<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number ____________
HENRY COMPANY
-----------------------------------------------------
(Exact Name of Registrant as Specific in Its Charter)
California 95-3618402
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2911 Slauson Avenue, Huntington Park, California 90255
------------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (323) 583-5000
--------------
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check X whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of November
13, 1998, there were 227,500 shares of the registrant's common stock, no par
value, outstanding.
1
<PAGE>
HENRY COMPANY
FORM 10-Q
TABLE OF CONTENTS
SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997
and September 30, 1998 (Unaudited)..................................... 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1997 and September 30, 1998 (Unaudited)............ 4
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 1998 (Unaudited)............... 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and September 30, 1998 (Unaudited).................. 6
Notes to Condensed Consolidated Financial Statements.................... 7
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 21
PART II. OTHER INFORMATION................................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 21
SIGNATURES.................................................................. 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HENRY COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................................................................. $118,857 $11,640,466
Trade accounts receivable, net of allowance for
doubtful accounts of $161,365 and $497,368 for
1997 and 1998, respectively............................................................. 10,368,904 32,860,258
Inventories................................................................................ 5,882,262 16,156,711
Receivables from affiliate................................................................. 2,264,341 2,704,202
Notes receivable........................................................................... 448,721 479,152
Prepaid expenses and other current assets.................................................. 1,197,167 2,749,667
----------- ------------
Total current assets.................................................................. 20,280,252 66,590,456
Property and equipment, net................................................................... 5,483,188 26,392,209
Cash surrender value of life insurance, net................................................... 1,658,305 3,993,906
Intangibles, net.............................................................................. 702,091 37,422,611
Notes receivable.............................................................................. 299,654 247,279
Note receivable from affiliate................................................................ 1,863,072 1,863,072
Other......................................................................................... 131,085 246,778
----------- ------------
Total assets.......................................................................... $30,417,647 $136,756,311
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable........................................................................... $4,846,131 $12,662,047
Accrued expenses........................................................................... 3,622,011 13,570,317
Notes payable, current portion............................................................. 638,199 377,823
Income taxes payable....................................................................... -- 1,431,962
Borrowings under lines of credit........................................................... 3,970,381 4,153,195
----------- ------------
Total current liabilities............................................................. 13,076,722 32,195,344
Notes payable................................................................................. 4,116,345 738,813
Environmental reserve......................................................................... -- 3,448,939
Deferred income taxes......................................................................... -- 2,189,123
Deferred warranty revenue..................................................................... 2,002,569 2,120,943
Deferred compensation......................................................................... 1,076,187 1,063,218
Subordinated shareholder debt................................................................. 5,023,466 --
Senior Notes.................................................................................. -- 85,000,000
----------- ------------
Total liabilities..................................................................... 25,295,289 126,756,380
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 adjustment........................................................ -- (797,220)
Retained earnings (accumulated deficit).................................................. (413,463) 1,822,330
----------- ------------
Total shareholders' equity............................................................ 5,122,358 8,560,931
----------- ------------
Total liabilities and shareholders' equity............................................ $30,417,647 $136,756,311
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
HENRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................................... $21,122,950 $56,796,945 $46,839,441 $108,904,548
Cost of sales........................................... 14,445,358 39,084,335 33,146,092 75,091,639
----------- ----------- ----------- ------------
Gross profit...................................... 6,677,592 17,712,610 13,693,349 33,812,909
Operating expenses:
Selling, general and administrative............... 4,984,719 11,601,041 12,558,493 24,206,002
Amortization of intangibles....................... 34,310 763,087 102,931 1,385,300
----------- ----------- ----------- ------------
Operating income.................................. 1,658,563 5,348,482 1,031,925 8,221,607
Other expense (income):
Interest expense.................................. 371,908 2,237,689 1,103,319 4,336,725
Interest and other income, net.................... (78,407) (61,711) (254,589) (183,811)
----------- ----------- ----------- ------------
Income before provision for income taxes.......... 1,365,062 3,172,504 183,195 4,068,693
Provision for income taxes.............................. -- 1,554,902 -- 1,032,900
----------- ----------- ----------- ------------
Net income ....................................... $1,365,062 $1,617,602 $183,195 $3,035,793
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
-------------------- Cumulative Retained
Issued Additional Translation Earnings
Shares Amount Paid-in Capital Adjustment (Deficit) Total
------ ------ --------------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances, 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 income:
Net income................... -- -- -- -- 3,035,793 3,035,793
Other comprehensive
income:
Change in cumulative
translation adjustment.. -- -- -- (797,220) -- (797,220)
----------
Total comprehensive
income....................... 2,238,573
------- ---------- ---------- --------- ---------- ----------
Balances, September 30, 1998.... 227,500 $4,691,080 $2,844,741 ($797,220) $1,822,330 $8,560,931
------- ---------- ---------- --------- ---------- ----------
------- ---------- ---------- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $183,195 $3,035,793
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 1,020,482 1,934,585
Provision for doubtful accounts..................................................... 180,820 218,764
Noncompetition and goodwill amortization............................................ 48,760 1,385,300
Interest on subordinated shareholder debt........................................... 286,201 176,506
Loss (gain) on disposal of property and equipment................................... 1,532 (138,262)
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable............................................................... (4,339,797) (5,440,118)
Inventories....................................................................... 346,858 (759,449)
Receivables from affiliates....................................................... 1,268,110 (439,861)
Notes receivable.................................................................. 12,956 171,944
Cash surrender value of life insurance............................................ (576,638) (663,601)
Other assets...................................................................... (210,515) (794,488)
Accounts payable and accrued expenses............................................. 2,584,395 5,015,245
Deferred warranty revenue......................................................... 137,595 118,375
Deferred compensation............................................................. 48,766 (12,969)
------------ ------------
Net cash provided by operating activities................................... 992,720 3,807,764
------------ ------------
Cash flows from investing activities:
Capital expenditures................................................................... (499,847) (1,361,499)
Proceeds from the disposal of property and equipment................................... 26,799 178,212
Acquisition of business, net of cash acquired.......................................... (134,779) (43,819,000)
Investment in affiliate................................................................ (52,138) (19,582)
------------ ------------
Net cash used in investing activities....................................... (659,965) (45,021,869)
------------ ------------
Cash flows from financing activities:
Net repayments under line of credit agreements......................................... (130,980) (14,157,186)
Repayments under notes payable agreements.............................................. (484,407) (11,364,189)
Borrowings under notes payable agreements.............................................. 427,278 4,281
Payments on subordinated shareholder debt.............................................. (286,347) (5,199,972)
Payments of finance fees for note offering............................................. -- (2,550,000)
Proceeds from Series B Senior Notes.................................................... -- 85,000,000
Proceeds from issuance of common stock................................................. -- 2,000,000
Proceeds from issuance of preferred stock.............................................. -- 600,000
Dividends paid......................................................................... -- (800,000)
------------ ------------
Net cash (used in) provided by financing activities......................... (474,456) 53,532,934
------------ ------------
Effect of changes in exchange rate on cash.................................. -- (797,220)
------------ ------------
Net increase (decrease) in cash and cash equivalents........................ (141,701) 11,521,609
Cash and cash equivalents at beginning of period.......................................... 300,162 118,857
------------ ------------
Cash and cash equivalents at end of period................................................ $158,461 $11,640,466
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<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 in accordance with quarterly
reporting guidelines. 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. The accompanying
financial statements should 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. ("Monsey Bakor") audited financial
statements and footnotes as of and for the year ended December 31, 1997, each
contained in the Company's Amendment No. 2 to Registration Statement on Form
S-4 filed September 11, 1998 (Registration No. 333-59485). Operating results
for the three and nine months ended September 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 three and nine months ended September 30, 1998 include the financial
results and accounts of Monsey Bakor and its subsidiaries which were acquired
by the Company on April 22, 1998. The Acquisition was accounted for using the
purchase method of accounting and accordingly the results of operations of
Monsey Bakor since the acquisition date have been included in the
consolidated financial statements of the Company.
2. BUSINESS ACQUISITION AND NOTE OFFERING:
On April 22, 1998, the Company completed the acquisition of Monsey
Bakor and its subsidiaries (the "Acquisition") which are 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 Bakor
for noncompetition agreements. A selling shareholder also purchased 22,500
shares of redeemable convertible preferred stock of the Company for $600,000
cash as more fully discussed in Note 8. 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 discussed 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
(the "Code") to a C Corporation status. Subsequent to the election the
Company is required to pay federal and state corporate income taxes on its
taxable income.
7
<PAGE>
In accordance with the requirements of APB Opinion No. 16 "Business
Combinations," the following unaudited pro forma summary presents the results
of operations of the Company as if the Acquisition and Offering had occurred
as of the beginning of each period presented. The pro forma adjustments
include the results of operations for Monsey Bakor for the period prior to
the acquisition, adjustment for compensation expense in excess of amounts
paid under new employment agreements, amortization of intangible assets
created as a result of the Acquisition, interest expense on the debt issued
as part of the Offering, and related income tax effects. The pro forma
financial information is presented for informational purposes only and may
not be indicative of the results of operations as they would have been if the
Company and Monsey Bakor had been a single entity during the three and nine
month periods ended September 30, 1998, nor is such information indicative of
the results of operations which may occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales........................... $ 56,797,548 $142,744,548
------------ ------------
------------ ------------
Net income.......................... $ 1,286,934 $ 1,169,934
------------ ------------
------------ ------------
</TABLE>
The Company's preliminary purchase price allocation reflecting the
acquisition is as follows:
<TABLE>
<S> <C>
Cash paid at closing for Monsey Bakor 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 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, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Raw materials............................ $2,232,684 $ 7,746,025
Finished goods........................... 3,649,578 8,410,686
---------- -----------
$5,882,262 $16,156,711
---------- -----------
---------- -----------
</TABLE>
8
<PAGE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Buildings..................................... $ 463,375 $ 9,781,643
Machinery and equipment....................... 10,129,940 18,592,920
Office furniture and equipment................ 2,344,253 3,688,045
Automotive equipment.......................... 1,447,456 1,683,670
Leasehold improvements........................ 3,047,521 3,114,166
Other......................................... 330,695 330,695
----------- -----------
17,763,240 37,191,139
Less, accumulated depreciation and
amortization.............................. 13,207,170 14,958,106
----------- -----------
4,556,070 22,233,033
Land.......................................... 472,162 2,945,279
Construction-in-progress...................... 454,956 1,213,897
----------- -----------
$ 5,483,188 $26,392,209
----------- -----------
----------- -----------
</TABLE>
5. LONG-TERM DEBT AND CREDIT FACILITIES:
On April 22, 1998 the Company privately issued and sold $85,000,000
of Senior Notes due in 2008. Interest on the Notes is payable semi-annually
at 10% per annum. In October 1998, the Company completed an exchange offer
for all of the Senior Notes. The terms of the new Senior Notes are identical
in all material respects to the original private issue. The proceeds from the
offering were used to (i) retire existing Company bank debt, (ii) retire
existing Company subordinated shareholder debt, (iii) acquire Monsey Bakor,
(iv) retire a substantial portion of Monsey Bakor's then-existing bank debt
with (v) the remainder providing additional working capital. Long-term debt
consists of the following at September 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... 1,116,636
-----------
86,116,636
Less current portion............................................ (377,823)
-----------
$85,738,813
-----------
-----------
</TABLE>
The Company's 10% Senior Notes are guaranteed by all of the
Company's United States subsidiaries, Monsey Products Co., Kimberton
Enterprises, Inc. and Monsey Products of Arizona LLC (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, 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 needs and $10 million of which may be used for capital expenditures.
The credit facility expires on April 22, 2003 with interest charged at prime
or LIBOR plus 2.25%. At September 30, 1998, there were no balances
outstanding under the credit facility.
9
<PAGE>
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 September 30,
1998, there was $2,642,296 and $2,841,027, respectively, outstanding under
this Canadian line.
6. INCOME TAXES:
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 a C Corporation status. Upon conversion, the Company
is 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.
The significant components of the provision (benefit) for income
taxes are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Current:
Federal.......................... $1,304,349
State............................ 153,988
Foreign.......................... 457,000
----------
1,915,337
----------
Deferred:
Federal.......................... (692,907)
State............................ (189,530)
----------
(882,437)
----------
$1,032,900
----------
----------
</TABLE>
The Company's effective tax rate differs from the federal statutory
tax rate for the nine months ended September 30, 1998 as follows:
<TABLE>
<S> <C>
Provision for income taxes at the federal statutory tax rate........................... 34.0%
State taxes net of federal tax benefit................................................. 3.4
Foreign income taxes in excess of U.S. statutory rate.................................. 5.9
Recognition of deferred tax benefits upon conversion to C status....................... (29.8)
Nondeductible intangibles.............................................................. 10.5
Income not subject to federal and state income tax prior to conversion to C status..... (3.9)
Other, net............................................................................. 5.3
----
25.4%
----
----
</TABLE>
Income before income taxes of the Company's Canadian operations was
$1,140,887 for the nine month period ended September 30, 1998.
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:
10
<PAGE>
<TABLE>
<S> <C>
Allowances and reserves deductible in the future.............. ($172,218)
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 the Company. The outstanding shares of Warner
Development were cancelled in the merger. For periods prior to this date, the
financial results of the 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 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, a director of the Company, 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 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 nine months ended September 30, 1998, the Company has
charged the Henry Wine Group approximately $788,980 for reimbursement of
administrative services provided by the 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 "Subsidiary Guarantors") 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 of
the Subsidiary Guarantors. Separate financial statements of the Subsidiary
Guarantors are not presented and the Subsidiary Guarantors are not filing
separate reports under the Exchange Act because the Subsidiary Guarantors
have fully and unconditionally guaranteed the Notes on a joint and several
basis under the guarantees and management has determined that separate
financial statements and other disclosures concerning the Subsidiary
Guarantors are not material to investors.
11
<PAGE>
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
The following summarizes the Condensed Consolidating Financial
Statements of the Subsidiary Guarantors subsequent to the date of the Company's
acquisition of Monsey Bakor:
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Henry
Company
(Parent Nonguarantor Consolidated Elimination
Corporation) Guarantor Subsidiaries Subsidiaries Entries Consolidated Total
------------ ---------------------- ------------ ------------------------ ------------------
ASSETS:
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 7,659,643 $ 2,996,069 $ 984,754 -- $ 11,640,466
Accounts receivable, net.... 12,710,714 16,020,778 4,128,766 -- 32,860,258
Inventories................. 6,624,891 6,235,431 3,296,389 -- 16,156,711
Receivables from affiliate.. 20,073,469 1,121,991 792,997 ($19,284,255) 2,704,202
Notes receivable............ 479,152 -- -- -- 479,152
Prepaid expenses and
other current assets....... 2,541,737 33,371 174,559 -- 2,749,667
------------ ---------------------- ------------ ------------------------ ------------------
Total current assets.... 50,089,606 26,407,640 9,377,465 (19,284,255) 66,590,456
Property and equipment, net... 5,404,074 15,027,171 5,932,252 28,712 26,392,209
Investment in subsidiaries.... 26,204,492 9,212,183 -- (35,416,675) --
Cash surrender value
of life insurance, net...... 2,222,377 1,771,529 -- -- 3,993,906
Intangibles, net.............. 33,274,207 1,481,089 2,667,315 -- 37,422,611
Notes receivable.............. 247,279 -- -- -- 247,279
Note receivable from
affiliate................... 1,863,072 -- -- -- 1,863,072
Other......................... 132,195 67,837 46,746 -- 246,778
------------ ---------------------- ------------ ------------------------ ------------------
Total assets... .............. $119,437,302 $53,967,449 $18,023,778 ($54,672,218) $136,756,311
------------ ---------------------- ------------ ------------------------ ------------------
------------ ---------------------- ------------ ------------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............ $ 6,039,681 $ 5,065,298 $ 1,557,068 -- $ 12,662,047
Accrued expenses............ 7,319,337 5,365,932 885,048 -- 13,570,317
Intercompany payables....... 2,470,053 15,768,496 1,046,113 ($19,284,662) --
Notes payable, current
portion.................... 142,480 52,043 183,300 -- 377,823
Income taxes payable........ -- 897,991 533,971 -- 1,431,962
Borrowings under line
of credit.................. -- -- 4,153,195 -- 4,153,195
------------ ---------------------- ------------ ------------------------ ------------------
Total current liabilities. 15,971,551 27,149,760 8,358,695 (19,284,662) 32,195,344
Notes payable................. 489,689 152,274 96,850 -- 738,813
Environmental reserve......... -- 3,448,939 -- -- 3,448,939
Deferred income taxes......... (882,437) 1,330,293 1,741,267 -- 2,189,123
Deferred warranty revenue..... 2,120,943 -- -- -- 2,120,943
Deferred compensation......... 1,063,218 -- -- -- 1,063,218
Subordinated shareholder debt. -- -- -- -- --
Senior Notes.................. 85,000,000 -- -- -- 85,000,000
------------ ---------------------- ------------ ------------------------ ------------------
Total liabilities......... 103,762,964 32,081,266 10,196,812 (19,284,662) 126,756,380
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
adjustment................. -- -- (1,385,220) 588,000 (797,220)
Accumulated (deficit)
retained earnings.......... (1,145,208) 12,229,183 2,017,784 (11,279,429) 1,822,330
------------ ---------------------- ------------ ------------------------ ------------------
Total shareholders' equity. 14,235,338 21,886,183 7,826,966 (35,387,556) 8,560,931
------------ ---------------------- ------------ ------------------------ ------------------
Total liabilities and
shareholders' (deficit)
equity................... $119,437,302 $53,967,449 $18,023,778 ($54,672,218) $136,756,311
------------ ---------------------- ------------ ------------------------ ------------------
------------ ---------------------- ------------ ------------------------ ------------------
</TABLE>
12
<PAGE>
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Henry Company Consolidated
(Parent Guarantor Nonguarantor Elimination Consolidated
Corporation) Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............................. $51,410,655 $46,315,735 $14,472,279 ($3,294,121) $108,904,548
Cost of sales......................... 35,476,697 32,268,992 10,734,427 (3,388,477) 75,091,639
------------- ------------ ------------ ------------ ------------
Gross profit.................... 15,933,958 14,046,743 3,737,852 94,356 33,812,909
Operating expenses:
Selling, general and
administrative.................. 13,232,590 7,796,201 2,398,968 778,243 24,206,002
Amortization of intangibles........ 1,161,518 127,570 96,212 -- 1,385,300
------------- ------------ ------------ ------------ ------------
Operating income (loss)......... 1,539,850 6,122,972 1,242,672 (683,887) 8,221,607
Other expense (income):
Interest expense................... 4,171,561 63,379 101,785 -- 4,336,725
Interest and other income, net..... (183,811) -- -- -- (183,811)
------------- ------------ ------------ ------------ ------------
Income (loss) before
provision for income taxes.... (2,447,900) 6,059,593 1,140,887 (683,887) 4,068,693
Provision (benefit) for income
taxes.............................. (1,551,100) 2,127,000 457,000 -- 1,032,900
Net (loss) income................. ($896,800) $3,932,593 $683,887 ($683,887) $3,035,793
------------- ------------ ------------ ------------ ------------
------------- ------------ ------------ ------------ ------------
</TABLE>
13
<PAGE>
10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Henry Company Consolidated
(Parent Nonguarantor Elimination Consolidated
Corporation) Guarantor Subsidiaries Subsidiaries Entries Total
------------- ---------------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 1,246,451 $ 94,040 $ 2,467,273 -- $ 3,807,764
------------- ---------------------- ------------ -------------- --------------
Cash flows from investing
activities:
Capital expenditures............... (910,086) (284,124) (167,289) -- (1,361,499)
Proceeds from the disposal of
property and equipment.......... 17,000 161,212 -- -- 178,212
Acquisition of business, net of
cash acquired................... (46,870,312) -- -- 3,051,312 (43,819,000)
Investment in affiliate............ (19,582) -- -- -- (19,582)
------------- ---------------------- ------------ -------------- --------------
Net cash used in (provided by)
investing activities.......... (47,782,980) (122,912) (167,289) 3,051,312 (45,021,869)
------------- ---------------------- ------------ -------------- --------------
Cash flows from financing
activities:
Net repayments under
line-of-credit agreement....... (13,734,381) -- (422,805) -- (14,157,186)
Repayments under notes payable
agreements..................... (11,242,613) (22,726) (98,850) -- (11,364,189)
Borrowings under notes payable
agreements.................... 4,281 -- -- -- 4,281
Payments on subordinated
shareholder debt.............. (5,199,972) -- -- -- (5,199,972)
Payments of finance fees for
note offering................. (2,550,000) -- -- -- (2,550,000)
Proceeds from Series B Senior
Notes......................... 85,000,000 -- -- -- 85,000,000
Proceeds from issuance of
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 provided by (used in)
financing activities........ 54,077,315 (22,726) (521,655) -- 53,532,934
------------- ---------------------- ------------ -------------- --------------
Effect of changes in
exchange rate on cash....... -- -- (797,220) -- (797,220)
------------- ---------------------- ------------ -------------- --------------
Net increase (decrease) in
cash and cash equivalents... 7,540,786 (51,598) 981,109 3,051,312 11,521,609
Cash and cash equivalents at
beginning of period.............. 118,857 3,047,667 3,645 (3,051,312) 118,857
------------- ---------------------- ------------ -------------- --------------
Cash and cash equivalents at end of
period......................... $ 7,659,643 $2,996,069 $ 984,754 -- $11,640,466
------------- ---------------------- ------------ -------------- --------------
------------- ---------------------- ------------ -------------- --------------
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information management
believes to be relevant to understanding the financial condition and results of
operations of the Company and certain of its wholly-owned subsidiaries, Monsey
Products Co., Kimberton Enterprises, Inc. and Monsey Products of Arizona LLC
(collectively, the "Company"). This discussion should be read in conjunction
with the Company's Quarterly Report on Form 10-Q for the period ended September
30, 1998, of which this commentary is a part, the unaudited condensed
consolidated financial statements and the related notes thereto.
GENERAL
The Company is a construction materials company focusing primarily
on products for roofing, sealing and paving applications. The Company
develops, manufactures and markets several separate but related product lines
including roof and driveway coatings and paving products, industrial
emulsions, air barriers, polyurethane foam for roofing and commercial uses,
sealants for construction and marine uses and specialty products. The Company
has seventeen manufacturing and distribution facilities located throughout
North America.
BUSINESS ACQUISITION AND NOTE OFFERING
On April 22, 1998, the Company completed the acquisition of Monsey
Bakor and its subsidiaries (the "Acquisition") which are 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 Bakor 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.
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 Bakor, retire a
substantial portion of Monsey Bakor's existing bank debt, and retire the
Company's existing 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.
15
<PAGE>
CORPORATE ORGANIZATION-TAX STATUS
Prior to the Acquisition, the Company was operated as a Subchapter
"S" Corporation under the Code. As a result, the 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 the Company were incurred and paid directly
by the shareholders of the Company. It was the policy of the Company to make
periodic distributions to the shareholders with respect to such tax
liabilities. During the nine months ended September 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 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 a net deferred
tax asset of $0.9 million 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
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY
Consolidated Statements of Operations Data (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------------------------------------------
1997 1998 1997 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% of % of % of % of
Amount Net sales Amount Net sales Amount Net sales Amount Net sales
--------------------------------------------------------------------------------------------------------
Net sales $21.1 100.0% $56.8 100.0% $46.8 100.0% $108.9 100.0%
Cost of Sales 14.4 68.2% 39.1 68.8% 33.1 70.7% 75.1 69.0%
--------------------------------------------------------------------------------------------------------
Gross Profit 6.7 31.8% 17.7 31.2% 13.7 29.3% 33.8 31.0%
Operating Expenses:
Selling, general
and administrative 5.0 23.7% 11.6 20.4% 12.6 26.9% 24.2 22.2%
Amortization of
intangibles -- -- 0.8 1.4% 0.1 0.2% 1.4 1.3%
--------------------------------------------------------------------------------------------------------
Operating income 1.7 8.1% 5.3 9.3% 1.0 2.1% 8.2 7.5%
--------------------------------------------------------------------------------------------------------
Other Expense (income):
Interest expense 0.4 1.9% 2.2 3.9% 1.1 2.4% 4.3 4.0%
Interest and other
income, net (0.1) (0.5%) (0.1) (0.2%) (0.3) (0.6%) (0.2) (0.2%)
--------------------------------------------------------------------------------------------------------
Income before
provision for taxes 1.4 6.6% 3.2 5.6% 0.2 0.4% 4.1 3.8%
Provision for
income taxes -- -- 1.6 2.8% -- -- 1.0 0.9%
--------------------------------------------------------------------------------------------------------
Net income $ 1.4 6.6% $ 1.6 2.8% $ 0.2 0.4% $ 3.1 2.8%
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. The Company's revenues increased to $56.8 million for the three
months ended September 30, 1998, an increase of $35.7 million, or 169.2%,
from $21.1 million for the three months ended September 30, 1997. The
acquisition of Monsey Bakor represented $37.5 million of the increase. This
increase was partially offset by a $1.8 million decrease in net sales due in
part to significantly increased sales of the Company in 1997 as a result of
the anticipation of rainfall in excess of annual averages.
GROSS PROFIT. The Company's gross profit increased to $17.7 million for the
three months ended September 30, 1998, an increase of $11.0 million, or
164.2%, from $6.7 million for the three months ended September 30, 1997. The
acquisition of Monsey Bakor represented $11.1 million of the increase. Gross
margin as a percentage of net sales remained relatively flat for the three
months ended September 30, 1998 as compared to the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales decreased to 20.4% for the
three months ended September 30, 1998 from 23.7% for the three months ended
September 30, 1997. The decrease was primarily due to the Company's ability to
support increased revenues from the Monsey Bakor acquisition without
proportionately increasing administrative costs. Selling, general and
administrative expenses increased to $11.6 million for the three months ended
September 30, 1998, an increase of $6.6 million, or 132.0%, from $5.0 million
for the three months ended September 30, 1997. The acquisition of Monsey Bakor
represented $7.0 million of the increase. This increase was partially offset by
a decrease of $0.4 million in selling, general and administrative expenses
associated with the Company's consolidation of administrative and accounting
functions.
OPERATING INCOME. Operating income increased to $5.3 million for the three
months ended September 30, 1998, an increase of $3.6 million, or 211.8%, from
$1.7 million for the three months ended September 30, 1997. Operating income
as a percentage of net sales increased to 9.3% for the three months ended
September 30, 1998, from 8.1% for the three months ended September 30, 1997.
The acquisition of Monsey Bakor represented $4.0 million of the increase in
operating income. This increase was partially offset by a decrease of $0.4
million in selling, general and administrative expense as noted above.
INTEREST EXPENSE. Interest expense increased to $2.2 million for the three
months ended September 30, 1998, an increase of $1.8 million, or 450.0%, from
$0.4 million for the three months ended September 30, 1997. The increase was
primarily attributable to the interest expense incurred on the Senior Notes
used to finance the acquisition of Monsey Bakor.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased to $0.8
million for the three months ended September 30, 1998, an increase of $0.8
million, from $0.0 million for the three months ended September 30, 1997. The
increase was primarily due to the amortization of intangible assets and
acquisition costs associated with the acquisition of Monsey Bakor.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to $1.5
million for the three months ended September 30, 1998, primarily due to the
acquisition of Monsey Bakor, and the conversion of the Company from an "S"
Corporation to a "C" Corporation, which resulted in the Company becoming a
fully taxable entity.
NET INCOME. Net income was $1.6 million for the three months ended September
30, 1998, an increase of $0.2 million, or 14.3% from $1.4 million for the
three months ended September 30, 1997. The acquisition of Monsey Bakor
represented a $2.6 million increase which was offset by a decrease of $2.3
million due primarily to the provision for income taxes of $1.5 million,
interest expense of $1.8 million and other factors discussed above.
17
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1998
NET SALES. The Company's revenues increased to $108.9 million for the nine
months ended September 30, 1998, an increase of $62.1 million, or 132.7%,
from $46.8 million for the nine months ended September 30, 1997. The
acquisition of Monsey Bakor represented $57.5 million of the increase. The
remaining increase in net sales of $4.6 million was primarily due to rainfall
in excess of annual averages in the first quarter of 1998 and increased sales
to existing customers.
GROSS PROFIT. The Company's gross profit increased to $33.8 million for the
nine months ended September 30, 1998, an increase of $20.1 million, or
146.7%, from $13.7 million for the nine months ended September 30, 1997. The
acquisition of Monsey Bakor represented $17.8 million of the increase. The
remaining increase of $2.3 million was primarily due to the increase in
revenues, but also reflects an increase in the Company's gross profit margin
to 31.0% in the first nine months of 1998 compared to 29.3% for the first
nine months of 1997. The increase was attributable to reduced costs for raw
materials and a sales mix of higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales decreased to 22.2% for
the nine months ended September 30, 1998 from 26.9% for the nine months ended
September 30, 1997. The decrease was primarily due to the Company's ability
to support increased revenues from the Monsey Bakor acquisition without
proportionately increasing administrative costs. Selling, general and
administrative expenses increased to $24.2 million for the nine months ended
September 30, 1998, an increase of $11.6 million, or 92.1%, from $12.6
million for the nine months ended September 30, 1997. The acquisition of
Monsey Bakor represented $11.0 million of the increase. The remaining
increase of $0.6 million was primarily due to incremental selling and general
administrative expenses associated with the Company's continued expansion in
both the retail roofing and the roofing systems business.
OPERATING INCOME. Operating income increased to $8.2 million for the nine
months ended September 30, 1998, an increase of $7.2 million, or 720.0%, from
$1.0 million for the nine months ended September 30, 1997. Operating income
as a percentage of net sales increased to 7.5% for the nine months ended
September 30, 1998, from 2.1% for the nine months ended September 30, 1997.
The acquisition of Monsey Bakor represented $6.6 million of the operating
income increase. The remaining increase of $0.6 million was primarily due to
higher gross profit margins and lower operating expenses as a percentage of
net sales, as discussed above.
INTEREST EXPENSE. Interest expense increased to $4.3 million for the nine
months ended September 30, 1998, an increase of $3.2 million, or 290.9%, from
$1.1 million for the nine months ended September 30, 1997. The increase was
attributable to interest expense incurred on the Senior Notes used to finance
the acquisition of Monsey Bakor.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased to $1.4
million for the nine months ended September 30, 1998, an increase of $1.3
million, or 1300%, from $0.1 million for the nine months ended September 30,
1997. The increase was primarily due to the amortization of intangible assets
and acquisition costs associated with the acquisition of Monsey Bakor.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to $1.0
million for the nine months ended September 30, 1998 primarily due to the
acquisition of Monsey Bakor, and the conversion of the Company from an "S"
Corporation to a "C" Corporation, which resulted in the Company becoming a
fully taxable entity. These amounts were partially offset by a $0.9 million
deferred tax benefit recognized upon conversion.
NET INCOME. Net income was $3.1 million for the nine months ended September
30, 1998, an increase of $2.9 million, or 1450% from $0.2 million for the
nine months ended September 30, 1997. The acquisition of Monsey Bakor
represented $3.9 million of the increase, which was partially offset by a
decrease of $1.1 million due to factors discussed above. Net income as a
percentage of net sales increased to 2.8% for the nine months ended September
30, 1998, from 0.4% for the nine months ended September 30, 1997.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical requirements for capital have been
primarily for working capital, capital expenditures and acquisitions. The
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 Offering and the Acquisition on
April 22, 1998, the Company entered into a new bank credit facility (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 September 30,
1998, there was no outstanding balances due under the revolving line of
credit and the capital expenditures facility.
Cash flows for the Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997
The Company's cash flows from operations were $3.8 million and $1.0
million for the nine months ended September 30, 1998 and 1997, respectively.
The increase from September 30, 1997 to September 30, 1998 of $2.8 million
was primarily attributable to increased profits partially offset by a build
up in inventories and receivables. Net cash provided by (used in) financing
activities during the nine months ended September 30, 1998 and the nine
months ended September 30, 1997 was $53.5 million and ($0.5) million,
respectively. The increase of $54.0 million from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998 was primarily
due to the issuance of $85 million of Senior Notes, reduced by principal
payments of $30.6 million. Net cash used for business acquisitions for the
nine months ended September 30, 1998 and for the nine months ended September
30, 1997 were $43.8 million and $0.1 million, respectively. For the nine
months ended September 30, 1998 and the nine months ended September 30, 1997,
capital expenditures were $1.4 million and $0.5, respectively. Scheduled
principal payments on debt were $16.6 million and $0.8 million for the nine
months ended September 30, 1998 and the nine months ended September 30, 1997,
respectively.
The Company believes that the net proceeds from the 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, lease payments, acquisitions, 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
The Company's business is seasonal and varies by geographic region.
Many of the Company's top selling products in the West and Southwest 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 the Company in these regions tend to
increase in July of each year and continue increasing 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 Company's highest level of sales
in the West and Southwest during the year.
Many of the Company's products sold in the Northwest, Midwest and
Southern regions of the United States and Canada are roofing or paving
products which are best applied in dry, warm periods. Consequently, sales to
these regions experience significant seasonal declines during the winter.
Retailers and distributors begin to build inventories of these products in
March and business for these regions is typically strongest from June through
October.
19
<PAGE>
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 the Company's results of
operations. The 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 the Company's operating
margins. The 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 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 is in the process of evaluating the impact, if any, of
the new standard.
YEAR 2000 MODIFICATIONS
The Company is not highly dependent on its internal computer
systems, and does not generally interact electronically with its customers or
suppliers. The 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. The 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. The 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 the
Company for a Year 2000 failure is believed to involve an interruption of
this electronic invoicing system. The Company is prepared to invoice its
customers manually to respond to such an interruption.
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press releases
and some oral statements by Company officials to ratings agencies, and
bondholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Act"). Statements which are predictive in nature, which depend
upon or refer to future events or conditions, or which include words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates," "hopes,"
and similar expressions constitute forward-looking statements. In addition, any
statements concerning future financial performance (including future revenues,
earnings or growth rates), ongoing business strategies or prospects, and
possible future Company actions, which may be provided by management are also
forward-looking statements as defined by the Act. Forward-looking statements are
based on current expectations and projections about future events and are
subject to risks, uncertainties, and assumptions about the Company, economic and
market factors and the
20
<PAGE>
construction materials industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed
or forecasted in the forward-looking statements made by the Company or
Company officials due to a number of factors. The principal important risk
factors that could cause the Company's actual performance and future events
and actions to differ materially from such forward-looking statements
include, but are not limited to, changes in general economic conditions
either nationally or in regions where the Company operates or may commence
operations, employment growth or unemployment rates, fluctuations in asphalt
or other raw material costs, labor costs, the impact of weather, product
liability and asbestos litigation, reliance on key personnel, environmental
matters, costs and effects of unanticipated legal or administrative
proceedings or governmental regulation and capital or credit market
conditions affecting the Company's cost of capital; as well as competition,
and unanticipated delays in the Company's operations. See the Company's
Amendment No. 2 to Registration Statement on Form S-4 filed September 11,
1998 (Registration No. 333-59485) for a further discussion of risks and
uncertainties applicable to the Company's business.
The Company undertakes no obligation to update any forward-looking
statements in this Report on Form 10-Q or elsewhere.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that
affect the quantitative and qualitative disclosures presented in the notes to
the Company's December 31, 1997 audited financial statements included in the
Company's Amendment No. 2 to Registration Statement on Form S-4, filed
September 11, 1998.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 7, 1998, at the Company's annual meeting of Shareholders, the
following matter was submitted for Shareholder vote:
Election of Directors
The board of directors, consisting of Messrs. Warner W. Henry, Terrill
M. Gloege, Frederick H. Muhs, Paul H. Beemer, Richard B. Gordinier,
Jeffrey A. Wahba, Donald M. Ford, Joseph A. Mooney, Jr. and Mrs. Carol
F. Henry, was re-elected in its entirety to serve as directors until the
next annual meeting of Shareholders or until otherwise replaced. One
hundred percent (100%) of the votes cast by the Shareholders were voted
in favor of the reelection of each director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits required in accordance with Item 601 of Regulation
S-K are incorporated by reference herein as filed with the
Company's Amendment No. 2 to Registration Statement on
Form S-4, filed September 11, 1998 (Registration
No. 333-59485).
21
<PAGE>
In addition, the registrant has filed herewith the following exhibits:
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule for the period ended September 30, 1998
(filed in electronic form only).
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarterly
period ended September 30, 1998:
None
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: November 16, 1998 HENRY COMPANY
/s/ Jeffrey A. Wahba
-------------------------------
By: JEFFREY A. WAHBA
Its: Vice President, Secretary
and Chief Financial Officer
23
<PAGE>
EXHIBIT 12.1
HENRY COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
EARNINGS:
Earnings before taxes $1,365 $3,173 $ 183 $4,069
Add: Fixed Charges* 596 2,434 1,775 5,094
------ ------ ------- ------
$1,961 $5,607 $1,958 $9,163
*FIXED CHARGES
Interest expense $ 372 $2,238 $1,103 $4,337
Interest on rent 224 196 672 757
------ ------ ------- ------
$ 596 $2,434 $1,775 $5,094
------ ------ ------- ------
------ ------ ------- ------
Ratio of Earnings
to Fixed Charges 3.3 2.3 1.1 1.8
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of earnings before taxes
plus fixed charges and "fixed charges" consist of interest expense and the
portion of rents representative of an interest factor.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,640,466
<SECURITIES> 0
<RECEIVABLES> 36,540,980
<ALLOWANCES> 497,368
<INVENTORY> 16,156,711
<CURRENT-ASSETS> 66,590,456
<PP&E> 41,350,315
<DEPRECIATION> 14,958,106
<TOTAL-ASSETS> 136,756,311
<CURRENT-LIABILITIES> 32,195,344
<BONDS> 86,116,636
0
1,439,000
<COMMON> 4,691,080
<OTHER-SE> 3,869,851
<TOTAL-LIABILITY-AND-EQUITY> 136,756,311
<SALES> 108,904,548
<TOTAL-REVENUES> 109,088,359
<CGS> 75,091,639
<TOTAL-COSTS> 99,297,641
<OTHER-EXPENSES> 1,385,300
<LOSS-PROVISION> 218,764
<INTEREST-EXPENSE> 4,336,725
<INCOME-PRETAX> 4,068,693
<INCOME-TAX> 1,032,900
<INCOME-CONTINUING> 3,035,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,035,793
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
