, prepayments of other indebtedness, mergers,
acquisitions or sales of assets, change in business activities, affiliate
transactions, issuance of equity and certain corporate activities. The Company's
ability to meet such financial ratios and tests may be affected by events beyond
its control. There can be no assurance that the Company will meet such tests. A
breach of any of these
21
<PAGE>
covenants could result in an event of default under the New Bank Credit
Facility. If such an event of default occurs, the lenders could elect to declare
all amounts borrowed under the New Bank Credit Facility, together with accrued
interest, to be immediately due and payable and to terminate all commitments
under the New Bank Credit Facility. If the Company were unable to repay all
amounts declared due and payable, the lenders could proceed against the
collateral granted to them to satisfy the indebtedness and other obligations due
and payable. The accounts receivable and inventory of the Company and certain
capital assets financed thereby have been pledged as security under the New Bank
Credit Facility. If the New Bank Credit Facility indebtedness were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company, including the Notes.
In addition, the Indenture also restricts the ability of the Company, among
other things, to incur additional indebtedness, incur liens, pay dividends or
make certain other restricted payments or investments, consummate certain asset
sales, enter into certain transactions with affiliates, impose restrictions on
the ability of a subsidiary to pay dividends or make certain payments to the
Company or any of its subsidiaries, merge or consolidate with any other person
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. These restrictions may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction. See "Description of the Credit Facilities" and "Description of the
Exchange Notes--Certain Covenants."
EFFECTIVE AND STRUCTURAL SUBORDINATION OF NOTES
The Notes will be general unsecured obligations of the Company and will rank
PARI PASSU in right of payment with all unsubordinated indebtedness of the
Company and will rank senior in right of payment to all subordinated
indebtedness of the Company. The Notes will be unconditionally guaranteed,
jointly and severally, by the Guarantors. The Guarantees will be a general
unsecured obligation of the Guarantors and will rank PARI PASSU in right of
payment with all unsubordinated indebtedness of the Guarantors and will rank
senior in right of payment to all subordinated indebtedness of the Guarantors.
However, the Notes will be effectively subordinated to all secured indebtedness
of the Company to the extent of the assets secured by such indebtedness and will
also be effectively subordinated to all secured indebtedness of the Guarantors.
The Notes will also be structurally subordinated to all existing and future
indebtedness and other liabilities of the Company's Canadian subsidiaries.
The Notes will not be secured by any of the assets of the Company and its
subsidiaries. Indebtedness incurred under the New Bank Credit Facility will be
secured by liens against the accounts receivable and inventory of the Company
and certain capital assets financed thereby. In the event of a default on such
secured indebtedness, or a bankruptcy, liquidation or reorganization of the
Company and its subsidiaries, such assets will be available to satisfy
obligations with respect to the secured indebtedness before any payment
therefrom will be made on the Notes. Similarly, in the event of a default under
any indebtedness of the Company's Canadian subsidiaries, or a bankruptcy,
liquidation or reorganization of any of such subsidiaries, the assets of such
subsidiaries will be available to satisfy obligations with respect to such
indebtedness before any payment therefrom will be made on the Notes.
22
<PAGE>
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS OR REVENUE GROWTH
The statements concerning potential cost savings and revenue growth
contained in this Prospectus are forward-looking statements that are based on
estimates and assumptions made by the Company's management. Although believed to
be reasonable, such statements are inherently uncertain, and results are
difficult to predict. Therefore, undue reliance should not be placed upon such
statements. The following important factors, among others, could cause the
Company not to achieve the results contemplated herein (principally those set
forth in "Business--Business Strategy and Key Benefits of the Acquisition" and
"Business--Additional Benefits of the Acquisition") or otherwise cause the
Company's business, financial condition or results of operations to be adversely
affected in future periods: (i) loss of key customers or continued or increased
competitive pressures; (ii) changes in customer spending levels; (iii)
unanticipated costs related to the Acquisition and the integration of the
companies; (iv) absence of inclement weather; (v) loss or retirement of key
members of management; (vi) increases in interest rates or the Company's cost of
borrowing or a default under any material debt agreement; (vii) unavailability
of funds for capital expenditures or research and development; (viii) changes in
governmental, environmental or other regulations or (ix) changes in general
economic conditions.
Additionally, references to annualized synergies as discussed in "Unaudited
Pro Forma Condensed Combined Financial Data--Notes to Unaudited Pro Forma
Condensed Combined Financial Statements" reflect the Company's estimates as to
annualized synergies that the Company believes will be realized as a result of
the Acquisition. These annualized synergies consist of a combination of selling,
general and administrative expense cost savings and production cost reductions.
Annualized cost savings and cost reductions are estimated to be $1.8 million.
One time costs associated with achieving these synergies are estimated to be
$0.8 million. The Company expects to realize these synergies once the
integration process is completed, which is expected to occur within 18 months
following the consummation of the Acquisition. Although the Company believes its
estimate of the cost savings and production cost reductions and the time
required to implement these cost savings to be reasonable, such savings and cost
reductions, and the time required to realize those savings and cost reductions,
are difficult to estimate. Undue reliance, therefore, should not be placed on
such estimates. There can be no assurance that any of these cost savings and
cost reductions will actually be realized or, if realized, will be realized to
the extent estimated by the Company. Further, there can be no assurance that
these cost savings and production cost reductions will be realized as quickly as
the Company currently estimates. Moreover, there can be no assurance that the
costs of achieving such synergies will not exceed the Company's estimates of
those costs. As a result, such synergies are excluded from the computation of
Adjusted EBITDA and from the Unaudited Pro Forma Condensed Combined Financial
Statements. See "Prospectus Summary--Summary Unaudited Pro Forma Combined
Financial Data," "Unaudited Pro Forma Condensed Combined Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Henry Company" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Monsey Bakor."
FLUCTUATION OF RAW MATERIAL COST
The Company utilizes a number of raw materials in its manufacturing
processes, some of which have historically fluctuated in price at particular
times. These price fluctuations have been based on such factors as the capacity
of the raw material supply chain, demand in the market, weather, general
economic factors and the availability of alternative raw materials. Raw
materials utilized by the Company that have historically experienced some price
fluctuation include asphalt, aluminum paste, rubber and certain diisocynates,
among others. For example, asphalt, which is a byproduct of crude oil refining,
has fluctuated in price with changes in worldwide crude oil prices and capacity
and with changes in the supply and demand in the oil, gasoline and fossil fuel
markets. Significant increases in asphalt prices or in the prices of other raw
materials, if not offset by product price increases, could have a material
adverse impact on the profit of the Company. There can be no assurance that the
Company will be able to pass any future cost increases through to its customers
in the form of price increases. See "Management's Discussion and
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Analysis of Financial Condition and Results of Operations of Henry
Company--Inflation and Raw Material Costs" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Monsey
Bakor--Inflation and Raw Material Costs" and "Business--Business of the
Company--Henry Coatings Division--Manufacturing" and "Business--Business of the
Company--Monsey Bakor Division--Manufacturing."
IMPACT OF WEATHER
Because many of the Company's products are designed to patch or fix damaged
roofs, the Company's revenues are affected by weather conditions. Sales of
roofing products have historically tended to increase in areas which have
experienced severe weather. The results of severe weather or the anticipation of
severe weather motivate property owners to undertake required roof maintenance
or to replace an old or worn roof. The absence of inclement weather in some or
all of the Company's markets could have an adverse impact on the Company's
business, financial condition or results of operations.
PRODUCT LIABILITY AND ASBESTOS LITIGATION
The Company's business entails an inherent risk of product liability claims,
including a particular risk with respect to chrysotile asbestos-containing
products that the Company manufactures. Although some roofing products
manufacturers have switched to an exclusively non-asbestos line, some of the
leading firms in the industry continue to use chrysotile asbestos in at least
some of their products. The Company believes that its use of chrysotile asbestos
fibers, which are encapsulated by asphalt in the manufacturing process, is in
accordance with applicable laws. However, Monsey Bakor has been named as a
defendant in suits alleging certain asbestos-related injuries. Although Monsey
Bakor has not paid any amounts in judgment or settlement of any asbestos-related
claim to date, there can be no assurance that any such claim will not in the
future result in a material adverse judgment against, or settlement by, the
Company. Other than these asbestos-related claims, no material product liability
claims are currently pending against Henry Company or Monsey Bakor. However,
there can be no assurance that such claims will not arise in the future. The
costs of defending the pending asbestos-related suits are currently funded by a
joint defense arrangement among Monsey Bakor's insurance carriers and the
Company believes such insurance coverage is adequate. However, neither Henry
Company nor Monsey Bakor is covered by insurance for asbestos-related claims for
injuries that are alleged to have arisen after 1985.
Both Henry Company and Monsey Bakor separately maintain product liability
insurance for non-asbestos claims in the amount of $11,000,000 each. However,
there can be no assurance that the product liability coverage maintained by the
Company will be adequate to cover product liability claims or that the
applicable insurer will be solvent at the time of any required payment. In
addition, there can be no assurance that the Company will be able to maintain
its product liability coverage on current or otherwise acceptable terms. A
product liability or asbestos-related claim that results in a judgment or
settlement in excess of the Company's insurance coverage, or a material judgment
or settlement for an asbestos-related claim for injuries alleged to have arisen
after 1985, would have a material adverse effect on the Company. See
"Business--Business of the Company--Henry Coatings Division--Manufacturing" and
"Business-- Litigation."
CONTROLLING SHAREHOLDERS
The Company's stock is controlled by current management. Warner W. Henry,
the Company's Chief Executive Officer, owns shares of Class A Common Stock of
the Company and warrants to purchase additional shares of such stock and Common
Stock of the Company representing 74.7% of the voting power on a fully exercised
and fully diluted basis. As a result of his ownership, Mr. Henry is able to
direct the election of a majority of the board of directors of the Company and
therefore direct the management and policies of the Company. Furthermore, the
remaining shares of the Company's capital stock are owned by Carol Henry (the
wife of Mr. Henry); trusts benefitting Mr. and Mrs. Henry's children; Joseph T.
Mooney, Jr., the former Chairman of the Board of Monsey Bakor, who is now a Vice
Chairman of the
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Board and an executive officer of the Company; and Frederick H. Muhs, a director
of the Company. The interests of these shareholders may differ from the
interests of holders of the Notes. See "Shareholders."
RELIANCE ON KEY PERSONNEL
The Company's future success will depend to a significant extent on its
executive officers and other key management personnel. In addition, the success
of any acquisitions by the Company (including the Acquisition) may depend, in
part, on the Company's ability to retain management personnel of the acquired
companies. Although the Company has employment agreements with several of its
executive officers and key personnel, including its President, Monsey Bakor's
former Chairman of the Board and the former President of Monsey Bakor's Canadian
operations, there can be no assurance that the Company will be able to retain
its executive officers and key personnel or attract additional qualified
management in the future. Although the Company is the beneficiary under
key-person life insurance policies on the lives of the Company's President and
Chief Operating Officer and Monsey Bakor's former Chairman of the Board (who has
become a Vice Chairman of the Board and an executive officer of the Company
following the Acquisition), there can be no assurance that the proceeds of these
policies would be adequate to compensate the Company for the loss of services
due to the death of these individuals. See "Management."
COMPETITION
The roofing products and roofing systems industries are highly competitive
in most product categories and geographic regions. Competition is largely based
on quality, service, price and distribution capabilities. The Company competes
for retail and wholesale business with both large national manufacturers and
smaller regional producers. In certain circumstances, due primarily to factors
such as freight rates and customer preference for local brands, manufacturers
with better access to certain geographic markets may have a competitive
advantage in such markets. In addition, many of the Company's competitors within
the roofing products industry have greater financial, marketing, distribution,
management and other resources than the Company, and as the industry
consolidates, the Company's competitors may further enhance these resources. The
Company also believes that excess capacity in the roofing products and roofing
systems industry, especially during slow periods for the industry, could result
in downward pricing pressure and intensified competition. Given these factors,
there can be no assurance that the Company will be able to continue to compete
successfully against existing or new competitors, and the failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.
ENVIRONMENTAL MATTERS
The past and present business operations of the Company and the past and
present ownership and operation of real property by the Company are subject to
extensive and changing federal, state, local and foreign environmental laws and
regulations pertaining to the discharge of materials into the environment, the
handling, storage, treatment and disposal of wastes (including solid and
hazardous wastes), the remediation of releases of toxic or hazardous materials
or otherwise relating to health, safety and protection of the environment
("Environmental Laws"). As such, the nature of the Company's operations as well
as previous operations by others at real property owned, leased or used by the
Company, expose the Company to the risk of claims under Environmental Laws, and
there can be no assurance that material costs or liabilities will not be
incurred in connection with such claims. Based on its experience to date, the
Company does not expect such claims or the costs of compliance with the scope or
enforcement of Environmental Laws to have a material impact on its earnings or
competitive position. The Company believes that it is in substantial compliance
with applicable Environmental Laws. No assurance can be given, however, that the
discovery of presently unknown environmental conditions, changes in the scope or
enforcement of Environmental Laws or their interpretation, or other
unanticipated events will not give rise to expenditures or liabilities that may
have a material adverse effect on the Company's business, financial condition or
results of operations. Monsey Bakor has been named as a potentially responsible
party in litigation concerning contamination at a former waste-oil recycling
facility used by it in Douglassville, Pennsylvania. Monsey Bakor is also a party
to a consent decree issued by the Federal Environmental
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Protection Agency relating to remediation of contamination at its corporate
headquarters. It is sharing remediation costs with a former owner of the
facility that is also a party to the consent decree. Based on currently
available information, the Company believes that neither this litigation nor
this remediation will have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business--Litigation" and
"Business--Environmental Matters."
GOVERNMENTAL REGULATION AND PERMITS
The Company is subject to regulation under various federal, state and local
laws, including laws regulating its manufacturing operations and laws relating
to employee health and safety. Permits are required for operation of the
Company's business, and such permits are subject to renewal, modification and,
in certain circumstances, revocation by governmental authorities. The loss of
certain of such permits could have a material adverse effect on the Company's
business, financial condition or results of operations. The Company expects to
incur ongoing capital and operating costs and administrative expenses to
maintain compliance with its permits and with applicable laws and regulations.
The Company cannot predict the legislation or regulations that may be enacted in
the future or how existing or future laws or regulations will be administered or
interpreted. Compliance with new laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies or stricter interpretation of
existing laws, may require additional expenditures by the Company, some or all
of which may be material.
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, each holder of Notes will have certain rights to
require the Company to repurchase all or a portion of such holder's Notes. See
"Description of the Exchange Notes--Change of Control." If a Change of Control
were to occur, there can be no assurance that the Company would have sufficient
funds to pay the repurchase price for all Notes tendered by the holders thereof
and such failure would result in an event of default under the Indenture. In
addition, a Change of Control would constitute a default under the New Bank
Credit Facility and is otherwise restricted by the New Bank Credit Facility and
may be prohibited or limited by, or create an event of default under, the terms
of other agreements relating to borrowings which the Company may enter into from
time to time, including other agreements relating to secured indebtedness. If
the Company's obligations under the New Bank Credit Facility or any other
secured indebtedness of the Company were accelerated due to a default
thereunder, the lenders thereunder would have a priority claim on the proceeds
from the sale of the collateral securing such indebtedness.
FRAUDULENT CONVEYANCE
If the Company or any Guarantor received less than reasonably equivalent
value in exchange for the Company's issuance of the Notes or, as the case may
be, its Guarantees, or the incurrence of liabilities pursuant thereto, the Notes
or such Guarantees, or any payments made in respect thereof, could be avoided
under federal or applicable state fraudulent transfer law, regardless of whether
the Company or any Guarantors were subject to any bankruptcy or insolvency
proceedings. In particular, to the extent that any Guarantors become liable for
any obligations of the Company in excess of the value actually received by the
Guarantors, the relevant Guarantees could be subject to avoidance as a
fraudulent transfer if, at the time of, or as a result of, either the issuance
of such Guarantees or any payment thereafter, (i) the Guarantors were or became
insolvent, (ii) the Guarantors had unreasonably small capital to conduct their
business as then conducted or contemplated to be conducted or (iii) the
Guarantors were unable or were rendered unable, to meet their probable
liabilities as they matured and became due and payable. If any Guarantees are
avoided, the holders of the Notes could lose the benefit of the Guarantees, and
the holders could also be required to return to the Guarantors the amount of any
payment or other property received in respect of the Notes.
The Indenture provides that certain future subsidiaries of the Company will
be required to guarantee the Notes. If certain bankruptcy or insolvency
proceedings are initiated by or against the new subsidiaries
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within 90 days (or, possibly, one year) after any such guaranty, grant or
assignment, or if any Guarantor incurs obligations under its Guarantees in
anticipation of insolvency, all or a portion of the affected Guarantees could be
avoided as a preferential transfer under federal bankruptcy or applicable state
law. In addition, a court could require holders to return all payments made
under any such Guarantees within such 90 day period (or, possibly, one year) as
preferential transfers.
The Company believes that it received equivalent value at the time the
indebtedness represented by the Notes was incurred. In addition, the Company
does not believe that the Company and the Guarantors, as a result of the
issuance of the Notes and the related Guarantees, (i) are insolvent or were
rendered insolvent under the foregoing standards, (ii) are engaged in a business
or transaction for which their remaining assets constitute unreasonably small
capital or (iii) intend to incur, or believe that they will incur, debts beyond
their ability to pay such debts as they mature. These beliefs are based on the
Company's and the Guarantors' operating history, net worth and management's
analysis of internal cash flow projections and estimated values of assets and
liabilities of such entities at the time of the Initial Offering and the
Exchange Offer. There can be no assurance, however, that a court passing on
these issues would make the same determination.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Old Notes are designated for trading in the PORTAL Market, the National
Association of Securities Dealers' screen-based automated market for trading of
securities eligible for resale under Rule 144A. The Company does not intend to
apply for listing of the Exchange Notes on any securities exchange or the NASDAQ
National Market. There can be no assurance as to the liquidity of any market
that may develop for the Exchange Notes, the ability of holders of the Exchange
Notes to sell their Exchange Notes, or the price at which holders would be able
to sell their Exchange Notes. Future trading prices of the Exchange Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
The Company has been advised by the Initial Purchaser that, following the
completion of the Exchange Offer, the Initial Purchaser intended to make a
market in the Exchange Notes. However, the Initial Purchaser is not obligated to
do so or to continue to do so and any market-making activities with respect to
the Exchange Notes may be discontinued at any time without notice. In addition,
such market-making activity will be subject to the limits imposed by the
Securities Act and the Exchange Act, and may be limited during the Exchange
Offer and the pendency of any shelf registration statement. Accordingly, no
assurance can be given that an active trading market for the Exchange Notes will
develop or, if such a market develops, as to the liquidity of such market. If
the Exchange Notes are traded after their initial issuance, they may trade at a
discount from their initial offering price, depending upon prevailing interest
rates, the market for similar securities, the performance of the Company and
certain other factors. The liquidity of, and trading market for, the Exchange
Notes may be adversely affected by general declines in the market for similar
securities. Such a decline may adversely affect such liquidity and trading
markets independent of the financial performance of, and prospects for, the
Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expect," "should," "may," "will," "continue" and "estimate," and
words of similar import, constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both domestic and foreign; industry
and market capacity; demographic changes; existing government regulations and
changes in, or the failure to comply with, government regulations; liability and
other claims asserted against the Company; competition; the loss of any
significant customers; changes in operating strategy or development plans; the
ability to attract and retain qualified personnel; the significant
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indebtedness of the Company after the Transactions; the availability and terms
of capital to fund the expansion of the Company's business; and other factors
referenced in this Prospectus. Certain of these factors are discussed in more
detail elsewhere in this Prospectus, including, without limitation, under the
captions "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Henry Company," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Monsey Bakor" and "Business." Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses of the Exchange Offer. No underwriter is
being used in connection with the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will receive
in exchange Old Notes in like principal amount, the terms of which are identical
to the Exchange Notes except that (i) the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) the Exchange Notes registered
hereunder will not be entitled to any rights under the Registration Rights
Agreement, including but not limited to the contingent increase in the interest
rate provided for therein. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
the issuance of the Exchange Notes will not result in any increase in the
indebtedness of the Company.
The proceeds received by the Company from the sale of the Old Notes and the
issuance of additional equity in the Company in connection with the Initial
Offering of approximately $87.6 million were used as follows: (i) approximately
$46.0 million to pay the purchase price for the Acquisition, (ii) approximately
$25.3 million to repay existing debt of the Company and Monsey Bakor, (iii) $5.0
million to repay subordinated debt of the Company, (iv) approximately $4.2
million to pay expenses related to the Acquisition and the other Transactions
and (v) approximately $7.1 million as an addition to working capital of the
Company.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
On April 22, 1998, the Company issued $85.0 million aggregate principal
amount of Old Notes to the Initial Purchaser. In connection with the issuance
and sale of the Old Notes, the Company entered into the Registration Rights
Agreement with the Initial Purchaser, which obligated the Company to (i) file
the Registration Statement of which this Prospectus is a part for the Exchange
Offer within 90 days after April 22, 1998, the date the Old Notes were issued,
(ii) use its best efforts to cause the Registration Statement to become
effective within 150 days after the Issue Date, and (iii) consummate the
Exchange Offer within 185 days of the Initial Issue Date. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Exchange Offer is being made
pursuant to the Registration Rights Agreement to satisfy the Company's
obligations thereunder.
Based on existing interpretations by the staff of the Commission, the
Company believes that a holder who exchanges Old Notes for Exchange Notes
pursuant to the Exchange Offer may offer for resale, resell and otherwise
transfer such Exchange Notes without compliance with the registration and
prospectus delivery requirements of the Securities Act; provided, that (i) such
Exchange Notes are acquired in the ordinary course of such holder's business,
(ii) such holder is not engaged in, and does not intend to engage in, a
distribution of such Exchange Notes and has no arrangement with any person to
participate in the distribution of such Exchange Notes, and (iii) such holder is
not an affiliate of the Company (as defined under Rule 405 of the Securities
Act). However, the staff of the Commission has not considered the Exchange Offer
in the context of a no-action letter and there can be no assurance that the
staff of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances. A holder who exchanges Old Notes
for Exchange Notes pursuant to the Exchange Offer with the intention to
participate in a distribution of the Exchange Notes may not rely on the staff's
position enunciated in any no-action letter and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution." The Letter of Transmittal states that by so acknowledging and by
delivering a Prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Notes) received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date (as defined below in
"The Exchange Offer--Expiration Date; Extension; Amendments"), if requested by a
Participating Broker-Dealer (as defined below in "The Exchange Offer--Terms of
the Exchange Offer"), it will use its best efforts to keep the Exchange
Registration Statement continuously effective or until each Participating Broker
Dealer shall have resold all Exchange Notes acquired in the Exchange Offer, and
that any Participating Broker Dealer may deliver this Prospectus in connection
with any such resale. See "Plan of Distribution."
In the event that applicable interpretations of the staff of the Commission
would not permit the Company to effect the Exchange Offer or, if for any other
reason the Exchange Offer is not consummated on or prior to October 24, 1998,
the Company has agreed to use its best efforts to cause to become effective a
shelf registration statement (the "Shelf Registration Statement") with respect
to the resale of the Old Notes and to keep the Shelf Registration Statement
effective until two years after the date of the initial sale of the Old Notes or
until all the Old Notes covered by the Shelf Registration Statement have been
sold pursuant to such Shelf Registration Statement.
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TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company will issue a principal amount at maturity of Exchange Notes in
exchange for an equal principal amount at maturity of outstanding Old Notes
validly tendered pursuant to the Exchange Offer and not withdrawn prior to the
Expiration Date. Old Notes may only be tendered in integral multiples at
maturity of $1,000. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer.
The terms of the Exchange Notes and the Old Notes are substantially
identical in all material respects, except that (i) the exchange will be
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer of such Exchange Notes, and (ii) holders
of the Exchange Notes will not be entitled to any of the registration rights of
holders of Old Notes under the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange Offer. See "Description of the
Exchange Notes." The Exchange Notes will evidence the same indebtedness as the
Old Notes. The Exchange Notes will be issued under and entitled to the benefits
of the Indenture pursuant to which the Old Notes were issued such that the
Exchange Notes and Old Notes will be treated as a single class of debt
securities under the Indenture.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange Notes
in the Exchange Offer will be required to make certain representations,
including that (i) any Exchange Notes to be received by such holder will be
acquired in the ordinary course of its business, (ii) that at the time of the
consummation of the Exchange Offer such holder will have no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes in violation of the
provisions of the Securities Act, (iii) that such holder is not an affiliate (as
defined in Rule 405 under the Securities Act) of the Company or any Subsidiary
Guarantor, (iv) if such holder is not a broker-dealer, that it is not engaged
in, and does not intend to engage in, the distribution of the Exchange Notes and
(v) if such holder is a broker-dealer (a "Participating Broker-Dealer") that
will receive Exchange Notes for its own account in exchange for Old Notes that
were acquired as a result of market-making activities or other trading
activities, that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sales of Old Notes) with this Prospectus. Under the Registration Rights
Agreement, the Company is required to allow Participating Broker-Dealers (and
other persons, if any, subject to similar prospectus delivery requirements) to
use this Prospectus in connection with the resale of such Exchange Notes,
provided, however, the Company shall not be required to amend or supplement this
Prospectus for a period exceeding 180 days after the consummation of the
Exchange Offer. In addition, under the Registration Rights Agreements, Old Notes
held by (i) the Initial Purchaser which may have the status of an unsold
allotment in an initial distribution or (ii) holders who are otherwise not
entitled to participate in the Exchange Offer may, upon request of such holders
to the Company prior to the consummation of the Exchange Offer, be exchanged,
simultaneously with the exchange of Old Notes in the Exchange Offer, for
unregistered notes ("Private Exchange Notes") identical to the Exchange Notes,
except for transfer restrictions thereon.
In the event the Exchange Offer is consummated on or before October 24,
1998, the Company will not be required to file a shelf registration statement to
register any Old Notes, and the interest rate on such Old Notes will remain at
its initial level of 10% per annum. The Exchange Offer shall be deemed to have
been consummated upon the Company's having exchanged, pursuant to the Exchange
Offer, Exchange Notes for all Old Notes that have been properly tendered and not
withdrawn by the Expiration Date. In such event, holders of Old Notes not
participating in the Exchange Offer who are seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act. Following the Exchange Offer,
holders of Private Exchange Notes and holders of Exchange Notes that may not be
sold without restriction under state and federal securities laws (other
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than solely due to the holder's status as an affiliate of the Company) shall
continue to have certain rights to require the Company to register such notes as
set forth in the Registration Rights Agreement. If the Company fails to register
such notes in accordance with the Registration Rights Agreement, the Company
must pay, as liquidated damages, additional interest on such notes as set forth
in the Registration Rights Agreement ("Additional Interest") until its
registration obligations thereunder are satisfied.
As of the date of this Prospectus, $85.0 million aggregate principal amount
at maturity of the Old Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of the Old Notes
as of September , 1998 (the "Record Date").
Holders of Old Notes do not have any appraisal or dissenters' rights under
the California General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered and were not prohibited
from being tendered for exchange in the Exchange Offer will remain outstanding
and continue to accrue interest and to be subject to transfer restrictions, but
will not be entitled to any rights or benefits under the Registration Rights
Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept, promptly after the Expiration Date, all Old Notes properly
tendered and not withdrawn and will issue Exchange Notes in exchange therefor
promptly after acceptance of the Old Notes. For purposes of the Exchange Offer,
the Company shall be deemed to have accepted properly tendered Old Notes for
exchange when, as and if, the Company has given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purposes of receiving the Exchange Notes from the Company.
In all cases, issuance of Exchange Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents; PROVIDED, HOWEVER, that
the Company reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offer. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount at
maturity than the holder desires to exchange, such unaccepted or nonexchanged
Old Notes or substitute Old Notes evidencing the unaccepted portion, as
appropriate, will be returned without expense to the tendering holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "The Exchange Offer--Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENT
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
1998 (20 business days following the commencement of the Exchange
Offer), unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" will mean the latest date and time to
which the Exchange Offer is extended. The Company may, in its sole discretion,
extend the Exchange Offer indefinitely, subject to the Company's obligation to
pay liquidated damages if the Exchange Offer is not consummated by October 24,
1998 and, under certain circumstances, to file a shelf registration statement
with respect to the Old Notes. Such extension may be made in the Company's
discretion, without limitation, to allow additional holders of Old Notes to
participate in the Exchange Offer or to respond to other presently unknown but
potentially material changed circumstances.
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In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, prior to 9:00 a.m., New York City time, on the
next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "The Exchange
Offer--Conditions" shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (ii) to
amend the terms of the Exchange Offer. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders and/or by a public announcement
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will then be distributed to
the registered holders of the Old Notes. The Company will then extend the
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders of the Old Notes, if the Exchange Offer would otherwise expire during
such five to 10 day business period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from April 22, 1998 at the rate of 10%
per annum, payable semi-annually in arrears, in cash, on April 15 and October 15
of each year, commencing October 15, 1998. Holders of Old Notes whose Old Notes
are accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued from April 22, 1998
until the date of the issuance of the Exchange Notes. Consequently, holders who
exchange their Old Notes for Exchange Notes will receive the same interest
payment on October 15, 1998 (the first interest payment date with respect to the
Old Notes and the Exchange Notes) that they would have received had they not
accepted the Exchange Offer.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to exchange any Exchange Notes for any Old Notes, and may terminate
or amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if: (i) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which seeks
to restrain or prohibit the Exchange Offer or, in the Company's judgment, would
materially impair the ability of the Company to proceed with the Exchange Offer,
or (ii) any law, statute, rule or regulation is proposed, adopted or enacted, or
any existing law, statute, rule, order or regulation is interpreted, by any
government or governmental authority which, in the Company's judgment, would
materially impair the ability of the Company to proceed with the Exchange Offer,
or (iii) the Exchange Offer or the consummation thereof would otherwise violate
or be prohibited by applicable law.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders who tendered such Old
Notes to withdraw their tendered Old Notes, or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If the Company's waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the
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<PAGE>
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to ten business day period.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The Company's failure at any time to
exercise any of the foregoing rights will not be deemed a waiver of any such
right, and each such right will be deemed an ongoing right which may be asserted
at any time and from time to time. Any determination by the Company concerning
the events described above will be final and binding on all parties. NO VOTE OF
THE COMPANY'S SECURITY HOLDERS IS REQUIRED TO EFFECT THE EXCHANGE OFFER AND NO
SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must (i) complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes (unless such tender is being effected pursuant to the procedure for
book-entry transfer described below) and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date,
or (ii) comply with the guaranteed delivery procedures described below. Delivery
of all documents must be made to the Exchange Agent at its address set forth
herein. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with the resale of
such Exchange Notes. See "Plan of Distribution."
The tender of Old Notes by a holder as set forth below will constitute an
agreement between such holder and the Company in accordance with the terms and
subject to the conditions set forth in this Prospectus and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangement to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal (described
below), as the case may be, must be guaranteed by an "eligible guarantor
institution" (banks, stockbrokers, savings and loan association and credit
unions with membership in an approved signature guarantee medallion program),
pursuant to Rule 17Ad-15 under the Exchange Act (an "Eligible Institution")
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special
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<PAGE>
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution.
If a person other than the registered holder of any Old Notes listed therein
signs the Letter of Transmittal, such Old Notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such Old Notes, with the signature thereon
guaranteed by an Eligible Institution. If the Letter of Transmittal or any Old
Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and unless waived by the Company, evidence satisfactory to the Company
of their authority to so act must be submitted with the Letter of Transmittal.
The Company will determine, in its sole discretion, all questions as to the
validity, form, eligibility (including time of receipt), acceptance of tendered
Old Notes and withdrawal of tendered Old Notes and the Company's determination
will be final and the Company reserves the absolute right to reject any and all
Old Notes not properly tendered or any Old Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth above under "The Exchange
Offer--Conditions," to terminate the Exchange Offer and, to the extent permitted
by applicable law, to purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of such holder, (ii) such
holder has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes
and (iii) such holder is not an "affiliate," as defined in Rule 405 under the
Securities Act, of the Company, or that if it is an "affiliate," it will comply
with applicable registration and prospectus delivery requirements of the
Securities Act.
BOOK-ENTRY TRANSFER
Promptly following the date of this Prospectus, the Exchange Agent will make
a request to establish an account with respect to the Old Notes at the
book-entry transfer facility for the Old Notes, DTC, for purposes of the
Exchange Offer. Any financial institution that is a participant in DTC's systems
may make book-entry delivery of Old Notes by causing DTC to transfer such Old
Notes into the Exchange Agent's account with respect to the Old Notes in
accordance with DTC's procedures for such transfer. Although delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, an appropriate Letter of Transmittal with any required signature
guarantee and all other required documents must in each case be transmitted to
and received and confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures.
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<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer of Old Notes to the Exchange Agent's account with DTC prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution (by facsimile transmission, mail or hand delivery)
a properly completed and duly executed notice of guaranteed delivery
substantially in the form provided by the Company (the "Notice of Guaranteed
Delivery"), setting forth the name and address of the holder, the
certificate number(s) of such Old Notes (if possible) and the principal
amount at maturity of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within five trading days after the
Expiration Date, (i) the Letter of Transmittal (or facsimile thereof)
together with the certificates) representing the Old Notes and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, or (ii) that book-entry
transfer of such Old Notes into the Exchange Agent's account at DTC will be
effected and confirmation of such book-entry transfer will be delivered to
the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificates) representing all tendered
Old Notes in proper form for transfer and all other documents required by
the Letter of Transmittal, or confirmation of book-entry transfer of the Old
Notes into the Exchange Agent's account at DTC, are received by the Exchange
Agent within five business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, the Exchange Agent
must receive at its address set forth herein a telegram, telex, facsimile
transmission or letter indicating notice of withdrawal prior to 5:00 p.m., New
York City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having tendered the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount at maturity of such Old
Notes), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accomplished by documents of
transfer sufficient to have the Trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn Old Notes or otherwise comply with DTC's procedures. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for payment will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange
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Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described above under "Exchange Offer--Procedures for Tendering" at
any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered but
not accepted in the Exchange Offer will continue to hold such Old Notes and will
be entitled to all the rights and preferences and subject to the limitations
applicable thereto under the Indenture. Following consummation of the Exchange
Offer, the holders of Old Notes will continue to be subject to the existing
restrictions upon transfer contained in the legend thereon. In general, the Old
Notes may not be offered for resale or resold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The Company
will have no further obligations to such holders, other than the Initial
Purchaser, to provide for the registration under the Securities Act of the Old
Notes held by them after the Expiration Date. To the Extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected.
EXCHANGE AGENT
U.S. Trust Company, National Association has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
BY MAIL: BY HAND:
U.S. Trust Company, National Association U.S. Trust Company, National Association
c/o United States Trust Company of New York c/o United States Trust Company of New York
P.O. Box 841, Peter Cooper Station 111 Broadway, Lower Level
New York, New York 10276-0841 New York, New York 10006
Attn: Corporate Trust and Agency Services Attn: Corporate Trust and Agency Services
BY OVERNIGHT EXPRESS: FACSIMILE TRANSMISSION:
U.S. Trust Company, National Association U.S. Trust Company, National Association
c/o United States Trust Company of New York c/o United States Trust Company of New York
770 Broadway, 13th Floor (212) 420-6211
New York, New York 10006 TO CONFIRM RECEIPT:
Attn: Corporate Trust and Agency Services Tel: (800) 548-6565
</TABLE>
Delivery to an address other than as set forth above or transmission of
instructions via facsimile to a number other than as set forth above will not
constitute a valid delivery.
FEES AND EXPENSES
The Company will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, officers and regular employees of
the Company and its affiliates may make additional solicitation by facsimile
transmission, telephone or in person.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay the cash expenses to be incurred in connection with the
Exchange Offer. Such expenses include registration fees, fees and expenses of
the Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
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The Company will pay any and all transfer taxes applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, satisfactory evidence of the payment of the amount of any such
transfer taxes must be submitted with the Letter of Transmittal (whether imposed
on the registered holder or any other person). Certificates representing
Exchange Notes will not be issued to such persons until satisfactory evidence of
the payment of such taxes, or an exemption therefrom, is submitted. Upon
consummation of the Exchange Offer, holders that were not prohibited from
participating in the Exchange Offer and did not tender their Old Notes will not
have any registration rights under the Registration Rights Agreement with
respect to such nontendered Old Notes and, accordingly, such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon as a consequence of the issuance of the Old Notes pursuant to exemptions
from or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered for resale or resold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
intend to register the Old Notes under the Securities Act. The Exchange Notes
may not be offered or sold unless they have been registered or qualified for
sale under applicable state securities laws or an exemption from registration or
qualification is available and is complied with. In the event of a public
offering of Exchange Notes or Old Notes, the Registration Rights Agreement
requires the Company to register such Notes in any jurisdiction reasonably
requested in writing by the holders, subject to certain limitations. To the
extent the Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected. See "Risk Factors--Consequences of Failure to Exchange."
RESALE OF THE EXCHANGE NOTES
Under existing interpretation of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in general
be freely transferable after the Exchange Offer without further registration
under the Securities Act. However, any purchaser of Old Notes who intends to
participate in the Exchange Offer for the purpose of distributing the Exchange
Notes (i) would not be able to rely on the interpretation of the staff of the
Commission, (ii) will not be able to tender its Old Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. By executing the Letter of Transmittal, each holder of the Old
Notes will represent that (i) it is not an affiliate of the Company or if such
holder is an "affiliate," that such holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable,
(ii) any Exchange Notes to be received by it were acquired in the ordinary
course of its business and (iii) at the time of commencement of the Exchange
Offer, it had no arrangement with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes. In addition,
in connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") who acquired the Notes for its own account as a
result of market-making or other trading activities must deliver a prospectus
meeting the requirements of the Securities Act. The Commission has taken the
position that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Old Notes) with the prospectus
contained in the Exchange Offer Registration Statement. Under the Registration
Rights Agreement, the Company is required to allow Participating Broker-Dealers
and other persons, if any, subject to similar prospectus delivery requirements
to use this Prospectus as it may be amended or supplemented from time to time,
in connection with the resale of such Exchange Notes. To comply with the
securities laws of certain jurisdictions, if applicable, the Exchange
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<PAGE>
Notes may not be offered or resold by any holder unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Company does not currently intend to register
or qualify the resale of the Exchange Notes in any such jurisdiction.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded in the Company's accounting records at
the same carrying value as the Old Notes as reflected in the Company's
accounting records on the date of the exchange. Accordingly, the Company will
recognize no gain or loss for accounting purposes upon the consummation of the
Exchange Offer. The expenses of the Exchange Offer will be amortized over the
remaining term of the Exchange Notes.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States federal
income tax considerations generally applicable to initial holders of the Old
Notes who purchased the Old Notes at their "issue price" (the first price at
which a substantial amount of the Old Notes sold for money to the public (not
including bond houses, brokers or similar persons or organizations acting in the
capacity of underwriters, placement agents or wholesalers)), and who exchange
their Old Notes for the Exchange Notes pursuant to the Exchange Offer. This
summary is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations, rulings and decisions currently in
effect, all of which are subject to change (possibly with retroactive effect).
The discussion does not purport to deal with all aspects of U.S. federal income
taxation that may be relevant to particular investors in light of their
particular circumstances (for example, to persons holding Notes as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes), nor does it discuss the U.S. federal
income tax considerations applicable to certain types of investors subject to
special treatment under the federal income tax laws (for example, insurance
companies, tax-exempt organizations, and financial institutions or
broker-dealers). In addition, the discussion does not consider the effect of any
foreign, state, local, gift, estate or other tax laws that may be applicable to
a particular investor. Except as specifically provided below with respect to
Non-U.S. Holders (as defined below), the discussion is limited to U.S. Holders
(as defined below). The discussion assumes that investors hold the Notes as
"capital assets" within the meaning of Section 1221 of the Code.
As used herein, the term "U.S. Holder" means any beneficial owner of a Note
that is, for U.S. federal income tax purposes, (i) a citizen or resident (as
defined in Section 7701(b)(1) of the Code) of the United States, (ii) a
corporation or other entity taxable as a corporation created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) an estate or trust described in Section 7701(a)(30) of the Code, or (iv) a
person whose worldwide income or gain is otherwise subject to U.S. federal
income taxation on a net income basis. The term also includes certain former
citizens and certain former long-term residents of the United States. A
"Non-U.S. Holder" means any beneficial owner of a Note that is not a U.S.
Holder.
The Company intends to treat the Notes as indebtedness and not as equity for
U.S. federal income tax purposes, and the U.S. federal income tax considerations
described below are based on that characterization. Such treatment, however, is
not binding on the Internal Revenue Service (the "IRS") (or the courts), and
there can be no assurance that the IRS would not argue (or that a court would
not hold) that the Notes should be treated as equity for such purposes.
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<PAGE>
Prospective investors considering the Exchange Offer should consult their
tax advisors with regard to the application of the U.S. federal income tax laws
to their particular situations as well as any tax consequences arising under
other federal tax laws or the laws of any state, local or foreign taxing
jurisdiction.
TAXATION OF THE NOTES
INTEREST ON A NOTE
A holder of a Note will be required to report interest earned on the Note as
ordinary interest income for U.S. federal income tax purposes in accordance with
such holder's method of accounting for U.S. federal income tax purposes.
DISPOSITION OF A NOTE
A holder's tax basis for a Note generally will be such holder's purchase
price for the Note. Upon the sale or other disposition of a Note, a holder
generally will recognize capital gain or loss equal to the difference (if any)
between the amount realized (other than amounts attributable to accrued but
unpaid stated interest, which will be taxable as ordinary income) and such
holder's tax basis in the Note.
EXCHANGE OFFER
The exchange of an Old Note for an Exchange Note pursuant to the Exchange
Offer will not constitute a taxable exchange for U.S. federal income tax
purposes.
CERTAIN CONSEQUENCES TO NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, a Non-U.S. Holder
generally will not be subject to U.S. federal income or withholding tax on
payments of interest on a Note, provided that: (i) the holder is not (A) the
actual or constructive owner of 10 percent or more of the total voting power of
all voting stock of the Company or (B) a controlled foreign corporation related,
directly or indirectly, to the Company through stock ownership; (ii) such
interest payments are not effectively connected with the conduct by the Non-U.S.
Holder of a trade or business within the United States; and (iii) the Company or
its paying agent receives certain information from the holder (or a financial
institution that holds the Notes in the ordinary course of its trade or
business) certifying that such holder is a Non-U.S. Holder. Subject to the
discussion of backup withholding below, a Non-U.S. Holder generally will not be
subject to U.S. federal income tax or withholding tax on gains from the sale or
other disposition of a Note, provided that: (i) such gains are not effectively
connected with the conduct by the Non-U.S. Holder of a trade or business within
the United States; and (ii) such Non-U.S. Holder is not an individual who is
present in the United States for 183 days or more in the taxable year of
disposition and meets certain other requirements.
If a Non-U.S. Holder is engaged in a trade or business in the United States,
and if interest or gain (if any) on a Note is effectively connected with the
conduct of such trade or business, then among other things, the Non-U.S. Holder
will generally be subject to regular U.S. federal income taxation on interest
and any gain on the Note in the same manner as if it were a U.S. Holder.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A holder of a Note may be subject to backup withholding at a rate of 31% on
certain payments with respect to a Note, unless such holder (i) is a corporation
or comes within certain other exempt categories, or (ii) provides a correct
taxpayer identification number, certifies as to its exemption from backup
withholding, and otherwise complies with the backup withholding rules. Certain
penalties may be imposed by the IRS on a holder that is required to supply
information but does not do so in the proper manner.
A Non-U.S. Holder generally will be exempt from backup withholding and
information reporting requirements, but may be required to comply with certain
certification and identification procedures in order to obtain such an
exemption.
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<PAGE>
Holders should consult their tax advisors regarding the application of
information reporting and backup withholding in their particular situations, the
availability of an exemption therefrom, and the procedure for obtaining such an
exemption, if available. The amount of any backup withholding from a payment to
a holder will be allowable as a credit against such holder's U.S. federal income
tax liability and may entitle such holder to a refund, provided that the
required information is furnished to the IRS.
FINAL REGULATIONS
The Treasury Department recently issued final regulations relating to
withholding, information reporting and backup withholding that unify current
certification procedures and forms and clarify reliance standards (the "Final
Regulations"). As promulgated, the Final Regulations would generally apply to
all payments made on or after January 1, 1999. The Treasury Department and the
IRS recently announced their intention to issue amended regulations that would
generally extend the date of applicability of certain requirements of the Final
Regulations to payments made on or after January 1, 2000.
Holders should consult their tax advisors regarding the effect, if any, the
Final Regulations will have upon their acquisition, ownership and disposition of
Notes.
40
<PAGE>
THE TRANSACTIONS
THE ACQUISITION
Pursuant to the Stock Purchase Agreement (the "Acquisition Agreement") dated
as of February 27, 1998, between the stockholders of Monsey Bakor and Henry
Company, Henry Company acquired all of the outstanding stock of Monsey Bakor for
a purchase price of $42.75 million (the "Acquisition"). Henry Company paid an
additional $3.25 million to certain selling stockholders of Monsey Bakor for
noncompetition agreements. The total cost of the Acquisition (including payments
for the noncompetition agreements) was $46.0 million (the "Purchase Price"). The
closing of the Acquisition occurred on April 22, 1998.
The Acquisition Agreement contained provisions customary for transactions of
its type, such as representations and warranties with respect to the history,
condition, operations and ownership of Monsey Bakor, covenants with respect to
the conduct of Monsey Bakor's operations prior to the consummation of the
Acquisition and indemnities from the selling shareholders regarding certain of
Monsey Bakor's obligations and liabilities. The Acquisition Agreement also
contained various closing conditions including the receipt of all necessary
consents and approvals and the continued accuracy of representations and
warranties contained in the Acquisition Agreement.
The Company accounted for the Acquisition as a purchase. The aggregate
acquisition costs were allocated to the tangible and intangible assets acquired
and liabilities assumed by the Company based on their respective fair values as
of the acquisition date. The Company believes that the Purchase Price was in
excess of the fair value of the net assets acquired, resulting in goodwill. See
"Henry Company--Notes to Condensed Consolidated Financial Statements--Note (2)."
Effective at the closing of the Acquisition, Joseph T. Mooney, Jr., the
former Chairman of the Board of Monsey Bakor, purchased 22,500 shares of Henry
Company redeemable convertible preferred stock for $600,000 (the
"Reinvestment"), convertible into 22,500 shares of Henry Company Common Stock
(9% of the economic interest in the Company on a fully diluted basis), and also
obtained rights to purchase sufficient shares of Common Stock of Henry Company
to prevent dilution of Mr. Mooney's ownership percentage in the event Henry
Company capital stock is purchased pursuant to outstanding warrants held by the
Warner W. Henry Living Trust (the "Henry Warrants") and outstanding rights held
by Mr. Muhs, a director of the Company. Mr. Mooney has the right to require the
Company to repurchase one-sixth of his capital stock each year over a five-year
period beginning January 1, 2004 (except that the last one-sixth would be
repurchased July 1, 2008) for an aggregate purchase price of $3.0 million and
such capital stock would also be repurchased upon Mr. Mooney's death, in which
event the purchase would be funded by the proceeds from the key person life
insurance policies the Company holds on Mr. Mooney's life. The Company is also
providing indemnity to Mr. Mooney in connection with certain aspects of the
Reinvestment. See "Management--Executive and Director Compensation."
Effective at the closing of the Acquisition, Frederick H. Muhs, a director
of the Company, purchased 27,500 shares of Common Stock of the Company for $2.0
million in cash (11% of the economic interest in the Company on a fully diluted
basis) (the "Equity Issuance"). Mr. Muhs was also granted rights to purchase
sufficient shares of Common Stock of the Company to prevent dilution of Mr.
Muhs' ownership percentage in the event of the exercise of outstanding warrants
or the outstanding rights held by Mr. Mooney.
In connection with the Transactions, Henry Company repaid in full
subordinated indebtedness of $5.0 million held by Warner W. Henry. See "Certain
Transactions."
Upon the consummation of the Acquisition, two former Monsey Bakor executive
officers entered into employment agreements with Henry Company to serve as
officers of the Company. See "Management-- Employment Agreements and
Compensation Arrangements."
REFINANCING
At the closing of the Acquisition the Company repaid the existing bank
credit lines of Henry Company and Monsey Bakor (other than Monsey Bakor's
Canadian line of credit) and entered into an amended and restated $35.0 million
credit facility (the "New Bank Credit Facility"), $25.0 million of which is
available in accordance with a borrowing base and will be used for working
capital and $10.0 million of which may be used for capital expenditures. For
further information, see "Description of the Credit Facilities."
41
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Henry Company, at June
30, 1998. This table should be read in conjunction with the Consolidated and
Combined Financial Statements of Henry Company and notes thereto, the
Consolidated Financial Statements of Monsey Bakor and notes thereto, and
"Unaudited Pro Forma Condensed Combined Financial Data" and notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE
30,
1998
-----------
(IN 000'S)
<S> <C>
Cash and cash equivalents.................................................................... $ 9,483
-----------
-----------
Revolving Credit Facility.................................................................... $ 4,150
The Notes.................................................................................... 85,000
Other indebtedness........................................................................... 1,281
-----------
Total debt............................................................................... 90,431
Total shareholders' equity................................................................... 7,834
-----------
Total capitalization......................................................................... $ 98,265
-----------
-----------
</TABLE>
42
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited pro forma condensed combined statements of
operations illustrate the effects of the Transactions.
The following unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1997 and for the six months ended
June 30, 1998 assume that the Transactions occurred at January 1, 1997, and
January 1, 1998, respectively.
The Acquisition has been accounted for as a purchase, with the assets
acquired and the liabilities assumed being recorded at estimated fair market
value. The adjustments included in the unaudited pro forma condensed combined
financial statements represent the Company's preliminary determination of the
Purchase Price allocation based upon available information and there can be no
assurance that the actual adjustments will not differ significantly from the pro
forma adjustments reflected in the pro forma financial information.
The unaudited pro forma condensed combined financial statements are not
necessarily indicative of the results that would have occurred if the
Transactions had been consummated as of the indicated dates or that may occur in
the future. The unaudited pro forma condensed combined financial statements
should be read in conjunction with the historical financial statements of Henry
Company and Monsey Bakor, together with the related notes thereto, included
elsewhere in this Prospectus.
The following information should be read in conjunction with "Unaudited Pro
Forma Condensed Combined Financial Data," "Selected Historical Combined
Financial Data of Henry Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Henry Company," "Selected
Historical Consolidated Financial Data of Monsey Bakor," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Monsey Bakor," the Consolidated and Combined Financial Statements of Henry
Company and the Consolidated Financial Statements of Monsey Bakor, including, in
each case, the notes thereto, and other financial information appearing
elsewhere in this Prospectus.
43
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
HENRY COMPANY MONSEY BAKOR ADJUSTMENTS COMBINED
--------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................... $ 67,424 $ 113,175 $ 180,599
Cost of goods sold.................................. 46,413 83,082 $ --(1) 129,495
------- ------------- ----------- -----------
Gross profit...................................... 21,011 30,093 51,104
Selling, general and administrative................. 17,509 24,444 --(1) 39,829
(1,124)(2)
(1,000)(3)
Accounting method change--non-cash environmental
charge............................................ -- 3,639 -- 3,639
Amortization of intangibles......................... 137 353 2,453(4) 2,943
------- ------------- ----------- -----------
Operating income.................................. 3,365 1,657 (329) 4,693
Other expense (income):
Interest expense.................................. 1,465 1,576 8,500(5) 8,702
(2,839)(6)
Interest and other income, net.................... (321) (390) -- (711)
------- ------------- ----------- -----------
Income (loss) before provision for taxes.......... 2,221 471 (5,990) (3,298)
Provision (benefit) for income taxes................ 33 187 (1,678)(7) (609)
849(8)
------- ------------- ----------- -----------
Net income (loss)................................. $ 2,188 $ 284 $ (5,161) $ (2,689)
------- ------------- ----------- -----------
------- ------------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements
44
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
HENRY COMPANY ADJUSTMENTS COMBINED
--------------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................... $ 52,107 $ 33,840(9) $ 85,947
Cost of goods sold.......................................... 36,007 25,375 )(9 61,382
------- ----------- -----------
Gross profit.............................................. 16,100 8,465(5) 24,565
Selling, general and administrative......................... 12,605 7,617 )(9 19,889
(333) 10)
Amortization of intangibles................................. 622 873 (11 1,495
------- ----------- -----------
Operating income (loss)................................... 2,873 308 3,181
Other expense (income):
Interest expense.......................................... 2,099 2,597 (12 4,387
(309)(6)
Interest and other income, net............................ (122) -- (122)
------- ----------- -----------
Income (loss) before provision (benefit) for taxes........ 896 (1,980) (1,084)
Provision (benefit) for income taxes........................ (522) (562) (7) (967)
117(8)
------- ----------- -----------
Net income (loss)......................................... $ 1,418 $ (1,535) $ (117)
------- ----------- -----------
------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements
45
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) Management of the Company has identified annualized synergies consisting of
a combination of selling, general and administrative expense cost savings
and production cost reductions. Annualized cost savings and cost reductions
estimated at $1,800 may be achieved by the Company as a result of the
integration of the operations of Henry Company and Monsey Bakor. One-time
costs associated with achieving these synergies are estimated at $800. The
Company expects to realize these synergies once the integration process is
completed, which is expected to occur within 18 months following the
consummation of the Acquisition. However, there can be no assurance that
any of these cost savings will actually be realized, or that the costs to
achieve such cost savings will not exceed Company estimates. As a result,
such synergies are excluded from the unaudited pro forma condensed combined
financial statements.
(2) Reflects administrative services fee for the reimbursement of certain
administrative services provided by Henry Company to an affiliate. After
January 1, 1998, Henry Company will be reimbursed monthly for services
provided to the affiliate pursuant to an administrative services agreement.
(3) Reverses compensation paid to previous shareholders and certain members of
management of Monsey Bakor in excess of amounts to be paid under new
employment agreements as a result of the Acquisition.
(4) Reflects amortization for intangible assets created as a result of the
Acquisition. The total pro forma amortization also takes into consideration
the evaluation of existing Monsey Bakor intangible assets and is computed
using lives ranging from 10 to 15 years on a straight-line basis.
(5) Reflects interest expense related to the issuance of the Old Notes.
(6) Reflects interest expense on debt retired from the issuance of the Old
Notes.
(7) Reflects the tax effect of the pro forma adjustments, excluding $1,763 and
$574 of nondeductible amortization of intangibles related to the
Acquisition for the year ended December 31, 1997 and for the six months
ended June 30, 1998, respectively.
(8) Records the pro forma Federal and state provision for income taxes for
Henry Company assuming the conversion from subchapter "S" Corporation to
"C" Corporation status under the Code in connection with the Transactions.
(9) Reflects net sales, cost of goods sold, and selling, general and
administrative expense for Monsey Bakor for the period January 1, 1998 to
the April 22, 1998 acquisition date not reflected in the historical Henry
Company results of operations for the six-months ended June 30, 1998.
(10) Records the reversal of compensation paid to previous shareholders and
certain members of management of Monsey Bakor in excess of amounts paid
under new employment agreements less the impact of actual compensation paid
as follows:
<TABLE>
<S> <C>
Pro forma compensation reductions for six-months ended June 30,
1998............................................................... $ 500
Actual compensation reductions included in historical Henry Company
results of operations for the six months ended June 30, 1998 (April
22, 1998 through June 30, 1998).................................... (167)
---------
Pro forma adjustment to compensation............................... $ 333
---------
---------
</TABLE>
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(11) Reflects amortization of intangible assets created as a result of the
Acquisition including the impact of existing Monsey Bakor intangible
amortization net of the actual amortization recorded for the six-months
ended June 30, 1998 as follows:
<TABLE>
<S> <C>
Pro forma amortization for the six-months ended June 30, 1998....... $ 1,342
Actual amortization of intangibles included in historical Henry
Company results of operations for the six months ended June 30,
1998.............................................................. (469)
---------
Pro forma adjustment to amortization.............................. $ 873
---------
---------
</TABLE>
(12) Reflects interest expense related to the issuance of the Old Notes net of
the actual interest expense recorded in the historical Henry Company
results of operations for the six months ended June 30, 1998 as follows:
<TABLE>
<S> <C>
Pro forma interest for six-months ended June 30, 1998.............. $ 4,250
Actual interest included in historical Henry Company results of
operations for the six-months ended June 30, 1998................ (1,653)
Pro forma adjustment to interest expense......................... $ 2,597
---------
---------
</TABLE>
47
<PAGE>
SELECTED HISTORICAL COMBINED FINANCIAL DATA OF HENRY COMPANY
The following selected historical combined financial data of Henry Company
as of December 31, 1996 and 1997 and for each of the years in the three year
period ended December 31, 1997 have been derived from the Henry Company Combined
Financial Statements and notes thereto that have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose report thereon is included
elsewhere in this Prospectus. The following selected historical combined
financial data as of December 31, 1993, 1994 and 1995 and for each of the two
years in the two year period ended December 31, 1994 have been derived from the
audited Henry Company combined financial statements not included herein. The
summary interim consolidated financial data as of June 30, 1998 and for the six
months ended June 30, 1997 and 1998 has been derived from the unaudited
consolidated financial statements of Henry Company. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the financial information for such periods. Results for the
interim periods are not necessarily indicative of the results for the full
fiscal year. The following data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Henry Company," the Combined Financial Statements of Henry Company
and notes thereto and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS
DATA(1):
Net sales.......................... $52,983 $51,163 $61,059 $59,186 $67,424 $25,717 $52,107
Cost of sales...................... 35,550 35,206 42,290 40,867 46,413 18,701 36,007
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 17,433 15,957 18,769 18,319 21,011 7,016 16,100
Operating expenses:
Selling, general and
administrative................. 15,272 14,849 17,518 16,934 17,509 7,574 12,605
Amortization of intangibles...... 1,104 858 703 183 137 69 622
------- ------- ------- ------- ------- ------- -------
Operating income (loss)........ 1,057 250 548 1,202 3,365 (627) 2,873
Interest expense................... 765 1,158 1,454 1,475 1,465 731 2,099
Interest and other income, net..... (49) (589) (402) (345) (321) (176) (122)
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for taxes............ 341 (319) (504) 72 2,221 (1,182) 896
Provision (benefit) for income
taxes(2)......................... 5 -- -- 1 33 -- (522)
------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ 336 $ (319) $ (504) $ 71 $ 2,188 $(1,182) $ 1,418
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Pro forma provision (benefit) for
income taxes(3).................. $ 135 $ (127) $ (200) $ 29 $ 882 $ (469) $ 480
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss)(3)..... $ 206 $ (192) $ (304) $ 43 $ 1,339 $ (713) $ 416
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
OTHER FINANCIAL DATA:
Capital expenditures............... $ 3,736 $ 1,745 $ 1,389 $ 1,449 $ 801 $ 350 $ 753
Depreciation and amortization
(including amortization of
intangibles)..................... 1,961 1,954 1,907 1,645 1,469 673 1,624
EBITDA(4).......................... 3,067 2,793 2,857 3,192 5,155 222 4,619
Ratio of earnings to fixed
charges(5)....................... 1.4x --(6) --(6) 1.0x 1.9x --(6) 1.3x
Cash flows provided by (used in):
Operating activities............. 944 (206) 2,224 1,171 4,781 587 142
Investing activities............. (3,783) (2,915) (1,342) (783) (949) (515) (44,565)
Financing activities............. 2,536 3,348 (785) (258) (4,013) (32) 53,694
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
----------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA(1):
Cash and cash equivalents......................... $ 298 $ 74 $ 170 $ 300 $ 119 $ 9,483
Working capital................................... 4,938 4,236 2,699 5,121 7,204 32,514
Total assets...................................... 26,643 29,247 30,730 31,204 30,418 130,616
Long-term debt, including current maturities, and
borrowings on lines of credit................... 14,614 18,329 17,619 17,416 13,748 90,431
Total shareholders' equity........................ 3,687 3,368 2,863 2,934 5,122 7,834
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
48
<PAGE>
- --------------------------
(1) The combined financial statements of Henry Company consist of Henry Company
and Warner Development Company of Texas, both companies under common
control. All significant intercompany accounts and transactions have been
eliminated. Upon the closing of the Acquisition, Warner Development Company
of Texas was merged with and into Henry Company.
(2) Henry Company was operated as a subchapter "S" Corporation under the Code.
As a result, Henry Company did not incur Federal and state income taxes
(except with respect to certain states) and, accordingly, the provision for
income taxes only includes the applicable state income tax. Federal and
state income taxes (except with respect to certain states) on the income of
Henry Company have been incurred and paid directly by the shareholders of
Henry Company. It has been the policy of Henry Company to make periodic
distributions to the shareholders in respect of such tax liabilities. During
the six months ended June 30, 1998 Henry Company paid distributions of $800
for the shareholders' 1997 tax liabilities. Upon completion of the
Transactions, the Company converted to a "C" Corporation under the Code and
will subsequently pay all tax obligations of the Company to the appropriate
taxing authorities.
(3) As described in Note (2) above, Henry Company was operated as a Subchapter
"S" Corporation for the historical years presented. The pro forma provision
(benefit) for income taxes and pro forma net income (loss) reflect the
results as if Henry Company were operated as a "C" Corporation for the
historical periods presented.
(4) EBITDA, as defined in the Indenture, represents net earnings before taking
into consideration taxes on earnings, interest expense, depreciation and
amortization, and non-recurring, non-cash charges, less any cash expended
that funds a non-recurring, non-cash charge. While EBITDA should not be
construed as a substitute for operating earnings, net earnings, or cash
flows from operating activities in analyzing operating performance,
financial position or cash flows, EBITDA has been included because it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity.
This data is relevant to an understanding of the economics of the Company's
business as it indicates cash flow available from operations (and/or trends
in cash flow available from operations) to service debt and satisfy certain
fixed obligations. A reconciliation of net income (loss) to EBITDA for the
respective years and related interim periods is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss).................... $ 336 $ (319) $ (504) $ 71 $ 2,188 $ (1,182) $ 1,418
Provision (benefit) for income
taxes.............................. 5 -- -- 1 33 -- (522)
Interest expense..................... 765 1,158 1,454 1,475 1,465 731 2,099
Depreciation and amortization........ 1,961 1,954 1,907 1,645 1,469 673 1,624
--------- --------- --------- --------- --------- --------- ---------
EBITDA............................... $ 3,067 $ 2,793 $ 2,857 $ 3,192 $ 5,155 $ 222 $ 4,619
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(5) For purposes of this ratio, "earnings" consist of earnings before income
taxes and fixed charges and "fixed charges" consist of interest expense and
the portion of rents representative of an interest factor. The ratio of
earnings to fixed charges is computed by adding earnings before income taxes
and fixed charges and dividing by fixed charges.
(6) The earnings were insufficient to cover fixed charges for these periods. The
amount of the deficiencies were $319 and $504 in 1994 and 1995,
respectively, and $1,179 for the six months ended June 30, 1997.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HENRY COMPANY
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE COMBINED FINANCIAL STATEMENTS OF
HENRY COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS.
GENERAL
Henry Company is a construction materials company focusing primarily on
products for roofing, sealing and paving applications. Henry Company develops,
manufactures and markets three separate but related product lines through its
separate divisions: roof and driveway coatings and paving products through the
Henry Coatings Division, polyurethane foam for roofing and commercial uses
through the Resin Technology Company and sealants for construction and marine
uses through the Henry Sealants Division. Henry Company's revenues by its major
product lines are produced by the respective divisions noted above and are as
follows, for the last three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997
---------------------- ---------------------- ----------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Henry Coatings Division............... $ 35,620 58.3% $ 34,985 59.1% $ 42,060 62.4%
Resin Technology Company.............. 19,610 32.1 18,247 30.8 19,595 29.0
Henry Sealants Division............... 5,830 9.6 5,955 10.1 5,769 8.6
--------- ----- --------- ----- --------- -----
Total revenues.................... $ 61,060 100.0% $ 59,187 100.0% $ 67,424 100.0%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
Henry Company has seven manufacturing and distribution facilities located
throughout the Northwest, West and Southwest. Six of these facilities have been
acquired or built as a result of acquisitions made since 1988. From 1988 to
1997, Henry Company purchased the operations of seven regional manufacturers in
its industry and integrated them into its operations. For the year ended
December 31, 1997, Henry Company generated $2.2 million of net income from net
sales of $67.4 million.
LACK OF SENSITIVITY TO BUSINESS CYCLES
Although the construction of new residential and commercial properties, and,
therefore, new roofs, is influenced by the demand for such properties and by
various economic factors that influence such demand, including interest and
employment rates and the general economic climate, management estimates that
over 70% of Henry Company's roofing business is derived from the roof repair and
replacement market. This market is far more influenced by the wear-and-tear of
the customer's roof and by various events such as severe weather conditions or
other factors necessitating roof repair or replacement. Under such
circumstances, it has been Henry Company's experience that customers often view
the purchase of roofing products as a necessity rather than as a postponable
event.
BUSINESS ACQUISITION AND NOTE OFFERING
On April 22, 1998, Henry Company completed the acquisition of Monsey
Products Co. ("Monsey") and its subsidiaries (the "Acquisition") engaged in the
distribution and manufacture of roof coatings, adhesives and membranes, and
waterproofing and air barrier systems, for residential and commercial
applications. The cash purchase price was $42.8 million with an additional $3.2
million paid at closing to certain selling shareholders of Monsey for
noncompetition agreements. A selling shareholder also purchased 22,500 of
redeemable convertible preferred stock of the Company for $0.6 million cash. The
Acquisition has been accounted for using the purchase method of accounting.
50
<PAGE>
Concurrent with the Acquisition, the Company conducted a senior note
offering (the "Offering") in the aggregate principal amount of $85.0 million.
The proceeds of the Offering were used to acquire Monsey, retire a substantial
portion of Monsey's existing bank debt, and retire the existing Henry Company
bank debt and subordinated shareholder debt.
Concurrent with the Acquisition and Offering, the Company's bank credit line
was replaced with a $35.0 million credit facility, $25.0 million of which is
available in accordance with a borrowing base and is to be used for working
capital and $10.0 million of which may be used for capital expenditures.
CORPORATE ORGANIZATION--TAX STATUS
Henry Company was operated as a subchapter "S" Corporation under the Code.
As a result, Henry Company did not incur Federal and state income taxes (except
with respect to certain states) and, accordingly, the provision for income taxes
only includes the applicable state income tax. Federal and state income taxes
(except with respect to certain states) on the income of Henry Company have been
incurred and paid directly by the shareholders of Henry Company. It has been the
policy of Henry Company to make periodic distributions to the shareholders with
respect to such tax liabilities. During the six months ended June 30, 1998, the
Company made a distribution to shareholders of $0.8 million for the 1997 tax
year.
Concurrent with the Acquisition and the Offering, the Company converted its
tax status from an S Corporation under Section 1361 of the Internal Revenue Code
to C Corporation status. Subsequent to this conversion the Company will be
required to pay federal and state corporate income taxes on its taxable income.
Upon conversion to C status, the Company recognized deferred taxes in
accordance with the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales represented by certain items reflected in the Henry Company historical
combined financial statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED DECEMBER 31 30,
---------------------------------------------------------------------- -----------
1995 1996 1997 1997
---------------------- ---------------------- ---------------------- -----------
% OF % OF % OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES AMOUNT
----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 61.1 100.0% $ 59.2 100.0% $ 67.4 100.0% $ 25.7
Cost of sales........................ 42.3 69.3 40.9 69.1 46.4 68.8 18.7
----- --------- ----- --------- ----- --------- -----
Gross profit....................... 18.8 30.7 18.3 30.9 21.0 31.2 7.0
Selling, general and
administrative..................... 17.5 28.7 16.9 28.6 17.5 26.0 7.6
Amortization of intangibles.......... 0.7 1.1 0.2 0.3 0.1 0.2 0.1
----- --------- ----- --------- ----- --------- -----
Operating income (loss)............ 0.6 0.9 1.2 2.0 3.4 5.0 (0.7)
Interest expense..................... 1.5 2.4 1.5 2.5 1.5 2.2 0.7
Interest and other income, net....... (0.4) (0.7) (0.4) (0.6) (0.3) (0.4) (0.2)
Income tax benefit................... -- -- -- -- -- -- --
----- --------- ----- --------- ----- --------- -----
Net income (loss).................. $ (0.5) (0.8)% $ 0.1 0.1% $ 2.2 3.2% $ (1.2)
----- --------- ----- --------- ----- --------- -----
----- --------- ----- --------- ----- --------- -----
<CAPTION>
1998
----------------------
% OF % OF
SALES AMOUNT SALES
--------- ----------- ---------
<S> <C> <C> <C>
Net sales............................ 100.0% $ 52.1 100.0%
Cost of sales........................ 72.8 36.0 69.1
--------- ----- ---------
Gross profit....................... 27.2 16.1 30.9
Selling, general and
administrative..................... 29.6 12.6 24.2
Amortization of intangibles.......... 0.3 0.6 1.2
--------- ----- ---------
Operating income (loss)............ (2.7) 2.9 5.5
Interest expense..................... 2.7 2.1 4.0
Interest and other income, net....... (0.8) (0.1) (0.2)
Income tax benefit................... -- (0.5) (1.0)
--------- ----- ---------
Net income (loss).................. (4.6)% $ 1.4 2.7%
--------- ----- ---------
--------- ----- ---------
</TABLE>
51
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Henry Company's revenues increased to $67.4 million in 1997, an
increase of $8.2 million, or 13.9%, from $59.2 million for the prior year. This
increase was primarily due to forecasted rainfall in excess of annual averages,
which resulted in increased sales in both the professional and retail roofing
business as property owners in California and Arizona repaired roofs during the
third and fourth quarters of 1997 in anticipation of significant rainfall. The
increase in revenues was also attributable to Henry Company's increased market
penetration into contiguous regions.
GROSS PROFIT. Gross profit increased to $21.0 million for 1997, an increase
of $2.7 million, or 14.8%, from $18.3 million for 1996. This increase was
primarily due to increased revenues, but also reflects an increase in Henry
Company's gross profit margin to 31.2% from 30.9% in the prior year. This
increase in gross profit margin was primarily attributable to a higher
proportion of revenues from the sales of roof patching cement, which
historically has had higher gross profit margins than other roof coatings lines
and polyurethane foam applications. This increase in gross profit margin was
partially offset by decreased revenues from certain higher-margin segments of
the sealants business.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense as a percentage of revenue decreased to 26.0% in 1997 from 28.6% in
1996. The decrease was primarily due to Henry Company's ability to service
increased revenues without proportionately increasing administrative costs.
Selling, general and administrative expense increased to $17.5 million in 1997,
an increase of $0.6 million, or 3.6% from $16.9 million in 1996. The increase
was primarily due to incremental selling, general and administrative expenses
associated with Henry Company's continued expansion into the roofing systems
business as well as increased overhead related to the hiring of additional
employees in connection with the overall growth of Henry Company.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased slightly
to $0.1 million in 1997 as compared to $0.2 million in 1996. This expense
represents amortization expense related to an acquisition completed in February
of 1994.
OPERATING INCOME. Operating income increased to $3.4 million in 1997, an
increase of $2.2 million, or 183.3%, from $1.2 million in 1996. Operating income
as a percentage of revenue increased to 5.0% in 1997 from 2.0% in the prior
year, primarily due to higher gross profit margins and lower operating expenses
as a percentage of revenues.
INTEREST EXPENSE. Interest expense remained flat from 1996 and relates
principally to interest expense on Henry Company's debt utilized to fund the
working capital needs of the Company.
NET INCOME. Net income was $2.2 million in 1997, an increase of $2.1
million, from $0.1 million in 1996 due primarily from increased revenues. Net
income as a percentage of revenues increased to 3.2% in 1997, from a nominal
return in 1996, due primarily to an increase of net sales in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Henry Company's revenues decreased to $59.2 million in 1996, a
decrease of $1.9 million as compared to 1995. This decrease was primarily due to
the bankruptcy filing of the largest customer of the Resin Technology Company,
accounting for $2.0 million in decreased revenues.
GROSS PROFIT. Henry Company's gross profit decreased to $18.3 million, a
decrease of $0.5 million. Gross profit decreased 2.7% while sales decreased 3.1%
reflecting increased sales of products with higher gross margins.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses as a percentage of revenue decreased slightly to 28.6% in 1996 compared
to 28.7% in 1995. Selling, general and administrative expenses decreased to
$16.9 million in 1996, a decrease of $0.6 million from $17.5 million in 1995.
The
52
<PAGE>
decrease was attributable to a $0.3 million reduction in administrative expense
and a $0.3 million reduction in selling expense. The decrease was primarily due
to staff reductions and reduced incentive compensation paid by Henry Company.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased to $0.2
million in 1996, a decrease of $0.5 million, or 71.4% from $0.7 million in 1995.
The decrease reflects lower amortization expense as a portion of the intangible
became fully amortized.
OPERATING INCOME. Operating income increased to $1.2 million in 1996, an
increase of $0.6 million, or 100.0%, from $0.6 million in 1995. Operating income
as a percentage of revenue increased to 2.0% in 1996 from 0.9% in the prior
year, primarily due to the reduction in selling, general and administrative
expense and reduced amortization expense on intangible assets.
INTEREST EXPENSE. Interest expense remained constant from 1995 and relates
principally to interest expenses on Henry Company's debt utilized to fund the
working capital needs of Henry Company.
NET INCOME. Net income was $0.1 million in 1996, an increase of $0.6
million from a loss of $0.5 million in 1995. The increase was due primarily to
lower selling, general and administrative expenses and reduced amortization
expense on intangible assets.
FOR THE SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO JUNE 30, 1998
NET SALES. The Company's revenues increased to $52.1 million for the six
months ended June 30, 1998, an increase of $26.4 million, or 102.7%, from $25.7
million for the six months ended June 30, 1997. The acquisition of Monsey Bakor
represented $21.8 million, or 82.6% of the increase. The remaining increase of
$4.6 million was primarily due to rainfall in excess of annual averages, which
resulted in increased sales in both the professional and retail roofing business
as property owners repaired leaking roofs. The increase in revenues was also
attributable to Henry Company's increased market penetration into contiguous
regions.
GROSS PROFIT. The Company's gross profit increased to $16.1 million for the
six months ended June 30, 1998, an increase of $9.1 million, or 130.0%, from
$7.0 million for the six months ended June 30, 1997. The acquisition of Monsey
Bakor represented $6.7 million, or 73.6% of the increase. The remaining increase
of $2.4 million was primarily due to the increase in revenues, but also reflects
an increase in Henry Company's gross profit margin to 30.9% in the first six
months of 1998 from 27.2% in the first six months of the prior year. The
increase was primarily attributable to a higher proportion of revenues from the
sales of roof patching cement, which historically has higher gross profit
margins than other roof coatings lines, and polyurethane foam applications.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses as a percentage of revenue decreased to 24.2% for the six months ended
June 30, 1998 from 29.6% for the six months ended June 30, 1997. The decrease
was primarily due to Henry Company's ability to service increased revenues
without proportionately increasing administrative costs. Selling, general and
administrative expenses increased to $12.6 million for the six months ended June
30, 1998, an increase of $5.0 million, or 65.8%, from $7.6 million for the six
months ended June 30, 1997. The acquisition of Monsey Bakor represented $4.3
million, or 86% of the increase. The remaining increase of $0.7 million was
primarily due to incremental selling, general and administrative expenses
associated with the Company's continued expansion into the roofing systems
business as well as increased overhead related to the hiring of additional
employees in connection with the overall growth of Henry Company.
OPERATING INCOME. Operating income increased to $2.9 million for the six
months ended June 30, 1998, an increase of $3.6 million, from a loss of $0.7
million for the six months ended June 30, 1997. Operating income as a percentage
of revenue increased to 5.5% for the six months ended June 30, 1998, from (2.7%)
for the six months ended June 30, 1997. The acquisition of Monsey Bakor
represented
53
<PAGE>
$2.3 million, or 63.9% of the operating income increase. The remaining increase
of $1.3 million was primarily due to higher gross profit margins and lower
operating expenses as a percentage of revenues.
INTEREST EXPENSE. Interest expense increased to $2.1 million for the six
months ended June 30, 1998, an increase of $1.4 million, or 200%, from $0.7
million for the six months ended June 30, 1997. The acquisition of Monsey Bakor
represented $1.4 million, or 100% of the increase.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased to $0.6
million for the six months ended June 30, 1998, an increase of $0.5 million, or
500%, from $0.1 million for the six months ended June 30, 1997. The acquisition
of Monsey Bakor represented $0.5 million, or 100% of the increase. The increase
was primarily due to the amortization of the excess purchase price over net
assets acquired and amortization of acquisition costs associated with financing,
banking, and other associated fees incurred to acquire Monsey Bakor.
NET INCOME. Net income was $1.4 million for the six months ended June 30,
1998, an increase of $2.6 million, from a loss of $1.2 million for the six
months ended June 30, 1997. The acquisition of Monsey Bakor represented $1.3
million, or 50.0% of the increase. The remaining increase of $1.3 million was
primarily due to the factors discussed above and due to a deferred tax benefit
of $0.9 million recognized upon the Company's conversion from S Corporation to C
Corporation status. Net income as a percentage of revenues increased to 2.7% for
the six months ended June 30, 1998, from a loss of 4.6% for the six months ended
June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Henry Company's historical capital requirements have been primarily for
working capital, capital expenditures and acquisitions. Henry Company's primary
sources of capital to finance such needs have been cash flow from operations and
borrowings under bank credit facilities. Concurrently with the consummation of
the Initial Offering and the Acquisition, the Company entered into the New Bank
Credit Facility which provides for $25.0 million which is available in
accordance with a borrowing base and is to be used for working capital, and
$10.0 million which may be used for capital expenditures. As of June 30, 1998
the outstanding balance was $0.3 million under the revolving line of credit and
no balances were outstanding under the capital expenditure facility. See
"Description of the Credit Facilities."
During 1997, Henry Company received a note from an affiliate for $1.9
million for the sale to the affiliate of certain real property, which related
solely to the business of the affiliate, with a net book value of $1.9 million.
The previously existing receivable from such affiliate decreased to $4.1 million
in 1997, a decrease of $0.2 million from $4.3 million in 1996. The decrease was
primarily attributable to payments of $2.1 million from the affiliate during
1997, the effect of which was offset in part by Henry Company's sale of the
property.
CASH FLOWS 1997 COMPARED TO 1996
Henry Company's cash flows from operations were $4.8 million and $1.2
million in 1997 and 1996, respectively. The increase from 1996 to 1997 of $3.6
million was primarily attributable to increased profits resulting from increased
revenues of $8.2 million during 1997. Net cash used in investing activities
during 1997 and 1996 was $0.9 million and $0.8 million, respectively. Additions
for capital expenditures for 1997 and 1996 were $0.8 million and $1.4 million,
respectively. Net cash used in financing activities during 1997 and 1996 was
$4.0 million and $0.3 million, respectively. The increase of $3.7 million from
1996 to 1997 was primarily due to payments applied to the revolving line of
credit. Scheduled principal payments on debt were $0.6 million and $0.4 million
for 1997 and 1996, respectively.
54
<PAGE>
CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
The Company's cash flows from operations were $0.1 million and $0.6 million
for the six months ended June 30, 1998 and 1997, respectively. The decrease from
June 30, 1997 to June 30, 1998 of $0.5 million was primarily attributable to
increased profits offset by a build-up in inventories and a decrease in
repayment of prior advances made to an affiliate during the six months ended
June 30, 1998. Net cash provided by financing activities during the six months
ended June 30, 1998 was $53.7 million as compared to $0.0 million for the six
months ended June 30, 1997. The increase of $53.7 million from the six months
ended June 30, 1997 was primarily due to the Acquisition and Offering. Net cash
used in investing activities of $44.6 million and $0.5 million during the six
months ended June 30, 1998 and 1997, respectively, was comprised primarily of
capital expenditures of $0.8 million and $0.3 million, respectively, and the
acquisition of a business for $43.8 million and $0.1 million, respectively.
Henry Company believes that the net proceeds from the Initial Offering,
together with available cash, cash generated from operations and available
borrowings under the New Bank Credit Facility, will be sufficient to finance
working capital, capital expenditures, acquisitions, lease payments and
scheduled principal and interest payments for the next twelve months. There can
be no assurance, however, that such resources will be sufficient to meet the
Company's anticipated working capital, capital expenditure and acquisition
financing requirements or that the Company will not require additional financing
within this time frame.
SEASONALITY
Henry Company's business is seasonal. Many of Henry Company's top selling
products relate to patching roof leaks. Roof leaks are often not detected in the
West and Southwest until the rainy season arrives, which typically occurs from
November to February. Retailers and distributors begin to build inventories of
these products during the fall in anticipation of consumer demand during the
rainy season. As a result, sales for Henry Company tend to begin climbing in
July of each year and continue climbing until November of each year.
Do-it-yourself and contractor sales of roof patching products increase if rain
in the West and Southwest exceeds average levels. These increased sales deplete
existing retail and wholesale inventories and require retailers and distributors
to order additional product. If rainfall in the West and Southwest is below
average levels the build-up of these inventories by retailers in the fall may be
adequate to last for much of the rainy season without reordering product.
Consequently, the third and fourth calendar quarters have traditionally
represented the highest level of sales during the year.
INFLATION AND RAW MATERIAL COSTS
During the past several years, the general rate of inflation has been
relatively low and has not had a significant impact on Henry Company's results
of operations. Henry Company purchases raw materials, including asphalt,
aluminum paste, rubber and certain diisocynates among others, that are subject
to price fluctuations. Prices have also tended to fluctuate based on such
factors as the capacity of the respective supply chains, demand in the market,
weather, general economic factors and the availability of alternative raw
materials. Historically, for example, there have been periods of significant and
rapid asphalt, aluminum paste, rubber and diisocynate price changes, both upward
and downward, with a concurrent short-term impact on Henry Company's operating
margins. Henry Company has historically mitigated the long-term effects of these
fluctuations by passing through price increases to its customers, although there
is no assurance that the Company will be able to do so in the future.
Significant increases in raw material prices could have a material adverse
impact on the profit of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." The standard establishes
55
<PAGE>
guidelines for the reporting and display of comprehensive income and its
components in financial statements. Henry Company has adopted the provisions of
SFAS No. 130 during the six months ended June 30, 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." The standard requires that
publically-held companies disclose "operating segments" based on the way
management disaggregates the company for making internal operating decisions.
The new rules will be effective for Henry Company's December 31, 1998 financial
statements. Henry Company has not evaluated the impact, if any, of the new
standard.
YEAR 2000 MODIFICATIONS
Henry Company is not highly dependent on its internal computer systems, and
does not generally interact electronically with its customers or suppliers.
Henry Company has been and is currently assessing its computer systems and
embedded-technology equipment in order to evaluate what, if any, corrections or
modifications may be necessary to respond to potential Year 2000 computer
issues. Henry Company currently expects to complete any necessary corrections or
modifications by December 31, 1998. The historical costs of this assessment and
correction have been less than $10,000, and future assessment and correction
(including replacement) costs are currently estimated to be less than $50,000.
Henry Company relies upon computer systems primarily to invoice its customers,
some of whom are billed on an EDI (Electronic Data Invoice) system. The most
reasonably likely risk to Henry Company for a Year 2000 failure is believed to
involve an interruption of this electronic invoicing system. Henry Company is
prepared to invoice its customers manually to respond to such an interruption.
56
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MONSEY BAKOR
The following selected historical consolidated financial data of Monsey
Bakor as of December 31, 1996 and 1997 and for each of the years in the three
year period ended December 31, 1997 have been derived from Monsey Bakor's
Consolidated Financial Statements and notes thereto that have been audited by
Ernst & Young LLP, independent auditors, and whose report thereon is included
elsewhere in this Prospectus. The following Selected Historical Consolidated
Financial Data as of December 31, 1993, 1994 and 1995 and for each of the two
years in the two year period ended December 31, 1994 have been derived from the
audited Monsey Bakor Consolidated Financial Statements not included herein. The
interim consolidated financial data as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 has been derived from the unaudited
consolidated financial statements of Monsey Bakor. In the opinion of management,
the unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, necessary for the fair
presentation of the consolidated financial information for such periods. Results
for the interim periods are not necessarily indicative of the results for the
full fiscal year. The following data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Monsey Bakor," the Consolidated Financial
Statements of Monsey Bakor and notes thereto, and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
----------------------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:(1)
Net sales................................... $ 74,936 $ 80,750 $ 79,636 $ 108,584 $ 113,175 $ 21,620 $ 22,738
Cost of sales............................... 54,512 58,281 59,641 79,428 83,082 16,580 17,495
--------- --------- --------- --------- --------- ----------- ---------
Gross profit............................ 20,424 22,469 19,995 29,156 30,093 5,040 5,243
Operating expenses:
Selling, general and administrative....... 19,098 19,578 17,818 23,513 24,444 5,693 5,679
Accounting method change--non-cash
environmental charge.................... -- -- -- -- 3,639 3,639 --
Amortization of intangibles............... -- -- 120 283 353 78 116
--------- --------- --------- --------- --------- ----------- ---------
Operating income (loss)................. 1,326 2,891 2,057 5,360 1,657 (4,370) (552)
Interest expense............................ 706 1,141 1,217 1,557 1,576 346 303
Other income, net........................... (626) (151) (81) (564) (390) (61) (61)
--------- --------- --------- --------- --------- ----------- ---------
Income (loss) before income taxes....... 1,246 1,901 921 4,367 471 (4,655) (794)
Income tax expense (benefit)................ 484 649 385 1,537 187 (1,848) (289)
--------- --------- --------- --------- --------- ----------- ---------
Net income (loss)....................... $ 762 $ 1,252 $ 536 $ 2,830 $ 284 $ (2,807) $ (505)
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
OTHER FINANCIAL DATA:
Capital expenditures........................ $ 2,080 $ 1,770 $ 1,280 $ 1,225 $ 2,610 $ 780 $ 240
Depreciation and amortization (including
amortization of intangibles).............. 1,522 1,631 1,873 2,482 2,566 643 629
EBITDA(2)................................... 3,474 4,673 4,011 8,406 8,185 (27) 138
Ratio of earnings to fixed charges(3)....... 2.5x 2.5x 1.7x 3.4x 1.3x --(4) --(4)
Cash flows provided by (used in):
Operating activities...................... 774 3,281 1,968 4,026 6,197 (4,769) (6,911)
Investing activities...................... (1,629) (2,540) (1,280) (2,786) (2,905) (820) (250)
Financing activities...................... 1,204 (993) (739) (636) (4,443) 4,893 8,102
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA(1):
<S> <C> <C> <C> <C> <C> <C> <C>
Cash........................................ $ 1,073 $ 821 $ 770 $ 1,375 $ 213 $ 1,169
Working capital............................. 2,340 1,133 218 3,281 488 271
Total assets................................ 30,357 31,402 31,052 46,192 46,217 53,803
Long-term debt, including current
maturities, and borrowings on lines of
credit.................................... 13,314 12,821 12,361 15,620 11,742 19,844
Total shareholders' equity.................. 9,665 10,417 10,673 18,160 17,142 16,652
</TABLE>
- ------------------------------
(1) On March 15, 1996, Monsey Products Co. acquired all of the outstanding
common stock of Bakor Holdings, Inc. in exchange for $1,837 plus 1,002,000
shares of its common stock valued at $5,357. The transaction was accounted
for as a purchase. The consolidated statements of operations reflect the
results of operations of Bakor Holdings, Inc. from the date of its
acquisition. On a pro forma basis, assuming that the acquisition of Bakor
Holdings, Inc. occurred on January 1, 1996, net sales for 1996 would have
been $112,276, net income would have been $2,486, and EBITDA, as defined,
would have been $8,384.
(2) EBITDA, as defined in the Indenture, represents net earnings before taking
into consideration taxes on earnings, interest expense, depreciation and
amortization and non-recurring, non-cash charges, less any cash expended
that funds a non-recurring, non-cash charge. While EBITDA should not be
construed as a substitute for operating earnings, net earnings, or cash
flows from operating activities in analyzing operating performance,
financial position or cash flows, EBITDA has been included because it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity.
This data is relevant to an understanding of the economics of the Company's
business as it indicates cash flow available from operations (and/or trends
in cash flow available from operations) to service debt and satisfy certain
fixed obligations. A reconciliation of net income (loss) to EBITDA for the
respective years and related interim periods is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)...................... $ 762 $ 1,252 $ 536 $ 2,830 $ 284 $ (2,807) $ (505)
Provision (benefit) for income taxes... 484 649 385 1,537 187 (1,848) (289)
Interest expense....................... 706 1,141 1,217 1,557 1,576 346 303
Depreciation and amortization.......... 1,522 1,631 1,873 2,482 2,566 643 629
Non-cash environmental charge.......... -- -- -- -- 3,639 3,639 --
Cash paid on environmental charge...... -- -- -- -- (67) -- --
--------- --------- --------- --------- --------- --------- ---------
$ 3,474 $ 4,673 $ 4,011 $ 8,406 $ 8,185 $ (27) $ 138
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(3) For purposes of this ratio, "earnings" consists of earnings before income
taxes and fixed charges and "fixed charges" consists of interest expense and
the portion of rents representative of an interest factor. The ratio of
earnings to fixed charges is computed by adding earnings before income taxes
and fixed charges and dividing by fixed charges.
(4) Earnings were insufficient to cover fixed charges. The amounts of the
deficiencies were $408 and $354 at March 31, 1997 and 1998, respectively.
58
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MONSEY BAKOR
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS
OF MONSEY BAKOR, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
GENERAL
On March 15, 1996 Monsey Products Co. acquired all of the outstanding stock
of Bakor Holdings, Inc. ("Bakor"). Following the acquisition, the consolidated
company continued its operations under the name "Monsey Bakor." The consolidated
results of operations reflect the results of Monsey Bakor from the date of the
Bakor acquisition.
Monsey Bakor develops, manufactures and markets four separate but related
product lines: roofing and paving products, industrial emulsions, air barriers
and specialty products.
Monsey Bakor's revenues by its major product lines are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997
---------------------- ----------------------- -----------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Roofing and paving products........ $ 64,468 80.9% $ 77,995 71.8% $ 81,601 72.1%
Industrial emulsions............... 8,025 10.1 17,397 16.0 17,058 15.1
Air barriers....................... 0 0.0 3,652 3.4 6,358 5.6
Other.............................. 7,143 9.0 9,540 8.8 8,158 7.2
--------- ---------- ----------
Total revenues................. $ 79,636 100.0% $ 108,584 100.0% $ 113,175 100.0%
--------- ----- ---------- ----- ---------- -----
--------- ----- ---------- ----- ---------- -----
</TABLE>
Monsey Bakor has ten manufacturing and distribution facilities in North
America with seven located in the United States and three located in Canada.
Monsey Products Co. acquired the three Canadian facilities which were formerly
owned by Bakor, in March, 1996. For the year ended December 31, 1997, Monsey
Bakor generated $0.3 million in net income (excluding the after-tax impact of
the accounting method change, net income would have been $2.4 million) from net
sales of $113.2 million.
59
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net sales represented by certain items reflected in Monsey Bakor's Historical
Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------------------------------------------------- -----------
1995 1996 1997 1997
-------------------------- -------------------------- -------------------------- -----------
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT
----------- ------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... $ 79.6 100.0% $ 108.6 100.0% $ 113.2 100.0% $ 21.6
Cost of sales...................... 59.6 74.9 79.4 73.1 83.1 73.4 16.6
----- ----- ----------- ----- ----------- ----- -----
Gross profit..................... 20.0 25.1 29.2 26.9 30.1 26.6 5.0
Operating expenses:
Selling, general and
administrative................. 17.8 22.4 23.5 21.6 24.4 21.6 5.7
Accounting method change-non-cash
environmental charge........... -- -- -- -- 3.6 3.2 3.6
Amortization of intangibles...... 0.1 0.1 0.3 0.3 0.4 0.3 0.1
----- ----- ----------- ----- ----------- ----- -----
Operating income (loss)........ 2.1 2.6 5.4 5.0 1.7 1.5 (4.4)
Interest expense................... 1.2 1.5 1.6 1.5 1.6 1.4 0.3
Other income, net.................. -- -- (0.6) (0.6) (0.4) (0.3) (0.1)
----- ----- ----------- ----- ----------- ----- -----
Income (loss) before income
taxes.......................... 0.9 1.1 4.4 4.1 0.5 0.4 (4.6)
Income tax expense (benefit)....... 0.4 0.5 1.6 1.5 0.2 0.1 (1.8)
----- ----- ----------- ----- ----------- ----- -----
Net income (loss)................ $ 0.5 0.6% $ 2.8 2.6% $ 0.3 0.3% $ (2.8)
----- ----- ----------- ----- ----------- ----- -----
----- ----- ----------- ----- ----------- ----- -----
<CAPTION>
1998
--------------------------
% OF SALES AMOUNT % OF SALES
------------- ----------- -------------
<S> <C> <C> <C>
Net sales.......................... 100.0% $ 22.7 100.0%
Cost of sales...................... 76.7 17.5 76.9
----- ----------- -----
Gross profit..................... 23.3 5.2 23.1
Operating expenses:
Selling, general and
administrative................. 26.3 5.7 25.0
Accounting method change-non-cash
environmental charge........... 16.8 -- --
Amortization of intangibles...... 0.4 0.1 0.5
----- ----------- -----
Operating income (loss)........ (20.2) (0.6) (2.4)
Interest expense................... 1.6 0.3 1.3
Other income, net.................. (0.3) (0.1) (0.2)
----- ----------- -----
Income (loss) before income
taxes.......................... (21.5) (0.8) (3.5)
Income tax expense (benefit)....... (8.5) (0.3) (1.3)
----- ----------- -----
Net income (loss)................ (13.0%) $ (0.5) (2.2%)
----- ----------- -----
----- ----------- -----
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Revenues increased $4.6 million to $113.2 million from $108.6
million, an increase of 4.2%. Sales to retailers declined $2.0 million, or 4.0%,
due to volume declines partially offset by price increases. Industrial,
commercial and institutional sales increased $3.2 million, or 9.2%, as pricing
and mix improvements exceeded volume declines. Sales of industrial emulsions
grew $3.7 million, or 23.0%, on higher volumes.
GROSS PROFIT. Gross profit increased $0.9 million to $30.1 million from
$29.2 million, an increase of 3.1% due to increased revenues. Gross profit
margin declined slightly from 26.9% to 26.6% due to higher material and overhead
costs.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses as a percentage of sales remained constant at 21.6%. Selling, general
and administrative expense increased $0.9 million to $24.4 million in 1997 from
$23.5 million in 1996 due to higher delivery and sales commissions partially
offset by lower administrative expenses.
AMORTIZATION EXPENSE. Amortization expense increased due principally to
having a full year's amortization in 1997 related to the acquisition of Bakor in
1996.
ACCOUNTING METHOD CHANGE--NON-CASH ENVIRONMENTAL CHARGE. In 1997, Monsey
Bakor adopted a new accounting policy for environmental remediation liabilities
as required under American Institute of Certified Public Accountants Statement
of Position (96-1) which resulted in a non-cash, pretax charge of $3.6 million.
This charge related to the operation and maintenance of a remedial action plan
at one of Monsey Bakor's facilities under a cost sharing agreement between
Monsey Bakor and another potentially responsible party that previously occupied
the property. See "Business--Environmental Matters." Monsey Bakor's 1997 cash
contribution under the cost sharing agreement was $67,000. Previously, Monsey
Bakor charged such contributions to expense in the period in which the
expenditures were incurred.
60
<PAGE>
OPERATING INCOME. Operating income decreased to $1.7 million in 1997 from
$5.4 million in 1996. Excluding the impact of the accounting method change,
operating income declined $0.1 million, or 1.9%, as operating cost increases
exceeded gross margin increases.
INTEREST EXPENSE AND OTHER INCOME. Interest expense remained flat with
1996. Other income declined due to lower gains on the sale of assets in 1997.
INCOME TAXES. The effective income tax rate increased to 39.7% in 1997 as
compared to 35.2% in 1996. This increase was principally attributable to higher
levels of non-deductible expenses in Canada.
NET INCOME. Net income declined $2.5 million to $0.3 million in 1997 as
compared to $2.8 million in 1996. Excluding the after-tax impact of the
accounting method change of $2.1 million, net income declined $0.4 million.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Comparisons are affected by the acquisition of Bakor on March 15, 1996 which
substantially increased Monsey Bakor's revenues and expenses in 1996.
NET SALES. Revenues increased $29.0 million of which $19.1 million was due
to the acquisition of Bakor in 1996. Other increases totaled $9.9 million.
Retail and industrial, commercial and institutional sales increased $4.3 million
and $3.3 million, respectively, on higher volumes and pricing. These products
were favorably impacted by harsh winter conditions in 1996 throughout the East
and Midwest. Sales of speciality emulsions increased $3.7 million which was
offset by declines of sales of other products of $1.4 million.
GROSS PROFIT. Gross profit increased $9.2 million of which $6.1 million was
due to the acquisition of Bakor in 1996. The balance of the increase of $3.1
million was due to sales increases. Margins were flat as compared to 1995.
SELLING, GENERAL AND ADMINISTRATIVE. Operating expenses increased $5.9
million of which $4.7 million was due to the acquisition of Bakor in 1996.
Operating expenses as a percentage of sales declined to 21.9% in 1996 from 22.5%
in 1995. This was a result of stronger revenues in 1996 and expense control
initiatives made in 1995.
OPERATING INCOME. Operating income increased $3.3 million of which $1.5
million was due to the acquisition of Bakor in 1996. The balance of the increase
of $1.8 million was due to increased gross profit margins and improvements of
operating expenses as a percentage of net sales.
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased by $0.4
million of which $0.2 million was due to the acquisition of Bakor in 1996 and
the balance of $0.2 million was due to higher borrowing levels. Other income
increased principally due to gains on the sale of a subsidiary in 1996.
INCOME TAXES. The effective income tax rate decreased to 35.2% in 1996 as
compared to 41.8% in 1995. This decrease was attributable to the usage of
Canadian net operating loss carryforwards, lower levels of non-deductible
expenses and higher state income taxes.
NET INCOME. Net income increased $2.3 million of which $1.0 million was due
to the acquisition of Bakor in 1996. Increased operating income was principally
responsible for the balance of this improvement.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
NET SALES. Revenues increased $1.1 million to $22.7 million from $21.6
million, an increase of 5.1% principally due to volume increases and improved
pricing.
61
<PAGE>
GROSS PROFIT. Gross profit increased $0.2 million to $5.2 million from $5.0
million, an increase of 4.0% due to increased revenues and a slight decrease in
margin.
OPERATING EXPENSES. Selling, general and administrative expenses remained
flat at $5.7 million while declining as a percentage of sales from 26.3% to
25.0%. This is primarily due to increased revenues and expense controls.
Monsey Bakor adopted a new accounting policy for environmental remediation
liabilities as required under an AICPA Statement of Position (96-1) in 1997.
Adoption of the new accounting standard resulted in a non-cash, pretax charge of
$3.6 million relating to the operation and maintenance of a remedial action plan
at one of Monsey Bakor's facilities under a cost sharing agreement executed with
another participating responsible party that previously occupied the property.
Previously, such contributions were charged to expense in the period in which
the expenditures were incurred.
OPERATING LOSS. Operating loss improved to $0.6 million in 1998 as compared
to $4.4 million in 1997. Excluding the impact of the accounting method change,
operating losses declined $0.2 million due to the factors described above.
INTEREST EXPENSE AND OTHER INCOME. Interest expense and other income
remained flat with 1997.
NET LOSS. Net loss improved to $0.5 million in 1998 as compared to $2.8
million 1997, due to increased volumes and the accounting method change in 1997.
Excluding the after tax impact of the accounting method change of $2.1 million,
net loss declined 0.2 million due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Monsey Bakor's historical capital requirements have been primarily for
working capital and capital expenditures. Primary sources of support for these
needs have been cash flow from operations and borrowings under bank credit
facilities. Monsey Bakor has a domestic line of credit, aggregating $13.0
million, subject to availability of qualifying collateral, and a term facility
with a bank. Monsey Bakor's Canadian operations are financed with a separate
bank line of credit, aggregating Canadian $6.0 million (U.S. $4.4 million)
subject to availability of qualifying collateral, as well as two term loans
aggregating Canadian $0.9 million (U.S. $0.6 million). Outstanding balances at
March 31, 1998 were $4.0 million (Canadian $5.8 million) and $7.3 million under
the Canadian and domestic credit facilities, respectively.
CASH FLOWS 1997 COMPARED TO 1996
Operating cash flows were $6.2 million and $4.0 million in 1997 and 1996,
respectively. The increase of $2.2 million from 1996 to 1997 is attributable to
changes in working capital. Net cash used in financing activities was $4.4
million and $0.6 million for 1997 and 1996, respectively. The increase in 1997
was due to increased payments on lines of credit of $1.4 million, a decrease in
payments on term debt of $1.4 million and 1996 term debt borrowings of $3.8
million. Cash used in investing activities was $2.9 million and $2.8 million for
1997 and 1996, respectively. Investment in plant and equipment increased $1.4
million to $2.6 million in 1997. In 1996, Monsey Products Co. acquired Bakor for
stock and $1.8 million in cash.
CASH FLOWS THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1997
Monsey Bakor's cash flows used in operations were $6.9 million and $4.8
million for the quarters ended March 31, 1998 and 1997, respectively. The
increase was attributable primarily to increased working capital requirements in
1998. Net cash provided by financing activities was $8.1 million and $4.9
million for the quarters ended March 31, 1998 and 1997, respectively. The
increase in 1998 was attributable to increased borrowings on lines of credit to
fund working capital requirements. Cash used in investing activities was $0.3
million and $0.8 million for the quarters ended March 31, 1998 and 1997,
respectively. The decrease was primarily attributable to decreased investment in
plant and equipment by $0.5 million in 1998 compared to the quarter ended March
31, 1997.
62
<PAGE>
SEASONALITY
Monsey Bakor's business is seasonal. Many of Monsey Bakor's products are
roofing or paving products which are best applied in dry, warm periods. Monsey
Bakor's sales are focused in the Eastern, Midwest and Southern regions of the
United States and in Canada resulting in significant seasonal declines during
the winter. Retailers and distributors begin to build inventories of these
products in March and Monsey Bakor's business is typically strongest from June
through October.
INFLATION AND RAW MATERIAL COSTS
During the past several years, the general rate of inflation has been
relatively low and has not had a significant impact on Monsey Bakor's results of
operations. Monsey Bakor purchases raw materials, including asphalt, aluminum
paste, rubber and certain diisocynates among others, that are subject to price
fluctuations. Prices have also tended to fluctuate based on such factors as the
capacity of the supply chain, demand in the market, weather, general economic
factors and the availability of alternative raw materials. Historically, for
example, there have been periods of significant and rapid asphalt, aluminum
paste, rubber and diisocynate price changes, both upward and downward, with a
concurrent short-term impact on Monsey Bakor's operating margins. Monsey Bakor
has historically mitigated the long-term effects of these fluctuations by
passing through price increases to its customers, although there is no assurance
that the Company will be able to do so in the future. Significant increases in
raw material prices could have a material adverse impact on the profit of the
Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS 130 establishes standards for
reporting comprehensive income. Monsey Bakor adopted SFAS 130 in 1998, which had
no impact on net income or shareholders' equity at March 31, 1998. SFAS 130
requires foreign currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform with the requirements of SFAS 130.
SFAS 131 establishes standards for annual and interim disclosures of
operating segments, products and services, geographic areas and major customers.
The new rules will be effective for Monsey Bakor's December 31, 1998 financial
statements. Monsey Bakor is in the process of evaluating the disclosure
requirements of SFAS 131, the adoption of which will have no impact of Monsey
Bakor's results of operations or financial condition.
YEAR 2000 MODIFICATIONS
Monsey Bakor is not highly dependent on its internal computer systems, and
does not, as a general matter, interact electronically with its customers or
suppliers. Monsey Bakor is currently reviewing its computer systems in order to
evaluate what, if any, corrections or modifications may be necessary for the
year 2000.
Followng the Acquisition, the Company has been combining the
information-technology operations of Monsey Bakor with those of Henry Company.
This integration is expected to be completed by December 31, 1998. Monsey
Bakor's business is substantially similar to that of Henry Company in its use of
computer systems and embedded-technology equipment and in its exposure to Year
2000 computer issues. For a description of the combined companies' evaluation
and response to Year 2000 computer issues, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Henry Company--Year
2000 Modifications."
63
<PAGE>
INDUSTRY OVERVIEW
The bulk of the Company's products compete in the roofing market which the
National Roofing Contractors Association ("NRCA") estimates was a $19.6 billion
market in the United States in 1996, an increase of approximately 7% over
estimated 1995 U.S. revenues. Further, the NRCA estimates that the reroofing
segment of this market accounts for 77% of total roofing industry revenues while
the remainder is from new construction. The Company's products are heavily
oriented to the reroofing segment of the market. The roofing market is also
segmented between commercial and residential markets. The commercial market
accounted for an estimated 71% of the U.S. revenues in the roofing industry
while residential purchases were estimated at 29%. The Company's products are
used both in the commercial and residential segments, although the commercial
market accounts for the majority of the Company's roofing sales.
The largest subsegment of the industry is the commercial reroofing segment
which accounts for an estimated 53% of the total U.S. roofing industry revenues
and is the primary segment in which the Company's products are sold. The NRCA
further divides this segment into types of roofing systems. The second largest
system in this segment is built-up-roofing which the NRCA estimates accounts for
29% of the sales in the commercial reroofing market. The next largest category
is the modified bitumen segment which accounts for an estimated 23% of the
market. The Company's products are focused on these two segments. The Company
also competes in the sprayed polyurethane foam subsegment which was one of the
fastest growing segments in this market in 1996, although it is still relatively
small with an estimated market size of $0.4 billion in 1996.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RE-ROOFING
<S> <C> <C> <C> <C> <C>
1996 Size: $4.7 1996 Size: $10.4
billion billion
Asphalt Shingles 63.5% Asphalt Shingles 6.9%
Cement/Wood Shingles 4.1% Sprayed Polyurethane 3.4%
Built-up Roofing 6.8% Built-up Roofing 29.0%
Modified Bitumen 7.5% Modified Bitumen 23.0%
Other 2.1% Other 4.0%
Concrete/Clay Tile 2.1% Metal 2.5%
Metal 3.2% Single-Ply 31.2%
Slates 3.0%
Single-Ply 7.7%
New Construction
Residential Commercial
Asphalt Shingles 57.0% Single Ply 37.0%
Cement/Wood Shingles 4.4% Sprayed Polyurethane 2.5%
Built-up Roofing 4.8% Built-up Roofing 24.6%
Modified Bitumen 5.6% Modified Bitumen 21.2%
Other 2.6% Other 3.1%
Concrete/Clay Tile 7.6% Asphalt Shingles 7.7%
Metal 4.2% Metal 3.9%
Slates 5.1%
Single-Ply 8.7%
</TABLE>
Source: National Roofing Contractors Association 1996-1997 Annual Market Survey.
64
<PAGE>
BUSINESS
Management believes that the combination of Henry Company and Monsey Bakor
has created the largest North American manufacturer and marketer of roof coating
and roof cement products. Henry Company believes that it is already the largest
manufacturer of roof coatings and roof cements in the western United States.
Monsey Bakor is a leading manufacturer of roof coatings, adhesives and membranes
with its strongest markets in the eastern United States and Canada. Henry
Company and Monsey Bakor have 65 and 59 years of experience in the roofing
products industry, respectively. After giving effect to the Transactions, the
Company would have had pro forma net sales of approximately $180.6 million, pro
forma combined Adjusted EBITDA (as defined in "Summary--Notes to Summary
Historical and Unaudited Pro Forma Combined Financial Data (note 3)") of
approximately $15.5 million and pro forma combined net loss of approximately
$2.7 million for the fiscal year ended December 31, 1997 and pro forma net sales
of approximately $85.9 million, pro forma combined Adjusted EBITDA of
approximately $6.6 million and pro forma combined net loss of approximately $0.1
million, for the six months ended June 30, 1998.
HISTORY
Henry Company was founded as a roofing company in 1933 by Warner White Henry
(the father of Henry Company's current Chairman and CEO) and has since been a
leader in the industry. Henry Company's commitment to research and development
has led to numerous breakthroughs in mastic, asphalt and reflective coating
technologies. Henry Company has developed strong brand awareness and is
recognized by its customers as a quality leader in many of its product lines.
Henry Company operated The W.W. Henry Company, a national manufacturer of
flooring and construction adhesives, until its sale to Armstrong World
Industries in October 1986. Subsequently, Henry Company operated as an
independent, largely Southern California-based roof coatings manufacturer.
Beginning in 1988, management focused on expanding the Henry brand through the
purchase of regional roof coatings manufacturers and distributors in contiguous
regions. GEO Industries, located in El Paso, Texas, was purchased in 1988 and
Gilsonite, Inc., headquartered in Portland, Oregon, was purchased in 1992. World
Asphalt Company, located in Elk Grove, California (near Sacramento), was
purchased in 1994 and the operations of American Blackline, located in Denver,
Colorado, were purchased in the first quarter of 1997 (although the Denver
facility has since been closed). In each of these regions Henry Company has been
successful in introducing the Henry brand and becoming a market share leader.
With regional plants and other facilities to support production and distribution
needs, Henry Company has become a low cost producer in each of these regions
while becoming recognized as a quality leader.
Monsey Bakor has served the U.S. and Canadian building products markets for
over 50 years. Monsey Bakor is a leading manufacturer and distributor of a broad
spectrum of building products for residential and commercial uses with a product
line consisting of roof coatings, adhesives and membranes, waterproofing and air
barrier systems as well as specialized industrial emulsions. Monsey Bakor has
manufactured and distributed its products under the Monsey trade name since the
founding of Monsey Products Co. in 1939. In March 1996, Monsey Products Co.
expanded its operations by acquiring a Canadian competitor, Bakor Holdings,
Inc., and thereafter has sold the majority of its products under the "Monsey
Bakor" brand. The predecessor company to Bakor Holdings, Inc. had been formed in
1931. Monsey Bakor's corporate headquarters is located in Kimberton,
Pennsylvania, 35 miles northwest of Philadelphia. Also located at the Kimberton
facility is Monsey Bakor's largest manufacturing operation and warehouse, as
well as technical and training centers.
65
<PAGE>
MAP OF THE COMPANY'S MANUFACTURING AND DISTRIBUTION FACILITIES
[LOGO]
The map above does not include over 20 public warehouse distribution facilities
that the Company utilizes throughout the United States, Canada and
internationally.
66
<PAGE>
COMPETITIVE STRENGTHS
The Company believes that the following competitive strengths will
contribute to the Company's opportunities for future growth.
LEADING MARKET POSITIONS
The Company believes that it is the largest manufacturer of roof coatings
and roof cements in North America. Henry Company believes that it is already the
largest such manufacturer in the western United States. Monsey Bakor is a
leading manufacturer of roof coatings, adhesives and membranes in the eastern
United States and Canada. Management believes that Monsey Bakor is also the
major producer of wax-based emulsions for the gypsum board industry, with a
dominant share of the market.
ESTABLISHED BRAND NAMES AND REPUTATION
The Company has significant brand name recognition within the roofing and
building products industries across each of its core product lines, with popular
brand names such as "Henry," "Monsey," "Bakor" and
"Wet-Patch-Registered Trademark-." The Company believes that these brands have
established a reputation for reliability and high quality in the industry.
BREADTH OF GEOGRAPHIC COVERAGE
The Company has manufacturing and distribution facilities strategically
located throughout the United States and eastern Canada. This broad geographic
coverage is advantageous as roof coatings products are heavy relative to their
value, and it is therefore often uneconomic to transport such products more than
500 miles from their place of manufacture. The Company's dispersed facilities
position it to better serve national and larger regional customers. Broad
geographic product distribution capability is important to many of the Company's
customers, particularly the mass merchandisers and roofing wholesalers, which
are increasingly being consolidated into large national companies.
STRONG CUSTOMER RELATIONSHIPS IN MULTIPLE DISTRIBUTION CHANNELS
Through Henry Company's and Monsey Bakor's 65 and 59 years of operations,
respectively, the Company has developed many long-standing relationships with
key customers in multiple distribution channels. The Company intends to continue
to distribute its products through mass merchandisers such as Home Depot,
HomeBase, Lowe's Home Improvement Warehouse and Eagle Hardware and Garden; co-
ops such as Ace Hardware and True-Value Hardware; roofing wholesalers such as
ABC Supply, Allied Building Products and Cameron Ashley Building Products; and
directly to the "industrial-commercial-institutional" market. Selling through
multiple distribution channels is intended to maximize the Company's market
penetration and reduce its reliance upon the success of any one distribution
channel. As evidence of the Company's strong customer relationships, Henry
Company was named a "1997 Partner of the Year" by Home Depot.
LOW COST PRODUCER
The Company believes that it is one of the lowest cost producers in the roof
coatings and roof cements industry. Raw material costs are the single largest
portion of finished product costs. Due to the size of its manufacturing
operations relative to its competition, management believes that the Company
will be positioned to purchase raw materials more efficiently than many of its
competitors. Furthermore, management believes that its proprietary manufacturing
processes for certain of its products will generate further cost advantages.
67
<PAGE>
EXPERIENCED MANAGEMENT TEAM
The Company has assembled a strong and experienced management team at both
the corporate and operating levels. More than 75% of the senior managers of the
Company have over 10 years of experience in the roofing products industry. In
addition, senior management of Henry Company has been responsible for
successfully acquiring and integrating seven companies since 1988.
TECHNICAL AND FORMULA DEVELOPMENT
The Company has developed an array of products that it believes are
recognized as among the highest quality products in their segments, including
Henry 208 Wet Patch-Registered Trademark- roof cement and Monsey Bakor's
industrial wax emulsions. The Company also believes that it generally allocates
greater resources to research and development than any of its roof coatings and
roof cements competitors.
BUSINESS STRATEGY AND KEY BENEFITS OF THE ACQUISITION
The Company's business strategy is to increase its product penetration,
create national brands from its core products, further expand its roof systems
business, continue to strive to be the lowest cost producer of roof coatings and
roof cements and pursue attractive opportunities for strategic acquisitions.
INCREASED PRODUCT PENETRATION OF CUSTOMER ACCOUNTS AND CREATION OF NATIONAL
BRANDS
The Company intends to increase the depth of its product offerings to a
number of its major customers and also intends to cross-sell products to
customers of its two predecessor companies. The Company expects that roof
coatings and roof cements bearing the Henry brand will be sold to a number of
Monsey Bakor's accounts in the eastern United States, some of whom already have
a relationship with Henry Company in the western United States. Likewise,
products bearing the Monsey Bakor name will be introduced into western United
States accounts with whom Henry Company has existing relationships.
As a result, the Company will carry two national branded lines of roof
coatings and roof cements products, with "Henry" positioned as the premium line
and "Monsey Bakor" positioned as the value line. National brands are situated to
take advantage of national advertising, marketing and distribution programs with
mass merchandisers and other national customers. The Company will also continue
to support several of its regional brands that have a strong local following.
NORTH AMERICAN EXPANSION OF ROOF SYSTEMS AND BUILDING ENVELOPE SEGMENTS
Henry Company has developed a successful roof systems business in the
western United States, while Monsey Bakor has created substantial demand for its
Building Envelope System-Registered Trademark- concept, particularly in Canada.
As a result of the Acquisition, the Company believes that it has a highly
competitive product offering in the roofing systems market which it believes to
have a size in excess of $1 billion. With national manufacturing and sales
support, the Company believes that it can leverage its reputation for high
quality and expand its product offerings in this segment throughout North
America.
CONTINUED ENHANCEMENT OF LOW-COST MANUFACTURING AND DISTRIBUTION
OPPORTUNITIES
The Company will continue to strive to be the lowest cost producer of roof
coatings and roof cements, and will target purchasing and manufacturing
efficiencies.
Henry Company and Monsey Bakor purchase many of the same raw materials, some
of which are obtained from the same vendors. The Company expects that the
combination of purchasing functions will enable it to take advantage of
increased volume discounts and should reduce freight costs and produce savings
from each company's current negotiated raw material prices.
68
<PAGE>
The Company believes that both Henry Company and Monsey Bakor lead the roof
coatings and roof cements industry in developing high quality products with low
cost formulations. The Acquisition will allow the sharing of product formula
processes benefitting the product lines of both companies. The Company intends
to apply certain of each company's proprietary processes to the other company's
products with a view towards reducing manufacturing costs and increasing product
quality.
SELECTIVE EXPANSION THROUGH STRATEGIC ACQUISITIONS
Henry Company has pursued acquisition opportunities that have complemented
and expanded its core business or have enabled it to enter into new markets.
Over the past ten years, Henry Company has made the following acquisitions in
order to grow regionally and/or build on its core competencies in roofing and
asphalt technology:
<TABLE>
<CAPTION>
PRIMARY BENEFITS
ACQUISITION YEAR LOCATION OF THE ACQUISITION
- ----------------------------------------------- --------- --------------- ---------------------------------------
<S> <C> <C> <C>
Resin Technology Company 1988 Ontario, Expanded the roofing line into
California polyurethane foam
Star Systems 1988 Los Angeles, Expanded the white roof coatings line
California
GEO Industries 1988 El Paso, Texas Expanded the roof coatings business in
the Southwest
K.T. Snyder Co. and related entities 1990 Houston, Texas Combined asphalt technology with
existing tape sealants business and
expanded the roof coatings business in
the Southwest
Gilsonite, Inc. 1992 Portland, Further expanded the roof coatings
Oregon and business in the Northwest
Auburn,
Washington
World Asphalt Company 1994 Sacramento, Further expanded the roof coatings
California business in Northern California and
established the pavings business
American Blackline 1997 Denver, Further expanded the roof coatings
Colorado business in the Rocky Mountain region
Monsey Products Co. 1998 Eastern United Extension of the Company's business
States and into Eastern Markets
Canada
</TABLE>
The Company competes in most of the larger markets within the United States
and Canada, but management believes that certain opportunities still exist for
strategic acquisitions on a smaller scale that could allow it to leverage its
well recognized brand names, achieve cost reductions and further enhance
geographic manufacturing and distribution capabilities. Strategic acquisitions
could also allow the Company to expand the depth of its product offerings
through its existing distribution network. The Company is considering further
acquisitions not expected to have a material effect on its business or market
position but which are consistent with the strategies outlined above.
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ADDITIONAL BENEFITS OF THE ACQUISITION
In addition to the potential benefits previously discussed, the Company
believes that the Acquisition will provide it with a number of additional
synergies and opportunities to reduce costs and increase overall profitability.
RATIONALIZATION OF MANUFACTURING, RESEARCH AND DEVELOPMENT OPERATIONS AND
REGULATORY FUNCTIONS
Although Henry Company believes that the combination of its manufacturing
operations with those of Monsey Bakor is strategically complementary and will
provide efficient coverage of North America, there will be some overlap of
operations. The Company expects to close one manufacturing operation without
losing significant cost and freight advantages and may close additional
facilities. Further efficiencies are also expected with the consolidation of
related functions such as research and development and environmental and
regulatory compliance.
REDUCTION IN OVERHEAD AND ADMINISTRATION EXPENSES
The Company believes that internal savings in certain overhead functions
such as accounting, finance, management information systems and administration
could be realized through the integration and centralization of these functions.
The combination of insurance programs, external accounting and audit functions,
benefit and 401(k) plans, tax preparation and telephone and communication
systems, among others, are also expected to generate cost savings.
VERTICAL INTEGRATION OPPORTUNITIES
Henry Company currently purchases products from third party manufacturers
that are also produced by Monsey Bakor, such as roll roofing and other sheet
membranes for the coatings and sealants business. It is anticipated that Henry
Company will procure a portion of these products from Monsey Bakor's current
operations, eliminating the cost of an intermediary markup.
CONSOLIDATION OF SALES AND MARKETING OPERATIONS
Both companies currently service a number of common regional or national
accounts in the retail and wholesaler segments. Coordinated management of these
accounts should produce cost savings while increasing service and will also
provide a more effective national brand strategy. Rationalization of regional
sales representation will reduce some overlap that currently exists. Certain
marketing expenses for such items as trade shows and advertising will also be
consolidated to save money on a combined basis.
DECREASED SEASONALITY AND WEATHER-RELATED CYCLICALITY
The peak buying season for roof coatings products in the eastern and western
parts of the country tend to be complimentary. The peak season in eastern North
America tends to be from May until September, while the peak season in western
North America tends to be from September until February. The Company believes
that the Acquisition will help level the sales volumes throughout the year which
should improve overall efficiencies. In addition, management believes that the
demand for roof coating products in the eastern and western United States is
affected by annual weather patterns that appear to produce extreme weather in
the eastern or western parts of the country, but not in both, in any given
winter. Therefore, management believes that annual sales performance based on a
diversified national enterprise may show less volatility from year to year.
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BUSINESS OF THE COMPANY
The Company is a construction materials company focusing primarily on
products for roofing, sealing and paving applications. Henry Company develops,
manufactures and markets three separate but related product lines: roof and
driveway coatings and paving products through the Henry Coatings Division,
polyurethane foam for roofing and commercial uses through the Resin Technology
Company, and sealants for construction and marine uses through the Henry
Sealants Division. The Company continues to manufacture Monsey Bakor's product
line of roof coatings, adhesives and membranes, waterproofing and air barrier
systems and specialized industrial emulsions through its Monsey Bakor Division.
For a breakdown of Henry Company's revenues by major product lines, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Henry Company."
HENRY COATINGS DIVISION
The Coatings Division accounted for the bulk of Henry Company's 1997 net
sales. The Coatings Division is headquartered in Huntington Park, California and
produces coatings products at its Elk Grove and Huntington Park, California,
Portland, Oregon, El Paso, Texas and Auburn, Washington facilities.
PRODUCTS
Henry Company's products include mastics and cements for sealing
applications, asphalt protective coatings, aluminum and white reflective
coatings, self-adhesive roofing membranes, driveway maintenance and paving
products, and other specialty coatings. Henry Company's products are sold in a
variety of containers for various customer markets, from 55-gallon drums for the
professional market to one gallon cans and 11 oz. cartridges that are primarily
sold to retail customers.
Henry Company's top selling roof mastics are marketed under the names Henry
208 and Henry 204. Henry 208 Wet Patch-Registered Trademark- roof cement is a
leading product in the western United States for sealing leaks on wet surfaces.
Henry 204 plastic roof cement is used to seal and patch leaks in asphalt, metal,
masonry and composition roofs in dry weather.
Henry Company's protective coatings are used to coat various roofing
surfaces and are used as a base coat with other Henry products. A leading
product in this category is Henry 107 Asphalt Emulsion.
Henry Company's leading reflective coatings include Henry 287
Solar-Flex-Registered Trademark- white acrylic roof coating, and Henry 220
Alumi-Top-Registered Trademark- fibered aluminum roof coating. The Coatings
Division's reflective roof coatings reflect solar heat and ultra-violet rays and
are intended to decrease roof and interior temperatures and prolong roof life.
Driveway maintenance and paving products are used for the asphalt highway
market and the preventative maintenance of asphalt parking lots and driveways.
Henry Company produces polymerized asphalt, an asphalt binder that is a key
ingredient of paving asphalts. Other key products include polymer modified
DuraSeal-Registered Trademark-, a coating with exceptional resistance to
ultra-violet radiation, physical abrasion and moisture. Henry Company also
manufactures and sells a number of coatings for specialty purposes such as for
wood preservation and agricultural purposes.
MANUFACTURING
Henry Company produces its roof and driveway coatings from four
manufacturing plants utilizing a controlled mixing process. Asphalt cutback
(asphalt that has been further liquified through the addition of various
solvents) is pumped into large mixers located in the plants from separate
storage tanks located in adjacent tank farms. Depending on the end product,
additives or fillers are mixed into the asphalt to enhance certain qualities. In
addition, some of Henry Company's products are enhanced with cellulose or
chrysotile asbestos fibers which significantly increase the strength and
durability of the product. The final product is then discharged from mixers into
cartridges, pails, drums or bulk tankers.
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The Company, as well as many of its competitors, uses fibers such as
chrysotile asbestos in its production process. Management believes that its use
of chrysotile asbestos is in accordance with regulations of the Occupational
Safety and Health Administration ("OSHA"). OSHA requires that chrysotile
asbestos fibers not be exposed to an open-air environment. In Henry Company's
production process the cellulose or chrysotile asbestos fiber is pumped through
a negative pressure fluffer that separates the fibers for optimal dispersion in
the product mixture. The fibers are then mixed into and fully encapsulated by
the asphalt. Once encapsulated the fibers are "locked" into the asphalt cutback
and cannot be physically separated from the product. OSHA and other regulatory
bodies have determined that encapsulation renders the chrysotile asbestos
harmless. The Environmental Protection Agency ("EPA") does not regulate or
enforce any special procedures for the application of chrysotile
asbestos-containing roof coatings or sealants.
Management believes that chrysotile asbestos-fibered roofing cements have
better application quality and durability as compared to those containing
chrysotile asbestos substitutes. The primary industries that currently continue
to use chrysotile asbestos are those manufacturing chrysotile asbestos-cement
pipe and shingles, automobile brake pads, gaskets and roof coatings and
sealants. Although chrysotile asbestos-cement pipe and shingles are no longer
manufactured in the United States, these products are still currently sold in
various parts of the country. Domestic manufacturers of brake pads, gaskets and
roof coatings used roughly 22,000 tons of chrysotile asbestos in 1996, because
of its strength, durability and heat resistance. Although some roofing products
manufacturers have switched to an exclusively non-asbestos line, some of the
leading firms in the industry continue to use asbestos in at least some of their
products.
SALES, MARKETING AND DISTRIBUTION
Henry Company's marketing strategy is to position the Henry brand as the
high end, premium-quality product. Henry Company focuses on selling through the
Henry Company brand in both the retail and roofing wholesale segments. When
necessary or requested by customers, however, Henry Company markets its
Henry-branded products with one of its lower-priced brands, such as Gilsonite,
GEO or Roofer's Choice. These lower-priced brands are utilized in particular
regions and channels of distribution, although nearly 75% of the Coatings
Division's sales are made under the Henry brand name.
The Coatings Division utilizes two primary channels of distribution--the
retail segment, primarily marketing to "do-it-yourself" customers and the
roofing wholesaler segment, marketing to professional roofing contractors. The
retail segment is made up of mass merchandisers such as Home Depot, HomeBase and
Eagle Hardware and retail chains or co-ops such as Ace Hardware and True-Value
Hardware. The professional roofing wholesale segment is made up of roofing
wholesalers such as ABC Supply, Cameron Ashley Building Products and Allied
Building Products, each of which has roofing wholesale yards located throughout
the country and competes with regional and local roofing wholesalers such as
Structural Materials, South Coast Shingle or Ford Wholesale. The Division's
remaining sales are for particular manufacturing applications and to overseas
customers.
Over the last ten years Henry Company has expanded significantly from its
Southern California base. Although Southern California remains its largest
region, Henry Company believes it is also the market share leader in the
Northern California, Northwest, Rocky Mountain and Southwest regions. In line
with its strategy to grow through regional expansion eastward, Henry Company
achieved its largest percentage sales increases over the last two years in the
Rocky Mountain and Midwest regions. Currently, Henry Company actively markets
its products to all regions west of the Mississippi River, including Hawaii,
Alaska and western Canada, and sells small amounts of product into the eastern
United States and internationally.
Henry Company has established its dominant brand awareness in the western
United States and particularly in California through its over sixty-year
presence in the marketplace. Henry Company has developed consumer-oriented
packaging for its products in reflex blue containers and the "wall of Henry
blue" that customers see at major retailers and wholesalers has become a
distinctive Henry Company
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marketing characteristic. Henry Company supports its product offerings with
product usage illustrations, advertising and a variety of point-of-purchase
tools. For example, Henry Company has developed an interactive television
display for placement in retail stores that assists customers in assessing their
needs and directs them to Henry Company products. These units are placed among
Henry brand products on store shelves and have contributed to an increase in
sales compared with retail stores without the interactive displays. Henry
Company has also sought to improve customer awareness and use of its products
through its Internet website which provides customers with detailed product
catalogs, specifications and how-to information.
ROOFING SYSTEMS
Henry Company has developed a profitable roofing systems segment for
one-stop commercial roofing or reroofing or roofing maintenance with warranty
protection. Henry Company personnel work with architects, building owners and
contractors to develop custom specifications utilizing Henry Company products
for the design, construction and maintenance of commercial roofs. An important
component of Henry Company's roof systems program's success is that building
owners are assured that Henry Company will stand behind the roof from beginning
to end. The Henry Company sales consultant will write a custom specification for
the roof and the roofing system will be applied by a Henry Company-approved
contractor generally using Henry Company products. A Henry Company technical
inspector will inspect the roof application during installation and regular
follow-up inspections and in some instances maintenance will be performed
throughout the life of the warranty. Henry Company offers 20-year warranties on
its reroofing systems and 5-year warranties on its maintenance systems
calculated on a fee per square-foot basis. Since its inception, expenses for
warranty claims experience has been very low. In part, this is due to Henry
Company's continuing inspection program. Henry Company roofing systems have been
applied throughout the western United States on corporate buildings for
customers as diverse as Sun Maid Raisins and Warner Brothers Studios. Management
believes that the roofing systems business represents a significant growth
opportunity.
RESIN TECHNOLOGY DIVISION
The Resin Technology Company ("RTC") was founded as an independent company
in 1982 and produces polyurethane foam products for roofing and other industrial
applications as a Henry Company division. RTC also sells coating products
manufactured for it by third parties for application on foam. The acquisition of
RTC in 1988 has enabled Henry Company to offer a broader range of roofing
products to meet the needs of the commercial and residential roofing markets.
PRODUCTS
RTC's primary product categories are polyurethane foam and coatings.
Polyurethane foam has two liquid components--resin and hardener--which are mixed
together in a spray unit during application. A chemical reaction causes the
liquid to expand many times in thickness creating a rigid layer of closed-cell
foam. In roofing applications, this foam is strong enough to be walked on
minutes after the application. The result is a seamless barrier against water
penetration that is durable and easy to maintain. In roofing applications, an
elastomeric coating must be applied as protection against the sun's ultraviolet
radiation. RTC sells acrylic, urethane, silicone and polyurea coatings.
RTC's products offer users several advantages, including a seamless barrier
that minimizes the likelihood of leaks versus other types of roofing
applications. Polyurethane foam also provides superior insulation
characteristics that can reduce energy costs, particularly in either relatively
cool or warm climates. It is relatively light in weight and is therefore
particularly adaptable to large arenas or other structures that may benefit from
a lighter weight roof. Furthermore, it can be applied directly over an existing
roof, potentially avoiding the costly "tear-offs" that may be required with
other roofing systems.
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RTC's products are also used in a number of original equipment manufacturer
applications. The insulation and weight characteristics of polyurethane foam
make it an integral part of the thermal panel, spa and packaging industries,
among others.
MANUFACTURING
RTC manufactures all of its polyurethane foam products in its Ontario,
California manufacturing facility. Its polyurethane resin system is made up of
two components: a hardening agent that is purchased by Henry Company and resin
that is manufactured in the Ontario facility. Raw materials are automatically
pumped from one or more of the 11 raw material storage tanks within the
facility, blended and then poured into 55-gallon drums, tote capsules or bulk
tanker trucks. The production process is highly automated. The bulk of RTC's
coatings products for polyurethane foam applications are produced by a
third-party manufacturer also located in Ontario. Henry Company believes that it
derives its success in the polyurethane foam market from its superior
understanding of technology and Henry Company has secured a number of original
equipment manufacturer accounts because of its ability to produce product for a
customer's very specific technical requirements.
SALES, MARKETING AND DISTRIBUTION
The Resin Technology Company sells primarily to roofing contractors and
original equipment manufacturers in the western United States. RTC's roofing
products are sold directly to pre-qualified contractors experienced in applying
and spraying polyurethane foam onto roofs. Sales to original equipment
manufacturers include those to spa equipment manufacturers and management
believes it is the leading supplier to this market. RTC also supplies
manufacturers in many other industries including those producing freezer panels,
thermal food transportation equipment, boat floatation and packaging products.
RTC's remaining sales are made to several distributors, particularly in the
Northwest and upper Midwest, regions that are not as geographically accessible
as the West and Southwest.
RTC supports its sales efforts with a sales staff organized according to
market segment and regional location. Henry Company believes that RTC's
marketing advantages are based on a commitment to technical development and
customer support and also believes that RTC has captured a number of original
equipment manufacturer accounts from its competitors by efficiently responding
to the customer's technical requirements. In both the roofing and original
equipment manufacturer segments Henry Company provides just-in-time delivery
capability which is essential in time and labor-sensitive roofing applications.
HENRY SEALANTS DIVISION
Henry Company acquired three related distributors of preformed sealants in
1990: K.T. Snyder Company; Diplomatic Marine Inc.; and
Synko-flex-Registered Trademark- Products, which have since been amalgamated
into what is now the Henry Sealants Division. These acquisitions were made in
part to leverage Henry Company's expertise in manufacturing asphalt-based
products and also to provide future manufacturing and distribution locations for
its roof coatings business.
In 1997, Henry Company formed a joint venture with J-K Polysource to sell
and manufacture O-ring gaskets to manufacturers of concrete pipe. This operation
is based in Henry Company's Houston, Texas facility and allows Henry Company
sales personnel to offer a broader array of products to its current customer
base.
PRODUCTS
The Sealants Division has three distinct product categories: sealants for
construction applications; hatch cover sealants for ocean freighters; and
preformed adhesive waterstops for expansion joint applications on construction
projects.
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RAM-NEK-Registered Trademark-, a preformed plastic gasket for precast
concrete structures, was developed in 1955 and was the first product designed
for this particular use. This asphalt-based, self-sealing, instant-bonding
gasket provides watertight sealing for joints such as those on underground
concrete drainage and manhole structures or on precast vault structures used in
the underground installation of power and telephone utility lines. The
RAM-NEK-Registered Trademark- trade name is also used for the Sealants
Division's marine sealants products which were also the first products of their
types when introduced to the marine industry in 1968. These products are used
for sealing hatch covers on ships to prevent water damage to cargoes that can
occur in heavy seas. RAM-NEK's-Registered Trademark- unique marine tape design
allows the tape to stretch as the ship bends and turns in heavy seas.
Synko-flex-Registered Trademark-, a preformed plastic adhesive waterstop, is
used as a construction joint sealant in poured-in-place concrete structures.
Henry Company believes this product allows for an easier, more reliable and more
efficient sealing method than the traditional PVC-type waterstop.
Synko-flex-Registered Trademark- is used in waste water treatment plants,
highway tunnels and airport terminals as well as in many other major
construction projects.
MANUFACTURING
The Sealants Division manufactures various water resistant tape sealants
products in its Houston facility which Henry Company constructed in 1991. In the
manufacturing process, various raw materials including asphalt and clay are
heated, mixed and then extruded onto release paper. The product is then cooled,
a top layer of paper is added and then the product is automatically cut to a
specific length. Finished products will vary as to raw material content and size
depending on the particular tape sealants application.
SALES, MARKETING AND DISTRIBUTION
The Sealants Division's products were the first used for their particular
application in all three of the Division's market segments. Management believes
that the RAM-NEK-Registered Trademark- trade name is widely recognized
throughout the concrete pipe and marine supply industries. The Division
warehouses product at its Houston facility and at other Henry facilities or at
several public warehouses located throughout the world. Due to the size and
weight of tape sealants, freight expense considerations are an important element
of a customer's buying decision. Henry Company therefore provides its customers
with regional access to less-than-truckload quantities at its various regional
warehouses. Henry Company has been successful in linking ship owners with marine
suppliers so that RAM-NEK-Registered Trademark- can be delivered on board a ship
docked in over one hundred ports worldwide, generally within a few hours.
Division sales also benefit because marine hatch cover sealants are in many
cases required to obtain insurance for particular ocean-going cargoes.
Synko-flex-Registered Trademark- is used on a variety of construction projects,
most often when specified by the architect. The Sealants Division sales force
focuses on identifying projects appropriate for its products and then educating
and assisting architects in specifying the particular Henry Company product.
MONSEY BAKOR DIVISION
Monsey Bakor is one of the leading manufacturers and distributors in North
America of roofing products with a line that includes coatings, cements,
adhesives, and modified bitumen membranes, as well as pavement maintenance,
air-barrier, waterproofing and speciality products. Traditional Monsey Bakor
products include rubberized asphalt, elastomeric roof systems and professional
grade roof cements and coatings. Monsey Bakor pioneered the Building Envelope
System-Registered Trademark- (the "skin" of a building) which integrates many of
these products for use on all of the exterior surfaces of a building. Monsey
Bakor is also a world leader in highly specialized emulsions for the gypsum
industry and manufactures wax-based emulsions in several plants using
proprietary and patented processes. For a breakdown of Monsey Bakor's revenues
by major product lines, see "Management's Discussion and Analysis of Financial
Condition and
Results of Operations of Monsey Bakor."
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ROOFING PRODUCTS
Roofing products represent the majority of Monsey Bakor's total revenues and
are the foundation for the Building Envelope System-Registered Trademark-.
Monsey Bakor's roofing products can be classified into two major categories:
modified bitumen roofing systems, and roof maintenance coatings, cements and
adhesives. Modified bitumen was developed in Europe in the 1950s as an
improvement to traditional built-up-roofing systems. Although similar to
built-up-roofing systems, modified bitumen systems are more versatile, less
susceptible to environmental stresses and can be applied to both steep and
low-slope surfaces. Modified bitumen was brought to the United States in the
1970s by European manufacturers and in over twenty years modified bitumen
systems have become one of the fastest growing segments of the United States
roofing market because of their specifications, light weight and versatility.
Monsey Bakor's modified bitumen flagship product, "MODIFIEDPLUS" is sold to
industrial, commercial and institutional customers. Monsey Bakor's coatings,
cements and adhesives are also used in roofing systems. MBA GOLD MODIFIED
BITUMEN MEMBRANE ADHESIVE binds membranes to substrates and is designed
specifically to be used with MODIFIEDPLUS or other asphalt coated membranes.
MONSEY BAKOR ELASTOMERIC FLASHING CEMENT is used to repair leaks in asphalt or
modified bitumen membranes and bond with MODIFIEDPLUS membranes for vertical
wall applications, flashings, projections and edge detail work. Monsey Bakor
also produces a full line of coatings, cements and adhesives formulated
especially for contractors under the brand PRO-GRADE. Specific products include
variations of roof cement, plastic cement, flashing cement, tile cement,
modified bitumen adhesive, cold process adhesive and roof repair. PRO-GRADE also
includes a line of reflective aluminum roof coatings and white acrylic roof
coatings which help reduce a roof's temperature, retarding the deterioration
process and prolonging the life of the roofing material.
The MONSEY BAKOR METALSHIELD ELASTOMERIC ROOF SYSTEM is an economical
alternative to a complete metal roof replacement, at approximately 50% less cost
per square foot versus other reroofing alternatives. METALSHIELD ELASTOMERIC
ROOF SYSTEM is an elastomeric polymer latex-based roof coating designed to
provide a pliable, monolithic, weather resistant roof system. The METAL SHIELD
ELASTOMERIC ROOF SYSTEM is specifically designed for use over existing
corrugated steel, standing seam or metal roof substrate. Monsey Bakor also
produces flashing compounds under the brand name METALSHIELD to be used in
conjunction with the METALSHIELD ELASTOMERIC ROOF COATING.
INDUSTRIAL EMULSIONS
Monsey Bakor's industrial emulsions are used as coating, sizing,
strengthening and moisture-proofing additives by manufacturers of fiber products
such as gypsum wallboard, insulation board, gaskets, paper board, and glass
fibers. Monsey Bakor's primary emulsion product, wax-based industrial emulsions,
are specifically used by manufacturers of gypsum wallboards. Management believes
that Monsey Bakor is the major producer for this market with a dominant market
share. Sales of industrial emulsions have increased in recent years partially
due to increased environmental restrictions on volatile organic compound
emissions, which has created a demand for emulsion-based products over
solvent-based products. Monsey Bakor's wax-based emulsions are manufactured with
proprietary and patented processes that management believes contributes to
higher margins relative to those of competitors.
AIR BARRIERS
Monsey Bakor's air barrier systems are designed to reduce air flows through
exterior walls of buildings. The movement of air into a building (infiltration)
and out of a building (exfiltration) is caused by pressure differences produced
by wind, chimney effect and pressurization. If air flows through a building and
exfiltrates, it can deposit moisture on the cold masonry cladding, causing brick
or stone to undergo major changes due to moisture absorption. This dampness can
cause dimensional changes and accelerate the deterioration process.
Moisture-laden air from a humidified building can also develop into ice under
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freezing conditions, causing displacement of the exterior masonry cladding,
corrosion, and lower energy efficiency. In 1986, Canada required air barriers in
all buildings as an amendment to the National Building Code. In the United
States, however, there is no national standard and the air barrier market
remains in its infancy.
Monsey Bakor is the only company that produces both air barrier designs:
modified bitumen sheets and liquid. The advantage of a prefabricated modified
bitumen sheet is that it provides a flexible air barrier membrane capable of
bridging construction gaps and absorbing deflection. Monsey Bakor manufactures
four variants of BLUESKIN-REGISTERED TRADEMARK- differentiated by application
method. BLUESKIN-REGISTERED TRADEMARK- can be heat fused, self-adhered, or
embedded in adhesive. Adhesive-applied BLUESKIN-REGISTERED TRADEMARK- is often
used as a thru-wall flashing. AIR-BLOC 21 and 21 FR are liquid barriers designed
to be trowel-applied over blocks or concrete and AIR-BLOC 06 is an elastomeric
trowel or spray-applied membrane designed for masonry blocks. Monsey Bakor's
line of air barriers can be installed into existing buildings on either internal
or external walls or in the construction of new buildings.
SPECIALTY PRODUCTS
Monsey Bakor's specialty products include protective coatings for a variety
of industrial and commercial applications, such as specialty asphalt coatings to
protect wood, metal, mortar or thermal insulation. Monsey Bakor manufactures
undercoatings for mobile homes, as well as both solvent and water-based
rust-proofing products for the automobile industry. Monsey Bakor provides
specially formulated products to tractor trailer and mobile home manufacturers.
Monsey Bakor also produces three categories of pavement sealers and a broad
range of paint products for interior and exterior use.
MANUFACTURING
Monsey Bakor's products can be segmented into six product groups for
purposes of describing the manufacturing process. Of Monsey Bakor's ten
manufacturing facilities, eight produce essentially the same product groups. The
exceptions are the two Canadian facilities located in Petrolia, Ontario and
Mirabel, Quebec, which produce membranes and specialty adhesives, respectively.
Monsey Bakor's product groups are as follows:
- Cold applied liquid coatings, cements and adhesives
- Asphalt, coal tar and wax emulsions
- Acrylic-based roof and insulation coatings
- Hot melt rubberized asphalt roofing and waterproofing products (Ville St.
Pierre, Quebec only)
- Styrene-butadiene-styrene ("SBS") modified bitumen membranes, air barrier
and waterproofing membranes (Petrolia, Ontario only)
- Specialty adhesives (Mirabel, Quebec only)
The production process for cold applied coatings, cements and adhesives is
basically a controlled mixing process. Asphalt cutback and additional solvents
are pumped from separate storage tanks located in the tank farm into large
mixers. Depending on the end product, additives or fillers such as neoprene
modifiers or SBS polymers are mixed into the asphalt to enhance certain
qualities. In addition, some of Monsey Bakor's products are enhanced with
cellulose or chrysotile asbestos fibers which significantly increase the
strength and durability of the product. The final product is then discharged
from the mixers into drums, pails or bulk tankers.
Asphalt, coal tar and wax emulsions are manufactured with a slight variation
to the above process. These emulsions are manufactured in high speed colloid
mills which combine the base material (asphalt, coal tar or wax) with a water
and clay mixture. The resulting product is an emulsion which "suspends" the
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base material. From the colloid mill, the mixture enters an emulsion storage
tank, from which the product is either packaged or moved to another mixer. The
second mixer blends the emulsion with various additives or mineral fillers. The
final product is usually loaded into bulk tankers for shipment to industrial
end-users.
Acrylic-based roof and insulation coatings, as well as specialty paint
products, are manufactured in high-speed dispersing equipment and packaged in
drums or standard metal pails. Many of the specialty paint products include
additives in order to create a textured finish.
Hot melt rubberized asphalt roofing and waterproofing products are blended
in special temperature controlled mixers and packaged for easy handling at the
job site. These products are currently made only at the Ville St. Pierre, Quebec
facility.
In contrast to the batch production process for the products discussed
above, the production process for roofing and other membrane products is a
continuous process. The three primary products are SBS modified bitumen roofing
membranes, BLUESKIN-REGISTERED TRADEMARK- air-barrier membranes, and
EAVEGUARD-REGISTERED TRADEMARK- waterproofing membranes. These products are
manufactured at the Petrolia, Ontario facility which has three membrane
production lines. The process for roofing membranes begins with rolls of
fiberglass or polyester reinforcement which is unwound and saturated with
modified bitumen. The bitumen-saturated reinforcement then proceeds through a
thickness adjuster and excess liquid bitumen is scraped off. One side of the
membrane may then be coated with granules similar to those found on residential
shingles. If not coated with granules, both sides of the membrane are covered
with a polyfilm which prevents the modified bitumen from bonding when the
membrane is rolled prior to packaging. The membrane then proceeds through a
cooling process, after which it is cut, rolled, taped, and packed onto skids.
The production process for BLUESKIN-REGISTERED TRADEMARK- and
EAVEGUARD-REGISTERED TRADEMARK- is similar, but these products are manufactured
on a steel belt as they do not have a reinforcement matting.
The key materials used in the production of roofing and pavement products
are asphalt, mineral spirits, various fibers, resins, and polyester and glass
matting. For the production of industrial emulsions, the primary material is
refined wax. These raw materials are generally available on a regional basis and
supply disruptions are very rare. The Company maintains multiple sourcing
arrangements for all of its key materials and has experienced low price
volatility over the past several years. In addition to raw materials, packaging
supplies represent a meaningful portion of production cost.
SALES, MARKETING AND DISTRIBUTION
The majority of Monsey Bakor's revenues are derived from the sale of roofing
products in the United States. The Company believes that significant additional
revenue synergies remain to be achieved between U.S. and Canadian operations.
For example, Monsey Bakor has been working to increase the sale of Canadian
manufactured modified bitumen membranes in the United States. Although an
established product in Canada, modified bitumen membranes are a new product for
Monsey Bakor in the United States and have considerable sales growth potential.
Monsey Bakor employs a variety of distribution channels and marketing
strategies, including sales to distributors and retail outlets and direct sales
to end-users such as original equipment manufacturers and professional
contractors. Monsey Bakor's customer base is diversified, including
"do-it-yourself" retailers such as Lowe's Home Improvement Warehouse, Builders
Square and Hechinger Company, commercial distributors and original equipment
manufacturers such as U.S. Gypsum. No one customer accounted for more than 10%
of Monsey Bakor's sales and the top ten customers represent approximately 26% of
total sales.
Monsey Bakor's primary retail distribution channel is through large format
do-it-yourself retailers and other retailers such as Agway and Sears and account
for approximately 48% of total sales. The majority of the products sold through
this channel are coatings, adhesives and sealants mainly sold in prepackaged
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<PAGE>
containers. Monsey Bakor's two most popular products sold through this channel
are aluminum roof coatings and driveway sealants. Monsey Bakor has built strong
relationships with retailers such as Lowe's Home Improvement Warehouse,
Hechinger Company, Agway, Sears and Builders Square. The strategic location of
Monsey Bakor's 10 production facilities near major markets allows it to provide
nearly "just-in-time" delivery while limiting the need for significant finished
goods inventories.
The second major segment of customers for Monsey Bakor's roofing,
air-barrier and waterproofing products is the
"industrial-commercial-institutional" market. These customers include the
general contractors, sub-contractors and other professionals who operate in the
roofing and construction industries. The sales and marketing process for the
industrial-commercial-institutional market is substantially more complex than
for the retail market because the "project specifier" and the ultimate purchaser
are often not the same in the industrial-commercial-institutional market. The
industrial-commercial-institutional market is composed of a sequence of decision
makers including building owners, architects and engineers (project specifiers),
general contractors, sub-contractors, and distributors. A core element of Monsey
Bakor's marketing strategy has been to invest significant resources toward
hiring technically proficient salespeople, and providing them with intensive
training to enable them to communicate with customers at each level of the
decision process. Monsey Bakor's sales representatives and independent
representatives invest significant time and resources educating architects as to
the specifications and attributes of Monsey Bakor's products--especially the
specialty products. The goal is to have the architect design Monsey Bakor's
products (or at a minimum the "specifications") into the plans for a commercial
project, increasing the probability that the general contractor or
sub-contractor will select a Monsey Bakor product or system when they receive
the design specifications.
Monsey Bakor's industrial emulsions are sold almost exclusively to original
equipment manufacturers in bulk form. Monsey Bakor's wax based emulsions are
sold primarily to manufacturers of gypsum wallboard such as U.S. Gypsum and
National Gypsum. Monsey Bakor supplies approximately 70 of the estimated 85
plants in North America that produce gypsum board and also supplies plants in
Europe. Monsey Bakor's line of specialty products such as undercoatings for
mobile homes and rust proofing products for the auto industry are also sold
directly to manufacturers.
EMPLOYEES
As of June 30, 1998, Henry Company and Monsey Bakor together employed
approximately 617 persons, the majority of whom were involved in production and
distribution, with the balance engaged in administration, sales and clerical
work. Of these employees, approximately 495 were employed in the United States
and 122 in Canada. Approximately 42 employees located in Huntington Park,
California, 36 employees in Kimberton, Pennsylvania, 12 employees in Rock Hill,
South Carolina, 29 employees in Ville St. Pierre, Quebec and 2 employees in
Mirabel, Quebec are unionized and covered by collective bargaining agreements.
These collective bargaining agreements expire on June 30, 2000, March 31, 2000,
February 3, 2001, June 30, 1999 and February 28, 2000, respectively. The Company
believes that its relationship with its employees is good. Neither Henry Company
nor Monsey Bakor have experienced a work stoppage at any of its facilities in
over 20 years.
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PROPERTIES
The Company's operations are conducted at the owned or leased facilities
described below:
<TABLE>
<CAPTION>
FACILITY
LOCATIONS PRODUCTS MANUFACTURED/PRINCIPAL USE SQUARE FOOTAGE OWNED/LEASED
- ------------------------ -------------------------------------------------------- -------------- -------------
<S> <C> <C> <C>
UNITED STATES
Huntington Park, - Solvent and emulsion-based bituminous coatings 95,478 Leased
California - Mastics
- Pavement/driveway sealers
- Asphalt emulsions
- Acrylic coatings
Sacramento (Elk Grove), - Solvent and emulsion-based bituminous coatings 18,871 Leased
California - Mastics
- Pavement/driveway sealers
- Asphalt emulsions
El Paso, Texas - Solvent and emulsion-based bituminous coatings 10,583 Owned
- Mastics
- Pavement/driveway sealers
- Asphalt emulsions
Portland, Oregon - Solvent and emulsion-based bituminous coatings 55,735 Leased
- Mastics
- Pavement/driveway sealers
- Asphalt emulsions
- Acrylic coatings
Seattle (Auburn), - Distribution center 12,500 Leased
Washington - Asphalt emulsions
Ontario, California - Polyurethane foam 13,330 Leased
- Coatings for polyurethane foam
Houston, Texas - Asphalt tape sealants 44,000 Owned
Kimberton, Pennsylvania - Solvent and emulsion-based bituminous coatings 147,400 Owned
- Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
Indianapolis, Indiana - Solvent and emulsion-based bituminous coatings 63,000 Owned
- Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
Waterford, New York - Solvent and emulsion-based bituminous coatings 120,000 Owned
- Mastics
- Pavement sealers
- Acrylic and solvent-based coatings
Rock Hill, South - Solvent and emulsion-based bituminous coatings 40,000 Owned
Carolina - Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FACILITY
LOCATIONS PRODUCTS MANUFACTURED/PRINCIPAL USE SQUARE FOOTAGE OWNED/LEASED
- ------------------------ -------------------------------------------------------- -------------- -------------
<S> <C> <C> <C>
Garland, Texas - Solvent and emulsion-based bituminous coatings 76,500 Owned
- Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
- Acrylic coatings
Bartow, Florida - Solvent based bituminous coatings 34,000 Owned
- Mastics
- Pavement sealers
- Acrylic coatings
Kingman, Arizona - Solvent and emulsion-based bituminous coatings 39,275 Owned
- Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
- Acrylic coatings
CANADA
Petrolia, Ontario - Roofing membranes 58,500 Owned
- Waterproofing
- Air barriers
- Protection/Recovery Board
Mirabel, Quebec - Insulation additives and coatings 6,100 Owned
- Liquid air barrier membranes
- Specialty primers
Ville St. Pierre - Insulating coatings and adhesives 44,000 Owned
(Montreal), Quebec - Air barriers
- Solvent and emulsion-based bituminous coatings
- Road emulsions
- Asphalt and wax industrial emulsions
</TABLE>
The Company also owns or leases smaller sales and administration facilities
in Costa Mesa, California, Irvington, New Jersey and Mississauga, Ontario. In
addition, the Company owns a small facility in Troy, New York that it leases to
a third party. The Company believes that its facilities are in good operating
condition and are adequate to meet anticipated future requirements.
LITIGATION
In the ordinary course of business, the Company is periodically named as a
defendant in a variety of product liability lawsuits including "slip and fall"
claims relating to pavement sealants and claims for alleged product failure. The
Company does not believe these cases will have a material adverse effect on the
Company's business, financial condition or results of operations.
Monsey Bakor has been identified as a participating responsible party by the
EPA under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, in litigation in the Federal District Court for the
Eastern District of Pennsylvania. Monsey Bakor's involvement with the property,
a former waste oil recycling facility in Douglassville, Pennsylvania, was
limited to the temporary storage and treatment of certain solvents on the site.
A proposed consent decree covering the EPA's alleged response costs has been
negotiated with the EPA which would fix the responsibility for Monsey Bakor and
approximately 150 other potentially responsible parties who were determined to
be
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responsible for a minor portion of such costs. Monsey Bakor's portion of this
settlement would be approximately $372,000.
As of September 2, 1998, Monsey Bakor was a party to 58 state court cases
alleging certain asbestos-related injuries. There were two new cases filed in
1997 and four cases were filed each in 1996 and 1995. The Company believes that
its use of chrysotile asbestos fibers, which are encapsulated by asphalt in the
manufacturing process, is in accordance with applicable laws. Although Monsey
Bakor has not paid any amounts in judgment or settlement of any asbestos-related
claim to date, there can be no assurance that any such claim will not in the
future result in a material adverse judgment against, or settlement by, the
Company. The costs of these suits are currently funded by a joint-defense
arrangement among Monsey Bakor's insurance carriers and the Company believes
that such insurance coverage is adequate. However, neither Henry Company nor
Monsey Bakor is covered by insurance for asbestos-related claims for injuries
that are alleged to have arisen after 1985. The Company does not believe that
the outcome of these suits will have a material adverse effect on the Company's
business, financial condition or results of operations.
ENVIRONMENTAL MATTERS
The Company is subject to extensive and changing Environmental Laws with
which it believes it is in substantial compliance. However, there can be no
assurance that the discovery of presently unknown environmental conditions or
changes in the scope, interpretation or enforcement of Environmental Laws will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
Monsey Bakor's Kimberton facility was formerly occupied by a pharmaceutical
manufacturer whose operations resulted in groundwater contamination identified
on the site and surrounding area. The contaminant of concern was
trichloroethylene which required various remedial activities, including the
provision of alternate water supplies to users in the surrounding area and a
groundwater treatment program. Remedial work is being completed under a consent
decree the EPA negotiated in 1990 with the pharmaceutical manufacturer and
Monsey Bakor and a confidential cost sharing agreement between these two
companies. Monsey Bakor's costs under the consent decree in 1995, 1996 and 1997
were approximately $60,000, $63,000 and $67,000, respectively, and are not
expected to be significantly different during 1998 and 1999. Effective January
1, 1997, the Company adopted a new accounting pronouncement, American Institute
of Certified Public Accountants' Statement of Position 96-1, Environmental
Remediation Liabilities, relating to this consent decree and cost-sharing
agreement. Upon adoption, Monsey Bakor recorded a charge against operations and
accrued as a liability the entire expected costs to it of the remedial work over
the remaining term of the consent decree and cost-sharing agreement. Costs paid
under the consent decree and cost-sharing agreement of $67,000 in 1997 reduced
the liability to $3.6 million at December 31, 1997.
Under current Federal and state regulatory programs, the Company is
obligated to upgrade, replace or close all non-complying underground storage
tanks that it owns or operates to meet certain corrosion protection and
overfill/spill containment standards on or before December 22, 1998. The Company
estimates that the capital expenditures required to comply with these regulatory
programs for the remainder of the 1998 fiscal year and for the 1999 fiscal year
will not be material or have a material adverse effect on the Company's earnings
or competitive position. Such estimates, however, are based on factors and
assumptions that are subject to change, including modifications of regulatory
requirements, detection of unanticipated environmental conditions or other
currently unexpected circumstances.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding each of the
Company's directors and executive officers as of September 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Warner W. Henry(1)(2)............ 60 Chairman of the Board and Chief Executive Officer
Joseph T. Mooney, Jr.(1)......... 63 Vice Chairman of the Board
Paul H. Beemer(1)(2)............. 75 Vice Chairman of the Board
Richard B. Gordinier(1)(2)....... 56 President, Chief Operating Officer and Director
Jeffrey A. Wahba(1)(2)........... 41 Chief Financial Officer, Secretary and Director
S. Duncan Moffat................. 50 President--Henry Coatings Division
James Doose...................... 50 President--Resin Technology Company
John R. Enright.................. 58 President--Henry Sealants Division
Larry A. Karasiuk................ 52 President--Monsey Bakor Canada
Norman F. Nickerson.............. 58 Vice President of Sales--Monsey Bakor U.S.
Frederick H. Muhs(1)............. 59 Director
Carol F. Henry................... 59 Director
Donald H. Ford................... 91 Director
Terrill M. Gloege(2)............. 62 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
WARNER W. HENRY has been Chairman of the Board, Chief Executive Officer and
a director of Henry Company or its parent since 1974, and had served in various
sales and sales management positions with Henry Company from 1963 to 1974. Mr.
Henry also serves on the board or is an Overseer of the following organizations:
The Employers Group, Hoover Institution, Los Angeles Music Center Opera and the
Los Angeles Chamber Orchestra. Mr. Henry received his B.A. in Economics and
M.B.A. from Stanford University.
JOSEPH T. MOONEY, JR. Mr. Mooney has served as a Vice Chairman of the Board
of the Company since the closing of the Acquisition. Mr. Mooney began his career
with Monsey Bakor in 1960 and previously served as Chairman of the Board and
President of Monsey Bakor from 1972 to 1998, where his responsibilities included
major strategic decisions regarding product and equipment purchases as well as
oversight of all of Monsey Bakor's financial operations. Mr. Mooney received a
B.S. from Villanova University.
PAUL H. BEEMER has served as Vice Chairman of Henry Company since 1983, and
as a director of Henry Company or its parent since 1964. Mr. Beemer began with
Henry Company in 1947, holding various technical and sales management positions,
and has also served as General Manager and President. Mr. Beemer was responsible
for the formulation and development of a number of Henry Company's key products
and continues to serve in a part-time technical consulting role. Mr. Beemer
received a B.S. from Loyola University (Los Angeles).
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<PAGE>
RICHARD B. GORDINIER has been President and a director of Henry Company
since 1988. From 1985 to 1988, Mr. Gordinier was President of Van De Kamp Dutch
Bakers. From 1979 to 1984, Mr. Gordinier served as President of the
International Division of Max Factor and Co., and from 1964 to 1979 held senior
management positions at Estee Lauder, Procter and Gamble Co. and Bristol-Myers
Squibb Co. Mr. Gordinier is currently a director of The Raymond Company and
Lawry's Restaurants, Inc. Mr. Gordinier received a B.S. in Civil Engineering
from Princeton University.
JEFFREY A. WAHBA has been Chief Financial Officer, Secretary and a director
of Henry Company since 1986. From 1984 to 1985, Mr. Wahba served as Chief
Financial Officer of Vault Corporation. From 1980 to 1984, Mr. Wahba was with
Max Factor and Co. and served as Controller of the International Division. Mr.
Wahba received a B.S. in Industrial Engineering and an M.S. in Industrial
Engineering and Engineering Management from Stanford University, as well as an
M.B.A. from the University of Southern California.
S. DUNCAN MOFFAT has served as President--Henry Coatings Division since
1997. From 1992 to 1997, Mr. Moffat was Senior Vice President of Coatings
Operations for Henry Company, and from 1989 to 1992 served as Director of West
Coast Operations for Esselte Pendaflex Corporation. Prior to that time, Mr.
Moffat served in various operations management capacities for Procter and Gamble
Co. Mr. Moffat received a B.S. in Mechanical Engineering from Princeton
University.
JAMES DOOSE has been the President of the Resin Technology Company since
1994. Mr. Doose and a partner founded the Resin Technology Company in 1982. Mr.
Doose served as Executive Vice President of the Resin Technology Company from
1982 to 1994. From 1973 to 1982, Mr. Doose was with Reichold Chemical Company in
various sales and technical positions. Mr. Doose received a B.S. in Chemistry
from California Polytechnic University at Pomona.
JOHN R. ENRIGHT has served as President--Henry Sealants Division, since
1993. From 1983 to 1992, Mr. Enright was Vice President of Sales and held other
management positions with Lennox Industries. From 1976 to 1983, Mr. Enright held
various sales management positions with Wallace Silversmiths Inc. Mr. Enright
received a B.S. in Business Management from San Jose State University.
LARRY A. KARASIUK Mr. Karasiuk has served as President--Monsey Bakor Canada
since the closing of the Acquisition. Mr. Karasiuk served as the President of
Bakor Holdings, Inc. and as the President of Monsey Bakor's Canadian operations
beginning in 1991. From 1982 to 1991, Mr. Karasiuk was the Vice President of
Marketing and Sales with the predecessor company of Bakor Holdings, Inc.,
Bakelite Thermosets Building Materials Division. Prior to that time, Mr.
Karasiuk served in various management positions with Hunter Douglas, a
subsidiary of Alcan. Mr. Karasiuk attended Simon Fraser University and York
University. Upon the closing of the Acquisition, Mr. Karasiuk will serve as
President--Monsey Bakor Canada.
NORMAN F. NICKERSON Mr. Nickerson has served as Vice President of
Sales--Monsey Bakor U.S. since the closing of the Acquisition. Mr. Nickerson
served as Vice President of Sales of Monsey Bakor from 1985 to 1998. From 1979
to 1985, Mr. Nickerson was General Manager of Monsey Bakor's Southeastern
division. From 1972 to 1979, Mr. Nickerson was General manager of Cosmicoat,
Inc. Mr. Nickerson received his B.A. in History from Allegheny College.
FREDERICK H. MUHS has been a director of Henry Company since 1996. Since
1991, Mr. Muhs has been a private investor and business consultant. From 1963 to
1990, Mr. Muhs held various positions in the investment and investment banking
operations of the Prudential Insurance Company of America, including as Managing
Director for its Prudential Bache Securities, Inc. subsidiary. Mr. Muhs received
a B.A. in Economics and an M.B.A. from Stanford University.
CAROL F. HENRY has been a director of Henry Company since 1970. She is
currently involved with several civic and charitable organizations. Mrs. Henry
received a B.A. and M.A. in Education from Stanford University.
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DONALD H. FORD has been director of Henry Company since 1958. From 1933 to
the present, Mr. Ford has practiced law with the law firm of Overton, Lyman and
Prince in Los Angeles, California. Mr. Ford received a B.S. in Commerce from
Oregon State University and a J.D. from the University of Michigan.
TERRILL M. GLOEGE has been a director of Henry Company since 1993. He is
currently the Chief Financial Officer of the Carson Companies. Mr. Gloege is
currently a director of Dominguez Services Corporation, a water services utility
company. Mr. Gloege received a B.S. from the United States Coast Guard Academy
and an M.B.A. from Stanford University.
The Company's bylaws provide that the Board of Directors of the Company
shall consist of nine directors. The number of authorized directors may be
increased or decreased from time to time by an amendment to the bylaws adopted
by the Board of Directors or by the Company's shareholders. Directors are
elected at each annual meeting of the Company's shareholders to hold office
until the next annual meeting and until their successors have been elected and
qualified. Executive officers are appointed by the Board of Directors and serve
at the Board's discretion, subject to any contracts of employment with the
Company.
Warner W. Henry and Carol F. Henry are husband and wife.
BOARD COMMITTEES
The Executive Committee is comprised of Warner W. Henry, Paul H. Beemer,
Joseph T. Mooney, Jr., Richard B. Gordinier and Frederick H. Muhs. Jeffrey A.
Wahba serves as Secretary of the Executive Committee without a vote. The
Executive Committee has the full authority of the Board of Directors, except
with respect to the approval of any action for which shareholder approval is
required by law or for certain other fundamental corporate actions, which
require the act of the full Board. The Audit Committee is comprised of Warner W.
Henry, Paul H. Beemer, Richard B. Gordinier, Terrill M. Gloege and Jeffrey A.
Wahba. The Audit Committee oversees the activities of Henry Company's
independent accountants.
EXECUTIVE AND DIRECTOR COMPENSATION
The Company's directors do not receive any cash compensation for service on
the Board of Directors or any Committee thereof, but directors may be reimbursed
for certain expenses in connection with attendance at board and committee
meetings.
Henry Company does not have a compensation committee or other Board
committee performing equivalent functions. Executive and employee compensation
is determined by Richard B. Gordinier. Annual increases in compensation for Mr.
Gordinier are determined by the Executive Committee of the Board without the
participation of Mr. Gordinier and increases in Mr. Henry's annual compensation
is determined by the Executive Committee without the participation of Mr. Henry.
During the 1997 fiscal year, Messrs. Henry, Beemer, Gordinier and Wahba
participated in deliberations of the Executive Committee regarding compensation
of Henry Company executive officers. No executive officer of the Company serves
as a member of the Board of Directors of any other entity which has one or more
members serving as a member of the Company's Board of Directors.
Paul H. Beemer is compensated for consulting advisory services pursuant to a
consulting agreement with the Company. Mr. Beemer provides the Company with a
certain number of hours of consulting advisory services each quarter for
compensation of $100,000 per year. Mr. Beemer may also provide additional
services which are compensated at the rate of $105 per hour. The consulting
agreement also contains a noncompetition clause restricting Mr. Beemer's
employment or service with a business entity that competes with the Company in
its present or future marketing areas. Mr. Beemer's consulting agreement expired
June 30, 1998, but has been extended by the Company to June 30, 1999. In fiscal
year 1997, Mr. Beemer received $112,705 in compensation under his consulting
agreement.
Through The Muhs Company, Inc., Frederick H. Muhs provides certain business
and financial consulting services to Henry Company. Henry Company pays The Muhs
Company, Inc. a retainer of $3,000 per month for these services. See "Certain
Transactions."
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SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
received for services rendered to Henry Company in all capacities during the
fiscal year ended December 31, 1997 by Henry Company's Chief Executive Officer
and each of Henry Company's five other most highly compensated executive
officers whose annual salary and bonus for the year ended December 31, 1997
exceeded $100,000 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION OTHER INCENTIVE
--------------------------------- ANNUAL PLAN ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMP.(1) LTIP PAYOUT COMPENSATION
- ---------------------------------------------------- --------- ---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Warner W. Henry .................................... 1997 $ 330,000 $ -- $ 21,450 -- --
Chairman of the Board and
Chief Executive Officer
Richard B. Gordinier ............................... 1997 245,415 122,523 23,888 -- 30,187(2)
President and Chief
Operating Officer
James Doose ........................................ 1997 229,400 3,000 -- -- --
President--Resin Technology Company
Jeffrey A. Wahba ................................... 1997 151,400 29,000 11,381 11,168(3) 12,494(4)
Chief Financial Officer,
Vice President and Secretary
John R. Enright .................................... 1997 154,500 31,000 4,295 -- --
President--Henry Coatings Division
James T. Nelligan(5)................................ 1997 149,000 33,000 11,450 -- --
</TABLE>
- ------------------------
(1) "Other Annual Compensation" represents contributions to the accounts of the
Named Executive Officers under Henry Company's Nonqualified Executive
Deferral Plan and Profit Sharing / 401(k) Plan. See "Management--Executive
Deferral Plan" and "Management--Profit Sharing/401(k) Plan."
(2) Included in this amount is $17,937 of debt owed to and forgiven by Henry
Company and $12,250 in annual compensation as result of the difference
between the market rate and actual interest rate on certain loans from Henry
Company. See "Management--Employment Agreements and Compensation
Arrangements" and "Certain Transactions."
(3) Represents incentive plan compensation payments received in 1997 and earned
as follows: $5,629 in 1995 and $5,539 in 1996. See "Management--Employment
Agreements and Compensation Arrangements."
(4) Represents an elected payout from Henry Company's Executive Deferral Plan
for contributions to such plan by Mr. Wahba and Henry Company of $2,400 and
$7,487, respectively, which were made in 1992. The remainder of $2,607
represents interest earned on the contributed amounts.
(5) James T. Nelligan was the former President of Henry Company's Coatings
Division. Mr. Nelligan's employment with the Company terminated on March 31,
1998.
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WARRANT GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding warrants to
purchase shares of Henry Company's capital stock granted to any Named Executive
Officer during the year ended December 31, 1997:
WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES WARRANTS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
WARRANTS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR (2) DATE VALUE(3)
- ----------------------------------------------------- ----------- --------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Warner W. Henry...................................... 400,000(1) 100 $ 12.94 9/30/12 $ 44,000
</TABLE>
- ------------------------
(1) On October 1, 1997 Henry Company granted the Warner W. Henry Living Trust
warrants to purchase an aggregate of 400,000 shares of Henry Company capital
stock, consisting of 12,000 shares of Class A Common Stock and 388,000
shares of Common Stock (the "Henry Warrants"). The Henry Warrants expire on
September 30, 2012 and may be exercised in whole or in part at variable and
increasing exercise prices over the term of the Henry Warrants. The current
and maximum exercise prices of the Henry Warrants for both Class A Common
Stock and Common Stock are $12.94 and $38.82 per share, respectively. Warner
W. Henry is the trustee of the Warner W. Henry Living Trust and may be
assumed to have beneficial ownership of the Henry Warrants and shares
purchasable upon exercise of the Henry Warrants. The Henry Warrants were
issued as further consideration for certain loans made to Henry Company by
Mr. Henry.
(2) The warrants have an exercise price that exceeded the fair value of the
capital stock at the date of grant.
(3) The grant date present value of each warrant is estimated at 11 CENTS using
the Black-Scholes pricing model with the following assumptions: risk-free
rate of return of 6.0%, expected warrant life of 15 years; forfeiture rate
of zero (0); volatility of 20%; no expected dividends; and no adjustments
for non-transferability.
EXECUTIVE DEFERRAL PLAN
Henry Company has adopted an Executive Deferral Plan (the "Plan") to allow
certain management personnel and highly compensated employees to defer a portion
of their annual salary and bonus to be paid at a future date chosen by them or
upon their retirement, death, disability or termination of employment.
Participants in the Plan are selected by an administrative committee (the "Plan
Committee") appointed by the Board of Directors which establishes eligibility
qualifications and manages and administers the Plan. To participate in the Plan
for any year, a participant must make an irrevocable election to defer at least
$2,000 to a maximum of 100% of his or her base salary and bonus for such year
prior to the beginning of the year for which the salary and bonus relate. For
each Plan year Henry Company may contribute to each participant's account at the
Plan Committee's discretion. Deferred amounts are credited with interest at the
September "Moody's Seasoned Corporate Bond" rate that is published prior to the
end of the Plan year preceding the Plan year for which the rate is used.
Participants are at all times fully vested in their deferred compensation
accounts except in the event of a termination of their employment, in which case
participants are vested to only a percentage of any Company contributions that
have been made, calculated according to the executive's number of years of
employment. At the time of deferral, participants may elect to receive future
short-term payouts with respect to each year's deferral, payable in a lump sum
not prior to the sixth Plan year following such deferral. Amounts payable to a
participant pursuant to the Plan are unfunded amounts to be paid from the
general assets of the Company and are at all times subject to the risk of the
Company's business. The Company funds the Plan with whole life insurance
policies. The policies are held by a trust that ensures funding of employee
benefits upon a change of control, a change in management or a change in the
Company's financial condition.
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PROFIT SHARING/401(K) PLAN
Henry Company's Profit Sharing / 401(k) Plan, as amended and restated as of
January 1, 1995 (the "401(k) Plan") is a qualified profit sharing plan with a
401(k) feature covering all employees of Henry Company and its affiliates who
have completed one year of service and attained the age of 21. Participants in
the 401(k) Plan may contribute up to 15% of their annual compensation to the
401(k) Plan through salary deferral. In addition, Henry Company may make annual
discretionary matching contributions not to exceed 10% of a participant's annual
compensation. Participating employees are 100% vested in participant
contributions and become vested to a certain percentage of any Henry Company
discretionary matching contributions according to the employee's years of
service with Henry Company or its affiliates.
EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS
Henry Company has entered into employment agreements with Mr. Gordinier, Mr.
Doose, Mr. Enright, Mr. Mooney and Mr. Karasiuk, and into incentive compensation
agreements with Mr. Enright and Mr. Wahba.
Mr. Gordinier's employment agreement entitles him to a base salary and a
bonus, subject to annual review by the Executive Committee of the Board of
Directors, and to certain other benefits, including reimbursement of certain
club memberships. In fiscal year 1997, Mr. Gordiner's base salary was $245,415
and his bonus was $122,523. Mr. Gordinier is also entitled to a bonus if a
distribution of money or assets is made to the shareholders of the Company. If a
distribution is made because of a sale of the Company, Mr. Gordinier would
receive 10% of the sale amount in excess of $5,895,595, reduced by $200,000 and
the outstanding balance of any outstanding loans to Mr. Gordinier (the
"Reduction Amount"). In connection with Mr. Gordiner's employment, Henry Company
has loaned him a total of $175,000 of loans which do not bear interest. As of
December 31, 1997, the aggregate amount outstanding under these loans was
$175,000. If Mr. Gordinier voluntarily terminates his employment or if the
Company terminates his employment for any reason other than "for cause" (as
defined in the employment agreement), Mr. Gordinier is entitled to a one-year
severance payment equal to his then salary and guaranteed bonus and a
termination award (the "Termination Award"). The Termination Award is equal to
10% of the amount by which the fair market value of the Company exceeds
$5,895,595, such fair market value to be determined by appraisal, subject to
reduction by the Reduction Amount. The Company maintains a life insurance policy
on the life of Mr. Gordinier in the amount of $2,000,000 to assist in funding
the Termination Award. The Termination Award is payable in four equal annual
installments, with the unpaid balance bearing interest at the Bank of America
prime rate existing on the due date of the first installment. Mr. Gordinier's
employment agreement automatically renews annually, unless terminated earlier by
either party.
Mr. Doose's employment agreement provides for a base salary, subject to
annual cost-of-living and discretionary increases. For 1997, Mr. Doose's base
salary was $229,400. Mr. Doose also receives annual bonuses based on the net
operating profits of, and on the return on capital employed at, RTC. If Mr.
Doose is terminated without cause, he is entitled to base compensation plus the
bonus calculated on net operating profits for the remaining term of the
agreement. The agreement contains a covenant restricting Mr. Doose from
competing with Henry Company for two years after the termination of employment.
Mr. Doose's employment agreement terminates January 1, 2004.
Pursuant to his employment agreement, Mr. Enright receives an annual base
salary, currently $154,500, subject to annual discretionary increases, and an
annual incentive bonus based upon certain agreed-upon objectives. During the
term of Mr. Enright's employment, and for twelve months following termination,
Mr. Enright has agreed not to directly or indirectly compete with or engage in a
business competitive with the Company. Mr. Enright's employment agreement is
automatically extended for additional one-year terms each July 1, unless
terminated sooner.
88
<PAGE>
Mr. Enright's incentive compensation agreement provides for deferred
compensation based upon an increase in the net book value of the Henry Sealants
Division. This amount is payable to Mr. Enright upon his termination or the
Division's cessation of operations (the "Termination Date"), although the
Company may accelerate the benefit in the event of Mr. Enright's death or
disability. Beginning January 1, 1998, Mr. Enright will receive annually 25% of
the deferred benefit amount that would be payable if the Termination Date had
occurred as of the end of the previous fiscal year. In addition, if Henry
Company sells all or substantially all of the assets of the Henry Sealants
Division, Mr. Enright is entitled to an amount equal to the greater of the
deferred benefit amount as of the month preceding such sale or an amount based
on the excess of the amount of sales proceeds over the Division's initial book
value.
Henry Company has entered into an incentive compensation agreement with Mr.
Wahba providing for additional compensation to Mr. Wahba upon the termination of
his employment, Henry Company's liquidation or cessation of business, or a
change of control of Henry Company. Such compensation is based upon the
cumulative operating profit for certain Henry Company divisions from a starting
date in 1988 or 1990. A portion of the deferred benefit amount may be paid to
Mr. Wahba following each fiscal year. In addition, Mr. Wahba is entitled to
receive a payment based on the excess of the amount of proceeds received from
the sale of a Henry Company division over an initial defined book value for that
division.
Mr. Mooney is a Vice Chairman of the Board of the Company with an annual
base salary of $350,000, subject to annual review. The term of Mr. Mooney's
employment agreement is for two years from the closing of the Acquisition. With
respect to the capital stock of the Company that was purchased by Mr. Mooney in
connection with the Acquisition, Mr. Mooney has the right to require the Company
to repurchase one-sixth of such capital stock each year over a five-year period
beginning January 1, 2004 (except that the last one-sixth would be repurchased
July 1, 2008) for an aggregate purchase price of $3.0 million. Such capital
stock would also be repurchased upon Mr. Mooney's death, in which event the
purchase would be funded by the proceeds from the key person life insurance
policies the Company holds on Mr. Mooney's life. See "The Transactions" and
"Management--Key Person Life Insurance."
Mr. Karasiuk is employed as the President of the Company's Monsey Bakor
division with an annual base salary of Canadian $250,000, subject to annual
review. Mr. Karasiuk is also entitled to an annual bonus of up to 50% of his
base salary in the discretion of the Company's Board of Directors. The term of
Mr. Karasiuk's employment agreement is for three years from the closing of the
Acquisition.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation authorize the indemnification of
Company officers and directors to the fullest extent permissible under
California law. Subject to the Articles of Incorporation and California law, the
Bylaws provide that Henry Company shall indemnify each of its directors and
officers against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that any person is or was a Company director or officer. The
Company also purchased a director's and officer's liability insurance policy
following the Acquisition.
KEY PERSON LIFE INSURANCE
Henry Company currently maintains a term life insurance policy in the amount
of $2,000,000 on the life of Richard B. Gordinier, under which Henry Company is
the sole beneficiary. The Company also maintains whole life insurance policies
in the amount of $7,770,000 on the life of Joseph T. Mooney, Jr., under which
the Company is the sole beneficiary.
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<PAGE>
SHAREHOLDERS
The following sets forth information regarding beneficial ownership of the
Common Stock and the Class A Common Stock of the Company as of September 1,
1998. Henry Company believes that persons and entities named in the table have
sole voting and investment power with respect to all shares of Class A Common
Stock and Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable. There is no established public trading market
for any class of Henry Company's equity securities. See "The Transactions."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
BENEFICIAL OWNERSHIP OF
COMMON STOCK CLASS A COMMON STOCK TOTAL VOTING
--------------------------------- -------------------------- POWER(1)(2)(3)(4)(5)
NAME AND ADDRESS NUMBER OF NUMBER OF ---------------------
OF BENEFICIAL OWNER SHARES PERCENT(1)(2)(3) SHARES PERCENT PERCENT
- --------------------------- ------------ ------------------- ------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C>
Warner W. Henry, Trustee,
Warner W. Henry Living
Trust(6)................... 388,000(1) 53.0% 18,000(4) 100.0% 74.7%
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as
Trustee of the William
Warner Henry Trust
established under the Henry
Trust dated 9/17/93........ 64,106 8.8 -- -- 4.7
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as
Trustee of the Catherine
Anne Henry Trust
established under the Henry
Trust dated 9/17/93........ 64,106 8.8 -- -- 4.7
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as
Trustee
of the Michael Andrew Henry
Trust established under the
Henry Trust dated
9/17/93.................... 64,106 8.8 -- -- 4.7
2911 Slauson Ave.
Huntington Park, CA
90255
Frederick H. Muhs.......... 82,500 (2) 11.3 -- -- 6.1
Joseph T. Mooney, Jr....... 67,500 (3) 9.2 -- -- 5.0
Carol F. Henry............. 1,682 0.2 -- -- 0.1
<CAPTION>
TOTAL ECONOMIC
INTEREST(1)(2)(3)(4)
NAME AND ADDRESS ---------------------
OF BENEFICIAL OWNER PERCENT
- --------------------------- ---------------------
<S> <C>
Warner W. Henry, Trustee,
Warner W. Henry Living
Trust(6)................... 54.1%
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as
Trustee of the William
Warner Henry Trust
established under the Henry
Trust dated 9/17/93........ 8.6
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as
Trustee of the Catherine
Anne Henry Trust
established under the Henry
Trust dated 9/17/93........ 8.6
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as
Trustee
of the Michael Andrew Henry
Trust established under the
Henry Trust dated
9/17/93.................... 8.6
2911 Slauson Ave.
Huntington Park, CA
90255
Frederick H. Muhs.......... 11.0
Joseph T. Mooney, Jr....... 9.0
Carol F. Henry............. 0.2
</TABLE>
- ------------------------------
(1) Assumes exercise of the Henry Warrants to purchase 388,000 shares of Common
Stock which expire on September 30, 2012. The warrants may be exercised in
whole or in part at variable exercise prices which increase over the term of
the warrant. The current and maximum exercise prices for such Common Stock
is $12.94 and $38.82 per share, respectively. See "Management-- Executive
and Director Compensation."
(2) Assumes the exercise of Mr. Muhs' right to purchase up to 55,000 shares of
Common Stock in amounts sufficient to maintain his current percentage of
economic interest in the Company following the exercise of any of the Henry
Warrants (and the purchase of shares of Common Stock by Mr. Mooney pursuant
to his similar rights).
(3) Assumes the conversion of Mr. Mooney's redeemable convertible preferred
stock into 22,500 shares of Common Stock and the exercise of Mr. Mooney's
right to purchase up to 45,000 shares of Common Stock in amounts sufficient
to maintain his current percentage of economic interest in the Company
following the exercise of any of the Henry Warrants (and the purchase of
shares of Common Stock by Mr. Muhs pursuant to his similar right).
(4) Assumes exercise of the Henry Warrants to purchase 12,000 shares of Class A
Common Stock which expire on September 30, 2012. The warrants may be
exercised in whole or in part at variable exercise prices which increase
over the term of the warrants. The current and maximum exercise prices for
such Class A Common Stock is $12.94 and $38.82 per share, respectively. See
"Management--Executive and Director Compensation."
(5) The Common Stock and the Class A Common Stock vote together as a single
class. However, each share of Class A Common Stock entities the holder to 35
votes on all matters for which there is a vote, while each share of Common
Stock entitles the holder to one vote on all such matters.
(6) Warner W. Henry is the trustee of the Warner W. Henry Living Trust and may
be assumed to have beneficial ownership of all shares and warrants held by
the trust. Amount shown does not include 1,682 shares owned by Carol Henry,
as to which shares Mr. Henry disclaims beneficial ownership.
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<PAGE>
CERTAIN TRANSACTIONS
The Company leases its Huntington Park headquarters and certain operating
equipment from a family trust and living trust for which Warner W. Henry is the
trustee pursuant to three separate real property leases and one equipment lease.
These leases expire in 2002, 2006 and 2016. The total rent paid in 1997 for the
Huntington Park leases was approximately $424,904. The Company leases additional
property at its Huntington Park headquarters from Alamo Development Company.
Frederick H. Muhs, a director of the Company, is a shareholder of Alamo
Development Company along with certain other members of his family. The Company
currently pays rent of $5,330 per month pursuant to this lease which is subject
to annual adjustments to reflect changes in the Bank of America prime rate. The
lease expires February 28, 2002 and provides for the Company's option to
purchase the property upon six months written notice. The Company also leases
certain warehouse facilities in Irvington, New Jersey, from Sea Jay, Inc. The
shareholders of Sea Jay, Inc. are Joseph T. Mooney, Jr. and certain of his
family members. The Company currently pays rent of $2,333 per month pursuant to
this lease which expires December 31, 1999. The Company has the option to extend
the lease for five additional consecutive one year terms at increasing annual
rental amounts. The Company believes that the rent paid under the above leases
represent substantially fair market value and that the other terms and
conditions of the leases are commercially reasonable.
Henry Company has made loans to Richard B. Gordinier for personal reasons
pursuant to various loan agreements and promissory notes originated at various
times since 1988 for one year terms that were subsequently extended for
successive one year terms. The loans currently bear interest at Bank of
America's prime rate, currently 8.5%, and may be prepaid without penalty. As of
December 31, 1997, an aggregate of $376,428 was outstanding on these loans. In
addition, Mr. Gordinier has received $175,000 of non-interest bearing loans in
connection with his employment. See "Management--Employment Agreements and
Compensation Arrangements."
Warner Henry previously loaned approximately $5.0 million to Henry Company
on a subordinated basis. The indebtedness accrued interest at a variable rate
based on Bank of America's prime rate. As of December 31, 1997, the accrued
interest on this indebtedness was $36,774. The Company repaid this indebtedness
in full at the closing of the Acquisition.
Mr. Muhs has purchased 27,500 shares of Common Stock of the Company for $2.0
million in cash at the closing of the Acquisition. Mr. Muhs was also granted
rights to purchase sufficient shares of Common Stock of the Company to prevent
dilution of Mr. Muhs' ownership percentage in the event of the exercise of the
Henry Warrants and outstanding rights held by Mr. Mooney.
Henry Company performs certain administrative services for an affiliate,
Henry II Company, a California corporation, pursuant to an administrative
services agreement that provides for payments from Henry II Company to Henry
Company. These payments are expected to total $1.1 million in 1998. Henry II
Company's shareholders are Warner W. Henry, Carol Henry, and certain trusts for
the benefit of their children.
At December 31, 1997, Henry Company received a note from Henry II Company
for $1.9 million representing the purchase price for its interest in certain
real property. Such real property related solely to the business of Henry II
Company and had a net book value of $1.9 million. The note bears interest at the
prime rate, and is repayable in a lump sum at any time up to December 31, 2002.
The balance of such note was $2.0 million at August 31, 1998, which amount
reflects $0.1 million of accrued interest. In addition, at December 31, 1997
Henry II Company owed $2.2 million to Henry Company, representing past advances
made on behalf of Henry II Company. Henry II Company repaid $2.1 million of
principal in 1997. The note evidencing this debt does not bear interest and is
payable upon demand. At August 31, 1998 the balance of such note was $2.2
million.
91
<PAGE>
Henry Company receives business and financial consulting services from The
Muhs Company, Inc., of which Frederick H. Muhs, a director of the Company, is
the President and controlling shareholder. Henry Company paid $33,000 for these
services in 1997. See "Management--Executive and Director Compensation."
Joseph T. Mooney, Jr. and certain of his family members are the shareholders
of Sea Jay, Inc. Monsey Bakor sold approximately $39,000 of product to Sea Jay
in fiscal year 1997.
The Company is a party to employment and consulting agreements with certain
directors and officers of the Company. See "Management."
92
<PAGE>
DESCRIPTION OF THE CREDIT FACILITIES
THE NEW BANK CREDIT FACILITY
Concurrently with the consummation of the Transactions, the Company entered
into a credit agreement providing for a new $35.0 million credit facility (the
"New Bank Credit Facility"). The New Bank Credit Facility allows the Company to
obtain revolving credit loans for working capital in an aggregate amount
outstanding of up to $25.0 million subject to a borrowing base, plus $10.0
million for capital expenditures. Working capital loans under the New Bank
Credit Facility bear interest at the lender's prime rate or at a LIBOR-based
rate, and capital expenditure loans bear interest at slightly higher rates than
the working capital loans.
The New Bank Credit Facility terminates on the fifth anniversary of the
consummation of the Acquisition. As of December 31, 1997, on a pro forma basis,
the Company would have had an estimated $17.2 million available under the
working capital facility. Amounts become available under the capital expenditure
facility in connection with the purchase of a qualifying asset. If the
Acquisition had closed on December 31, 1997, the Company's borrowings under the
New Bank Credit Facility would have totaled approximately $0.0 million. As of
June 30, 1998, such borrowings totaled approximately $0.2 million.
The obligations of the Company under the New Bank Credit Facility are
secured by a first priority lien on the Company's accounts receivable,
inventory, the assets financed under the capital expenditure facility and
certain other assets. The Notes are effectively subordinated to the obligations
under the New Bank Credit Facility.
The New Bank Credit Facility contains various covenants that restrict the
Company from taking various actions and that require that the Company achieve
and maintain certain levels of performance as measured by certain financial
ratios. Such covenants include provisions relating to minimum current ratio,
minimum tangible net worth, minimum fixed charge ratio, maximum leverage ratio
and limitations on capital expenditures, investments, indebtedness, liens,
dividends, sales of assets, guarantee obligations, prepayments of other
indebtedness, mergers, acquisitions or sales of assets, change in business
activities, affiliate transactions, issuance of equity and certain corporate
activities. The New Bank Credit Facility also prohibits the Company from
prepaying the Exchange Notes.
The New Bank Credit Facility contains customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy of
representations or warranties in any material respect, default under certain
other indebtedness, bankruptcy, material judgments and liabilities and change of
control. The Company believes that it is in current compliance with all of the
material provisions and covenants of the New Bank Credit Facility.
CANADIAN CREDIT FACILITIES
The holding company for the Company's Canadian subsidiaries has financed its
and its subsidiaries' working capital needs as of June 30, 1998 through a
Canadian $6.0 million (approximately U.S. $4.4 million) secured credit facility
guaranteed by its Canadian subsidiaries. Borrowings under this facility are
subject to a borrowing base, and the principal thereunder is due upon demand.
The facility bears interest at National Bank of Canada's prime rate.
In addition, a Canadian subsidiary of the Company had approximately $0.4
million (Canadian $0.5 million) outstanding at June 30, 1998 pursuant to a
secured term loan facility which matures in 2000. Another Canadian subsidiary
had approximately $0.2 million (Canadian $0.3 million) of term indebtedness
outstanding at December 31, 1997 which was retired in February 1998.
The Company believes that its subsidiaries are in current compliance with
all of the material provisions and covenants of the Canadian credit facilities.
93
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under an indenture (the "Indenture"),
dated as of April 22, 1998 by and among the Company, the Guarantors and U.S.
Trust Company, National Association, as Trustee (the "Trustee"). The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. A copy of the Indenture may be obtained from the Company
or the Initial Purchaser. The definitions of certain capitalized terms used in
the following summary are set forth below under "--Certain Definitions." For
purposes of this section, references to the "Company" include only the Company
and not its Subsidiaries.
The Exchange Notes will be senior unsecured obligations of the Company,
ranking PARI PASSU in right of payment with all other senior unsecured
obligations of the Company.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the Exchange Notes. The
Exchange Notes may be presented for registration or transfer and exchange at the
offices of the Registrar, which initially will be the Trustee's corporate trust
office. The Company may change any paying agent and registrar without notice to
holders of the Exchange Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Exchange Notes at the Trustee's corporate office in
New York, New York. At the Company's option, interest may be paid at the
Trustee's corporate trust office or by check mailed to the registered address of
Holders. Any Exchange Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, will be treated as a single class of securities under the
Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Indenture is limited in aggregate principal amount to $150,000,000, of
which $85,000,000 has been issued as Old Notes, some or all of which may be
exchanged for Exchange Notes. will be issued in the Exchange Offer. The Exchange
Notes will mature on April 15, 2008. Additional amounts may be issued in one or
more series from time to time subject to the limitations set forth under
"--Certain Covenants-- Limitation on Incurrence of Additional Indebtedness" and
restrictions contained in the New Bank Credit Facility. Interest on the Exchange
Notes will accrue at the rate of 10% per annum and will be payable semiannually
in cash on each April 15 and October 15 commencing on October 15, 1998, to the
persons who are registered Holders at the close of business on April 1 and
October 1, respectively, immediately preceding the applicable interest payment
date. The Exchange Notes will bear interest from April 22, 1998 at the rate of
10% per annum, payable semi-annually in arrears, in cash, on April 15 and
October 15 of each year, commencing October 15, 1998. Holders of Old Notes whose
Old Notes are accepted for exchange will be deemed to have waived the right to
receive any payment in respect of interest on the Old Notes accrued from April
22, 1998 until the date of the issuance of the Exchange Notes. Consequently,
holders who exchange their Old Notes for Exchange Notes will receive the same
interest payment on October 15, 1998 (the first interest payment date with
respect to the Old Notes and the Exchange Notes) that they would have received
had they not accepted the Exchange Offer.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
OPTIONAL REDEMPTION.
The Exchange Notes will be redeemable, at the Company's option, in whole at
any time or in part from time to time, on and after April 15, 2003, upon not
less than 30 nor more than 60 days' notice, at the
94
<PAGE>
following redemption prices (expressed as percentages of the principal amount
thereof) if redeemed during the twelve-month period commencing on April 15 of
the year set forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 105.000%
2004.............................................................................. 103.333%
2005.............................................................................. 101.667%
2006 and thereafter............................................................... 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS.
At any time, or from time to time, on or prior to April 15, 2001, the
Company may, at its option, use the net cash proceeds of one or more Public
Equity Offerings (as defined below) to redeem up to 35% of the sum of (i) the
initial aggregate principal amount of the Notes issued in the Initial Offering
and (ii) the respective initial aggregate principal amounts of the Notes issued
under the Indenture after the Initial Issue Date, at a redemption price equal to
110% of the principal amount thereof plus accrued and unpaid interest thereon,
if any, to the date of redemption; PROVIDED, HOWEVER, that at least 65% of the
sum of (i) the initial aggregate principal amount of the Notes issued in the
Initial Offering and (ii) the respective initial aggregate principal amounts of
the Notes issued under the Indenture after the Initial Issue Date remains
outstanding immediately after any such redemption. In order to effect the
foregoing redemption with the proceeds of any Public Equity Offering, the
Company shall make such redemption not more than 120 days after the consummation
of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a PRO RATA basis, by lot or by such method as the
Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; PROVIDED, FURTHER,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the paying agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
GUARANTEES
Each Guarantor unconditionally guarantees, on a senior basis, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The obligations of each
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed
95
<PAGE>
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under the Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in an amount PRO RATA, based on the net assets of each
Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company without limitation, or with other Persons upon the terms and conditions
set forth in the Indenture. See "--Certain Covenants--Merger, Consolidation and
Sale of Assets." In the event all of the Capital Stock of a Guarantor is sold by
the Company and the sale complies with the provisions set forth in "--Certain
Covenants--Limitation on Asset Sales," the Guarantor's Guarantee will be
released.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 60 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have an Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant Liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume, guarantee, acquire, become
liable, contingently or otherwise, with respect to, or otherwise become
responsible for payment of (collectively, "incur") any Indebtedness (other than
Permitted Indebtedness); PROVIDED, HOWEVER, that if no Default or Event of
Default shall have occurred and be continuing at the time of or as a consequence
of the incurrence of any such Indebtedness, the Company or any of its Guarantors
may incur Indebtedness (including, without limitation, Acquired Indebtedness) if
on the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0.
The Company will not, and will not permit any Guarantor to, incur any
Indebtedness which by its terms (or by the terms of any agreement governing such
Indebtedness) is subordinated in right of payment to any other Indebtedness of
the Company or such Guarantor, as the case may be, unless such Indebtedness is
also by its terms (or by the terms of any agreement governing such Indebtedness)
made expressly subordinate in right of payment to the Notes or the Guarantee of
such Guarantor, as the case may be, pursuant to subordination provisions that
are substantively identical to the subordination provisions of such Indebtedness
(or such agreement) that are most favorable to the holders of any other
Indebtedness of the Company or such Guarantor, as the case may be.
LIMITATION ON RESTRICTED PAYMENTS.
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make
any distribution (other than dividends or distributions payable in Qualified
Capital Stock of the Company) on or in respect of shares of the Company's
Capital Stock to holders of such Capital Stock, (b) purchase, redeem or
otherwise acquire or retire for value any Capital Stock of the Company or any
warrants, rights or options to purchase or acquire shares of any class of such
Capital Stock, (c) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to any
scheduled final maturity, scheduled repayment or scheduled sinking fund payment,
any Indebtedness of the Company or a Guarantor that is subordinate or junior in
right of payment to the Notes or a Guarantee, as the case may be, or (d) make
any Investment (each of the foregoing actions set forth in clauses (a), (b), (c)
and (d), other than Permitted Investments, being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date shall exceed the sum of: (w) 50% of
the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company earned subsequent to
the Issue Date and on or prior to the date the Restricted Payment occurs (the
"Reference Date") (treating such period as a single accounting period); plus (x)
100% of the aggregate net cash proceeds received by the Company from any Person
(other than a Subsidiary of the Company) from
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the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company; plus (y) to the extent
not otherwise included in Consolidated Net Income of the Company, an amount
equal to the net reduction in Investments (other than reductions in Permitted
Indebtedness) in Unrestricted Subsidiaries resulting from dividends, interest
payments, repayments of loans or advances, or other transfers of cash, in each
case, to the Company or to any Wholly Owned Restricted Subsidiary of the Company
from Unrestricted Subsidiaries, or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (in each case valued as provided in the
definition of "Investment"), not to exceed, in the case of an Unrestricted
Subsidiary, the amount of Investments previously made by the Company or any
Restricted Subsidiary of the Company in such Unrestricted Subsidiary and which
were treated as a Restricted Payment under the Indenture; plus (z) without
duplication of any amounts included in clause (iii)(x) above, 100% of the
aggregate net cash proceeds of any equity contribution received by the Company
from a holder of the Company's Capital Stock (excluding, in the case of clauses
(iii)(x) and (z), any net cash proceeds from a Public Equity Offering to the
extent used to redeem the Notes).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the Company; (3) if no Default
or Event of Default shall have occurred and be continuing, the acquisition of
any Indebtedness of the Company or a Guarantor that is subordinate or junior in
right of payment to the Notes or a Guarantee, as the case may be, either (i)
solely in exchange for shares of Qualified Capital Stock of the Company, or (ii)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Subsidiary of the Company) of (A) shares of Qualified
Capital Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no
Default or Event of Default shall have occurred and be continuing, (i)
repurchases by the Company of Common Stock of the Company (or rights to acquire
such Common Stock) from employees of the Company or any of its Subsidiaries or
their authorized representatives upon the death, disability or termination of
employment of such employees, or as otherwise required by existing employment
agreements, in an aggregate amount not to exceed $500,000 in any calendar year
and $3,000,000 in the aggregate (PROVIDED that, notwithstanding the foregoing
$500,000 per year limitation, on or after April 22, 2003, the Company may
repurchase Common Stock of the Company (or rights to acquire such Common Stock)
through the issuance of indebtedness subordinated in right of payment to the
Notes in an aggregate principal amount of not more than $3,000,000 less the
aggregate amount of Restricted Payments made pursuant to this clause (4) prior
to the date of such issuance, which indebtedness shall provide for no payments
of principal in excess of $500,000 per year prior to the repayment in full of
the Notes) plus (ii) the aggregate cash proceeds from any payments on life
insurance policies for which the Company or its Subsidiaries is the beneficiary
with respect to any employees, officers or directors of the Company and its
Subsidiaries which proceeds are used to purchase the Common Stock of the Company
held by any such employees, officers or directors. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, amounts expended
pursuant to clauses (1), (2)(ii), (3)(ii)(A), and (4)(i) shall be included in
such calculation.
The amount of any non-cash Restricted Payment shall be the fair market
value, on the date such Restricted Payment is made, of the assets or securities
proposed to be transferred or issued by the Company or such Restricted
Subsidiary, as the case may be, pursuant to such Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the Board
of Directors of the Company whose resolution with respect thereto shall be
delivered to the Trustee, such determination to be based upon an opinion or
appraisal issued by an accounting, appraisal or investment banking firm of
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national standing if such fair market value exceeds $10,000,000. Not later than
50 days after the end of any fiscal quarter (100 days in the case of the last
fiscal quarter of the fiscal year) during which any Restricted Payment in made,
the Company shall deliver to the Trustee an officers' certificate stating that
all Restricted Payments made during such fiscal quarter were permitted and
setting forth the basis upon which the calculations required by this covenant
were computed, together with a copy of any opinion or appraisal required by the
Indenture.
LIMITATION ON ASSET SALES.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless (i) the Company or the applicable Restricted
Subsidiary, as the case may be, receives consideration at the time of such Asset
Sale at least equal to the fair market value of the assets sold or otherwise
disposed of (as determined in good faith by the Company's Board of Directors),
(ii) at least 75% of the consideration received by the Company or the Restricted
Subsidiary, as the case may be, from such Asset Sale shall be in the form of
cash or Cash Equivalents and is received at the time of such disposition;
PROVIDED that the provisions of this clause (ii) shall not apply to an Asset
Sale to the extent comprised of real property; and (iii) upon the consummation
of an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary
to apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of
receipt thereof either (A) to prepay any Indebtedness under the New Bank Credit
Facility and, in the case of any Indebtedness under any Revolving Credit
Facility, effect a permanent reduction in the availability under such Revolving
Credit Facility, (B) to make an investment in properties and assets that replace
the properties and assets that were the subject of such Asset Sale or in
properties and assets that will be used in the business of the Company and its
Subsidiaries as existing on the Issue Date or in businesses reasonably related
thereto ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the
361st day after an Asset Sale or such earlier date, if any, as the Board of
Directors of the Company or of such Restricted Subsidiary determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which
have not been applied on or before such Net Proceeds Offer Trigger Date as
permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount") shall be applied by the Company or
such Restricted Subsidiary to make an offer to purchase (the "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a PRO RATA basis, that amount of Notes equal to the Net Proceeds
Offer Amount at a price equal to 100% of the principal amount of the Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; PROVIDED, HOWEVER, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary of the Company, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5,000,000 resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5,000,000, shall be applied as required pursuant to this
paragraph).
Notwithstanding the immediately preceding paragraph, the Company and its
Restricted Subsidiaries will be permitted to consummate an Asset Sale without
complying with such paragraph to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; PROVIDED that any consideration not
constituting Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
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Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with this covenant,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this covenant by
virtue thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES.
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of the Company to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary of the Company; or (c) transfer any of its property or
assets to the Company or any other Restricted Subsidiary of the Company, except
for such encumbrances or restrictions existing under or by reason of: (1)
applicable law; (2) the Indenture; (3) customary non-assignment provisions of
any contract or any lease governing a leasehold interest of any Restricted
Subsidiary of the Company; (4) any instrument governing Acquired Indebtedness,
which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the properties or
assets of the Person so acquired; (5) agreements existing on the Issue Date to
the extent and in the manner such agreements are in effect on the Issue Date
(including the New Bank Credit Facility); or (6) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (2), (4) or (5) above; PROVIDED,
HOWEVER, that the provisions relating to such encumbrance or restriction
contained in any such Indebtedness are no less favorable to the Company in any
material respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such clause
(2), (4) or (5).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES.
The Company will not permit any of its Restricted Subsidiaries that is not a
Guarantor to issue any Preferred Stock (other than to the Company or to a Wholly
Owned Restricted Subsidiary of the Company) or permit any Person (other than the
Company or a Wholly Owned Restricted Subsidiary of the Company) to own any
Preferred Stock of any Restricted Subsidiary of the Company that is not a
Guarantor.
LIMITATION ON LIENS.
The Company will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist any Liens of any kind against or upon any property or assets of
the Company or any of its Restricted Subsidiaries whether owned on the Issue
Date or acquired after the Issue Date, or any proceeds therefrom, or assign or
otherwise convey any right to receive income or profits therefrom unless (i) in
the case of Liens securing Indebtedness that is expressly subordinate or junior
in right of payment to the Notes or any Guarantee, the Notes and such Guarantee,
as the case may be, are secured by a Lien on such property, assets or proceeds
that is senior in priority to such Liens and (ii) in all other cases, the Notes
and the Guarantees are equally and ratably secured, except for
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(A) Liens existing as of the Issue Date to the extent and in the manner such
Liens are in effect on the Issue Date; (B) Liens securing Indebtedness under the
New Bank Credit Facility or the Canadian Credit Facility; (C) Liens securing the
Notes and the Guarantees; (D) Liens in favor of the Company or a Wholly Owned
Restricted Subsidiary of the Company on assets of any Restricted Subsidiary of
the Company; (E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; PROVIDED, HOWEVER, that such Liens (A) are no less favorable to the
Holders and are not more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being Refinanced and (B) do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F)
Permitted Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS.
The Company will not, in a single transaction or series of related
transactions, consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary of the Company to sell, assign, transfer, lease, convey or
otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Company's Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be
a corporation organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (y) shall expressly assume,
by supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"--Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
or be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
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Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of the "--Limitation on Asset
Sales" covenant) will not, and the Company will not cause or permit any
Guarantor to, consolidate with or merge with or into any Person other than the
Company or any other Guarantor unless: (i) the entity formed by or surviving any
such consolidation or merger (if other than the Guarantor) or to which such
sale, lease, conveyance or other disposition shall have been made is a
cor-poration organized and existing under the laws of the United States or any
State thereof or the District of Columbia; (ii) such entity assumes by
supplemental indenture all of the obligations of the Guarantor on the Guarantee;
(iii) immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing; and (iv) immediately after
giving effect to such transaction and the use of any net proceeds therefrom on a
PRO FORMA basis, the Company could satisfy the provisions of clause (ii) of the
first paragraph of this covenant. Any merger or consolidation of a Guarantor
with and into the Company (with the Company being the surviving entity) or
another Guarantor that is a Wholly Owned Restricted Subsidiary of the Company
need only comply with clause (iv) of the first paragraph of this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist any
transaction or series of related transactions (including, without limitation,
the purchase, sale, lease or exchange of any property or the rendering of any
service) with, or for the benefit of, any of its Affiliates (each an "Affiliate
Transaction"), other than (x) Affiliate Transactions permitted under paragraph
(b) below and (y) Affiliate Transactions on terms that are no less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $500,000 shall be approved by a majority of non-interested directors
of the Board of Directors of the Company or such Restricted Subsidiary, as the
case may be, such approval to be evidenced by a Board Resolution stating that
such majority of non-interested directors of the Board of Directors have
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary of the Company enters into an Affiliate
Transaction (or a series of related Affiliate Transactions related to a common
plan) that involves an aggregate fair market value of more than $5,000,000, the
Company or such Restricted Subsidiary, as the case may be, shall, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view, from
an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management; (ii) transactions exclusively between or among
the Company and any of its Wholly Owned Restricted Subsidiaries or exclusively
between or among such Wholly Owned Restricted Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture; (iii) any agreement
as in effect as of the Issue Date or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto) in any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the Holders in any material respect
than the original agreement as in effect on the Issue Date; and (iv) Restricted
Payments permitted by the Indenture.
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ADDITIONAL SUBSIDIARY GUARANTEES.
If the Company or any of its Restricted Subsidiaries transfers or causes to
be transferred, in one transaction or a series of related transactions, any
property to any Restricted Subsidiary (other than a Foreign Subsidiary) that is
not a Guarantor, or if the Company or any of its Restricted Subsidiaries shall
organize, acquire or otherwise invest in another Restricted Subsidiary (other
than a Foreign Subsidiary) having total assets with a book value in excess of
$500,000, then such transferee or acquired or other Restricted Subsidiary shall
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(ii) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and enforceable obligation of
such Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Guarantor for all purposes of the Indenture.
CONDUCT OF BUSINESS.
The Company and its Restricted Subsidiaries will not engage in any
businesses which are not the same, similar or related to the businesses in which
the Company and its Restricted Subsidiaries are engaged on the Issue Date.
REPORTS TO HOLDERS.
The Indenture will provide that the Company will deliver to the Trustee
within 15 days after the filing of the same with the Commission, copies of the
quarterly and annual reports and of the information, documents and other
reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the "Merger, Consolidation
and Sale of Assets" covenant, which will constitute an Event of Default with
such notice requirement but without such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary of the Company,
or the acceleration of the final stated maturity of any such Indebtedness if
the aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, aggregates
$2,500,000 or more at any time;
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(v) one or more judgments in an aggregate amount in excess of $2,500,000
shall have been rendered against the Company or any of its Restricted
Subsidiaries and such judgments remain undischarged, unpaid or unstayed for
a period of 60 days after such judgment or judgments become final and
non-appealable;
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees ceases to be in full force and effect or any
of the Guarantees is declared to be null and void and unenforceable or any
of the Guarantees is found to be invalid or any of the Guarantors denies its
liability under its Guarantee (other than by reason of release of a
Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal of
and accrued interest on all the Notes to be due and payable by notice in writing
to the Company and the Trustee specifying the respective Event of Default and
that it is a "notice of acceleration" (the "Acceleration Notice"), and the same
shall become immediately due and payable. If an Event of Default specified in
clause (vi) above occurs and is continuing, then all unpaid principal of, and
premium, if any, and accrued and unpaid interest on all of the outstanding Notes
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied. Notwithstanding the foregoing, the opinion
of counsel required by clause (ii) above with respect to a Legal Defeasance need
not be delivered if all Notes not therefore delivered to the Trustee for
cancellation
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(x) have become due and payable, or (y) will become due and payable on the
maturity date within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; (vi) after the Company's
obligation to purchase Notes arises thereunder, amend, change or modify in any
material respect the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate a
Net Proceeds Offer with respect to any Asset Sale that has been consummated or
modify any of the provisions or definitions with respect thereto; (vii) modify
or change any provision of the Indenture or the related definitions affecting
the ranking of the Notes or any Guarantee in a manner which adversely affects
the Holders; or (viii) release any Guarantor from any of its obligations under
its Guarantee or the Indenture otherwise than in accordance with the terms of
the Indenture.
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GOVERNING LAW
The Indenture will provide that it, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs. The Indenture and
the provisions of the TIA contain certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payments of
claims in certain cases or to realize on certain property received in respect of
any such claim as security or otherwise. Subject to the TIA, the Trustee will be
permitted to engage in other transactions; PROVIDED that if the Trustee acquires
any conflicting interest as described in the TIA, it must eliminate such
conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"ASSET ACQUISITION" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or any Restricted Subsidiary
of the Company, or shall be merged with or into the Company or any Restricted
Subsidiary of the Company, or (b) the acquisition by the Company or any
Restricted Subsidiary of the Company of the assets of any Person (other than a
Restricted Subsidiary of the Company) which constitute all or substantially all
of the assets of such Person or comprise any division or line of business of
such Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business;
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PROVIDED, HOWEVER, that Asset Sales shall not include (i) a transaction or
series of related transactions for which the Company or its Restricted
Subsidiaries receive aggregate consideration of less than $500,000 and (ii) the
sale, lease, conveyance, disposition or other transfer of all or substantially
all of the assets of the Company as permitted under the "Merger, Consolidation
and Sale of Assets" covenant.
"BOARD OF DIRECTORS" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"CANADIAN CREDIT FACILITY" means the Credit Agreement dated as of February
27, 1995, between Bakor Holdings Inc. and National Bank of Canada, together with
the related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder (PROVIDED that such
increase in borrowings is permitted by the "Limitation on Incurrence of
Additional Indebtedness" covenant above) or adding Restricted Subsidiaries of
the Company as additional borrowers or guarantors thereunder) all or any portion
of the Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group of
lenders.
"CAPITAL STOCK" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person, and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank or (with respect to any Restricted Subsidiary)
any foreign country in which such Restricted Subsidiary is principally located,
having at the date of acquisition thereof combined capital and surplus of not
less than $250,000,000; (v) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; (vi) in the case of any foreign Restricted Subsidiary, Investments: (a)
in direct obligations of the sovereign nation (or any agency thereof) in which
such foreign Restricted Subsidiary is organized or is conducting a substantial
amount of business or in obligations fully and unconditionally guaranteed by
such sovereign nation (or any agency thereof), (b) of the type and maturity
described in clauses (i) through (v) above of foreign obligors, which
Investments or obligors (or the parents of such obligors) have ratings described
in such clauses or equivalent ratings from
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comparable foreign rating agencies or (c) of the type and maturity described in
clauses (i) through (v) above of foreign obligors (or the parents of such
obligors), which Investments or obligors (or the parents of such obligors), are
not rated as provided in such clauses or in clause (vi) (b) but which are, in
the reasonable judgment of the Company, comparable in investment quality to such
Investments and obligors (or the parents of such obligors); and (vii)
investments in money market funds which invest substantially all their assets in
securities of the types described in clauses (i) through (vi) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the Company of any plan or proposal
for the liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group
(other than the Permitted Holders) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50% of
the aggregate ordinary voting power represented by the issued and outstanding
Capital Stock of the Company; or (iv) the replacement of a majority of the Board
of Directors of the Company over a two-year period from the directors who
constituted the Board of Directors of the Company at the beginning of such
period, and such replacement shall not have been approved by a vote of at least
a majority of the Board of Directors of the Company then still in office who
either were members of such Board of Directors at the beginning of such period
or whose election as a member of such Board of Directors was previously so
approved.
"CHANGE OF CONTROL OFFER" has the meaning set forth under "--Change of
Control."
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth under "--Change
of Control."
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of, such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent
Consolidated Net Income has been reduced thereby, (A) all income taxes of such
Person and its Restricted Subsidiaries paid or accrued in ac-cordance with GAAP
for such period (other than income taxes attributable to extraordinary, unusual
or nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense and
(C) Consolidated Non-cash Charges (1) LESS any non-cash items increasing
Consolidated Net Income for such period (but not including non-cash income
recognized under the Company's warranty programs where such income reflects cash
already or simultaneously received by the Company), and (2) LESS any cash
payments made pursuant to the accounting method change "-non-cash environmental
charge," all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a PRO
FORMA basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of such Person or any of its Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the
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ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (ii) any asset sales or other distribution or Asset
Acquisitions (including, without limitation, any Asset Acquisition giving rise
to the need to make such calculation as a result of such Person or one of its
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated Net
Income") attributable to the assets which are the subject of the Asset
Acquisition or asset sale or other disposition during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such asset sale or other disposition or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If such Person or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such
Person had directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated Fixed
Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per annum
equal to the rate of interest on such Indebtedness in effect on the Transaction
Date; (2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a factor of a
prime or similar rate, a eurocurrency interbank offered rate, or other rates,
then the interest rate in effect on the Transaction Date will be deemed to have
been in effect during the Four Quarter Period; and (3) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) or any Guarantor paid, accrued or scheduled to be paid or accrued during
such period times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
federal, state and local tax rate of such Person, expressed as a decimal.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-off
of deferred financing costs, (b) the net costs under Interest Swap Obligations,
(c) all capitalized interest and (d) the interest portion of any deferred
payment obligation; and (ii) the interest component of Capitalized Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; PROVIDED that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains, (c) the net
income of any Person acquired in a "pooling of interests" transaction accrued
prior to the date it becomes a Restricted Subsidiary of the referent Person or
is merged or consolidated with the referent Person or any Restricted Subsidiary
of the referent Person,
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(d) the net income (but not loss) of any Restricted Subsidiary of the referent
Person to the extent that the declaration of dividends or similar distributions
by that Restricted Subsidiary of that income is restricted by a contract,
operation of law or otherwise, (e) the net income of any Person, other than a
Restricted Subsidiary of the referent Person, except to the extent of cash
dividends or distributions paid to the referent Person or to a Wholly Owned
Restricted Subsidiary of the referent Person by such Person, (f) any restoration
to income of any contingency reserve, except to the extent that provision for
such reserve was made out of Consolidated Net Income accrued at any time
following the Issue Date, (g) income or loss attributable to discontinued
operations (including, without limitation, operations disposed of during such
period whether or not such operations were classified as discontinued), and (h)
in the case of a successor to the referent Person by consolidation or merger or
as a transferee of the referent Person's assets, any earnings of the successor
corporation prior to such consolidation, merger or transfer of assets.
"CONSOLIDATED NET WORTH" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"CONSOLIDATED NON-CASH CHARGES" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"FOREIGN SUBSIDIARY" means any Subsidiary of the Company which (i) is not
organized under the laws of the United States, any state thereof or the District
of Columbia and (ii) conducts substantially all of its business operations in a
country other than the United States of America.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
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"GUARANTOR" means (i) the domestic Subsidiaries of the Company on the Issue
Date and (ii) each of the Company's Restricted Subsidiaries that in the future
executes a supplemental indenture in which such Restricted Subsidiary agrees to
be bound by the terms of the Indenture as a Guarantor; provided that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
of the Indenture.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person, (ix) all Obligations for Preferred Stock of a
Guarantor and all Disqualified Capital Stock issued by such Person with the
amount of Indebtedness represented by such Preferred Stock or Disqualified
Capital Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price, but excluding
accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase
price" of any Preferred Stock of any Guarantor or Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Preferred Stock or Disqualified Capital Stock as if such
Preferred Stock or Disqualified Capital Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture,
and if such price is based upon, or measured by, the fair market value of such
Preferred Stock or Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the issuer
of such Preferred Stock or Disqualified Capital Stock.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is
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designated an Unrestricted Subsidiary and shall exclude the fair market value of
the net assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any
Investment shall be the original cost of such Investment plus the cost of all
additional Investments by the Company or any of its Restricted Subsidiaries,
without any adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment, reduced by the
payment of dividends or distributions in connection with such Investment or any
other amounts received in respect of such Investment; PROVIDED that no such
payment of dividends or distributions or receipt of any such other amounts shall
reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, 50% of the
outstanding Common Stock of such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes.
"LEGAL DEFEASANCE" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"LIEN" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"NET PROCEEDS OFFER" has the meaning set forth under "--Certain
Covenants--Limitations on Asset Sales."
"NET PROCEEDS OFFER AMOUNT" has the meaning set forth under "--Certain
Covenants--Limitations on Asset Sales."
"NET PROCEEDS OFFER PAYMENT DATE" has the meaning set forth under "--Certain
Covenants--Limitations on Asset Sales."
"NET PROCEEDS OFFER TRIGGER DATE" has the meaning set forth under "--Certain
Covenants--Limitations on Asset Sales."
"NEW BANK CREDIT FACILITY" means the Amended and Restated Financing and
Security Agreement dated as of April 22, 1998, between the Company and
NationsBank, N.A., together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreement extending the maturity
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of, refinancing, replacing or otherwise restructuring (including increasing the
amount of available borrowings thereunder (PROVIDED that such increase in
borrowings is permitted by the "Limitation on Incurrence of Additional
Indebtedness" covenant above) or adding Restricted Subsidiaries of the Company
as additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED HOLDER" means Warner W. Henry, and each of his immediate family
members, the Warner W. Henry Living Trust, trustees of the Warner W. Henry
Living Trust or trusts, entities or arrangements for the benefit of the
foregoing persons and entities.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the following:
(i) Indebtedness under the Notes issued in the Offering and the
Guarantees thereof;
(ii) Indebtedness incurred pursuant to the New Bank Credit Facility in
an aggregate principal amount at any time outstanding not to exceed
$25,000,000 and Indebtedness incurred pursuant to the Canadian Credit
Facility in an aggregate principal amount at any time outstanding not to
exceed Canadian $8,000,000, in each case, less any required permanent
repayments (which are accompanied by a corresponding permanent commitment
reduction) thereunder; and additional Indebtedness incurrred pursuant to a
capital expenditure facility under the New Bank Credit Facility in an
aggregate principal amount at any time outstanding not to exceed
$10,000,000.
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; PROVIDED, HOWEVER, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; PROVIDED that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company
to the Company or to a Wholly Owned Restricted Subsidiary of the Company for
so long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien held
by a Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company; PROVIDED that if as of any date any Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company owns or holds
any such Indebtedness or holds a Lien in respect of such Indebtedness, such
date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company, in
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each case subject to no Lien; PROVIDED that (a) any Indebtedness of the
Company to any Wholly Owned Restricted Subsidiary of the Company is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the Notes and (b) if as of any
date any Person other than a Wholly Owned Restricted Subsidiary of the
Company owns or holds any such Indebtedness or any Person holds a Lien in
respect of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; PROVIDED, HOWEVER, that such Indebtedness is
extinguished within five business days of incurrence;
(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(x) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary of the Company providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred in connection
with the disposition of any business, assets or Restricted Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition; PROVIDED that the maximum aggregate liability in
respect of all such Indebtedness shall at no time exceed the gross proceeds
actually received by the Company and the Restricted Subsidiary in connection
with such disposition;
(xi) Refinancing Indebtedness; and
(xii) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10,000,000 at
any one time outstanding.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company, (ii) Investments in the Company by any
Restricted Subsidiary of the Company; PROVIDED that any Indebtedness evidencing
such Investment is unsecured and subordinated, pursuant to a written agreement,
to the Company's obligations under the Notes and the Indenture; (iii)
investments in cash and Cash Equivalents; (iv) loans and advances to employees
and officers of the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $1,000,000
at any one time outstanding; (v) Currency Agreements and Interest Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (vi) Investments in Unrestricted Subsidiaries not to exceed
$2,500,000 at any one time outstanding; PROVIDED that such Unrestricted
Subsidiary is engaged in a business or businesses which are the same, similar or
related to the businesses in which the Company and its Restricted Subsidiaries
are engaged on the Issue Date; (vii) Investments in securities of trade
creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (viii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant; (ix) Investments by
the Company or a Wholly Owned Restricted Subsidiary of the Company not in excess
of $500,000 at any one time outstanding in any partnership, joint venture,
limited liability partnership, limited liability company or similar entity of
which (A) at least 50% of the capital accounts, distribution rights, total
equity and voting interests or general or limited partnership interests, as
applicable, are owned or controlled, directly or indirectly, by the Company or a
Wholly Owned Restricted Subsidiary of the Company whether
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in the form of membership, general, special or limited partnership interests or
otherwise and (B) the Company or any Wholly Owned Restricted Subsidiary of the
Company is a controlling general partner, member or manager or otherwise
controls such entity which is engaged in a business or businesses which are the
same, similar or related to the businesses in which the Company and its
Restricted Subsidiaries are engaged on the Issue Date; and (x) additional
Investments not to exceed $2,500,000 at any one time outstanding.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obliga-tions
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; PROVIDED that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business; PROVIDED, HOWEVER, that (A) the related purchase money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired and
(B) the Lien securing such Indebtedness shall be created within 90 days of
such acquisition;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
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(xi) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries;
(xii) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xiii) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of custom duties in connection with the
importation of goods;
(xiv) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xv) Liens securing Indebtedness under Currency Agreements; and
(xvi) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant; PROVIDED
that (A) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company and (B) such Liens do
not extend to or cover any property or assets of the Company or of any of
its Restricted Subsidiaries other than the property or assets that secured
the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary of the
Company and are no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Capital Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix) or (xi) of the
definition of Permitted Indebtedness), in each case that does not (1) result in
an increase in the aggregate principal amount of Indebtedness of such Person as
of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; PROVIDED that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
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"REVOLVING CREDIT FACILITY" means one or more revolving credit facilities
under the New Bank Credit Facility or the Canadian Credit Facility.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"SIGNIFICANT SUBSIDIARY" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"SUBSIDIARY", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; PROVIDED that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities (other
than in the case of a foreign Restricted Subsidiary, directors' qualifying
shares or an immaterial amount of shares required to be owned by other Persons
pursuant to applicable law) are owned by such Person or any Wholly Owned
Restricted Subsidiary of such Person.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
("Participating Broker-Dealer") pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a Participating Broker-Dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale, or such
shorter period as will terminate when all Old Notes acquired by broker dealers
for their own account as a result of market making activities or other trading
activities has been exchanged for Exchange Notes and resold by such broker
dealers. In addition, until , 1998 (90 days after the date of this
Prospectus), all dealers effecting transactions in the Exchange Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
Participating Broker-Dealers. Exchange Notes received by Participating
Broker-dealer for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer or the purchasers of any
such Exchange Notes. Any Participating Broker-dealer that resells Exchange Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commission or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, or such shorter period
as will terminate when all Old Notes acquired by broker dealers for their own
account as a result of market making activities or other trading activities has
been exchanged for Exchange Notes and resold by such broker dealers, the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the reasonable expenses of
one counsel for the holders of the Notes) other than commissions or concessions
of any brokers or dealers and will indemnify the Initial Purchaser and the
holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
119
<PAGE>
TRANSFER RESTRICTIONS ON OLD NOTES
Unless and until an Old Note is exchanged for an Exchange Note pursuant to
the Exchange Offer, it will bear a legend substantially similar to the following
effect unless otherwise agreed by the Company and the holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION
HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (a)(1), (2), (3), OR (7) UNDER
THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S.
PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL
NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR
OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY THEREOF OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT,
(C) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER)
TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND
AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE FOR THIS SECURITY),
(D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE), OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM
THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN TWO YEARS
AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS
AN ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO
THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON"
HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
120
<PAGE>
BOOK ENTRY; DELIVERY AND FORM
The Old Notes and the related Guarantees were initially, and the Exchange
Notes and the related Guarantees will be, represented by one or more permanent
global certificates in definitive, fully registered form (the "Global Notes").
The Global Notes will be deposited on the Issue Date with, or on behalf of, The
Depository Trust Company, New York, New York ("DTC") and registered in the name
of a nominee of DTC (except such Old Notes or Exchange Notes, if any, that are
issued in certificated form as described below).
Notes (i) originally purchased by or transferred to "foreign purchasers"
(persons other than U.S. Persons) or (ii) held by QIBs or other institutional
Accredited Investors who elect to take physical delivery of their certificates
instead of holding their interests through a Global Note (and which are thus
ineligible to trade through DTC (collectively referred to herein as the
"Non-Global Purchasers") will be issued in registered form (the "Certificated
Security"). Upon the transfer to a QIB or another institutional Accredited
Investor of any Certificated Security initially issued to a Non-Global
Purchaser, such Certificated Security will, unless the transferee requests
otherwise or the Global Notes have previously been exchanged in whole for
Certificated Securities, be exchanged for an interest in a Global Note.
THE GLOBAL NOTES. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchaser and ownership of beneficial interests in the Global Notes will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Holders may hold their interests in the
Global Notes directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any), interest (including
Liquidated Damages) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Liquidated Damages) on the
Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
121
<PAGE>
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Notes
for Certificated Securities, which it will distribute to its participants and
which will bear the legends referred to under the heading "Transfer
Restrictions."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers. dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Notes, which certificates will bear the legends
referred to under the heading "Transfer Restrictions."
122
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered by the Company hereby were passed
upon for the Company by Munger, Tolles & Olson LLP, Los Angeles, California. The
validity of the issuance of the Guarantees offered by Monsey Products Co.,
Kimberton Enterprises, Inc. and Monsey Products of Arizona LLC were passed upon
for those companies by John D. O'Keefe, Esq., Philadelphia, Pennsylvania.
EXPERTS
The combined financial statements of Henry Company as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Monsey Products Co., T/A Monsey
Bakor at December 31, 1996 and 1997 and for each of the three years in the
period ended December 31, 1997, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMBINED FINANCIAL STATEMENTS OF HENRY COMPANY PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Combined Balance Sheets as of December 31, 1996 and 1997................................................... F-3
Combined Statements Of Operations for each of the years in the three year period ended December 31, 1997... F-4
Combined Statements Of Shareholders' Equity for each of the years in the three year period ended December
31, 1997.................................................................................................. F-5
Combined Statements Of Cash Flows for each of the years in the three year period ended December 31, 1997... F-6
Notes To Combined Financial Statements..................................................................... F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
- -----------------------------------------------------------------------------------------------------------
Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998-- Unaudited................ F-16
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and
1998...................................................................................................... F-17
Unaudited Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 1998........... F-18
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and
1998...................................................................................................... F-19
Notes to Unaudited Condensed Consolidated Financial Statements............................................. F-20
CONSOLIDATED FINANCIAL STATEMENTS OF MONSEY BAKOR
- -----------------------------------------------------------------------------------------------------------
Report of Independent Auditors............................................................................. F-29
Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited)................ F-30
Consolidated Statements of Operations for each of the years in the three year period ended December 31,
1997 and the three months ended March 31, 1997 and 1998 (unaudited)....................................... F-31
Consolidated Statements of Shareholders' Equity for each of the years in the three year period ended
December 31, 1997 and for the three months ended March 31, 1998 (unaudited)............................... F-32
Consolidated Statements of Cash Flows for each of the years in the three year period ended December 31,
1997 and for the three months ended March 31, 1997 and 1998 (unaudited)................................... F-33
Notes to Consolidated Financial Statements................................................................. F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Henry Company
Huntington Park, California
We have audited the accompanying combined balance sheets of Henry Company as of
December 31, 1996 and 1997, and the related combined statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Henry Company as
of December 31, 1996 and 1997, and the combined results of their operations and
their cash flows for each of the years in the three year period ended December
31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 9, 1998
F-2
<PAGE>
HENRY COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents........................................................ $ 300,162 $ 118,857
Trade accounts receivable, net of allowance for doubtful accounts of $141,786 and
$161,365 for 1996 and 1997, respectively....................................... 9,146,272 10,368,904
Inventories...................................................................... 5,924,765 5,882,262
Receivables from affiliate....................................................... 4,297,773 2,264,341
Notes receivable................................................................. 408,838 448,721
Prepaid expenses and other current assets........................................ 839,451 1,197,167
------------- -------------
Total current assets....................................................... 20,917,261 20,280,252
Property and equipment, net........................................................ 7,957,535 5,483,188
Cash surrender value of life insurance, net........................................ 992,501 1,658,305
Noncompetition agreements, net..................................................... 765,438 702,091
Notes receivable................................................................... 363,396 299,654
Note receivable from affiliate..................................................... -- 1,863,072
Other.............................................................................. 207,588 131,085
------------- -------------
Total assets............................................................... $ 31,203,719 $ 30,417,647
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................. $ 5,148,271 $ 4,846,131
Accrued expenses................................................................. 2,941,580 3,622,011
Notes payable, current portion................................................... 644,796 638,199
Borrowings under line of credit.................................................. 7,061,528 3,970,381
------------- -------------
Total current liabilities.................................................. 15,796,175 13,076,722
Notes payable...................................................................... 4,286,840 4,116,345
Deferred warranty revenue.......................................................... 1,833,430 2,002,569
Deferred compensation.............................................................. 930,349 1,076,187
Subordinated shareholder debt...................................................... 5,422,555 5,023,466
------------- -------------
Total liabilities.......................................................... 28,269,349 25,295,289
Commitments and contingencies (Note 5)
Common stock....................................................................... 2,853,669 2,853,669
Additional paid-in capital......................................................... 2,682,152 2,682,152
Accumulated deficit................................................................ (2,601,451) (413,463)
------------- -------------
Total shareholders' equity................................................. 2,934,370 5,122,358
------------- -------------
Total liabilities and shareholders' equity................................. $ 31,203,719 $ 30,417,647
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
HENRY COMPANY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 61,059,484 $ 59,186,000 $ 67,423,603
Cost of sales....................................................... 42,290,227 40,866,724 46,412,828
------------- ------------- -------------
Gross profit.................................................... 18,769,257 18,319,276 21,010,775
Operating expenses:
Selling, general and administrative............................... 17,518,731 16,934,453 17,508,108
Amortization of intangibles....................................... 703,003 182,693 137,241
------------- ------------- -------------
Operating income (loss)......................................... 547,523 1,202,130 3,365,426
Other expense (income):
Interest expense.................................................. 1,453,946 1,474,899 1,464,665
Interest and other income, net.................................... (402,257) (344,841) (320,547)
------------- ------------- -------------
Income (loss) before provision for income taxes................. (504,166) 72,072 2,221,308
Provision for income taxes.......................................... -- 1,081 33,320
------------- ------------- -------------
Net income (loss)............................................... $ (504,166) $ 70,991 $ 2,187,988
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
HENRY COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994................... 200,100 $ 2,853,669 $ 2,682,152 $ (2,168,276) $ 3,367,545
Net loss................................... -- -- -- (504,166) (504,166)
--------- ------------ ------------ ------------- ------------
Balance, December 31, 1995................... 200,100 2,853,669 2,682,152 (2,672,442) 2,863,379
Net income................................. -- -- -- 70,991 70,991
--------- ------------ ------------ ------------- ------------
Balance, December 31, 1996................... 200,100 2,853,669 2,682,152 (2,601,451) 2,934,370
Net income................................. -- -- -- 2,187,988 2,187,988
--------- ------------ ------------ ------------- ------------
Balance, December 31, 1997................... 200,100 $ 2,853,669 $ 2,682,152 $ (413,463) $ 5,122,358
--------- ------------ ------------ ------------- ------------
--------- ------------ ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
HENRY COMPANY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $ (504,166) $ 70,991 $ 2,187,988
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization......................................... 1,439,595 1,582,974 1,404,361
Provision for doubtful accounts....................................... 698,628 178,963 179,374
Noncompetition and goodwill amortization.............................. 467,428 61,716 65,014
Interest on subordinated shareholder debt............................. 343,033 377,205 345,441
(Gain) loss on disposal of property and equipment..................... 19,610 (45,611) 2,278
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable................................................. (2,573,847) (300,283) (1,402,006)
Inventories......................................................... 479,595 (508,358) 64,126
Receivables from affiliates......................................... (1,031,664) (265,047) 2,033,432
Notes receivable.................................................... 496,272 271,888 23,859
Cash surrender value of life insurance.............................. (242,748) (129,479) (665,804)
Other assets........................................................ 227,520 (408,237) (150,535)
Accounts payable and accrued expenses............................... 2,219,245 (132,985) 378,293
Deferred warranty revenue........................................... 185,363 210,441 169,138
Deferred compensation............................................... 202 206,603 145,838
------------- ------------- -------------
Net cash provided by operating activities....................... 2,224,066 1,170,781 4,780,797
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures.................................................... (1,389,094) (1,448,693) (801,239)
Proceeds from the disposal of property and equipment.................... 47,046 666,224 50,874
Acquisition of business, net of cash acquired........................... -- -- (134,779)
Investment in affiliate................................................. -- -- (64,189)
------------- ------------- -------------
Net cash used in investing activities........................... (1,342,048) (782,469) (949,333)
------------- ------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement.............. 1,100,000 (738,472) (3,091,147)
Repayments under note payable agreements................................ (937,650) (437,266) (604,370)
Borrowings under note payable agreements................................ -- 1,908,333 427,278
Payments on subordinated shareholder debt............................... (641,380) (827,947) (744,530)
Payments under capital lease obligations................................ (306,415) (162,950) --
------------- ------------- -------------
Net cash used in financing activities........................... (785,445) (258,302) (4,012,769)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents............ 96,573 130,010 (181,305)
Cash and cash equivalents at beginning of period.......................... 73,579 170,152 300,162
------------- ------------- -------------
Cash and cash equivalents at end of period................................ $ 170,152 $ 300,162 $ 118,857
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts of Henry Company and
Warner Development Company of Texas (the "Company"), both companies under common
ownership and control. All significant intercompany accounts and transactions
have been eliminated.
The Company is a manufacturer of materials for the construction industry
focusing primarily on roofing, sealing and paving applications. The Company
develops, manufactures and distributes the following related product lines:
roof/driveway coatings and paving products, polyurethane foam for roofing and
commercial uses, and sealants for the construction and marine industries.
REVENUE RECOGNITION
Revenues are recognized when products are shipped. The Company has
established programs which, under specified conditions, allow customers to
return products. The Company establishes liabilities for estimated returns and
allowances at the time of shipment. In addition, accruals for customer discounts
and returns are recorded when revenues are recognized.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes and are
included in "Accounts Payable" in the accompanying balance sheet. At December
31, 1996 and 1997, these overdraft balances amounted to $355,089 and $1,488,003,
respectively.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost is determined using standard cost which approximates actual costs on a
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Leasehold improvements are
amortized on a straight-line basis over the remaining lease term, or the asset's
estimated useful life, whichever is shorter. All other depreciable assets are
depreciated using the double-declining-balance method or the straight-line
method, over the assets' estimated useful lives.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings..................................... 25 to 30 years
Machinery and equipment....................... 10 years
Office furniture and equipment................ 5 years
Automotive equipment.......................... 3 to 5 years
Primary term of
Leasehold improvements........................ lease
Other......................................... 5 years
</TABLE>
F-7
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Additions, major renewals and betterments are capitalized, while repair and
maintenance costs are expensed as incurred. Upon sale or retirement of property
and equipment, the cost and accumulated depreciation are removed from the
appropriate accounts and any gain or loss is included in income in the year the
asset was disposed.
INCOME TAXES
The Company elected to be taxed under Section 1361 of the Internal Revenue
Code as an S Corporation. Under these provisions, the Company does not pay
federal corporate income taxes on its taxable income. Instead, the shareholders
are individually liable for federal income taxes based on the Company's taxable
income. This election is also valid for state income tax reporting. However, a
provision for state income taxes is required based on a 1.5% state income tax
rate, and this state tax provision is included in the provision for income taxes
in the accompanying combined statements of operations.
NONCOMPETITION AGREEMENT
A noncompetition agreement related to the acquisition of World Asphalt
Paving has been recorded at the present value of the future payments under the
agreement and is being amortized over the life of the agreement using the
straight-line method. The statement of operations includes amortization and
imputed interest related to this noncompetition agreement.
DEFERRED WARRANTY REVENUE
The Company offers its customers an optional separately purchased warranty
program for its Henry commercial roofing systems. Revenue from the warranty
program is recognized over the 20 year warranty period. Warranty repair expenses
under the program are charged to expense as incurred.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include all costs associated
with marketing and distributing the Company's products. Also included in
selling, general and administrative expenses are research and development costs.
Research and development costs incurred in developing and improving product
formulas are charged to expense in the year incurred. Total research and
development costs were $321,811, $320,961 and $320,275 for the years ended
December 31, 1995, 1996 and 1997, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company currently maintains substantially all of its day-to-day
operating cash balances with major financial institutions. At times, cash
balances may be in excess of Federal Depository Insurance Corporation ("FDIC")
insurance limits. Cash equivalents principally consist of money market funds on
deposit with major financial institutions.
Concentration of credit risk with respect to trade receivables is derived
from the Company's largest customer, which represents approximately 13% and 15%
at December 31, 1996 and 1997, respectively. This customer also accounted for
approximately 12% of net sales in fiscal years 1995 and 1996 and 15% of net
sales in fiscal year 1997. However, the majority of the Company's customers are
geographically diverse roofing distributors and contractors located in the
western United States, which limits the extent of trade
F-8
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
credit risk. The Company also maintains credit insurance that provides
substantial reimbursement for actual credit losses relating to its Henry
Coatings Division. In addition, the Company controls credit risk through credit
approvals, credit limits and monitoring procedures.
THE VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of fair
value information about most financial instruments both on and off the balance
sheet, if it is practicable to estimate. SFAS No. 107 excludes certain financial
instruments, such as certain insurance contracts and all non-financial
instruments from its disclosure requirements. A financial instrument is defined
as a contractual obligation that ultimately ends with the delivery of cash or an
ownership interest in an entity. Disclosures regarding the fair value of
financial instruments are derived using external market sources, estimates using
present value or other valuation techniques. Cash, accounts receivable, accounts
payable, accrued liabilities and short-term debt are reflected in the financial
statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt approximates its carrying value.
The Company has issued a standby letter of credit relating to their business
insurance and is contingently liable for approximately $490,000. The standby
letter of credit is in force for the term of the insurance policy, and reflects
a fair value based on the condition of its purpose.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
The carrying value of long-lived assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value. During the year ended December 31, 1996, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires
that long-lived assets and certain identifiable intangible assets to be held and
used be reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable. The adoption
of SFAS No. 121 did not have any impact on the financial position, results of
operations or cash flows of the Company.
F-9
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ADVERTISING AND PROMOTION COSTS
All costs associated with advertising and promoting products are expensed in
the year incurred and are included in selling, general and administrative
expenses. Advertising and promotion expenses were $623,589, $485,069 and
$579,250 for 1995, 1996 and 1997, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income." The standard establishes guidelines for the reporting and
display of comprehensive income and its components in financial statements. The
Company has adopted the provisions of SFAS No. 130 as of March 31, 1998,
however, there was no impact to the Company as there are no elements of
comprehensive income not included in the Company's operating results.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." The standard requires that
publicly-held companies disclose "operating segments" based on the way
management disaggregates the company for making internal operating decisions.
The new rules will be effective for the Company's December 31, 1998 financial
statements. The Company has not evaluated the impact, if any, of the new
standard.
2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 2,133,565 $ 2,232,684
Finished goods.................................................... 3,791,200 3,649,578
------------ ------------
$ 5,924,765 $ 5,882,262
------------ ------------
------------ ------------
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Buildings..................................................... $ 2,572,513 $ 463,375
Machinery and equipment....................................... 8,984,603 10,129,940
Office furniture and equipment................................ 2,352,896 2,344,253
Automotive equipment.......................................... 1,595,398 1,447,456
Leasehold improvements........................................ 3,008,308 3,047,521
Other......................................................... 313,360 330,695
-------------- --------------
18,827,078 17,763,240
Less, accumulated depreciation and amortization............... 12,341,532 13,207,170
-------------- --------------
6,485,546 4,556,070
Land.......................................................... 472,162 472,162
Construction-in-progress...................................... 999,827 454,956
-------------- --------------
$ 7,957,535 $ 5,483,188
-------------- --------------
-------------- --------------
</TABLE>
F-10
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Line of credit borrowings, at the bank's prime interest rate (8.75% at
December 31, 1996 and 1997)............................................. $ 7,061,528 $ 3,970,381
Term note payable to bank, with interest at 9% at December 31, 1996 and
1997, interest payable monthly, principal payable in monthly
installments of $41,667, due in fiscal year 1999........................ 3,958,333 3,499,996
Term note payable to bank, with interest at 9%, interest and principal
payable quarterly, principal installments of $31,250, due in fiscal year
1999.................................................................... -- 427,278
Term note payable, with interest at 9.25% at December 31, 1996 and 1997,
interest and principal payable quarterly, principal installments of
$31,250, due in fiscal year 1999........................................ 456,250 331,250
Term note payable to third party, with interest at 8.0% at December 31,
1996 and 1997, principal and interest payable monthly in installments of
$4,705, due in fiscal year 2013......................................... 511,287 495,147
Other.................................................................... 5,766 873
------------- -------------
11,993,164 8,724,925
Less, current maturities................................................. 7,706,324 4,608,580
------------- -------------
$ 4,286,840 $ 4,116,345
------------- -------------
------------- -------------
</TABLE>
As of December 31, 1997, the Company had a $10,000,000 line of credit
facility, a $4,000,000 term loan and a $1,000,000 capital expenditure note. The
Company's line of credit facility expires on November 30, 1999. The Company's
line of credit and term loan contain certain covenants requiring the Company to
maintain certain financial ratios and minimum net worth requirements, and have
as collateral the Company's property and equipment, inventory, and receivables.
There is a guarantee in the amount of $6,000,000 of the outstanding principal
balance from the Company's Chairman of the Board related to all the Company's
credit facilities.
The following are future maturities of long-term debt for each of the next
five years ending December 31 and in total thereafter:
<TABLE>
<S> <C>
1998.................................................... $4,608,580
1999.................................................... 3,596,861
2000.................................................... 103,453
2001.................................................... 24,047
2002.................................................... 26,042
Thereafter.............................................. 365,942
---------
Total............................................... $8,724,925
---------
---------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company conducts certain operations out of leased facilities, including
the corporate office and divisional warehouses. The lease terms range from 1 to
6 years and begin to expire in 1998. Certain of the
F-11
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Company's operating lease agreements provide for escalation of payments, which
are based on fluctuations of certain published cost-of-living indices. The
Company also leases certain land, buildings and equipment from related parties,
with terms expiring in 1998. Various leases also contain certain renewal
options.
Total rent expense was $712,097, $693,320 and $896,465 for the years ended
December 31, 1995, 1996 and 1997, respectively. Included in rent expense is rent
paid to related parties of $609,053, $630,747 and $735,960 for the years ended
December 31, 1995, 1996 and 1997, respectively. The minimum rental commitments
for land, buildings and equipment under all noncancellable operating leases,
with lease terms in excess of one year, are as follows:
<TABLE>
<S> <C>
1998.................................................... $ 876,722
1999.................................................... 581,017
2000.................................................... 520,911
2001.................................................... 498,423
2002.................................................... 435,559
Thereafter.............................................. 424,898
---------
$3,337,530
---------
---------
</TABLE>
Included in the annual minimum rental commitments are operating lease
payments to related parties of $710,541 in 1998, $496,951 in 1999, $488,861 in
2000 and $488,861 in 2001, $435,559 in 2002 and $424,898 thereafter.
The Company is involved in various lawsuits, claims and inquiries, most of
which are routine to the nature of their business. In the opinion of management,
the resolution of these matters will not materially affect the financial
position, results of operations or cash flows of the Company.
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Paid During The Year For:
Interest.......................................... $ 1,673,324 $ 1,912,996 $ 1,461,977
------------ ------------ ------------
------------ ------------ ------------
Income taxes...................................... $ 1,600 $ 1,600 $ 1,600
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NON-CASH TRANSACTIONS
At December 31, 1997, the Company sold property to the Henry II division of
the Henry Wine Group ("Wine Group") for the net book value of $1,863,072. This
transaction is excluded from the statement of cash flows for the year ended
December 31, 1997 as the consideration was received in the form of a note, as
more fully described in Note 8.
7. PROFIT-SHARING AND PENSION PLAN:
The Company sponsors a deferred profit-sharing plan for employees.
Contributions into the plan are maintained in a trust. Contributions are
discretionary and determined by the Board of Directors each year. Participants
are salaried regular employees with at least one year of continuous Company
employment. The Company has expensed $530,664, $232,951 and $403,242,
respectively, during 1995, 1996 and 1997 in contributions.
F-12
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. PROFIT-SHARING AND PENSION PLAN: (CONTINUED)
Hourly employees of the Henry Coatings Division at the Huntington Park plant
are covered by the Employers'-Warehousemen's Pension Trust Fund, a
multi-employer union plan to which the Company makes periodic contributions as
determined by a collective bargaining agreement effective through June 30, 2000.
The Company is also subject to additional charges as determined by the plan's
trustees during the term of the agreement to maintain the current level of
health and welfare benefits. The information with respect to the plan's net
assets and actuarial present value of accumulated plan benefits are not
determinable due to the nature of the plan. The costs incurred during the years
ended December 31, 1995, 1996 and 1997 were $76,175, $75,766 and $71,532,
respectively.
8. RELATED PARTIES:
The Company is obligated under certain leases at December 31, 1997 and has
incurred rent expense in 1995, 1996 and 1997 with related parties, as more fully
described in Note 5.
Receivables from affiliate represents amounts due from the Henry Wine Group,
an affiliated group of companies under common control, and relates to operating
advances made to the Wine Group.
The note receivable from affiliate relates to proceeds due the Company on
the sale of property to the Wine Group at its net book value at December 31,
1997. The note receivable is repayable by December 31, 2002, bears interest at
the prime interest rate and is secured by an interest in the property.
The Company charges the Wine Group certain direct administrative costs for
services provided by the Company's finance, human resources, and management
information systems departments. The administrative costs charged totalled
$50,000, $110,000 and $199,000 for the years ended 1995, 1996 and 1997,
respectively.
As of December 31, 1996 and 1997, notes receivable in the accompanying
balance sheet include outstanding principal and accrued interest due from the
Company's President in the amount of $526,000 and $559,557, respectively. The
notes bear interest at Bank of America's First Rate and are payable in
installments or lump sum payments due through December 31, 1998 with the
exception of $175,000 which is due and payable upon termination.
Subordinated shareholder debt financing has been obtained from the Chairman
of the Board. The notes have a variable interest rate based on the Bank of
America "First Rate". Payments of principal and interest may be made in a lump
sum or installments at the option of the borrower. As of December 31, 1996 and
1997, accrued interest payable on the subordinated shareholder debt was $97,098
and $1,405, respectively.
9. ACQUISITIONS:
On February 3, 1997, the Company entered into a joint venture with J-K
Polysource, Inc. to form RamSource L.L.C. for an initial investment of $60,000
and additional investments of $4,189. RamSource L.L.C. manufactures and
distributes gaskets to the concrete pipe industry. The Company accounts for
their investment in the joint venture under the equity method of accounting.
On March 7, 1997, the Company purchased the net assets of American Blackline
Coatings, Inc. for cash payments totalling $134,779. American Blackline
Coatings, Inc. was based in Denver, Colorado, and manufactured and distributed
roof coating products in the Rocky Mountain region. In 1997, the Company
F-13
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS: (CONTINUED)
closed the manufacturing operations and transferred all assets to other Company
facilities. The Company continues to sell and distribute products in the Rocky
Mountain region.
The net effect of these acquisitions did not have a material effect on the
financial position, results of operations or cash flows of the Company in 1997.
10. COMMON STOCK:
As of December 31, 1996 and 1997, common stock is composed of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Henry Company, common stock, stated value $5 per share, 100,000 shares,
issued and outstanding..................................................... $ 500,000 $ 500,000
Henry Company, common stock, stated value $21.78 per share, authorized
94,000 shares, issued and outstanding...................................... 2,047,320 2,047,320
Warner Development of Texas, common stock, stated value $1,616.20 per share,
authorized 94 shares, issued and outstanding............................... 151,922 151,922
Henry Company, super voting class A common stock, stated value $23.96 per
share, authorized 6,000 shares, issued and outstanding..................... 143,760 143,760
Warner Development of Texas, super voting class A common stock, stated value
$1,777.82 per share, authorized 6 shares, issued and outstanding........... 10,667 10,667
------------ ------------
$ 2,853,669 $ 2,853,669
------------ ------------
------------ ------------
</TABLE>
On October 1, 1997, Henry Company granted the Warner W. Henry Living Trust
warrants to purchase an aggregate of 400,000 shares of Henry Company capital
stock, consisting of 12,000 shares of Class A common stock and 388,000 shares of
common stock (the "Warrants"). The Warrants expire on September 30, 2012 and may
be exercised in whole or in part at variable and increasing exercise prices over
the term of the warrants. The current and maximum exercise prices for both Class
A common stock and common stock are $12.94 and $38.82 per share, respectively.
The warrants have an initial exercise price that exceeds the fair value of
the capital stock at the date of grant. The grant date present value of each
warrant is estimated at 11 CENTS or an aggregate of $44,000 using the
Black-Scholes pricing model, using the following assumptions: risk-free interest
rate at 6.0%; expected warrant life of 15 years; volatility of 20.0%; forfeiture
rate zero (0); no expected dividends; and no adjustments for nontransferability.
As of December 31, 1997, no warrants have been exercised.
11. SUBSEQUENT EVENT (UNAUDITED):
On April 22, 1998, Henry Company completed the acquisition of Monsey
Products Co. ("Monsey") and its subsidiaries (the "Acquisition") engaged in the
distribution and manufacture of roof coatings, adhesives and membranes, and
waterproofing and air barrier systems, for residential and commercial
applications. The cash purchase price was $42,750,000 with an additional
$3,250,000 paid at closing to certain selling shareholders of Monsey for
noncompetition agreements. A selling shareholder also purchased 22,500 of
redeemable convertible preferred stock of the Company for $600,000 cash. The
Acquisition will be accounted for using the purchase method of accounting.
F-14
<PAGE>
HENRY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT (UNAUDITED): (CONTINUED)
Concurrent with the Acquisition, the Company conducted a senior note
offering (the "Offering") in the aggregate principal amount of $85,000,000. The
proceeds of the Offering were used to acquire Monsey, retire a substantial
portion of Monsey's existing bank debt, and retire the existing Henry Company
bank debt and subordinated shareholder debt included in the accompanying
combined balance sheet at December 31, 1997 in the amounts of $7,897,255 and
$5,023,466, respectively.
Concurrent with the Acquisition and Offering, the Company's bank credit line
was replaced with a $35 million credit facility, $25 million of which is
available in accordance with a borrowing base and to be used for working capital
and $10 million of which may be used for capital expenditures.
F-15
<PAGE>
HENRY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS--UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 118,857 $ 9,482,810
Trade accounts receivable, net of allowance for doubtful accounts of $161,365
and $202,487 for 1997 and 1998, respectively.................................. 10,368,904 28,189,390
Inventories..................................................................... 5,882,262 16,593,863
Receivables from affiliate...................................................... 2,264,341 2,495,128
Notes receivable................................................................ 448,721 468,552
Prepaid expenses and other current assets....................................... 1,197,167 1,827,819
------------- --------------
Total current assets........................................................ 20,280,252 59,057,562
Property and equipment, net....................................................... 5,483,188 27,252,712
Cash surrender value of life insurance, net....................................... 1,658,305 3,674,564
Intangibles, net.................................................................. 702,091 38,241,271
Notes receivable.................................................................. 299,654 265,195
Note receivable from affiliate.................................................... 1,863,072 1,942,692
Other............................................................................. 131,085 181,533
------------- --------------
Total assets................................................................ $ 30,417,647 $ 130,615,529
------------- --------------
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................ $ 4,846,131 $ 11,393,720
Accrued expenses................................................................ 3,622,011 9,886,021
Notes payable, current portion.................................................. 638,199 391,923
Income taxes payable............................................................ -- 722,389
Borrowings under line of credit................................................. 3,970,381 4,149,950
------------- --------------
Total current liabilities................................................... 13,076,722 26,544,003
Notes payable..................................................................... 4,116,345 888,860
Environmental reserve............................................................. -- 3,455,626
Deferred income taxes............................................................. -- 2,323,067
Deferred warranty revenue......................................................... 2,002,569 2,032,084
Deferred compensation............................................................. 1,076,187 1,099,358
Subordinated shareholder debt..................................................... 5,023,466 --
Senior notes...................................................................... -- 85,000,000
------------- --------------
Total liabilities........................................................... 25,295,289 121,342,998
Redeemable convertible preferred stock............................................ -- 1,439,000
Shareholders' equity:
Common stock.................................................................... 2,853,669 4,691,080
Additional paid-in capital...................................................... 2,682,152 2,844,741
Cumulative translation account.................................................. -- 92,982
Retained earnings (accumulative deficit)........................................ (413,463) 204,728
------------- --------------
Total shareholders' equity.................................................. 5,122,358 7,833,531
------------- --------------
Total liabilities and shareholders' deficit................................. $ 30,417,647 $ 130,615,529
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
HENRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS--UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net sales.......................................................................... $ 25,716,491 $ 52,107,603
Cost of sales...................................................................... 18,700,734 36,007,304
------------- -------------
Gross profit................................................................... 7,015,757 16,100,299
Operating expenses:
Selling, general and administrative............................................ 7,573,774 12,604,961
Amortization of intangibles.................................................... 68,621 622,213
------------- -------------
Operating income (loss)........................................................ (626,638) 2,873,125
Other expense (income):
Interest expense............................................................... 731,411 2,099,036
Interest and other income, net................................................. (176,182) (122,100)
------------- -------------
Income (loss) before provision for income taxes................................ (1,181,867) 896,189
Benefit for income taxes........................................................... -- (522,002)
------------- -------------
Net income (loss).............................................................. $ (1,181,867) $ 1,418,191
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
HENRY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY--UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE RETAINED
----------------------- PAID-IN TRANSLATION EARNINGS
SHARES AMOUNT CAPITAL ACCOUNT (DEFICIT) TOTAL
--------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997........... 200,100 $ 2,853,669 $ 2,682,152 $ -- $ (413,463) $ 5,122,358
Merger of Warner Development Company
of Texas into Henry Company........ (100) (162,589) 162,589 -- -- --
Issuance of common stock............. 27,500 2,000,000 -- -- -- 2,000,000
Dividend to shareholders............. -- -- -- -- (800,000) (800,000)
Comprehensive loss:
Net income......................... -- -- -- -- 1,418,191 1,418,191
Other comprehensive income:
Change in cumulative translation
account........................ -- -- -- 92,982 -- 92,982
------------
Total comprehensive loss............. 1,511,173
--------- ------------ ------------ ----------- ------------ ------------
Balance, June 30, 1998............... 227,500 $ 4,691,080 $ 2,844,741 $ 92,982 $ 204,728 $ 7,833,531
--------- ------------ ------------ ----------- ------------ ------------
--------- ------------ ------------ ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
HENRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ (1,181,866) $ 1,418,191
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 640,681 1,028,766
Provision for doubtful accounts................................................ 98,503 141,426
Amortization of intangibles.................................................... 32,506 595,292
Interest on subordinated shareholder debt...................................... 218,911 176,506
(Gain) loss on disposal of property and equipment.............................. -- (17,000)
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable.......................................................... (11,664) (691,912)
Inventories.................................................................. 661,736 (1,196,601)
Receivables from affiliates.................................................. 1,199,719 (310,407)
Notes receivable............................................................. 21,634 14,628
Cash surrender value of life insurance....................................... (432,478) (344,259)
Other assets................................................................. (660,293) (218,744)
Accounts payable and accrued expenses........................................ (80,592) (506,320)
Deferred warranty revenue.................................................... 58,783 29,516
Deferred compensation........................................................ 21,125 23,171
------------- --------------
Net cash provided by operating activities................................ 586,705 142,253
------------- --------------
Cash flows from investing activities:
Capital expenditures............................................................. (349,562) (753,290)
Proceeds from the disposal of property and equipment............................. 22,799 17,000
Acquisition of business, net of cash acquired.................................... (134,779) (43,819,000)
Investment in affiliate.......................................................... (53,391) (9,828)
------------- --------------
Net cash used in investing activities.................................... (514,933) (44,565,118)
------------- --------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements...................... 446,819 (14,160,431)
Repayments under notes payable agreements........................................ (322,857) (11,200,042)
Borrowings under notes payable agreements........................................ -- 4,281
Payments on subordinated shareholder debt........................................ (156,275) (5,199,972)
Payments of finance fees for note offering....................................... -- (2,550,000)
Proceeds from Series A Senior Notes.............................................. -- 85,000,000
Proceeds from issuance for common stock.......................................... -- 2,000,000
Proceeds from issuance of preferred stock........................................ -- 600,000
Dividends paid................................................................... -- (800,000)
------------- --------------
Net cash provided by (used in) financing activities...................... (32,313) 53,693,836
------------- --------------
Effect of changes in exchange rate on cash............................... -- 92,982
------------- --------------
Net increase in cash and cash equivalents................................ 39,459 9,363,953
Cash and cash equivalents at beginning of year..................................... 300,162 118,857
------------- --------------
Cash and cash equivalents at end of year........................................... $ 339,621 $ 9,482,810
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements of
Henry Company, a California corporation (the "Company"), include all adjustments
(consisting of normal recurring entries) which management believes are necessary
for a fair presentation of the financial position and results of operations for
the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The year-end condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles. It
is suggested that the accompanying financial statements be read in conjunction
with the Company's audited financial statements and footnotes as of and for the
year ended December 31, 1997 and the Monsey Products Co. audited financial
statements and footnotes as of and for the year ended December 31, 1997.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the operating results for the full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
As more fully described in Note 2, the interim financial statements for the
six months ended June 30, 1998 include the financial results and accounts of
Monsey Products Co. ("Monsey") and its subsidiaries which were acquired by Henry
Company on April 22, 1998. The Acquisition was accounted for using the purchase
method of accounting and accordingly the results of operations of Monsey since
the acquisition date have been included in the consolidated financial statements
of Henry Company.
2. BUSINESS ACQUISITION AND NOTE OFFERING:
On April 22, 1998, Henry Company completed the acquisition of Monsey and its
subsidiaries (the "Acquisition") engaged in the distribution and manufacture of
roof coatings, adhesives and membranes, and waterproofing and air barrier
systems, for residential and commercial applications. The cash purchase price
was $42,750,000 with an additional $3,227,000 paid at closing to certain selling
shareholders of Monsey for noncompetition agreements. A selling shareholder also
purchased 22,500 shares of redeemable convertible preferred stock of the Company
for $600,000 cash. The Acquisition was accounted for using the purchase method
of accounting.
Concurrent with the Acquisition, the Company conducted a senior note
offering (the "Offering") in the aggregate principal amount of $85,000,000 as
more fully described in Note 5.
Also concurrent with the Acquisition, the Company converted its tax status
from an S Corporation under Section 1361 of the Internal Revenue Code to a C
Corporation status. Subsequent to the election the Company will be required to
pay federal and state corporate income taxes on its taxable income.
F-20
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. BUSINESS ACQUISITION AND NOTE OFFERING: (CONTINUED)
The Company is in the process of completing the final purchase price
allocation, however, the preliminary purchase price allocation is as follows:
<TABLE>
<S> <C>
Cash paid at closing for Monsey stock and noncompetition
agreements....................................................... $45,977,000
Fair value of redeemable convertible preferred stock in excess of
cash received.................................................... 839,000
Financing fees related to the Note Offering and other costs related
to the transactions.............................................. 4,200,000
----------
51,016,000
Tangible net assets acquired....................................... 17,366,000
----------
$33,650,000
----------
----------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZABLE
AMOUNT LIFE
------------- -----------
<S> <C> <C>
Excess of cost over the estimated fair value of net assets acquired... $ 27,873,000 15 years
Noncompetition agreements............................................. 3,227,000 10 years
Financing fees........................................................ 2,550,000 10 years
-------------
$ 33,650,000
-------------
-------------
</TABLE>
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -------------
<S> <C> <C>
Raw materials........................................................ $2,232,684 $ 7,653,266
Finished goods....................................................... 3,649,578 8,940,597
------------ -------------
$5,882,262 $ 16,593,863
------------ -------------
------------ -------------
</TABLE>
F-21
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------- -------------
<S> <C> <C>
Buildings................................................................ $ 463,375 $ 10,192,584
Machinery and equipment.................................................. 10,129,940 19,920,266
Office furniture and equipment........................................... 2,344,253 3,258,094
Automotive equipment..................................................... 1,447,456 1,737,790
Leasehold improvements................................................... 3,047,521 3,089,497
Other.................................................................... 330,695 330,695
------------- -------------
17,763,240 38,528,926
Less, accumulated depreciation and
amortization........................................................... 13,207,170 15,338,320
------------- -------------
4,556,070 23,190,606
Land..................................................................... 472,162 3,176,757
Construction-in-progress................................................. 454,956 885,349
------------- -------------
$ 5,483,188 $ 27,252,712
------------- -------------
------------- -------------
</TABLE>
5. LONG-TERM DEBT AND CREDIT FACILITIES:
On April 22, 1998 the Company issued $85,000,000 of Senior Notes due in
2008. Interest is payable semi-annually at 10% per annum. The proceeds from the
offering were used to (i) retire existing Henry Company bank debt, (ii) retire
existing Henry Company subordinated shareholder debt, (iii) acquire Monsey, (iv)
retire a substantial portion of Monsey's then-existing bank debt with (v) the
remainder providing additional working capital. Long-term debt consists of the
following at June 30, 1998:
<TABLE>
<S> <C>
10.0% Senior Notes due 2008............................................ $85,000,000
Various term notes payable to third parties with interest rates ranging
from 6% to 9.25%, maturing from 1999 to 2013.......................... 1,280,783
----------
86,280,783
Less current portion................................................... (391,923)
----------
$85,888,860
----------
----------
</TABLE>
The Company's 10% Senior Notes are guaranteed by all U.S. subsidiaries of
the Company (the "Subsidiary Guarantors"). The guarantee obligations of the
Subsidiary Guarantors are full, unconditional and joint and several. See Note 10
for the Guarantor Condensed Consolidating Financial Statements.
Concurrent with the Offering, Henry Company's bank credit line was replaced
with a $35 million credit facility, $25 million of which is available in
accordance with a borrowing base and to be used for working capital needs and
$10 million of which may be used for capital expenditures. The credit facility
expires on April 22, 2003. At June 30, 1998, $270,915 was outstanding under the
credit facility with interest charged at prime or LIBOR plus 2.25% (8.5% at June
30, 1998).
F-22
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. LONG-TERM DEBT AND CREDIT FACILITIES: (CONTINUED)
The Company also has a Canadian bank line of credit, subject to annual
confirmation, aggregating $4,440,000 with interest charged at prime plus 0.5%
(6.5% at December 31, 1997). At December 31, 1997 and June 30, 1998, there was
$2,642,296 and $3,263,000, respectively, outstanding under this Canadian line.
6. INCOME TAXES:
Concurrent with the Acquisition and the Offering Henry Company converted its
tax status from an S Corporation under Section 1361 of the Internal Revenue Code
to a C Corporation status. Subsequent to the conversion Henry Company will be
required to pay federal and state corporate income taxes on its taxable income.
Upon conversion to C status Henry Company recognized deferred taxes in
accordance with the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The significant components of the provision (benefit) for income taxes are
as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
-----------------
<S> <C>
Current:
Federal............................................................................ $ (274,471)
State.............................................................................. 46,906
Foreign............................................................................ 588,000
-----------------
360,435
-----------------
Deferred:
Federal............................................................................ (692,907)
State.............................................................................. (189,530)
-----------------
(882,437)
-----------------
$ (522,002)
-----------------
-----------------
</TABLE>
The Company's effective tax rate differs from the federal statutory tax rate
for the six-months ended June 30, 1998 as follows:
<TABLE>
<CAPTION>
Provision for income taxes at the federal statutory tax rate.............. 34.0%
<S> <C>
State taxes net of federal tax benefit.................................... 0.3
Foreign income taxes in excess of U.S. statutory rate..................... 3.0
Recognition of deferred tax benefits upon conversion to C status.......... (98.5)
Nondeductible intangibles................................................. 13.4
Income not subject to federal and state income tax prior to conversion to
C status................................................................ (13.0)
Other, net................................................................ 2.6
----------
(58.2)%
----------
----------
</TABLE>
F-23
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. INCOME TAXES: (CONTINUED)
Income (loss) before income taxes of the Company's Canadian operations was
$451,803 for the six-month period ended June 30, 1998.
The significant components of the Company's deferred tax assets and
liabilities as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Environmental reserve................................................. $1,397,356
Allowances and reserves deductible in the future...................... 172,218
Deferred revenue...................................................... 871,597
Other accruals........................................................ 483,447
----------
Deferred tax assets................................................... 2,924,618
----------
Deferred tax liabilities:
Depreciation.......................................................... (4,429,377)
Deferred gain on discharge of liability............................... (818,308)
----------
Deferred tax liabilities.............................................. (5,247,685)
----------
Net deferred tax liability............................................ $(2,323,067)
----------
----------
</TABLE>
The deferred tax provision (benefit) recognized as a result of the
conversion from S corporation status to C status and the related recognition of
deferred taxes is as follows:
<TABLE>
<CAPTION>
Allowances and reserves deductible in the future......................... $(172,218)
<S> <C>
Deferred revenue......................................................... (871,597)
Depreciation............................................................. 644,825
Other accruals........................................................... (483,447)
---------
Net deferred tax benefit from conversion............................... $(882,437)
---------
---------
</TABLE>
7. CAPITAL STOCK
On April 21, 1998, Warner Development Company of Texas ("Warner
Development") was merged into Henry Company. The outstanding shares of Warner
Development were cancelled in the merger. For periods prior to this date, the
financial results of Henry Company and Warner Development were presented on a
combined basis as both entities were under common control with identical
management and shareholder ownership and interests.
In addition, on April 21, 1998, the number of authorized shares of Henry
Company Common Stock was increased to 1,000,000 shares.
On April 22, 1998, the Company issued 27,500 shares of Common Stock to
Frederick Muhs for $2,000,000 in cash.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In connection with the Acquisition, the Company sold 22,500 shares of
redeemable convertible preferred stock in the Company to Joseph T. Mooney, Jr.
for $600,000. The Company is obligated, upon
F-24
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
the exercise of Mr. Mooney's put option, to redeem the stock for cash in annual
amounts of $500,000 beginning in 2004 and aggregating $3,000,000, or for
$3,000,000 upon the death of Mr. Mooney. The shares are convertible into shares
of Common Stock. The fair value recorded for the issuance of the preferred stock
represents the estimated present value of the redemption payments.
9. RELATED PARTY TRANSACTIONS
During the six months ended June 30, 1998, the Company has charged the Henry
Wine Group approximately $552,000 for reimbursement of administrative services
provided by Henry Company pursuant to an administrative services agreement that
was effective as of January 1, 1998.
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:
In connection with the Offering, the Company's United States subsidiaries,
Monsey Products Co., Kimberton Enterprises, Inc. and Monsey Products of Arizona
LLC (the "Guarantor Subsidiaries") are unconditional guarantors, on a full,
joint and several basis, of the Company's debt represented by the Senior Notes.
The Company's Canadian subsidiaries are not guarantors of the Notes.
Condensed consolidating financial statements of the Guarantors, from the
date of acquisition, are presented below. The Company wholly owns all Guarantor
Subsidiaries. Separate financial statements of the Guarantors are not presented
because the Guarantors are jointly, severally and unconditionally liable under
the guarantees and the Company believes the condensed consolidating financial
statements presented are more meaningful in understanding the financial position
of the Guarantors.
F-25
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
The following summarizes the Condensed Consolidating Financial Statements of
the guarantors subsequent to the date of Henry Company's acquisition of Monsey:
CONDENSED CONSOLIDATING BALANCE SHEET--UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------------------------
HENRY COMPANY
(PARENT GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
CORPORATION) SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............. $ 6,052,107 $3,025,213 $ 405,490 $ -- $9,482,810
Accounts receivable, net.............. 9,946,950 14,116,730 4,125,710 -- 28,189,390
Inventories........................... 5,941,738 6,519,405 4,132,720 -- 16,593,863
Receivables from affiliate............ 22,235,149 1,081,532 749,662 (21,571,215) 2,495,128
Notes receivable...................... 468,552 -- -- -- 468,552
Prepaid expenses and other current
assets.............................. 1,526,178 78,191 223,450 -- 1,827,819
--------------- ----------- ------------- ----------- ------------
Total current assets................ 46,170,674 24,821,071 9,637,032 (21,571,215) 59,057,562
Property and equipment, net............. 5,336,810 15,418,317 6,458,286 39,299 27,252,712
Investment in subsidiaries.............. 26,204,492 8,793,275 -- (34,997,767) --
Cash surrender value of life insurance,
net................................... 1,963,035 1,711,529 -- -- 3,674,564
Intangibles, net........................ 33,869,120 1,468,108 2,904,043 -- 38,241,271
Notes receivable........................ 265,195 -- -- -- 265,195
Note receivable from affiliate.......... 1,942,692 -- -- -- 1,942,692
Other................................... 122,441 -- 59,092 -- 181,533
--------------- ----------- ------------- ----------- ------------
Total assets........................ $ 115,874,459 5$2,212,300 $19,058,453 ($56,529,683) 1$30,615,529
--------------- ----------- ------------- ----------- ------------
--------------- ----------- ------------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable...................... $ 5,022,433 $3,603,220 $ 2,768,067 $ -- $11,393,720
Accrued expenses...................... 5,219,123 3,871,995 794,903 -- 9,886,021
Intercompany payables................. 758,762 19,731,331 1,081,532 (21,571,625) --
Notes payable, current portion........ 142,480 52,043 197,400 -- 391,923
Income taxes payable.................. -- 711,991 10,398 -- 722,389
Borrowings under line of credit....... 270,915 -- 3,879,035 -- 4,149,950
--------------- ----------- ------------- ----------- ------------
Total current liabilities........... 11,413,713 27,970,580 8,731,335 (21,571,625) 26,544,003
Notes payable........................... 569,101 166,109 153,650 -- 888,860
Environmental reserve................... -- 3,455,626 -- -- 3,455,626
Deferred income taxes................... (882,437) 1,330,293 1,875,211 -- 2,323,067
Deferred warranty revenue............... 2,032,084 -- -- -- 2,032,084
Deferred compensation................... 1,099,358 -- -- -- 1,099,358
Subordinated shareholder debt........... -- -- -- -- --
Bond debt............................... 85,000,000 -- -- -- 85,000,000
--------------- ----------- ------------- ----------- ------------
Total liabilities................... 99,231,819 32,922,608 10,760,196 (21,571,625) 121,342,998
Redeemable convertible preferred
stock................................. 1,439,000 -- -- -- 1,439,000
Shareholders' equity:
Common stock.......................... 12,756,868 2,505,000 7,194,402 (17,765,190) 4,691,080
Additional paid-in capital............ 2,623,678 7,152,000 -- (6,930,937) 2,844,741
Cumulative translation accounts....... -- -- (495,018) 588,000 92,982
(Accumulated deficit) retained
earnings............................ (176,906) 9,632,692 1,598,873 (10,849,931) 204,728
--------------- ----------- ------------- ----------- ------------
Total shareholders' equity.......... 15,203,640 19,289,692 8,298,257 (34,956,058) 7,833,531
--------------- ----------- ------------- ----------- ------------
Total liabilities and shareholders'
deficit........................... $ 115,874,459 5$2,212,300 $19,058,453 ($56,529,683) 1$30,615,529
--------------- ----------- ------------- ----------- ------------
--------------- ----------- ------------- ----------- ------------
</TABLE>
F-26
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS--UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------
HENRY COMPANY
(PARENT GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
CORPORATION) SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 30,267,784 $ 17,668,030 $ 5,605,816 $ (1,434,027) $ 52,107,603
Cost of sales....................... 20,884,389 12,458,969 4,160,877 (1,496,931) 36,007,304
--------------- ------------- ------------- ------------- -------------
Gross profit.................... 9,383,395 5,209,061 1,444,939 62,904 16,100,299
Operating expenses:
Selling, general and
administrative.................. 8,293,072 3,078,849 905,160 327,880 12,604,961
Amortization of intangibles....... 522,618 49,531 50,064 -- 622,213
--------------- ------------- ------------- ------------- -------------
Operating income (loss)......... 567,705 2,080,681 489,715 (264,976) 2,873,125
Other expense (income):
Interest expense.................. 2,023,718 27,579 47,739 -- 2,099,036
Interest and other income, net.... (122,100) -- -- -- (122,100)
--------------- ------------- ------------- ------------- -------------
Income (loss) before provision
(benefit) for income taxes.... (1,333,913) 2,053,102 441,976 (264,976) 896,189
Provision (benefit) for income
taxes............................. (1,416,002) 717,000 177,000 -- (522,002)
--------------- ------------- ------------- ------------- -------------
Net income (loss)............... $ 82,089 $ 1,336,102 $ 264,976 $ (264,976) $ 1,418,191
--------------- ------------- ------------- ------------- -------------
--------------- ------------- ------------- ------------- -------------
</TABLE>
F-27
<PAGE>
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS--UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------------------------
HENRY COMPANY
(PARENT GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
CORPORATION) SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating
activities............................. $ (1,075,928) $ 50,591 $ 1,167,590 $ -- $ 142,253
--------------- ----------- ------------- ----------- ------------
Cash flows from investing activities:
Capital expenditures................... (627,198) (63,941) (62,151) -- (753,290)
Proceeds from the disposal of property
and equipment........................ 17,000 -- -- -- 17,000
Acquisition of business, net of cash
acquired............................. (46,870,312) -- -- 3,051,312 (43,819,000)
Investment in affiliate................ (9,828) -- -- -- (9,828)
--------------- ----------- ------------- ----------- ------------
Net cash used in investing
activities......................... (47,490,338) (63,941) (62,151) 3,051,312 (44,565,118)
--------------- ----------- ------------- ----------- ------------
Cash flows from financing activities:
Net repayments under line-of-credit
agreement............................ (13,396,755) -- (763,676) -- (14,160,431)
Repayments under notes payable
agreements........................... (11,158,038) (9,104) (32,900) -- (11,200,042)
Borrowings under notes payable
agreements........................... 4,281 -- -- -- 4,281
Payments on subordinated shareholder
debt................................. (5,199,972) -- -- -- (5,199,972)
Payments under capital lease
obligations.......................... -- -- -- -- --
Payments of finance fees for note
offering............................. (2,550,000) -- -- -- (2,550,000)
Proceeds from senior notes............. 85,000,000 -- -- -- 85,000,000
Proceeds from issuance for common
stock................................ 2,000,000 -- -- -- 2,000,000
Proceeds from issuance of preferred
stock................................ 600,000 -- -- -- 600,000
Dividends paid......................... (800,000) -- -- -- (800,000)
--------------- ----------- ------------- ----------- ------------
Net cash used in financing
activities......................... 54,499,516 (9,104) (796,576) -- 53,693,836
--------------- ----------- ------------- ----------- ------------
Effect of changes in exchange rate on
cash............................... -- -- 92,982 -- 92,982
--------------- ----------- ------------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents................... 5,933,250 (22,454) 401,845 3,051,312 9,363,953
Cash and cash equivalents at beginning of
year................................... 118,857 3,047,667 3,645 (3,051,312) 118,857
--------------- ----------- ------------- ----------- ------------
Cash and cash equivalents at end of
year................................... $ 6,052,107 $3,025,213 $ 405,490 $ -- $9,482,810
--------------- ----------- ------------- ----------- ------------
--------------- ----------- ------------- ----------- ------------
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Monsey Products Co.
We have audited the accompanying consolidated balance sheets of Monsey Products
Co., T/A Monsey Bakor, as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Monsey Products
Co., T/A Monsey Bakor, at December 31, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, in 1997 the Company changed
its method of accounting for environmental remediation liabilities.
ERNST & YOUNG LLP
Philadelphia, PA
February 6, 1998
F-29
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------ MARCH 31,
------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................................................. $ 1,375,167 $ 213,034 $ 1,168,611
Accounts receivable, net of allowance for doubtful accounts of $412,000 and
$289,000 at December 31, 1996 and 1997, respectively and $289,000 at March 31,
1998........................................................................... 9,228,612 9,783,653 14,477,293
Inventories...................................................................... 7,018,984 6,883,809 9,187,700
Prepaid expenses and other current assets........................................ 618,868 640,753 553,995
Refundable income taxes.......................................................... 93,723 -- 58,559
------------ ------------ ------------
Total current assets........................................................... 18,335,354 17,521,249 25,446,158
Property and equipment:
Land............................................................................. 2,599,501 2,693,300 2,693,300
Buildings and improvements....................................................... 16,008,570 16,460,028 16,442,194
Machinery and equipment.......................................................... 19,292,217 20,288,192 20,332,920
Furniture and fixtures........................................................... 1,840,270 2,350,824 2,556,381
Transportation equipment......................................................... 3,580,612 1,856,469 1,615,015
------------ ------------ ------------
43,321,170 43,648,813 43,639,810
Less accumulated depreciation.................................................... 20,604,088 21,164,710 21,439,445
------------ ------------ ------------
22,717,082 22,484,103 22,200,365
Cash surrender value of insurance.................................................. 1,258,730 1,591,529 1,651,529
Intangibles and other assets net of accumulated amortization of $598,975 and
$806,249 at December 31, 1996 and 1997, respectively and $890,686 at March 31,
1998.............................................................................. 1,679,315 1,695,066 1,611,509
Goodwill, net of accumulated amortization of $65,277 and $185,267 at December 31,
1996 and 1997, respectively and $216,367 at March 31, 1998........................ 2,201,175 2,924,757 2,893,656
------------ ------------ ------------
$ 46,191,656 $ 46,216,704 $ 53,803,217
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit.................................................................. $ 4,920,051 $ 2,642,296 $ 11,298,822
Accounts payable................................................................. 5,638,291 7,228,813 8,139,144
Accrued expenses................................................................. 2,943,823 3,036,284 2,486,083
Income taxes payable............................................................. -- 259,079 --
Current portion of long-term debt................................................ 1,552,652 3,866,566 3,251,949
------------ ------------ ------------
Total current liabilities...................................................... 15,054,817 17,033,038 25,175,998
Long-term debt, less current portion............................................... 9,147,492 5,232,797 5,293,267
Environmental reserve.............................................................. -- 3,502,510 3,502,510
Deferred income taxes.............................................................. 3,829,221 3,305,967 3,178,715
Shareholders' equity:
Preferred stock, $100 par value; Authorized shares--14,000 shares authorized
issued and outstanding shares--7,000 in 1996 and 0 in 1997 and 1998............ 700,000 -- --
Common stock, $1.00 par value; 3,000,000 shares authorized: Issued and
outstanding shares--2,505,000.................................................. 2,505,000 2,505,000 2,505,000
Additional paid-in capital....................................................... 7,152,000 7,152,000 7,152,000
Cumulative translation account................................................... -- (602,198) (587,590)
Retained earnings................................................................ 7,803,126 8,087,590 7,583,317
------------ ------------ ------------
Total shareholders' equity..................................................... 18,160,126 17,142,392 16,652,727
------------ ------------ ------------
$ 46,191,656 $ 46,216,704 $ 53,803,217
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-30
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 79,635,623 $ 108,583,539 $ 113,174,990 $ 21,619,844 $ 22,738,151
Cost of sales............................. 59,640,781 79,428,328 83,082,278 16,580,018 17,495,298
-------------- -------------- -------------- ------------- -------------
Gross profit............................ 19,994,842 29,155,211 30,092,712 5,039,826 5,242,853
Selling, general and administrative....... 17,817,697 23,513,166 24,444,040 5,693,127 5,679,072
Accounting method change--non-cash
environmental charge for change in
estimate................................. -- -- 3,638,965 3,638,965 --
Amortization of intangibles............... 120,459 282,537 352,535 77,283 115,538
-------------- -------------- -------------- ------------- -------------
Operating income (loss)................... 2,056,686 5,359,508 1,657,172 (4,369,549) (551,757)
Interest expense.......................... 1,217,043 1,557,017 1,576,135 346,691 302,552
Other income, net......................... (81,572) (564,445) (390,427) (61,196) (60,786)
-------------- -------------- -------------- ------------- -------------
Income (loss) before income taxes......... 921,215 4,366,936 471,464 (4,655,044) (793,523)
Income tax expense (benefit).............. 385,000 1,537,000 187,000 (1,848,000) (289,250)
-------------- -------------- -------------- ------------- -------------
Net income (loss)....................... $ 536,215 $ 2,829,936 $ 284,464 $ (2,807,044) $ (504,273)
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
</TABLE>
See accompanying notes.
F-31
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL CUMULATIVE
PREFERRED COMMON STOCK STOCK PAID-IN TRANSLATION RETAINED
STOCK STOCK CLASS A CLASS B CAPITAL ACCOUNT EARNINGS TOTAL
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994........ $5,600,000 $ -- $10,000 $90,000 $ -- $ -- $ 4,716,975 $10,416,975
Net income....................... 536,215 536,215
Dividends Paid................... (280,000) (280,000)
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
Balances, December 31, 1995........ 5,600,000 10,000 90,000 -- 4,973,190 10,673,190
Recapitalization................. (4,200,000) 1,503,000 (10,000 ) (90,000 ) 2,797,000
Redemption of preferred stock.... (700,000) (700,000)
Purchase of Canadian
subsidiary..................... 1,002,000 4,355,000 5,357,000
Net income....................... 2,829,936 2,829,936
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
Balances, December 31, 1996........ 700,000 2,505,000 -- -- 7,152,000 -- 7,803,126 18,160,126
Redemption of preferred stock...... (700,000) (700,000)
Comprehensive loss:
Net income....................... 284,464 284,464
Other comprehensive income--
change in cumulative
translation account............ (602,198 ) (602,198)
-----------
Total comprehensive loss........... (317,734)
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
Balances, December 31, 1997........ -- 2,505,000 -- -- 7,152,000 (602,198 ) 8,087,590 17,142,392
Comprehensive loss:
Net loss (unaudited)............. (504,273) (504,273)
Other comprehensive income--
change in cumulative
translation account
(unaudited).................... 14,608 14,608
-----------
Total comprehensive loss
(unaudited)....................... (489,665)
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
Balances, March 31, 1998
(unaudited)....................... -- $2,505,000 -- -- $7,152,000 $ (587,590 ) $ 7,583,317 $16,652,727
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
---------- ---------- -------- -------- ---------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-32
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ 536,215 $ 2,829,936 $ 284,464 $(2,807,044) $ (504,273)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation............................... 1,752,059 2,199,118 2,213,205 565,536 513,355
Amortization of intangible assets.......... 120,459 282,537 352,535 77,283 115,538
Environmental charge....................... -- -- 3,638,965 3,638,965 --
Deferred tax provision..................... (154,000) 107,000 (1,243,000) (1,508,000) (39,000)
(Gain) loss on sale of assets.............. 5,623 (323,961) (227,545) (22,423) (33,650)
Changes in operating assets and
liabilities:
Accounts receivable...................... (376,557) (1,127,381) (778,993) (5,779,512) (4,693,640)
Inventories.............................. (44,852) (1,162,867) (31,737) (1,927,145) (2,303,891)
Prepaid expenses and other............... 31,871 168,136 (69,929) (674,872) 94,576
Income taxes payable (refundable)........ 90,691 62,337 299,446 (272,602) (420,002)
Accounts payable and accrued expenses.... 6,321 991,579 1,759,090 3,940,844 360,130
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................. 1,967,830 4,026,434 6,196,501 (4,768,971) (6,910,857)
INVESTING ACTIVITIES
Purchases of property and equipment........ (1,279,671) (1,224,845) (2,609,947) (779,712) (240,480)
Acquisitions of intangible assets.......... -- (910,784) (347,102) -- --
Proceeds from sale of assets............... -- 573,479 384,784 27,000 50,000
Investment in Canadian subsidiary, net of
cash acquired............................ -- (1,437,887) -- -- --
(Increase) decrease in cash surrender value
of life insurance........................ -- 214,436 (332,799) (67,150) (60,000)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.. (1,279,671) (2,785,601) (2,905,064) (819,862) (250,480)
FINANCING ACTIVITIES
Long-term borrowings....................... 150,000 3,789,478 -- -- --
Repayment of long-term debt................ (1,763,553) (2,978,026) (1,555,740) (392,670) (554,147)
Net (repayments) borrowings under lines of
credit................................... 1,154,554 (747,416) (2,187,755) 5,285,600 8,656,453
Redemption of preferred stock.............. (280,000) (700,000) (700,000) -- --
----------- ----------- ----------- ----------- -----------
Cash provided by (used in) financing
activities............................... (738,999) (635,964) (4,443,495) 4,892,930 8,102,306
Effect of changes in exchange rate on
cash..................................... -- -- (10,075) -- 14,608
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash.............. (50,840) 604,869 (1,162,133) (695,903) 955,577
Cash, beginning of period.................... 821,138 770,298 1,375,167 1,375,167 213,034
----------- ----------- ----------- ----------- -----------
Cash, end of period.......................... $ 770,298 $ 1,375,167 $ 213,034 $ 679,264 $ 1,168,611
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental disclosures:
Cash paid for interest..................... $ 1,217,000 $ 1,557,000 $ 1,495,000 $ 303,000 $ 265,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cash paid for income taxes................. $ 463,000 $ 1,402,000 $ 942,000 $ 143,000 $ 303,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-33
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Monsey Products Co. (the "Company"), trading as Monsey Bakor, manufactures
protective coatings, adhesives, and membranes used in roofing, waterproofing,
and air barrier applications for both the retail and construction markets and
specialty products for industrial applications. Its products are sold primarily
in the United States and in Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to the Company's prior years'
financial statements to conform to the 1997 presentation.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's wholly-owned Canadian
subsidiaries are translated from Canadian dollars to U.S. dollars using exchange
rates in effect at the balance sheet date and operations are translated using
average exchange rates for the year. Translation gains and losses are recorded
in stockholders' equity and transaction gains and losses (not significant in
amount) are included in operating results for the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product sales revenue is recognized upon the transfer of title to goods.
CREDIT RISK
Financial instruments that subject the Company to credit risk consist
primarily of accounts receivable. The Company performs periodic credit
evaluations of its customers and generally does not require collateral. The
majority of accounts receivable are from retail chains and building supply
distributors.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable and accounts payable approximate
fair value because of their short-term nature. The carrying amounts of the line
of credit and long-term debt approximate fair
F-34
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
value because their interest rates are based upon rates currently available to
the Company for debt with similar terms and conditions.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
under the last-in first-out (LIFO) method for U.S. operations and under the
first-in, first-out method for Canadian operations. If the first-in, first-out
(FIFO) method had been used for all operations, inventories would have been
approximately $1,022,000 and $1,032,000 higher than reported at December 31,
1997 and 1996, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed over the estimated useful lives of the applicable assets by use of the
straight-line method for financial reporting purposes and straight-line and
accelerated methods for income tax purposes. The estimated useful lives range
from 15 to 31 years for buildings and improvements and from 5 to 10 years for
machinery, equipment and fixtures.
GOODWILL
Goodwill represents the excess of the cost over the fair value of the net
assets at the date of acquisition and is being amortized using the straight-line
method over 25 years.
ENVIRONMENTAL REMEDIATION LIABILITIES
In 1997 the Company adopted American Institute of Certified Public
Accountants' SOP 96-1, Environmental Remediation Liabilities, ("SOP 96-1") which
provides new guidance for the accrual of environmental remediation costs. In
accordance with the pronouncement, the Company accrues for losses associated
with environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as further information
develops or circumstances change. Cost of future expenditures for environmental
remediation obligations are not discounted.
INCOME TAXES
The Company and its U.S. subsidiaries file a consolidated federal income tax
return. Consolidated federal income tax expense is allocated to members of the
affiliated group on the basis of their separate-return tax liability. The
Company's Canadian subsidiaries are required to file separate income tax returns
and income tax expense is determined at the individual subsidiary level.
The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are recorded
based on the difference between the tax basis of assets and liabilities and
their carrying amounts for financial reporting purposes, referred to as
"temporary differences." Temporary differences result from the use of different
accounting methods for financial statement and income tax reporting purposes.
F-35
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." SFAS 130 establishes standards for
reporting comprehensive income. The Company adopted SFAS 130 in 1998, which had
no impact on net income or shareholders' equity at March 31, 1998. SFAS 130
requires foreign currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform with the requirements of SFAS 130.
SFAS 131 establishes standards for annual and interim disclosures of
operating segments, products and services, geographic areas and major customers.
The new rules will be effective for the Company's December 31, 1998 financial
statements. The Company is in the process of evaluating the disclosure
requirements of SFAS 131, the adoption of which will have no impact on the
Company's results of operations or financial condition.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim consolidated balance sheet as of March 31, 1998 and
the consolidated statements of operations, shareholders' equity and cash flows
for the three months ended March 31, 1997 and 1998 together with the related
notes are unaudited and include all adjustments, consisting of only normal
recurring adjustments, which the Company considers necessary to present fairly
in all material respects, the financial position, the results of operations and
cash flows for the three months ended March 31, 1997 and 1998. Results for the
three months ended March 31, 1997 and 1998 are not necessarily indicative of
results for an entire year. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
3. ACQUISITIONS AND DIVESTITURES
On March 15, 1996, the Company acquired all of the outstanding common stock
of Bakor Holdings, Inc. (Bakor) in exchange for $1,837,000 plus 1,002,000 shares
of its common stock valued at $5,357,000. The transaction was accounted for as a
purchase. The purchase price, as revised in 1997, was allocated as follows: net
working capital $2,892,000; property, equipment and other assets--$6,045,000;
goodwill--$3,335,000; debt assumed--$3,194,000 and deferred tax
liability--$1,884,000. The consolidated results of operations reflect the
results of operations of Bakor from the date of acquisition.
In July 1996, the Company sold the principal assets of its wholly-owned
subsidiary, Carecraft Industries, Inc. for $534,000 and recognized a gain on the
sale of approximately $286,000.
4. RECAPITALIZATION
In conjunction with the Bakor acquisition, the Company recapitalized its
outstanding shares whereby the 56,000 shares of $100 par value preferred stock
were exchanged for 14,000 shares and the 100 shares of Class A common stock and
900 shares of Class B common stock were exchanged for 1,503,000 shares of $1.00
par value common stock. During 1996 and 1997 all preferred stock was redeemed.
F-36
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1997
------------ ------------- MARCH 31,
1998
-------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.............................................. $ 4,457,462 $ 3,741,758 $ 4,798,912
Finished goods............................................. 2,561,522 3,142,051 4,388,788
------------ ------------- -------------
$ 7,018,984 $ 6,883,809 $ 9,187,700
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
6. LINES OF CREDIT
The Company has a domestic line of credit with a bank, subject to annual
confirmation, aggregating up to $13,000,000 with interest charged at the prime
rate less 0.25% (8.25% at December 31, 1997). The Company also has a Canadian
line of credit with a bank, subject to annual confirmation, aggregating
$4,440,000 with interest charged at the prime rate plus .5% (6.5% at December
31, 1997). At December 31, 1997 and March 31, 1998, there was $2,642,296 and
$11,298,822 outstanding under these lines, respectively.
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
MONTHLY INTEREST ------------------------
DEBT INSTRUMENT PAYMENT RATE MATURITY DATE 1996 1997
- ----------------------- ----------- --------- ---------------- ----------- ----------- MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Note payable $ 83,334 7.1% November 1998 $ 3,999,976 $ 2,999,968 $2,749,966
Note payable ** prime June 2001 3,789,478 3,789,478 3,789,478
Note payable 13,542 8.1% February 2002 1,272,916 1,110,416 1,069,791
Note payable 7,738 8.45% July 1999 425,598 332,742 309,528
Mortgage payable 2,900* 6% September 2000 116,597 88,015 80,598
Mortgage payable 2,839* 6.5% June 2003 180,199 157,169 151,175
Mortgage payable 4,167 10.5% February 1998 231,250 178,250 --
Debenture 23,500 8.5% March 2000 684,130 443,325 394,680
----------- ----------- -----------
10,700,144 9,099,363 8,545,216
Less current maturities 1,552,652 3,866,566 3,251,949
----------- ----------- -----------
$ 9,147,492 $ 5,232,797 $5,293,267
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
* Monthly payment includes interest
** Monthly installments of $20,387 commencing April 1, 1998 increasing to
$103,720 on January 1, 1999.
The bank indebtedness is secured by substantially all of the assets of the
Company. The agreements limit the amount of cash dividends, capital
expenditures, loans and investments and require the maintenance of certain
financial ratios.
F-37
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Principal payments of long-term debt are due as follows:
<TABLE>
<S> <C>
1998.................................................................... $3,866,566
1999.................................................................... 1,900,043
2000.................................................................... 1,514,736
2001.................................................................... 1,309,066
2002.................................................................... 490,352
2003.................................................................... 18,600
---------
$9,099,363
---------
---------
</TABLE>
At December 31, 1997, the Company had letters of credit of $632,000 with
various banks expiring on various dates. The letters are expected to be renewed
upon expiration.
8. INCOME TAXES
The significant components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................ $ 444,000 $ 1,084,000 $ 1,008,000 $ (236,000) $ (123,250)
State.............................. 65,000 124,000 151,000 (26,000) (52,000)
Foreign............................ -- 222,000 273,000 (78,000) (75,000)
---------- ----------- ----------- ----------- -----------
509,000 1,430,000 1,432,000 (340,000) (250,250)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Deferred:
Federal............................ (52,000) 26,000 (1,027,000) (1,158,000) (31,000)
State.............................. (72,000) 11,000 (273,000) (350,000) (8,000)
Foreign............................ -- 70,000 55,000 -- --
---------- ----------- ----------- ----------- -----------
(124,000) 107,000 (1,245,000) (1,508,000) (39,000)
---------- ----------- ----------- ----------- -----------
$ 385,000 $ 1,537,000 $ 187,000 $(1,848,000) $ (289,250)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
The effective income tax rate of 41.8%, 35.2% and 39.7% for the years ended
December 31, 1995, 1996 and 1997, respectively, and 39.7% and 36.5% for the
three month periods ended March 31, 1997 and 1998, respectively, differs from
the federal statutory rate of 34% because of the difference in treatment of
F-38
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
certain expense items for financial and income tax reporting purposes. A
reconciliation between the statutory provision and the provision for financial
reporting purposes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- ----------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory federal tax provision........... $ 313,000 $ 1,485,000 $ 160,000 $(1,583,000) $ (270,000)
State income taxes, net of federal income
tax benefit.............................. (4,000) 89,000 (81,000) (248,000) (40,000)
Foreign income taxes in excess of (less
than) U.S. statutory rate................ -- (164,000) 65,000 (13,000) (2,000)
Other..................................... 76,000 127,000 43,000 (4,000) 22,750
--------- ----------- --------- ----------- ----------
Income tax expense (benefit).............. $ 385,000 $ 1,537,000 $ 187,000 $(1,848,000) $ (289,250)
--------- ----------- --------- ----------- ----------
--------- ----------- --------- ----------- ----------
</TABLE>
Income (loss) before income taxes of the Canadian operations was $0,
$1,342,000, and $773,000 for the years ended 1995, 1996 and 1997, respectively,
and $(191,000) and $(215,000) for the three month periods ended March 31, 1997
and 1998, respectively.
Pre-tax income of the Canadian operations was $0, $1,342,000 and $773,000
for 1995, 1996 and 1997, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and are disclosed in the
consolidated balance sheets. The significant components of the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax asset:
Environmental reserve...................................................... $ -- $ 1,415,028
Deferred tax liabilities:
Depreciation and other property and equipment basis differences............ (3,334,901) (3,902,687)
Deferred gain on discharge of liability.................................... (494,320) (818,308)
----------- -----------
Total deferred tax liabilities............................................. (3,829,221) (4,720,995)
----------- -----------
Net deferred tax liabilities............................................... $(3,829,221) $(3,305,967)
----------- -----------
----------- -----------
</TABLE>
9. RETIREMENT PLANS
The Company participates in noncontributory defined contribution pension
plans for eligible U.S. hourly employees. Amounts charged to expense under these
plans are based upon predetermined hourly rates and were $259,000, $215,000,
$252,000 in 1995, 1996 and 1997, respectively.
The Company has a defined contribution profit sharing plan for eligible U.S.
salaried employees. In 1997 a 401(k) feature was added allowing employee
contributions and employer profit sharing contributions were discontinued.
Employer contributions charged to expense for this plan were $477,000, $508,000
and $0 in 1995, 1996 and 1997.
F-39
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain office and warehouse facilities, automobiles and
office equipment under operating leases with terms ranging from one to six
years. Certain of the leases contain escalation provisions based on fluctuations
in certain cost of living indices.
Total rent expense was $430,000, $698,000 and $676,000 in 1995, 1996 and
1997, respectively. The minimum rental commitments under all noncancelable
leases with an original term of one year or more are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.............................................................................. $ 487,000
1999.............................................................................. 308,000
2000.............................................................................. 112,000
2001.............................................................................. 42,000
2002.............................................................................. 8,000
Thereafter........................................................................ 2,000
</TABLE>
The Company has an agreement granting it exclusive production and selling
rights in Canada and the United States for specific products listed in the
agreement. The agreement provides for a fixed royalty payment of $1,380,000
together with a variable royalty payment as a royalty on sale of the specific
products with predetermined minimum payments in year two through ten of the
agreement. The estimated remaining balance at December 31, 1997 is approximately
$200,000 and is expected to be earned and paid in 1998. As collateral for the
payments under the licensing agreement, the Company has granted a second
mortgage against certain real property of the Company.
The Company is a party to several legal actions arising in the ordinary
course of business. In management's opinion, the Company has adequate legal
defenses and insurance coverage with respect to each of these actions and does
not believe that they will materially affect the Company's operations or
financial position.
11. ENVIRONMENTAL RESERVE
In 1997, the Company adopted SOP 96-1, Environmental Remediation
Liabilities, which provides new guidance for the accrual of environmental
remediation costs. The SOP sets forth benchmarks to aid in the determination of
when environmental remediation liabilities should be recognized and specific
guidance as to how the liabilities should be measured. The impact of applying
SOP 96-1 was accounted for as a change in estimate and resulted in a pretax
charge of $3,638,965 which is included in operating income. The effect of this
change reduced 1997 net income by approximately $2,131,000.
The pretax charge of $3,638,965 relates to operation and maintenance of a
remedial action plan at one of the Company's facilities under a Record of
Decision issued by the EPA in 1988 and a Remedial Design/ Remedial Action plan
approved and adopted by the EPA, the Company, and another Participating
Responsible Party (PRP). The facility was previously occupied by the other PRP
who agreed to a formal cost sharing agreement with the Company in 1990. The cost
sharing agreement required the other PRP to pay for the construction of the
treatment system and for the Company and the other PRP to share in the annual
operating cost. The Company's agreement to participate in the annual cost of
operating the treatment system expires in 2023 and is subject to annual caps.
The Company annually expensed its share of the costs until 1997 when it adopted
SOP 96-1. The Company has accrued its best estimate of its obligation with
respect to the site which is $3,572,402 at December 31, 1997. The amount of the
obligation
F-40
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ENVIRONMENTAL RESERVE (CONTINUED)
accrued by the Company represents the maximum amount it is required to pay out
under the formal cost sharing agreement. The majority of this balance is
included in long-term liabilities as it is expected to be disbursed over the
next twenty-six years. If the other PRP is ultimately not able to fund its
allocated share or the EPA insists on a more expensive remediation approach, the
Company could incur additional obligations.
12. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 22, 1998, Henry Company acquired all of the outstanding shares of
the Company with proceeds raised in a Senior Note offering (the "Offering") to
finance the acquisition. The guarantees of the Company and its U.S.
subsidiaries, Kimberton Enterprises, Inc. and Monsey Products of Arizona LLC,
(the "Guarantors") are full, unconditional, and joint and several. The Company's
Canadian subsidiaries are not guarantors of the Senior Notes.
Condensed consolidating financial statements of the Guarantors are presented
below. The Company wholly owns all Guarantor Subsidiaries. Separate financial
statements of the Guarantor Subsidiaries are not presented because the
Guarantors are jointly, severally and unconditionally liable under the
guarantees and the Company believes the condensed consolidating financial
statements presented are more meaningful in understanding the financial position
of the Guarantors. Separate condensed consolidating financial statements are not
presented prior to 1996, as the Company did not acquire its Nonguarantor
Subsidiaries (Canadian subsidiaries) until 1996.
F-41
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT MARCH 31, 1998 (UNAUDITED):
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash................................................ $ 1,094,171 $ 74,440 $ 1,168,611
Accounts receivable, net............................ 12,020,431 3,760,107 $ (1,303,245) 14,477,293
Inventories......................................... 5,569,570 3,618,130 9,187,700
Prepaid expenses and other current assets........... 315,052 238,943 553,995
Refundable (payable) income taxes................... 156,759 (98,200) 58,559
------------- ------------- ------------ ------------
Total current assets.................................. 19,155,983 7,593,420 (1,303,245) 25,446,158
Investments in affiliates at equity................... 8,560,778 (8,560,778)
Property and equipment:
Land................................................ 1,913,897 779,403 2,693,300
Buildings and improvements.......................... 13,762,173 2,680,021 16,442,194
Machinery and equipment............................. 16,441,284 3,891,636 20,332,920
Furniture and fixtures.............................. 2,388,843 167,538 2,556,381
Transportation equipment............................ 1,615,015 1,615,015
------------- ------------- ------------
36,121,212 7,518,598 43,639,810
Less accumulated depreciation....................... 20,390,927 1,048,518 21,439,445
------------- ------------- ------------
15,730,285 6,470,080 22,200,365
Cash surrender value of insurance................... 1,651,529 1,651,529
Intangibles and other assets, net................... 1,544,636 66,873 1,611,509
Goodwill, net....................................... 2,893,656 2,893,656
------------- ------------- ------------ ------------
$46,643,211 $17,024,029 $ (9,864,023) $ 53,803,217
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit...................................... $ 7,270,580 $ 4,028,242 $ 11,298,822
Accounts payable.................................... 6,950,714 2,491,675 $ (1,303,245) 8,139,144
Accrued expenses.................................... 2,198,261 287,822 2,486,083
Current portion of long-term debt................... 3,057,369 194,580 3,251,949
------------- ------------- ------------ ------------
Total current liabilities............................. 19,476,924 7,002,319 (1,303,245) 25,175,998
Long-term debt, less current portion.................. 5,093,167 200,100 5,293,267
Environmental reserve................................. 3,502,510 3,502,510
Deferred income taxes................................. 1,330,293 1,848,422 3,178,715
Shareholder's equity:
Common stock........................................ 2,505,000 7,194,402 (7,194,402) 2,505,000
Additional paid-in capital.......................... 7,152,000 7,152,000
Cumulative translation account...................... (587,590) (587,590)
Retained earnings................................... 7,583,317 1,366,376 (1,366,376) 7,583,317
------------- ------------- ------------ ------------
Total shareholders' equity............................ 17,240,317 7,973,188 (8,560,778) 16,652,727
------------- ------------- ------------ ------------
$46,643,211 $17,024,029 $ (9,864,023) $ 53,803,217
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes
F-42
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 (UNAUDITED):
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................ $19,295,941 $ 5,097,284 $ (1,655,074) $ 22,738,151
Cost of sales........................................ 15,243,442 3,906,930 (1,655,074) 17,495,298
------------- ------------- ------------- -------------
Gross profit......................................... 4,052,499 1,190,354 5,242,853
Selling, general and administrative.................. 4,352,734 1,326,338 5,679,072
Amortization of intangibles.......................... 75,812 39,726 115,538
------------- ------------- -------------
Operating loss....................................... (376,047) (175,710) (551,757)
Interest expense..................................... 263,492 39,060 302,552
Other income, net.................................... 60,786 60,786
------------- ------------- ------------- -------------
Loss before income taxes............................. (578,753) (214,770) (793,523)
Income tax benefit................................... (203,000) (86,250) (289,250)
------------- ------------- ------------- -------------
Net loss........................................... $ (375,753) $ (128,520) $ (504,273)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1998 (UNAUDITED):
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net cash used in operating activities................ $(4,369,208) $(2,541,649) $ (6,910,857)
Investing activities.................................
Purchases of property and equipment................ (143,651) (96,829) (240,480)
Proceeds from sale of assets....................... 50,000 50,000
Increase in cash surrender value of life
insurance........................................ (60,000) (60,000)
------------- ------------- -------------
Net cash used in investing activities............ (153,651) (96,829) (250,480)
Financing activities.................................
Net borrowings under lines of credit............... 5,870,284 2,786,169 8,656,453
Repayment of long-term debt........................ (327,252) (226,895) (554,147)
------------- ------------- -------------
Net cash provided by financing activities........ 5,543,032 2,559,274 8,102,306
Effect of changes in exchange rate on cash........... 14,608 14,608
------------- ------------- -------------
Net increase (decrease) in cash...................... 1,020,173 (64,596) 955,577
Cash, beginning of year.............................. 73,998 139,036 213,034
------------- ------------- -------------
Cash, end of period.................................. $ 1,094,171 $ 74,440 $ 1,168,611
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes
F-43
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash................................................ $ 73,998 $ 139,036 $ 213,034
Accounts receivable, net............................ 7,141,978 3,344,203 $ (702,528) 9,783,653
Inventories......................................... 4,580,431 2,303,378 6,883,809
Prepaid expenses and other current assets........... 446,831 193,922 640,763
------------- ------------- ------------ -------------
Total current assets.................................. 12,243,238 5,980,539 (702,528) 17,521,249
Investments in affiliates at equity................... 8,689,299 (8,689,299)
Property and equipment
Land................................................ 1,913,897 779,403 2,693,300
Buildings and improvements.......................... 13,784,550 2,675,478 16,460,028
Machinery and equipment............................. 16,402,852 3,885,340 20,288,192
Furniture and fixtures.............................. 2,282,952 67,872 2,350,824
Transportation equipment............................ 1,856,469 1,856,469
------------- ------------- -------------
36,240,720 7,408,093 43,648,813
Less accumulated depreciation....................... 20,276,904 887,806 21,164,710
------------- ------------- -------------
15,963,816 6,520,287 22,484,103
Cash surrender value of insurance..................... 1,591,529 1,591,529
Intangibles and other assets, net..................... 1,619,569 75,497 1,695,066
Goodwill, net......................................... 2,924,757 2,924,757
------------- ------------- ------------ -------------
$40,107,451 $15,501,080 $ (9,391,827) $46,216,704
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit...................................... $ 1,400,296 $ 1,242,000 $ 2,642,296
Accounts payable.................................... 5,597,437 2,333,904 $ (702,528) 7,228,813
Accrued expenses.................................... 1,959,970 1,076,314 3,036,284
Income taxes payable................................ 53,566 205,513 259,079
Current portion of long-term debt................... 3,493,736 372,830 3,866,566
------------- ------------- ------------ -------------
Total current liabilities............................. 12,505,005 5,230,561 (702,528) 17,033,038
Long-term debt, less current portion.................. 4,984,052 248,745 5,232,797
Environmental reserve................................. 3,502,510 3,502,510
Deferred income taxes................................. 1,371,294 1,934,673 3,305,967
Shareholders' equity:
Common stock........................................ 2,505,000 7,194,402 (7,194,402) 2,505,000
Additional paid-in capital.......................... 7,152,000 7,152,000
Cumulative translation account...................... (602,198) (602,198)
Retained earnings................................... 8,087,590 1,494,897 (1,494,897) 8,087,590
------------- ------------- ------------ -------------
Total shareholders' equity............................ 17,744,590 8,087,101 (8,689,299) 17,142,392
------------- ------------- ------------ -------------
$40,107,451 $15,501,080 $ (9,391,827) $46,216,704
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
See accompanying notes
F-44
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1997:
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales............................................ $92,389,353 $28,187,055 $ (7,401,418) $ 113,174,990
Cost of sales........................................ 69,529,589 20,954,107 (7,401,418) 83,082,278
------------- ------------- ------------ -------------
Gross profit......................................... 22,859,764 7,232,948 30,092,712
Selling, general and administrative.................. 18,414,608 6,029,432 24,444,040
Accounting method change............................. 3,638,965 3,638,965
Amortization of intangibles.......................... 173,087 179,448 352,535
------------- ------------- -------------
Operating income..................................... 633,104 1,024,068 1,657,172
Interest expense..................................... 1,325,424 250,711 1,576,135
Other income (expense), net.......................... (390,427) (390,427)
------------- ------------- -------------
(Loss) income before income taxes.................... (301,893) 773,357 471,464
Income tax expense (benefit)......................... (141,000) 328,000 187,000
------------- ------------- -------------
Net (loss) income.................................. $ (160,893) $ 445,357 $ 284,464
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER
31, 1997:
<TABLE>
<CAPTION>
GUARANTOR NON GUARANTOR
MONSEY BAKOR MONEY BAKOR ELIMINATIONS CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities............... $ 3,714,505 $ 2,481,996 $ 6,196,501
Investing activities
Purchases of property and equipment................... (873,367) (1,736,580) (2,609,947)
Acquisitions of intangible assets..................... (347,102) (347,102)
Proceeds from sale of assets.......................... 384,784 384,784
Increase in cash surrender value of life insurance.... (332,799) (332,799)
-------------- -------------- -------------
Net cash used in investing activities............... (1,168,484) (1,736,580) (2,905,064)
Financing activities
Repayment of long-term debt........................... (1,306,976) (248,764) (1,555,740)
Net (repayments) under lines of credit................ (1,329,464) (858,291) (2,187,755)
Redemption of preferred stock......................... (700,000) (700,000)
-------------- -------------- -------------
Net cash used in financing activities............... (3,336,440) (1,107,055) (4,443,495)
Effect of changes in exchange rate on cash.............. (10,075) (10,075)
-------------- -------------- -------------
Net decrease in cash.................................... (790,419) (371,714) (1,162,133)
Cash, beginning of year................................. 864,417 510,750 1,375,167
-------------- -------------- -------------
Cash, end of year....................................... $ 73,998 $ 139,036 $ 213,034
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See accompanying notes
F-45
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 1996:
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash.................................................. $ 864,417 $ 510,750 $1,375,167
Accounts receivable, net.............................. 5,082,505 4,168,959 $ (22,852) 9,228,612
Inventories........................................... 4,747,069 2,271,915 7,018,984
Prepaid expenses and other current assets............. 446,427 172,441 618,868
Refundable income taxes (payable)..................... 158,991 (65,268) 93,723
------------- ------------- ----------- ------------
Total current assets.................................... 11,299,409 7,058,797 (22,852) 18,335,354
Investments in affiliates at equity..................... 8,243,942 (8,243,942)
Property and equipment:
Land.................................................. 1,913,898 685,603 2,599,501
Buildings and improvements............................ 13,649,440 2,359,130 16,008,570
Machinery and equipment............................... 16,187,152 3,105,065 19,292,217
Furniture and fixtures................................ 1,781,737 58,533 1,840,270
Transportation equipment.............................. 3,580,612 3,580,612
------------- ------------- ------------
37,112,839 6,208,331 43,321,170
Less accumulated depreciation......................... 20,243,157 360,931 20,604,088
------------- ------------- ------------
16,869,682 5,847,400 22,717,082
Cash surrender value of insurance....................... 1,258,730 1,258,730
Intangibles and other assets, net....................... 1,552,314 127,001 1,679,315
Goodwill, net........................................... 2,201,175 2,201,175
------------- ------------- ----------- ------------
$39,224,077 $15,234,373 ($8,266,794) $46,191,656
------------- ------------- ----------- ------------
------------- ------------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Lines of credit....................................... $ 2,729,760 $ 2,190,291 $4,920,051
Accounts payable...................................... 3,492,674 2,168,469 $ (22,852) 5,638,291
Accrued expenses...................................... 2,339,430 604,393 2,943,823
Current portion of long-term debt..................... 1,306,972 245,680 1,552,652
------------- ------------- ----------- ------------
Total current liabilities............................... 9,868,836 5,208,833 (22,852) 15,054,817
Long-term debt, less current portion.................... 8,477,794 669,698 9,147,492
Deferred income taxes................................... 2,717,321 1,111,900 3,829,221
Shareholder's equity:
Preferred stock....................................... 700,000 700,000
Common stock.......................................... 2,505,000 7,194,402 (7,194,402) 2,505,000
Additional paid-in capital............................ 7,152,000 7,152,000
Retained earnings..................................... 7,803,126 1,049,540 (1,049,540) 7,803,126
------------- ------------- ----------- ------------
Total shareholders' equity.............................. 18,160,126 8,243,942 (8,243,942) 18,160,126
------------- ------------- ----------- ------------
$39,224,077 $15,234,373 ($8,266,794) $46,191,656
------------- ------------- ----------- ------------
------------- ------------- ----------- ------------
</TABLE>
See accompanying notes
F-46
<PAGE>
MONSEY PRODUCTS CO.
T/A MONSEY BAKOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12.EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE (UNAUDITED) AND GUARANTOR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1996:
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales............................................ $89,628,561 $22,447,432 $ (3,492,454) $ 108,583,539
Cost of sales........................................ 66,701,959 16,218,823 (3,492,454) 79,428,328
------------- ------------- ------------ -------------
Gross profit......................................... 22,926,602 6,228,609 29,155,211
Selling, general and administrative.................. 18,886,079 4,627,087 23,513,166
Amortization of intangibles.......................... 217,260 65,277 282,537
------------- ------------- -------------
Operating income..................................... 3,823,263 1,536,245 5,359,508
Interest expenses.................................... 1,362,313 194,704 1,557,017
Other income, net.................................... (564,445) (564,445)
------------- ------------- -------------
Income before income taxes........................... 3,025,395 1,341,541 4,366,936
Income tax expense................................... 1,245,000 292,000 1,537,000
------------- ------------- -------------
Net income........................................... $ 1,780,395 $ 1,049,541 $ 2,829,936
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER
31, 1996:
<TABLE>
<CAPTION>
GUARANTOR NONGUARANTOR
MONSEY BAKOR MONSEY BAKOR ELIMINATION CONSOLIDATED
U.S. CANADA ENTRIES TOTAL
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities............. $ 3,374,098 $ 652,336 $ 4,026,434
Investing activities
Purchases of property and equipment................. (772,195) (452,650) (1,224,845)
Acquisitions of intangible assets................... (910,784) (910,784)
Proceeds from sale of assets........................ 573,479 573,479
Investment in Canadian subsidiary, net of cash
acquired.......................................... (1,837,400) 399,513 (1,437,887)
Increase in cash surrender value of life insurance.. 214,436 214,438
------------- ------------- ------------
Net cash used in investing activities........... (2,732,464) (53,137) (2,785,601)
Financing activities
Long-term borrowings................................ 3,789,478 3,789,478
Repayment of long-term debt......................... (2,773,292) (204,734) (2,978,026)
Net (repayments) borrowings under lines of credit... (863,701) 116,285 (747,416)
Redemption of preferred stock....................... (700,000) (700,000)
------------- ------------- ------------
Net cash used in financing activities........... (547,515) (88,449) (635,964)
------------- ------------- ------------
Net increase in cash.................................. 94,119 510,750 604,869
Cash, beginning of year............................... 770,298 770,298
------------- ------------- ------------
Cash, end of year..................................... $ 864,417 $ 510,750 $ 1,375,167
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
See Accompanying Notes
F-47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION TO OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF NOR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... i
Summary........................................ 1
Risk Factors................................... 20
Use of Proceeds................................ 28
The Exchange Offer............................. 29
Certain U.S. Federal Income Tax
Considerations................................ 38
The Transactions............................... 41
Capitalization................................. 42
Unaudited Pro Forma Condensed Combined
Financial Data................................ 43
Selected Historical Combined Financial Data of
Henry Company................................. 48
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of Henry Company.............................. 50
Selected Historical Consolidated Financial Data
of Monsey Bakor............................... 57
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of Monsey Bakor............................... 59
Industry Overview.............................. 64
Business....................................... 65
Management..................................... 83
Shareholders................................... 90
Certain Transactions........................... 91
Description of the Credit Facilities........... 93
Description of the Exchange Notes.............. 94
Plan of Distribution........................... 119
Transfer Restrictions on Old Notes............. 120
Book Entry; Delivery and Form.................. 121
Legal Matters.................................. 123
Experts........................................ 123
Index to Financial Statements.................. F-1
</TABLE>
--------------
PROSPECTUS
--------------
$85,000,000
[LOGO]
10% SERIES B SENIOR NOTES
DUE 2008
SEPTEMBER , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DIRECTOR LIABILITY
As authorized by the California General Corporation Law ("CGCL"), the
Company's Articles of Incorporation (the "Articles") provide that, to the
fullest extent permissible under California law, the liability of the directors
of the Company for monetary damages shall be eliminated and the Company is
authorized to indemnify the directors and officers of the Company. The CGCL does
not permit limitation of liability of any director (i) for acts or omissions
that involve intentional misconduct or a knowing and culpable violation of law,
(ii) for acts or omissions that a director believes to be contrary to the best
interests of the Company or its shareholders or that involve the absence of good
faith on the part of the director, (iii) for any transaction from which a
director derived an improper personal benefit, (iv) for acts or omissions that
show a reckless disregard for the director's duty to the Company or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a directors' duties, of a risk
of serious injury to the corporation or its shareholders, (v) for acts or
omissions that constitute an unexcused pattern of inattention that amounts to an
abdication of the directors' duty to the corporation or its shareholders or (vi)
for certain unlawful distributions, loans or guarantees. The effect of these
provisions and understandings will be to eliminate the rights of the Company and
its stockholders (through stockholder derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director, except in the situations described in clauses (i)-(vi) of the second
sentence of this paragraph. These provisions and understandings will not alter
the liability of the Directors under federal securities laws. Warner W. Henry
has entered into a written indemnification agreement with Paul H. Beemer, and
has made certain oral agreements with Terrill M. Gloege regarding Mr. Henry's
personal indemnification of Mr. Beemer and Mr. Gloege for any liabilities
incurred in connection with the Initial Note Offering and the Exchange Offer.
Subject to the Articles of Incorporation and California law, the Bylaws
provide that the Company shall indemnify each of its directors and officers
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any person is or was a Company director or officer.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1* Stock Purchase Agreement between Henry Company and the Shareholders of Monsey Products Co. dated as
of February 27, 1998
2.2* Amendment to Stock Purchase Agreement between Henry Company and the Shareholders of Monsey Products
Co. dated as of February 27, 1998
2.3+ Summary of contents of omitted schedules to Stock Purchase Agreement
3.1* Certificate of Amendment and Restatement of Articles of Incorporation of Henry Company
3.2* Bylaws of Henry Company
4.1* Indenture dated as of April 22, 1998 between Henry Company, each of the guarantors named therein and
U.S. Trust Company of California, N.A., as Trustee, including forms of Senior Notes
4.2* Registration Rights Agreement dated as of April 22, 1998 by and among Henry Company, each of the
Guarantors named therein and BT Alex.Brown Incorporated as Initial Purchaser
5.1* Opinion of Munger, Tolles & Olson LLP
5.2* Opinion of John D. O'Keefe, Esq.
10.1* Amended and Restated Financing and Security Agreement dated April 22, 1998, by and between Henry
Company and Monsey Products Co., Kimberton Enterprises, Inc. Monsey Products of Arizona LLC and
Nationsbank, N.A.
10.2* Administrative Services Agreement, dated as of January 1, 1998, between Henry Company and Central
Coast Wine Company dba The Henry Wine Group.
10.3* Lease, dated September 5, 1996, between Warner Wheeler Henry Living Trust and Henry Family Trust B
and Henry Company
10.4* Ground Lease, dated April 30, 1976, (as extended on December 11, 1996) between The Warner W. Henry
Family Trust, the Declaration of Trust for Dorothy H. Floyd and The W.W. Henry Company.
10.5* Machinery Lease, dated August 1, 1958 and Amendment to Machinery Lease, dated August 1, 1968, between
Warner White Henry and The W.W. Henry Company.
10.6* Lease, dated February 27, 1992, between Alamo Development Company and Henry Company
10.7* Lease Agreement and Addendum to Lease Agreement dated December 23, 1994, by and between Seaboard
Supply Co. and Monsey Products Co.
10.8* Warrant Agreement between Henry Company and the Warner W. Henry Living Trust dated as of October 1,
1997
10.9* Convertible Preferred Stock Purchase Agreement between Henry Company and Joseph T. Mooney, Jr. dated
as of April 22, 1998
10.10 * Stock Purchase Agreement between Henry Company and Frederick Muhs dated as of April 22, 1998
10.11 * Henry Company Executive Deferral Plan
10.12 * Employment and Incentive Agreement between Henry Company, Henry II, Warner Development Company of
Texas and Richard B. Gordinier, dated September 30, 1992
10.13 * Amendment No. 1 to Employment and Incentive Agreement between Henry Company, Henry II, Warner
Development Company of Texas and Richard B. Gordinier, dated October 16, 1997
10.14 * Amendment No. 2 to Employment and Incentive Agreement between Henry Company, Henry II, Warner
Development Company of Texas and Richard B. Gordinier, dated April 21, 1998
10.15 * Non-Negotiable Promissory Notes, between Henry Company and Richard B. Gordinier, dated July 11,
August 24 and December 15, 1997
</TABLE>
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.16* Employment Agreement between Henry Company and Joseph T. Mooney, Jr. dated as of April 22, 1998
10.17* Employment Agreement between Henry Company and Larry A. Karasiuk dated as of April 22, 1998
10.18* Employment Agreement between Henry Company and John R. Enright dated July 1, 1993
10.19* Amended and Restated Employment Agreement between Henry Company and James Doose dated May 27, 1994
10.20* Incentive Compensation Agreement between Henry Company and Jeffrey A. Wahba dated August 1, 1994
10.21* Incentive Compensation Agreement between Henry Company and John R. Enright dated July 1, 1993
10.22* Noncompetition Agreement between Henry Company and James F.C. Stewart dated as of February 27, 1998
10.23* Noncompetition Agreement between Henry Company and Edward P. Mooney dated as of April 22, 1998
10.24* Noncompetition Agreement between Henry Company and Larry Karasiuk dated as of April 22, 1998
10.25* Consulting Agreement between Henry Company and Paul Beemer dated November 24, 1993
10.26* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated July 29, 1996
10.26(A)* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated June 1, 1995
10.26(B)* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated August 27, 1998
10.27* Custodial Agreement between Henry Company the Shareholders of Monsey Products Co. and PNC Bank,
National Association dated as of April 22, 1998
10.28* Promissory Note from Henry II Company to Henry Company, dated December 31, 1997
10.29* Non-negotiable Promissory Note from Henry II Company to Henry Company, dated December 31, 1997
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges
21.1* Subsidiaries of the Registrant
23.1* Consent of Munger, Tolles & Olson LLP
23.2* Consent of John D. O'Keefe, Esq.
23.3+ Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.4+ Consent of Ernst & Young LLP, Independent Auditors
24.1* Powers of Attorney (contained on the signature page of this Prospectus)
25.1* Form T-1 Statement of Eligibility of U.S. Trust Company, N.A.
27.1* Financial Data Schedule
</TABLE>
- ------------------------
+ The Company will furnish upon request of the Commission any omitted schedule
or exhibit.
* Previously filed.
+ Filed herewith.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission (the "Commission") pursuant to rule 424(b) if, in the
aggregate, the changes in volume and price represent no more that a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in this Registration Statement when
it becomes effective;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of a Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) to file an application for the purpose of determining the eligibility of
the trustee to act under subsection (a) of Section 310 of the Trust Indenture
Act in accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act.
(6) to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
(7) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrants have duly caused this Amendment No. 2 to the Registration Statement
to be signed on their behalf by the undersigned, thereunto duly authorized, in
the city of Los Angeles, state of California on September 11, 1998.
<TABLE>
<S> <C> <C> <C>
HENRY COMPANY MONSEY PRODUCTS CO.
By: /s/ JEFFREY WAHBA By: /s/ JEFFREY WAHBA
---------------------------------------- ----------------------------------------
Its: Secretary and CFO Its: Secretary and CFO
- -------------------------------------------- --------------------------------------------
KIMBERTON ENTERPRISES, INC. MONSEY PRODUCTS OF ARIZONA LLC
By: /s/ JEFFREY WAHBA By: Monsey Products Co.
----------------------------------------
Its: Secretary and CFO Designated Manager
- -------------------------------------------- By: /s/ JEFFREY WAHBA
------------------------------------
Its: Secretary and CFO
------------------------------------
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ September 11, 1998
Warner W. Henry Chairman of the Board,
Chief Executive Officer
and Director,
Henry Company, Monsey
Products Co. and
Kimberton Enterprises,
Inc.
*
- ------------------------------ September 11, 1998
Richard B. Gordinier President, Chief Operating
Officer and Director,
Henry Company, Monsey
Products Co. and
Kimberton Enterprises,
Inc.
/s/ JEFFREY A. WAHBA
- ------------------------------ September 11, 1998
Jeffrey A. Wahba Vice President, Chief
Financial, Officer,
Secretary and Director,
(Principal Financial
Officer), Henry Company,
Monsey Products Co. and
Kimberton Enterprises,
Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ September 11, 1998
Gary Spence Controller (Principal
Accounting
Officer), Henry Company,
Monsey Products Co. and
Kimberton Enterprises,
Inc.
*
- ------------------------------ September 11, 1998
Paul H. Beemer Vice Chairman of the Board
and Director, Henry
Company
*
- ------------------------------ September 11, 1998
Joseph T. Mooney, Jr. Vice Chairman of the Board
and Director, Henry
Company
*
- ------------------------------ September 11, 1998
Frederick H. Muhs Director, Henry Company,
Monsey Products Co. and
Kimberton Enterprises,
Inc.
*
- ------------------------------ September 11, 1998
Carol F. Henry Director, Henry Company
*
- ------------------------------ September 11, 1998
Donald H. Ford Director, Henry Company
*
- ------------------------------ September 11, 1998
Terrill M. Gloege Director, Henry Company
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JEFFREY A. WAHBA
-------------------------
Jeffrey A.Wahba
AS ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1* Stock Purchase Agreement between Henry Company and the Shareholders of Monsey Products Co. dated as
of February 27, 1998
2.2* Amendment to Stock Purchase Agreement between Henry Company and the Shareholders of Monsey Products
Co. dated as of February 27, 1998
2.3+ Summary of contents of omitted schedules to Stock Purchase Agreement
3.1* Certificate of Amendment and Restatement of Articles of Incorporation of Henry Company
3.2* Bylaws of Henry Company
4.1* Indenture dated as of April 22, 1998 between the Company, each of the guarantors named therein and
U.S. Trust Company of California, N.A., as Trustee, including forms of Senior Notes
4.2* Registration Rights Agreement dated as of April 22, 1998 by and among the Company, each of the
Guarantors named therein and BT Alex.Brown Incorporated as Initial Purchaser
5.1* Opinion of Munger, Tolles & Olson LLP
5.2* Opinion of John D. O'Keefe, Esq.
10.1* Amended and Restated Financing and Security Agreement dated April 22, 1998, by and between Henry
Company and Monsey Products Co., Kimberton Enterprises, Inc. Monsey Products of Arizona LLC and
Nationsbank, N.A.
10.2* Administrative Services Agreement, dated as of January 1, 1998, between Henry Company and Central
Coast Wine Company dba The Henry Wine Group.
10.3* Lease, dated September 5, 1996, between Warner Wheeler Henry Living Trust and Henry Family Trust B
and Henry Company
10.4* Ground Lease, dated April 30, 1976, (as extended on December 11, 1996) between The Warner W. Henry
Family Trust, the Declaration of Trust for Dorothy H. Floyd and The W.W. Henry Company.
10.5* Machinery Lease, dated August 1, 1958 and Amendment to Machinery Lease, dated August 1, 1968, between
Warner White Henry and The W.W. Henry Company.
10.6* Lease, dated February 27, 1992, between Alamo Development Company and Henry Company
10.7* Lease Agreement and Addendum to Lease Agreement dated December 23, 1994, by and between Seaboard
Supply Co. and Monsey Products Co.
10.8* Warrant Agreement between Henry Company and the Warner W. Henry Living Trust dated as of October 1,
1997
10.9* Convertible Preferred Stock Purchase Agreement between Henry Company and Joseph T. Mooney, Jr. dated
as of April 22, 1998
10.10* Stock Purchase Agreement between Henry Company and Frederick Muhs dated as of April 22, 1998
10.11* Henry Company Executive Deferral Plan
10.12* Employment and Incentive Agreement between Henry Company, Henry II, Warner Development Company of
Texas and Richard B. Gordinier, dated September 30, 1992
10.13* Amendment No. 1 to Employment and Incentive Agreement between Henry Company, Henry II, Warner
Development Company of Texas and Richard B. Gordinier, dated October 16, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.14* Amendment No. 2 to Employment and Incentive Agreement between Henry Company, Henry II, Warner
Development Company of Texas and Richard B. Gordinier, dated April 21, 1998
<C> <S>
10.15* Non-Negotiable Promissory Notes, between Henry Company and Richard B. Gordinier, dated July 11,
August 24 and December 15, 1997
10.16* Employment Agreement between Henry Company and Joseph T. Mooney, Jr. dated as of April 22, 1998
10.17* Employment Agreement between Henry Company and Larry A. Karasiuk dated as of April 22, 1998
10.18* Employment Agreement between Henry Company and John R. Enright dated July 1, 1993
10.19* Amended and Restated Employment Agreement between Henry Company and James Doose dated May 27, 1994
10.20* Incentive Compensation Agreement between Henry Company and Jeffrey A. Wahba dated August 1, 1994
10.21* Incentive Compensation Agreement between Henry Company and John R. Enright dated July 1, 1993
10.22* Noncompetition Agreement between Henry Company and James F.C. Stewart dated as of February 27, 1998
10.23* Noncompetition Agreement between Henry Company and Edward P. Mooney dated as of April 22, 1998
10.24* Noncompetition Agreement between Henry Company and Larry Karasiuk dated as of April 22, 1998
10.25* Consulting Agreement between Henry Company and Paul Beemer dated November 24, 1993
10.26* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated July 29, 1996
10.26(A)* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated June 1, 1995
10.26(B)* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated August 27, 1998
10.27* Custodial Agreement between Henry Company the Shareholders of Monsey Products Co. and PNC Bank,
National Association dated as of April 22, 1998
10.28* Promissory Note from Henry II Company to Henry Company, dated December 31, 1997
10.29* Non-negotiable Promissory Note from Henry II Company to Henry Company, dated December 31, 1997
12.1* Statement of Computation of Ratio of Earnings to Fixed Charges
21.1* Subsidiaries of the Registrant
23.1* Consent of Munger, Tolles & Olson LLP
23.2* Consent of John D. O'Keefe, Esq.
23.3+ Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.4+ Consent of Ernst & Young LLP, Independent Auditors
24.1* Powers of Attorney (contained on the signature page of this Prospectus)
25.1* Form T-1 Statement of Eligibility of U.S. Trust Company, N.A.
27.1* Financial Data Schedule
</TABLE>
- ------------------------
+ The Company will furnish upon request of the Commission any omitted schedule
or exhibit.
* Previously filed.
+ Filed herewith.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated February 9, 1998, on our audits of the combined financial
statements of Henry Company. We also consent to the reference to our firm
under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
September 11, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Historical and Unaudited Pro Forma Combined Financial Data," "Selected
Historical Consolidated Financial Data of Monsey Bakor," and "Experts" and to
the use of our report dated February 6, 1998, with respect to the financial
statements of Monsey Products Co., T/A Monsey Bakor included in Amendment No.
2 to the Registration Statement (Form S-4 No. 333-59485) and related
Prospectus of Henry Company for the registration of $85,000,000 of its 10%
Series B Senior Notes due 2008.
/s/ Ernst & Young LLP
Philadelphia, PA
September 11, 1998
