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 March 31, 2000
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 333-59485
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 May 15, 2000,
there were 221,500 shares of the registrant's common stock and 6,000 shares of
Class A Common Stock, no par value, outstanding.
1
HENRY COMPANY
FORM 10-Q
TABLE OF CONTENTS
MARCH 31, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000 (Unaudited)......................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 2000 (Unaudited).............................. 4
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 2000 (Unaudited).................. 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 2000 (Unaudited).......................... 6
Notes to Consolidated Financial Statements.............................. 7
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 19
PART II. OTHER INFORMATION................................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 19
SIGNATURES.................................................................. 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HENRY COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 2000
------------ -------------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents.................................................................. $ 685,044 $ 1,303,039
Trade accounts receivable, net of allowance for
doubtful accounts of $1,027,825 and $1,126,006 for
1999 and 2000, respectively............................................................. 21,349,756 31,983,338
Inventories................................................................................ 15,606,752 17,908,662
Receivables from affiliate................................................................. 2,144,212 2,634,873
Notes receivable........................................................................... 516,210 514,091
Prepaid expenses and other current assets.................................................. 2,564,743 2,155,809
Income tax receivable...................................................................... - 159,889
------------ ------------
Total current assets.................................................................. 42,866,717 56,659,701
Property and equipment, net................................................................... 36,751,720 36,341,882
Cash surrender value of life insurance, net................................................... 4,340,388 4,490,179
Intangibles, net.............................................................................. 29,401,525 28,755,238
Notes receivable.............................................................................. 354,462 356,827
Note receivable from affiliate................................................................ 1,863,072 1,863,072
Other......................................................................................... 349,326 393,587
------------ ------------
Total assets.......................................................................... $115,927,210 $128,860,486
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable........................................................................... $ 7,662,800 $ 12,354,629
Accrued expenses........................................................................... 8,328,487 10,475,873
Income taxes payable....................................................................... 258,117 59,730
Notes payable, current portion............................................................. 124,994 131,681
Borrowings under lines of credit........................................................... 2,629,837 11,679,926
------------ ------------
Total current liabilities............................................................. 19,004,235 34,701,839
Notes payable................................................................................. 516,214 434,995
Environmental reserve......................................................................... 3,375,025 3,368,225
Deferred income taxes......................................................................... 5,428,817 5,261,681
Deferred warranty revenue..................................................................... 2,563,231 2,565,435
Deferred compensation......................................................................... 1,071,073 1,048,519
Series B Senior Notes......................................................................... 81,400,000 81,400,000
------------ ------------
Total liabilities..................................................................... 113,358,595 128,780,694
Commitments and contingencies
Redeemable convertible preferred stock........................................................ 1,764,594 1,802,091
Shareholders' equity:
Common stock............................................................................. 4,691,080 4,691,080
Additional paid-in capital............................................................... 2,519,147 2,481,650
Cumulative translation adjustment........................................................ (149,083) (244,795)
Accumulated deficit...................................................................... (6,257,123) (8,650,234)
------------ ------------
Total shareholders' equity............................................................ 804,021 (1,722,299)
------------ ------------
Total liabilities and shareholders' equity............................................ $115,927,210 $128,860,486
------------ ------------
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
3
HENRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
---------------------
1999 2000
---- ----
Net sales............................................... $35,570,696 $41,552,345
Cost of sales........................................... 25,515,405 30,480,271
----------- -----------
Gross profit...................................... 10,055,291 11,072,074
Operating expenses:
Selling, general and administrative............... 10,801,154 11,401,295
Amortization of intangibles....................... 880,091 792,654
----------- -----------
Operating loss.................................... (1,625,954) (1,121,875)
Other expense (income):
Interest expense.................................. 2,144,625 2,212,145
Interest and other income, net.................... (49,809) (55,742)
----------- ----------
Loss before benefit for
income taxes..................................... (3,720,770) (3,278,278)
Benefit for income taxes................................ (1,126,303) (885,167)
----------- -----------
Net loss.......................................... ($2,594,467) ($2,393,111)
----------- -----------
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
4
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF MARCH 31, 2000
(UNAUDITED)
Common Stock
-------------------- Cumulative Retained
Issued Additional Translation Earnings
Shares Amount Paid-in Capital Adjustment (Deficit) Total
------ ------ --------------- ----------- --------- -----
Balance, December 31, 1999...... 227,500 $4,691,080 $2,519,147 ($149,083) ($6,257,123) $804,021
Accretion on redeemable
convertible preferred stock.. -- -- (37,497) -- -- (37,497)
Comprehensive income (loss):
Net loss..................... -- -- -- -- (2,393,111) (2,393,111)
Other comprehensive
income (loss):
Change in cumulative
translation adjustment.. -- -- -- (95,712) -- (95,712)
----------
Total comprehensive
income (loss)................ -- -- -- -- -- (2,488,823)
------- ---------- ---------- --------- ----------- ----------
Balance, March 31, 2000......... 227,500 $4,691,080 $2,481,650 ($244,795) ($8,650,234) ($1,722,299)
------- ---------- ---------- --------- ----------- ----------
------- ---------- ---------- --------- ----------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
5
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 2000
(UNAUDITED)
1999 2000
---- ----
Cash flows from operating activities:
Net loss............................................................................... ($2,594,467) ($2,393,111)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................................................... 1,018,705 1,142,124
Provision for doubtful accounts..................................................... 48,685 98,181
Deferred income taxes............................................................... (8,938) (167,136)
Noncompetition and goodwill amortization............................................ 812,303 792,654
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable............................................................... (3,458,302) (10,731,763)
Inventories....................................................................... (2,696,743) (2,301,910)
Receivables from affiliates....................................................... 122,055 (490,661)
Notes receivable.................................................................. 1,766 (246)
Cash surrender value of life insurance............................................ (112,336) (149,791)
Other assets...................................................................... (138,620) 367,255
Income tax receivable............................................................. (1,529,292) (159,889)
Accounts payable and accrued expenses............................................. 4,121,083 6,634,027
Deferred warranty revenue......................................................... 50,657 2,204
Deferred compensation............................................................. 12,687 (22,554)
---------- -----------
Net cash used in operating activities....................................... (4,350,757) (7,380,616)
---------- -----------
Cash flows from investing activities:
Capital expenditures................................................................... (1,402,996) (869,622)
Acquisition of business, net of cash acquired.......................................... (2,655,117) --
Investment in affiliate................................................................ (14,432) (4,099)
---------- -----------
Net cash used in investing activities....................................... (4,072,545) (873,721)
---------- -----------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements......................................... 7,649,916 9,050,089
Repayments under notes payable agreements.............................................. (311,162) (74,532)
Borrowings under notes payable agreements.............................................. 148,737 --
---------- -----------
Net cash provided by financing activities.................................. 7,487,491 8,975,557
---------- -----------
Effect of exchange rate changes on cash and cash equivalents.............................. 8,000 (103,225)
---------- -----------
Net increase (decrease) in cash and cash equivalents........................ (927,811) 617,995
Cash and cash equivalents, beginning of period............................................ 12,022,676 685,044
---------- -----------
Cash and cash equivalents, end of period.................................................. $11,094,865 $1,303,039
---------- -----------
---------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
6
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 the Company's audited consolidated 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 consolidated financial statements and footnotes as of and
for the year ended December 31, 1999 as included in the Company's Annual
Report on Form 10-K. Operating results for the three months ended March 31,
2000 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
does not expect the adoption of this statement to have a significant impact
on the Company's financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which Provides the SEC's views on applying generally accepted accounting
principles to selected revenue recognition issues. The Company is presently
evaluating the impact, if any, that this may have on the Company's revenue
recognition policy.
3. INVENTORIES:
Inventories consist of the following:
December 31, March 31,
1999 2000
------------ -------------
Raw materials............................ $ 7,333,325 $ 8,866,050
Finished goods........................... 8,273,427 9,042,612
---------- -----------
$15,606,752 $17,908,662
---------- -----------
---------- -----------
7
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, March 31,
1999 2000
------------ -------------
Buildings..................................... $14,621,684 $14,613,677
Machinery and equipment....................... 26,799,922 26,871,649
Office furniture and equipment................ 6,236,473 6,236,473
Automotive equipment.......................... 1,521,456 1,527,624
Leasehold improvements........................ 3,183,658 3,183,658
Other......................................... 454,834 454,834
----------- -----------
52,818,027 52,887,915
Less, accumulated depreciation and
amortization.............................. 20,449,525 21,719,707
----------- -----------
32,368,502 31,168,208
Land.......................................... 3,475,849 3,473,095
Construction-in-progress...................... 907,369 1,700,579
----------- -----------
$36,751,720 $36,341,882
----------- -----------
----------- -----------
5. LONG-TERM DEBT AND CREDIT FACILITIES:
In 1998, the Company privately issued and sold $85,000,000 of Series
B Senior Notes (the "Senior Notes") due in 2008. Interest on the Senior 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 Henry
Company bank debt, (ii) retire existing Henry 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 March 31, 2000:
Long-Term debt consists of the following at March 31, 2000:
10.0% Series B Senior Notes due 2008.......................... $81,400,000
Various term notes payable to third parties with interest
rates ranging from 6% to 9.25%, maturing from 2000 to 2013... 12,246,602
-----------
93,646,602
Less, current maturities...................................... 11,811,607
-----------
$81,834,995
-----------
-----------
The Company's Senior Notes are guaranteed by all of the Company's
United States subsidiaries (the "Subsidiary Guarantors"). The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint
and several. See Note 8 for the Guarantor Condensed Consolidating Financial
Statements.
The Company has 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% (8.5% at March 31, 2000). At March 31, 2000, $7,471,536
was outstanding under the credit facility.
8
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% (8.064% at March 31, 2000). At March 31, 2000, $4,208,390 was
outstanding under this Canadian line.
6. INCOME TAXES:
The significant components of the provision (benefit) for income
taxes are as follows:
Year Ended Three Months Ended
December 31, 1999 March 31, 2000
----------------- ------------------
Current:
Federal.......................... -- ($732,105)
State............................ -- (129,195)
Foreign.......................... 681,896 70,551
--------- ------------
681,896 790,749
--------- ------------
Deferred:
Federal.......................... (207,557) (74,158)
State............................ (170,370) (20,260)
Foreign.......................... -- --
--------- ------------
(377,927) (94,418)
--------- ------------
303,969 ($885,167)
--------- ------------
--
--------- ------------
The Company's effective tax rate differs from the federal statutory
tax rate for the year ended December 31, 1999 and the three months ended
March 31, 2000 as follows:
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
----------- ------------
Provision (benefit) for income taxes at the federal statutory tax rate................. (34.0%) (34.0%)
State taxes, net of federal tax benefit................................................ (6.0) (6.0)
Foreign income taxes in excess of U.S. statutory rate.................................. 20.0 1.5
Nondeductible intangibles.............................................................. 26.0 9.7
Nondeductible business expense......................................................... 5.0 --
Other, net............................................................................. (2.0) 1.8
---- ------
9.0% (27.0%)
---- ------
---- ------
Income (Loss) before income taxes of the Company's Canadian
operations was ($281,974) and $ 123,474 for the year ended December 31, 1999
and the three month period ended March 31, 2000 respectively.
9
7. RELATED PARTY TRANSACTIONS:
During the three month period ended March 31, 2000, the Company has
charged the Henry Wine Group approximately $194,000 for reimbursement of
administrative services provided by the Company pursuant to an administrative
services agreement that was effective as of January 1, 1998.
8. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:
The Company's United States subsidiaries, Kimberton Enterprises,
Inc. and Grundy Industries, Inc. (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 Senior Notes.
Condensed consolidating financial statements of the Guarantors are
Combined with the Henry Company and are presented below. Separate financial
statements of the Guarantor Subsidiaries are not presented and the Guarantor
Subsidiaries are not filing separate reports under the Exchange Act because
the Subsidiary Guarantors have fully and unconditionally guaranteed the
Senior Notes on a full joint and several basis under the guarantees and
management has determined that separate financial statements and other
disclosures concerning the Guarantor Subsidiaries are not material to
investors.
10
8. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2000
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
--------------- ------------ ------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents... $ 378,698 $ 924,341 -- $ 1,303,039
Accounts receivable, net.... 27,995,225 3,988,113 -- 31,983,338
Inventories................. 13,998,345 3,910,317 -- 17,908,662
Receivables from affiliate.. 6,701,074 2,292,652 ($6,358,853) 2,634,873
Notes receivable............ 514,091 -- -- 514,091
Prepaid expenses and
other current assets....... 2,008,667 147,142 -- 2,155,809
Income tax receivable....... 159,889 -- -- 159,889
------------ ----------- ------------ ------------
Total current assets.... 51,755,989 11,262,565 (6,358,853) 56,659,701
Property and equipment, net... 29,931,125 6,410,757 -- 36,341,882
Investment in subsidiaries.... 8,693,789 -- (8,564,729) 129,060
Cash surrender value
of life insurance, net...... 4,490,179 -- -- 4,490,179
Intangibles, net.............. 26,110,762 2,644,476 -- 28,755,238
Notes receivable.............. 356,827 -- -- 356,827
Note receivable from
affiliate................... 1,863,072 -- -- 1,863,072
Other......................... 260,503 4,024 -- 264,527
------------ ----------- ------------ ------------
Total assets.................. $123,462,246 $20,321,822 ($14,923,582) $128,860,486
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............ $ 9,876,488 $ 2,478,141 -- $ 12,354,629
Accrued expenses............ 9,554,185 921,688 -- 10,475,873
Intercompany payables....... 2,292,652 4,066,201 ($6,358,853) --
Income taxes payable........ -- 59,730 -- 59,730
Notes payable, current
portion.................... 131,681 -- -- 131,681
Borrowings under line
of credit.................. 7,471,536 4,208,390 -- 11,679,926
------------ ----------- ------------ ------------
Total current liabilities. 29,326,542 11,734,150 (6,358,853) 34,701,839
Notes payable................. 434,995 -- -- 434,995
Environmental reserve......... 3,368,225 -- -- 3,368,225
Deferred income taxes......... 3,483,896 1,777,785 -- 5,261,681
Deferred warranty revenue..... 2,565,435 -- -- 2,565,435
Deferred compensation......... 1,048,519 -- -- 1,048,519
Series B Senior Notes......... 81,400,000 -- -- 81,400,000
------------ ----------- ------------ ------------
Total liabilities......... 121,627,612 13,511,935 (6,358,853) 128,780,694
Redeemable convertible
preferred stock.............. 1,802,091 -- -- 1,802,091
Common stock................. 4,691,080 7,194,402 (7,194,402) 4,691,080
Additional paid-in
capital.................... 2,481,650 -- -- 2,481,650
Cumulative translation
adjustment................. -- (832,795) 588,000 (244,795)
Accumulated (deficit)
retained earnings.......... (7,140,187) 448,280 (1,958,327) (8,650,234)
------------ ----------- ------------ ------------
Total shareholders'
equity.................. 32,543 6,809,887 (8,564,729) (1,722,299)
------------ ----------- ------------ ------------
Total liabilities and
shareholders' deficit... $123,462,246 $20,321,822 ($14,923,582) $128,860,486
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
11
8. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------
Net sales............................. $37,039,599 $ 6,894,768 ($2,382,022) $ 41,552,345
Cost of sales......................... 27,451,139 5,442,606 (2,413,474) 30,480,271
------------- ------------ ------------ ------------
Gross profit.................... 9,588,460 1,452,162 31,452 11,072,074
Operating expenses:
Selling, general and
administrative.................. 9,520,779 1,849,064 31,452 11,401,295
Amortization of intangibles........ 761,445 31,209 -- 792,654
------------- ------------ ------------ ------------
Operating loss ................. (693,764) (428,111) -- (1,121,875)
Other expense (income):
Interest expense................... 2,164,630 47,515 -- 2,212,145
Interest and other income, net..... (55,742) -- -- (55,742)
------------- ------------ ------------ ------------
Loss before
benefit for
income taxes.................. (2,802,652) (475,626) -- (3,278,278)
Provision (benefit) for income taxes.. (955,718) 70,551 -- (885,167)
------------- ------------ ------------ ------------
Net loss.......................... ($1,846,934) ($546,177) -- ($2,393,111)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
12
8. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------
Net cash used in operating
activities......................... ($7,109,356) ($271,260) -- ($7,380,616)
------------- ---------- ------------ ------------
Cash flows from investing activities:
Capital expenditures............... (505,145) (364,477) -- (869,622)
Investment in affiliate............ (4,099) -- -- (4,099)
------------- ---------- ------------ ------------
Net cash used in investing
activities.................... (509,244) (364,477) -- (873,721)
------------- ---------- ------------ ------------
Cash flows from financing
activities:
Net borrowings under
line-of-credit agreements...... 7,334,339 1,715,750 -- 9,050,089
Repayments under notes payable
agreements..................... (20,179) (54,353) -- (74,532)
------------- ---------- ------------ ------------
Net cash provided by
financing activities........ 7,314,160 1,661,397 -- 8,975,557
------------- ---------- ------------ ------------
Effect of changes in
exchange rate on cash and
cash equivalents............ -- (103,225) -- (103,225)
------------- ---------- ------------ ------------
Net Increase decrease in cash
and cash equivalents......... (304,440) 922,435 -- 617,995
Cash and cash equivalents,
beginning of period.............. 683,138 1,906 -- 685,044
------------- ---------- ------------ ------------
Cash and cash equivalents,
end of period.................... $ 378,698 $924,341 -- $ 1,303,039
------------- ---------- ------------ ------------
------------- ---------- ------------ ------------
13
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. This discussion should be read in
conjunction with the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2000, of which this commentary is a part, the unaudited
condensed consolidated financial statements and the related notes thereto.
GENERAL
The Company manages its business through two reportable segments or
primary business units with separate management teams, infrastructures,
marketing strategies and customers. The Company's reportable segments are:
the Henry Coatings Division, which develops, manufactures and markets roof
and driveway coatings and paving products, industrial emulsions, air
barriers, and specialty products; and the Resin Technology Division, which
develops, manufactures and sells polyurethane foam for roofing and commercial
construction. The Company evaluates the performance of its operating segments
based on net sales, gross profit and operating income. Intersegment sales and
transfers are not significant.
Summarized financial information concerning the Company's reportable
segments is shown below.
Three Months Ended March 31, 2000
---------------------------------------
Henry Resin
Coatings Technology
Division Division Total
----------- ---------- -----------
Net sales $ 37,085,026 $ 4,467,319 $ 41,552,345
Gross profit 10,277,541 794,533 11,072,074
Operating income (Loss) (1,153,749) 31,874 (1,121,875)
Depreciation and amortization 1,900,015 34,763 1,934,778
Total assets 116,434,540 12,425,946 128,860,486
Capital expenditures 832,873 36,749 869,622
The Company is domiciled in the United States with foreign
operations based in Canada which were acquired in April 1998. Prior to the
April 1998 acquisition of Monsey Bakor, the Company had no foreign
operations. Summarized geographic data related to the Company's operations
for the three months ended March 31, 2000 are as follows:
LONG-LIVED
NET SALES ASSETS
----------- -----------
United States................................. $34,657,577 $63,141,528
Canada........................................ 6,894,768 9,059,257
----------- -----------
Total................................... $41,552,345 $72,200,785
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14
RESULTS OF OPERATIONS
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF HENRY COMPANY
Consolidated Statements of Operations Data:
Three Months Ended March 31
($ in millions)
-----------------------------------------
1999 % of sales 2000 % of sales
-----------------------------------------
Net sales $35.6 100.0% $41.6 100.0%
Cost of sales 25.5 71.6% 30.5 73.3%
----------------------------------------
Gross Profit 10.1 28.4% 11.1 26.7%
Operating expenses:
Selling, general and administrative 10.8 30.4% 11.4 27.4%
Amortization of intangibles 0.9 2.5% 0.8 1.9%
----------------------------------------
Operating loss (1.6) (4.5)% (1.1) (2.6%)
----------------------------------------
Interest expense 2.1 5.9% 2.2 5.3%
Interest and other income, net -- -- -- --
----------------------------------------
Loss before
(benefit) for income taxes (3.7) (10.4%) (3.3) (7.9%)
Benefit for income taxes (1.1) (3.1%) (0.9) (2.2%)
----------------------------------------
Net income (loss) $(2.6) (7.3%) ($2.4) (5.8%)
----------------------------------------
----------------------------------------
15
FOR THE THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1999
NET SALES. The Company's net sales increased to $41.6 million for the three
months ended March 31, 2000, an increase of $6.0 million, or 16.9%, from
$35.6 million for the three months ended March 31, 1999. The increase was
primarily due to the introduction of products into new markets and increased
rainfall in the Southwest.
GROSS PROFIT. The Company's gross profit increased to $11.1 million for the
three months ended March 31, 2000, an increase of $1.0 million, or 9.9%, from
$10.1 million for the three months ended March 31, 1999. The increase was
primarily due to increased sales. Gross profit as a percentage
of net sales decreased to 26.7% for the three months ended March 31, 2000
from 28.4% for the three months ended March 31, 1999. The decrease was
due to increased raw material prices primarily related to petroleum based
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of sales decreased to 27.4% for the
three months ended March 31, 2000 from 30.4% for the three months ended March
31, 1999. Selling, general and administrative expenses increased to $11.4
million for the three months ended March 31, 2000, an increase of $0.6
million, or 5.6%, from $10.8 million for the three months ended March 31,
1999. The increase of $0.6 million was primarily due to an increase of
selling and general and administrative expenses associated with the Company's
continued expansion in the retail and roofing systems segments of the
business.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased 11.1% to
$0.8 million for the three months ended March 31, 2000, from $0.9 million
for the three months ended March 31, 1999. The decrease in amortization
expense was primarily due to the expiration of a noncompete agreement.
OPERATING LOSS. The Company's operating loss was reduced to a loss of $1.1
million for the three months ended March 31, 2000, a decrease of $0.5
million, or 31.3%, from a loss of $1.6 million for the three months ended
March 31, 1999. Operating loss as a percentage of net sales decreased to a
negative 2.6% for the three months ended March 31, 2000, from a loss of 4.5%
as a percentage of net sales for the three months ended March 31, 1999. The
decrease of $0.5 million was primarily attributable to increased net sales
partially offset by higher raw material costs.
INTEREST EXPENSE. Interest expense increased to $2.2 million for the three
months ended March 31, 2000, an increase of $0.1 million, or 4.8%, from $2.1
million for the three months ended March 31, 1999. The increase was primarily
due to working capital borrowings required to support increased sales.
BENEFIT FOR INCOME TAXES. The benefit for income taxes decreased
to $0.9 million for the three months ended March 31, 2000, or 18.2%, from a
benefit for income taxes of $1.1 million for the three months ended March 31,
1999. The decrease is primarily related to the Company's reduced operating
loss for the three months ended March 31, 2000.
NET LOSS. The net loss decreased to $2.4 million for the three months
ended March 31, 2000, a decrease of $0.2 million, or 7.7% from a loss of $2.6
million for the three months ended March 31, 1999. The decrease was
primarily due to increased sales and other factors discussed above.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical requirements for capital 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. The bank
credit facility (the "Credit Facility") 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
March 31, 2000 outstanding balances were $7.5 million for the revolving line
of credit facility, and no amounts were outstanding under for the capital
expenditure facility. The Company also had $4.2 million outstanding under its
Canadian line of credit at March 31, 2000.
Cash flows for the Three Months Ended March 31, 2000 Compared to The Three
Months Ended March 31, 1999
The Company's cash flows from operations were ($7.4) million and
($4.4) million for the three months ended March 31, 2000 and 1999,
respectively. The decrease in operating cash flows from March 31, 2000 to
March 31, 1999 of $3.0 million was primarily attributable to increased
accounts receivables. Cash from financing activities during the three months
ended March 31, 2000 and the three months ended March 31, 1999 was $9.0
million and $7.5 million, respectively. The increase of $1.5 million from
the three months ended March 31, 1999 to the three months ended March 31,
2000 was primarily due to borrowings under the line of credit agreement. Cash
flows used in investing activities were ($0.9) million and ($4.1) million
for the three months ended March 31, 2000 and 1999, respectively. The
decrease in cash used in investing activities was due primarily to the
acquisition of a business for $2.7 million in March 1999 and a decrease in
capital expenditures of $0.5 million.
The Company believes that available cash and cash equivalents, cash
generated from operations and available borrowings under the Credit Facility,
will be sufficient to finance working capital, capital expenditures,
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
does not expect the adoption of this statement to have a significant impact
on the Company's financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which Provides the SEC's views on applying generally accepted accounting
principles to selected revenue recognition issues. The Company is presently
evaluating the impact, if any, that this may have on the Company's revenue
recognition policy.
YEAR 2000 MODIFICATIONS
The Company used internal and external resources to remediate and
test its systems. Costs incurred in addressing the Year 2000 (Y2K) issue were
expensed as incurred and were not material to the Company's financial results.
The Company did not experience any significant malfunctions or
errors in its operating or business systems when the date changed from 1999
to 2000. Based on operations since January 1, 2000, the Company does not
expect any significant impact to its ongoing business as a result of the Y2K
issue. However, it is possible that the full impact of the date change has
not been fully recognized. The Company currently is not aware of any
significant Y2K or similar problems that have arisen for its customers and
suppliers.
17
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
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.
18
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, 1999 audited financial statements and management's
discussion and analysis included in the Company's Annual Report on Form 10-K.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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
The registrant has filed herewith the following exhibits:
27 Financial Data Schedule for the three month period ended March
31, 2000 (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 March 31, 2000:
None
19
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: May 15, 2000 HENRY COMPANY
/s/ Jeffrey A. Wahba
-------------------------------
By: JEFFREY A. WAHBA
Its: Vice President, Secretary
and Chief Financial Officer
20