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, 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 November 14,
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.
HENRY COMPANY
FORM 10-Q
TABLE OF CONTENTS
SEPTEMBER 30, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 (Unaudited)................................ 3
Consolidated Statements of Operations for the three months and nine months ended September 30, 1999
and 2000 (Unaudited)................................................................................................ 4
Consolidated Statement of Changes in Shareholders' Equity for the nine months ended
September 30, 2000 (Unaudited) ..................................................................................... 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 2000 (Unaudited)............... 6
Notes to 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.............................................................................. 22
SIGNATURES..................................................................................................................23
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HENRY COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1999 2000
------------ -------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents............................................................... $ 685,044 $ 2,150,158
Trade accounts receivable, net of allowance for
doubtful accounts of $1,027,825 and $1,221,439 for
1999 and 2000, respectively.......................................................... 21,349,756 36,997,514
Inventories............................................................................. 15,606,752 19,563,729
Receivables from affiliate.............................................................. 2,144,212 2,464,877
Notes receivable........................................................................ 516,210 533,628
Prepaid expenses and other current assets............................................... 2,564,743 2,382,786
Income tax receivable................................................................... - 1,111,858
------------- ------------
Total current assets............................................................... 42,866,717 65,204,550
Property and equipment, net................................................................ 36,751,720 34,942,704
Cash surrender value of life insurance, net................................................ 4,340,388 4,571,506
Intangibles, net........................................................................... 29,401,525 27,390,725
Notes receivable........................................................................... 354,462 355,268
Note receivable from affiliate............................................................. 1,863,072 1,863,072
Other...................................................................................... 349,326 104,436
------------- ------------
Total assets....................................................................... $115,927,210 $134,432,261
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable........................................................................ $ 7,662,800 $ 13,974,123
Accrued expenses........................................................................ 8,328,487 12,030,089
Income taxes payable.................................................................... 258,117 83,947
Notes payable, current portion.......................................................... 124,994 92,736
Borrowings under lines of credit........................................................ 2,629,837 17,063,891
------------- ------------
Total current liabilities.......................................................... 19,004,235 43,244,786
Notes payable.............................................................................. 516,214 424,204
Environmental reserve...................................................................... 3,375,025 3,327,975
Deferred income taxes...................................................................... 5,428,817 5,001,405
Deferred warranty revenue.................................................................. 2,563,231 2,682,702
Deferred compensation...................................................................... 1,071,073 929,886
Series B Senior Notes...................................................................... 81,400,000 81,400,000
------------- ------------
Total liabilities.................................................................. 113,358,595 137,010,958
Commitments and contingencies
Redeemable convertible preferred stock..................................................... 1,764,594 1,878,681
Shareholders' equity:
Common stock.......................................................................... 4,691,080 4,691,080
Additional paid-in capital............................................................ 2,519,147 2,405,060
Cumulative translation adjustment..................................................... (149,083) (459,668)
Accumulated deficit................................................................... (6,257,123) (11,093,850)
------------- ------------
Total shareholders' equity......................................................... 804,021 (4,457,378)
------------- ------------
Total liabilities and shareholders' equity......................................... $115,927,210 $134,432,261
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
HENRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1999 2000 1999 2000
----------- ----------- ------------ ------------
Net sales................................... $54,796,067 $56,374,757 $137,489,244 $149,467,826
Cost of sales............................... 36,621,353 39,581,694 95,803,602 108,857,793
----------- ----------- ------------ ------------
Gross profit.......................... 18,174,714 16,793,063 41,685,642 40,610,033
Operating expenses:
Selling, general and administrative... 13,318,471 12,689,644 35,948,479 36,869,765
Restructuring charges................. -- 237,200 -- 237,200
Amortization of intangibles........... 906,460 791,136 2,684,221 2,373,408
----------- ----------- ------------ ------------
Operating income...................... 3,949,783 3,075,083 3,052,942 1,129,660
Other expense (income):
Interest expense...................... 2,304,130 2,524,835 6,789,734 7,241,604
Interest and other income, net........ (54,167) (60,565) (155,979) (174,891)
----------- ----------- ------------ ------------
Income (loss) before provision (benefit)
for income taxes..................... 1,699,820 610,813 (3,580,813) (5,937,053)
Provision (benefit) for income taxes........ 1,107,316 682,232 (312,002) (1,100,326)
----------- ----------- ------------ ------------
Net income (loss)..................... $ 592,504 $ (71,419) $ (3,268,811) $ (4,836,727)
=========== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
HENRY COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30, 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.. -- -- (114,087) -- -- (114,087)
Comprehensive income (loss):
Net loss..................... -- -- -- -- (4,836,727) (4,836,727)
Other comprehensive income:
Change in cumulative
translation adjustment.. -- -- -- (310,585) -- (310,585)
----------
Total comprehensive
income (loss)................ -- -- -- -- -- (5,147,312)
------- ---------- --------------- ----------- ----------- ----------
Balance, September 30, 2000..... 227,500 $4,691,080 $ 2,405,060 ($459,668) $(11,093,850) $(4,457,378)
======= ========== =============== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
1999 2000
----------- ----------
Cash flows from operating activities:
Net loss............................................................................... ($3,268,811) ($4,836,727)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................................... 2,458,833 3,295,413
Provision for doubtful accounts..................................................... 399,280 301,255
Deferred income taxes............................................................... (398,359) (427,412)
Noncompetition and goodwill amortization............................................ 2,890,980 2,377,106
(Gain) loss on disposal of property and equipment and other assets.................. (1,625) 134,503
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable............................................................... (13,940,520) (15,949,013)
Inventories....................................................................... (2,108,776) (3,956,977)
Receivables from affiliates....................................................... (68,153) (320,665)
Notes receivable.................................................................. 23,211 (18,224)
Cash surrender value of life insurance............................................ (303,009) (231,118)
Other assets...................................................................... (1,136,621) 297,332
Income tax receivable............................................................. (413,597) (1,111,858)
Accounts payable and accrued expenses............................................. 7,065,025 9,791,704
Deferred warranty revenue......................................................... 292,050 119,471
Deferred compensation............................................................. 37,456 (141,187)
----------- ----------
Net cash used in operating activities ...................................... (8,472,636) (10,676,397)
----------- ----------
Cash flows from investing activities:
Capital expenditures................................................................... (2,868,683) (2,383,311)
Proceeds from the disposal of property and equipment and other assets.................. 1,625 220,378
Acquisition of business, net of cash acquired.......................................... (2,613,931) --
Investment in affiliate................................................................ (25,756) 7,080
----------- ----------
Net cash used in investing activities....................................... (5,506,745) (2,155,853)
----------- ----------
Cash flows from financing activities:
Net borrowings under line-of-credit agreements......................................... 3,210,046 14,434,054
Repayments under notes payable agreements.............................................. (409,717) (146,363)
Borrowings under notes payable agreements.............................................. 67,871 22,095
----------- ----------
Net cash provided by financing activities......................... 2,868,200 14,309,786
----------- ----------
Effect of exchange rate changes on cash and cash equivalents.............................. 122,842 (12,422)
----------- ----------
Net increase (decrease) in cash and cash equivalents........................ (10,988,339) 1,465,114
Cash and cash equivalents, beginning of period............................................ 12,022,676 685,044
----------- ----------
Cash and cash equivalents, end of period.................................................. $ 1,034,337 $2,150,158
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Page 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 and nine
months ended September 30, 2000 are not necessarily indicative of the operating
results for the full fiscal year.
The preparation of the consolidated 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. In October
2000, the SEC issued additional guidance in the form of its Frequently Asked
Questions and Answers publication. The Company is presently evaluating the
impact, if any, that this may have on the Company's revenue recognition
policy.
Page 7
3. INVENTORIES:
Inventories consist of the following:
December 31, September 30,
1999 2000
------------ -------------
Raw materials............................ $ 7,333,325 $ 9,196,866
Finished goods........................... 8,273,427 10,366,863
----------- -----------
$15,606,752 $19,563,729
=========== ===========
Page 8
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, September 30,
1999 2000
------------- -------------
Buildings..................................... $14,621,684 $ 14,488,246
Machinery and equipment....................... 26,799,922 26,805,066
Office furniture and equipment................ 6,236,473 6,189,739
Automotive equipment.......................... 1,521,456 1,473,006
Leasehold improvements........................ 3,183,658 3,183,658
Other......................................... 454,834 454,834
------------- -------------
52,818,027 52,594,549
Less, accumulated depreciation and
amortization.............................. 20,449,525 24,022,768
------------- -------------
32,368,502 28,571,781
Land.......................................... 3,475,849 3,260,677
Construction-in-progress...................... 907,369 3,110,246
------------- -------------
$36,751,720 $ 34,942,704
============= =============
Page 9
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 September 30, 2000:
Long-Term debt consists of the following at September 30, 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 9.5%, maturing from 2000 to 2013... 17,580,831
-----------
98,980,831
Less, current maturities...................................... 17,156,627
-----------
$81,824,204
===========
Page 10
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 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% (9.5% at September 30, 2000). At September 30, 2000, $13,303,816 was
outstanding under the credit facility.
The Company also has a Canadian bank line of credit, subject to annual
confirmation, aggregating $5,324,000 with interest charged at prime plus 0.5%
(7.5% at September 30, 2000). At September 30, 2000, $3,760,075 was outstanding
under this Canadian line.
6. INCOME TAXES:
The significant components of the provision (benefit) for income taxes for
the year ended December 31, 1999 and nine months ended September 30, 2000
are as follows:
Year Ended Nine Months Ended
December 31, 1999 September 30, 2000
----------------- ------------------
Current:
Federal.......................... -- $(1,112,140)
State............................ -- (196,260)
Foreign.......................... 681,896 496,641
---------- -----------
$ 681,896 $ (811,759)
---------- -----------
Deferred:
Federal.......................... (207,557) (226,607)
State............................ (170,370) (61,960)
Foreign.......................... -- --
---------- -----------
(377,927) (288,567)
---------- -----------
$ 303,969 $(1,100,326)
========== ===========
Page 11
The Company's effective tax rate differs from the federal statutory tax
rate for the twelve and nine months ended December 31, 1999 and September 30,
2000 respectively as follows:
Nine Months
Year Ended Ended
December 31, September 30,
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 8.4
Nondeductible intangibles.................................................. 26.0 15.2
Nondeductible business expenses 5.0 --
Other, net................................................................. (2.0) (2.1)
----- -----
9.0% (18.5)%
===== =====
Income (loss) before income taxes of the Company's Canadian operations
was ($281,974) and $1,083,156 for the year ended December 31, 1999 and the nine
month period ended September 30, 2000 respectively.
7. RELATED PARTY TRANSACTIONS:
During the nine month period ended September 30, 2000, the Company has
charged the Henry Wine Group approximately $581,000 for reimbursement of
administrative services provided by the Company pursuant to an administrative
services agreement that was effective as of January 1, 1998 and has been
subsequently renewed and modified on an annual basis.
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 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.
Page 12
8. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
and Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
--------------- ------------ ------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents... $ 2,148,326 $ 1,832 -- $ 2,150,158
Accounts receivable, net.... 32,051,847 4,945,667 -- 36,997,514
Inventories................. 14,296,516 5,267,213 -- 19,563,729
Receivables from affiliate.. 6,468,372 2,780,495 $ (6,783,990) 2,464,877
Notes receivable............ 533,628 -- -- 533,628
Prepaid expenses and
other current assets....... 2,223,203 159,583 -- 2,382,786
Income tax receivable....... 1,111,858 -- -- 1,111,858
------------ ------------ ------------ ------------
Total current assets.... 58,833,750 13,154,790 (6,783,990) 65,204,550
Property and equipment, net... 28,860,773 6,081,931 -- 34,942,704
Investment in subsidiaries.... 8,564,729 -- (8,564,729) --
Cash surrender value
of life insurance, net...... 4,571,506 -- -- 4,571,506
Intangibles, net.............. 24,899,768 2,490,957 -- 27,390,725
Notes receivable.............. 355,268 -- -- 355,268
Note receivable from
affiliate................... 1,863,072 -- -- 1,863,072
Other......................... 103,882 554 -- 104,436
------------ ----------- ------------ ------------
Total assets.................. $128,052,748 $21,728,232 $(15,348,719) $134,432,261
============ =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............ $ 8,941,975 $ 5,032,148 -- $ 13,974,123
Accrued expenses............ 10,822,785 1,207,304 -- 12,030,089
Intercompany payables....... 2,780,495 4,003,495 $ (6,783,990) --
Notes payable, current
portion.................... 92,736 -- -- 92,736
Income taxes payable........ -- 83,947 -- 83,947
Borrowings under lines
of credit.................. 13,303,816 3,760,075 -- 17,063,891
------------ ----------- ------------ ------------
Total current liabilities. 35,941,807 14,086,969 (6,783,990) 43,244,786
Notes payable................. 424,204 -- -- 424,204
Environmental reserve......... 3,327,975 -- -- 3,327,975
Deferred income taxes......... 3,286,495 1,714,910 -- 5,001,405
Deferred warranty revenue..... 2,682,702 -- -- 2,682,702
Deferred compensation......... 929,886 -- -- 929,886
Series B Senior Notes......... 81,400,000 -- -- 81,400,000
------------ ----------- ------------ ------------
Total liabilities......... 127,993,069 15,801,879 (6,783,990) 137,010,958
Redeemable convertible
preferred stock.............. 1,878,681 -- -- 1,878,681
Common stock................. 4,691,080 7,194,402 (7,194,402) 4,691,080
Additional paid-in
capital.................... 2,405,060 -- -- 2,405,060
Cumulative translation
adjustment................. -- (1,047,668) 588,000 (459,668)
Accumulated (deficit)
retained earnings.......... (8,915,142) (220,381) (1,958,327) (11,093,850)
------------ ----------- ------------ ------------
Total shareholders'
equity.................. (1,819,002) 5,926,353 (8,564,729) (4,457,378)
------------ ----------- ------------ ------------
Total liabilities and
shareholders' deficit... $128,052,748 $21,728,232 $(15,348,719) $134,432,261
============ =========== ============ ============
Page 13
8. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------
Net sales............................. $130,393,329 $26,562,755 $(7,488,258) $149,467,826
Cost of sales......................... 95,340,196 21,081,881 (7,564,284) 108,857,793
------------ ------------ ------------ ------------
Gross profit.................... 35,053,133 5,480,874 76,026 40,610,033
Operating expenses:
Selling, general and
administrative.................. 30,856,240 5,937,499 76,026 36,869,765
Restructuring charges.............. 237,200 -- -- 237,200
Amortization of intangibles........ 2,279,781 93,627 -- 2,373,408
------------ ------------ ------------ ------------
Operating income (loss)......... 1,679,912 (550,252) -- 1,129,660
Other expense (income):
Interest expense................... 7,073,659 167,945 -- 7,241,604
Interest and other income, net..... (174,891) -- -- (174,891)
------------ ------------ ------------ ------------
Loss before provision (benefit)
for income taxes.............. (5,218,856) (718,197) -- (5,937,053)
Provision (benefit) for income taxes.. (1,596,967) 496,641 -- (1,100,326)
------------ ------------ ------------ ------------
Net loss.......................... ($3,621,889) ($1,214,838) -- ($4,836,727)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------
Net cash used in operating
activities......................... ($10,069,014) ($607,383) -- ($10,676,397)
------------ ---------- ------------ ------------
Cash flows from investing activities:
Capital expenditures............... (1,789,960) (593,351) -- (2,383,311)
Proceeds from the disposal of
property and equipment.......... 220,378 -- -- 220,378
Investment in affiliate............ 7,080 -- -- 7,080
------------ ---------- ------------ ------------
Net cash used in investing
activities.................... (1,562,502) (593,351) -- (2,155,853)
------------ ---------- ------------ ------------
Cash flows from financing
activities:
Net borrowings under
line-of-credit agreements...... 13,166,619 1,267,435 -- 14,434,054
Repayments under notes payable
agreements..................... (92,010) (54,353) -- (146,363)
Borrowings under notes payable
agreements.................... 22,095 -- -- 22,095
------------ ---------- ------------ ------------
Net cash provided by
financing activities........ 13,096,704 1,213,082 -- 14,309,786
------------ ---------- ------------ ------------
Effect of changes in
exchange rate on cash and
cash equivalents............ -- (12,422) -- (12,422)
------------ ---------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents........ 1,465,188 (74) -- 1,465,114
Cash and cash equivalents,
beginning of period.............. 683,138 1,906 -- 685,044
------------ ---------- ------------ ------------
Cash and cash equivalents,
end of period.................... $ 2,148,326 $ 1,832 -- $ 2,150,158
============ ========== ============ ============
9. RESTRUCTURING CHARGES
In the third quarter of 2000, the Company announced a realignment of
its cost structure designed to increase operating efficiencies and improve
profitability. The realignment resulted in a $237,200 restructuring charge in
the third quarter 2000 and reflected severance payments to employees that
have been terminated due to the permanent elimination of their positions
under the program.
Page 14
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 September 30,
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.
Nine Months Ended September 30, 2000
----------------------------------
Henry Resin
Coatings Technology
Division Division Total
--------- ---------- --------
Net sales 132,671,053 $16,796,773 $149,467,826
Gross profit 37,679,985 2,930,048 40,610,033
Operating income (Loss) 819,467 310,193 1,129,660
Depreciation and amortization 5,547,203 125,316 5,672,519
Total assets 121,571,400 12,860,861 134,432,261
Capital expenditures 2,305,689 77,622 2,383,311
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 nine months ended
September 30,2000 are as follows:
Nine Months Ended
September 30, 2000
------------------
Net Long-Lived
Sales Assets
United States.................. $122,905,071 $60,654,269
Canada............................. 26,562,755 8,573,442
------------ -----------
Total........................ 149,467,826 69,227,711
=========== ===========
Page 15
RESULTS OF OPERATIONS
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF HENRY COMPANY
Consolidated Statements of Operations Data:
Three Months Ended September 30 Nine Months Ended September 30
($ in millions) ($ in millions)
----------------------------------------- -----------------------------------------
1999 % of sales 2000 % of sales 1999 % of sales 2000 % of sales
----------------------------------------- -----------------------------------------
Net sales $ 54.8 100.0% $ 56.4 100.0% $137.5 100.0% $149.5 100.0%
Cost of sales 36.6 66.8% 39.6 70.2% 95.8 69.7% 108.9 72.8%
Gross Profit 18.2 33.2% 16.8 29.8% 41.7 30.3% 40.6 27.2%
Operating expenses:
Selling, general
And administrative 13.4 24.5% 12.7 22.5% 36.0 26.2% 36.9 24.7%
Restructuring charges - - 0.2 0.4% - - 0.2 0.1%
Amortization of Intangibles 0.9 1.6% 0.8 1.4% 2.7 2.0% 2.4 1.6%
----------------------------------------- -----------------------------------------
Operating income 3.9 7.1% 3.1 5.5% 3.0 2.2% 1.1 0.7%
----------------------------------------- -----------------------------------------
Interest expense 2.3 4.2% 2.5 4.4% 6.8 4.9% 7.2 4.8%
Interest and other (0.1) (0.2%) (0.1) (0.2)% (0.2) (0.1)% (0.2) (0.1)%
income
----------------------------------------- -----------------------------------------
Income (loss) before provision
(benefit) for taxes 1.7 3.1% 0.6 1.1% (3.6) (2.6%) (5.9) (3.9%)
Provision (benefit) for taxes 1.1 2.0% 0.7 1.2% (0.3) (0.2%) (1.1) (0.7%)
----------------------------------------- -----------------------------------------
Net income (loss) $ 0.6 1.1% $ (0.1) (0.2%) $ (3.3) (2.4%) $ (4.8) (3.2%)
======================================== =========================================
Page 16
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES. The Company's net sales increased to $56.4 million for the three
months ended September 30, 2000, an increase of $1.6 million, or 2.9%, from
$54.8 million for the three months ended September 30, 1999. The increase was
primarily due to price increases enacted in the second and third quarters of
2000.
GROSS PROFIT. The Company's gross profit decreased to $16.8 million for the
three months ended September 30, 2000, a decrease of $1.4 million, or 7.7%, from
$18.2 million for the three months ended September 30, 1999. Gross profit
decreased as a percentage of net sales to 29.8% for the three months ended
September 30, 2000 from 33.2% for the three months ended September 30, 1999. The
percentage decrease was primarily attributable to increased raw material costs
primarily related to petroleum based products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales decreased to 22.5% for the
three months ended September 30, 2000 from 24.5% for the three months ended
September 30, 1999. Selling, general and administrative expenses decreased to
$12.7 million for the three months ended September 30, 2000, a decrease of $0.7
million, or 5.2%, from $13.4 million for the three months ended September 30,
1999. The decrease of $0.7 was primarily attributable to reduced payroll costs
as well as other operating expenses.
RESTRUCTURING CHARGES. Restructuring charges amounted to $0.2 million for the
period ended September 30, 2000. These charges primarily relate to the
reorganization of certain operational and marketing functions.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles amounted to $0.8
million for the three months ended September 30, 2000. The decrease in
amortization expense was primarily due to the expiration of a noncompete
agreement.
OPERATING INCOME (LOSS). Operating income decreased to $3.1 million for the
three months ended September 30, 2000, a decrease of $0.8 million, or 20.5%,
from income of $3.9 million for the three months ended September 30, 1999.
Operating income as a percentage of net sales decreased to 5.5% for the three
months ended September 30, 2000, from operating income of 7.1% as a
percentage of net sales for the three months ended September 30, 1999. The
decrease of $0.8 million was primarily attributable to higher raw material
costs partially offset by increased sales.
INTEREST EXPENSE. Interest expense increased to $2.5 million for the three
months ended September 30, 2000, an increase of $0.2 million, or 8.7%, from $2.3
million for the three months ended September 30, 1999, primarily as a result of
the interest incurred on the Senior Notes used to finance the Monsey Bakor
acquisition.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes
decreased to $0.7 million for the three months ended September 30, 2000, a
decrease of $0.4 million, or 36.4%, from a provision for income taxes of $1.1
million for the three months ended September 30, 1999. The decrease is
primarily related to the Company's decreased operating income for the three
months ended September 30, 2000.
Page 17
NET INCOME (LOSS). The net loss was $0.1 million for the three months ended
September 30, 2000, a decrease of $0.7 million, or 116.7% from the net income
of $0.6 million for the three months ended September 30, 1999. The decrease
of $0.7 million was primarily due to increased raw material costs,
restructuring costs, interest expense and other factors discussed above.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
NET SALES. The Company's net sales increased to $149.5 million for the nine
months ended September 30, 1999, an increase of $12.0 million, or 8.7%, from
$137.5 million for the nine months ended September 30, 1999. The increase was
primarily due to the introduction of products into new markets, growth with
several existing major accounts and increased rainfall in the southwest
during the first quarter of 2000.
GROSS PROFIT. The Company's gross profit decreased to $40.6 million for the
nine months ended September 30, 1999, a decrease of $1.1 million, or 2.6%,
from $41.7 million for the nine months ended September 30, 1998. Gross profit
decreased as a percentage of net sales to 27.2% for the nine months ended
September 30, 2000 from 30.3% for the nine months ended September 30, 1999.
The decrease was attributable to increased raw material costs primarily
related to petroleum based products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of revenue decreased to 24.7% for the
nine months ended September 30, 2000 from 26.2% for the nine months ended
September 30, 1999. Selling, general and administrative expenses increased to
$36.9 million for the nine months ended September 30, 2000, an increase of
$0.9 million, or 2.5%, from $36.0 million for the nine months ended September
30, 1999. The increase of $0.9 million was primarily due to the more than
commensurate increase in net sales and the Company's continued support of its
national brand strategy.
RESTRUCTURING CHARGES. Restructuring charges amounted to $0.2 million for the
nine months ended September 30, 2000. These charges primarily relate to the
reorganization of certain operational and marketing functions.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased to $2.4
million for the nine months ended September 30, 2000, a decrease of $0.3
million, or 11.1%, from $2.7 million for the nine months ended September 30,
1999. The decrease in amortization expense was primarily due to the expiration
of a noncompete agreement.
OPERATING INCOME. Operating income decreased to $1.1 million for the nine months
ended September 30, 2000, a decrease of $1.9 million, or 63.3%, from income of
$3.0 million for the nine months ended September 30, 1999. Operating income as a
percentage of net sales decreased to 0.7% for the nine months ended September
30, 2000, from 2.2% as a percentage of net sales for the nine months ended
September 30, 1999. The decrease of $1.9 million was primarily attributable to
increased net sales offset by higher raw material costs.
INTEREST EXPENSE. Interest expense increased to $7.2 million for the nine months
ended September 30, 2000, an increase of $0.4 million, or 5.9%, from $6.8
million for the nine months ended September 30, 1999. The increase was primarily
due to increased working capital borrowings required to support increased
sales levels.
PROVISION (BENEFIT) FOR INCOME TAXES. The benefit for income taxes increased to
$1.1 million for the nine months ended September 30, 2000, or 266.7%, from
a benefit for income taxes of $0.3 million for the nine months ended September
30, 1999. The increased benefit is primarily attributable to the Company's
increased loss before provision for taxes.
Page 18
NET INCOME (LOSS). The net loss increased to $4.8 million for the nine months
ended September 30, 2000, an increase of $1.5 million, or 45.5% from a loss of
$3.3 million for the nine months ended September 30, 1999. The increase of $1.5
million was primarily due to increased sales offset by other factors discussed
above.
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. Concurrently with the
consummation of the Offering and the acquisition of Monsey Baker on April 22,
1998, the Company entered into a new bank credit facility (the "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, 2000 outstanding
balances were $13.3 million for the revolving line of credit facility and no
amounts were outstanding under for the capital expenditure facility. The Company
also had $3.8 million outstanding under its Canadian line of credit at September
30, 2000.
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
The Company's cash flows from operations were ($10.7) million and
($8.5) million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease from September 30, 1999 to September 30, 2000 of
$2.2 million was primarily attributable to increased inventories and
receivables partially offset by an increase in accounts payable and accrued
expenses. Cash flows used in investing activities were ($2.2) million and
($5.5) million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in cash used in investing activities of $3.3
million was primarily due to the acquisition of a business for $2.7 million
in March 1999 and reduced capital expenditures of $0.5 million. Cash flows
from financing activities during the nine months ended September 30, 2000 and
the nine months ended September 30, 1990 was $14.3 million and $2.9 million,
respectively. The increase in financial cash flows of $11.4 million from the
nine months ended September 30, 1999 to the nine months ended September 30,
2000 was primarily due to borrowings under the line of credit agreement.
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 timeframe.
Page 19
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 ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which provides the SEC's views on applying generally
accepted accounting principles to selected revenue recognition issues. In
October 2000, the SEC issued additional guidance in the form of its Frequently
Asked Questions and Answers publication. The Company is presently evaluating
the impact, if any, that this may have on the Company's revenue recognition
policies.
YEAR 2000 MODIFICATIONS
The Company used internal and external resources to remediate and
test its information 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.
Page 20
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.
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.
Page 21
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 nine month period ended September 30,
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 September 30, 2000:
None
Page 22
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 14, 2000 HENRY COMPANY
/s/ JEFFREY A. WAHBA
------------------------------------
By: Jeffrey A. Wahba
Its: Vice President, Secretary
and Chief Financial Officer
Page 23