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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK
ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934

For the transition period from ______________________________________

Commission file number 333-59485

HENRY COMPANY
(Exact Name of Registrant as Specified in its Charter)

CALIFORNIA 95-3618402
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

2911 SLAUSON AVENUE, 90255
HUNTINGTON PARK, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)

Registrant's telephone number, including area code (323) 583-5000

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH
CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None

Securities registered pursuant to Section 12(g) of the Act:

10% SERIES B SENIOR NOTES DUE 2008
(Title of Class)

Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

As of December 31, 1998, there were outstanding 221,500 shares of the
Registrant's common stock ("Common Stock") and 6,000 shares of the Registrant's
class A common stock ("Class A Common Stock"). As of December 31, 1998, no
shares of the Common Stock or the Class A Common Stock were held by
non-affiliates of the Registrant.

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HENRY COMPANY

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 31, 1998

TABLE OF CONTENTS

ITEM NO. REPORT PAGE
- --------- -------------

PART I

1. Business.................................................................................. 2
2. Properties................................................................................ 9
3. Legal Proceedings......................................................................... 11
4. Submission of Matters to a Vote of Security Holders....................................... 12

PART II

5. Market for the Registrant's Common Equity and Related Shareholder Matters................. 13
6. Selected Financial Data................................................................... 13
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 15
8. Financial Statements and Supplementary Data............................................... 21
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 21

PART III

10. Directors and Executive Officers of the Registrant........................................ 22
11. Executive Compensation.................................................................... 25
12. Security Ownership of Certain Beneficial Owners and Management............................ 29
13. Certain Relationships and Related Transactions............................................ 30

PART IV

14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K......................... 31

FORWARD LOOKING STATEMENTS

Statements in this Form 10-K that are not historical facts are hereby
identified as "forward looking statements" for the purpose of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Act"). Henry Company ("Henry" or the "Company") cautions readers
that such "forward looking statements," including without limitation those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs and income, wherever they may appear in this document
or in other statements attributable to the Company, are necessarily estimates
reflecting the best judgment of the Company's senior management and involve a
number of risks and uncertainties that could cause actual results to differ
materially from those suggested by the "forward looking statements." Such
"forward looking statements" should, therefore, be considered in light of
various important factors ("Cautionary Statements"), including those set forth
below and others set forth from time to time in the Company's reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC").

These "forward looking statements" are found at various places throughout
this document. Additionally, the discussions herein under the captions
"Business," "Properties," "Legal Proceedings," and "Management's Discussion and
Analysis of Financial Condition and Results of Operation" are susceptible to the
risks and uncertainties discussed under "Risk Factors" and elsewhere in this
Form 10-K. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may", "will," "expect,"
"should," "intend," "estimate," "anticipate," "believe," or "continue" or the
negative thereof or variations thereon or similar terminology. Moreover, the
Company, through its senior management or persons acting on its behalf, may from
time to time make "forward looking statements" about the matters described
herein or other matters concerning the Company and such statements are subject
to the qualifications set forth herein and in the Cautionary Statements. The
Company disclaims any intent or obligation to update publicly or revise "forward
looking statements."

PART I

ITEM 1. BUSINESS

GENERAL

Beginning in 1988, the Company's management focused on expanding the Henry
brand from its Southern California base initially through the acquisition of
regional roof coatings manufacturers and distributors in contiguous regions--the
Southwest, the Northwest, Northern California and the Rocky Mountain region. In
1998, the Company became a national organization by acquiring Monsey Bakor,
which has served the U.S. and Canadian markets for over 50 years as a leading
manufacturer and distributor of a broad spectrum of building products for
residential and commercial use with a product line consisting of roof coatings,
adhesives and membranes, roofing and air barrier systems as well as specialized
industrial emulsions.

DIVISIONS

The Company's two major divisions are the Henry Coatings Division and the
Resin Technology Division.

HENRY COATINGS DIVISION

The Henry Coatings Division, which accounted for the bulk of the Company's
1998 net sales, develops, manufactures and markets coatings, sealants and
membranes for construction, industrial, building materials and other specialty
applications. The Company also manufactures wax-based emulsions for the gypsum
industry.

PRODUCTS

Roofing products represent the majority of the Coatings Division's total
revenues. Henry's roofing products are designed to address the problems of water
invasion, wind erosion and ultraviolet damage. Henry offers a full line of
liquid roof coatings and adhesives including both solvent and water-based
products. In addition to roof coatings and mastics, Henry manufactures
high-quality modified bitumen roofing membrane products (SBS) designed to be
used in roofing systems that can meet the challenge of the elements encountered
throughout North America.

The Company offers a full line of reflective coatings designed to improve
roof aesthetics and aid in the conservation of energy through their reflective
qualities. Henry's reflective coatings product line includes both white acrylic
and solvent-based coatings and high-quality aluminum products and the
accessories needed to protect roofs for years.

Henry's industrial emulsions are used as coating, sizing, strengthening and
moisture-proofing additives by manufacturers of fiber products such as gypsum
wallboard, insulation board, gaskets, paper board, and glass fibers. The
Company's primary emulsion product, wax-based industrial emulsions, are
specifically used by manufacturers of gypsum wallboards. Sales of industrial
emulsions have increased in recent years partially due to increased
environmental restrictions on volatile organic compound emissions, which has
created a demand for emulsion-based products over solvent-based products. The
Company's wax-based emulsions are manufactured with proprietary and patented
processes that management believes contributes to higher margins relative to
those of competitors.

Driveway maintenance and paving products manufactured by Henry are used for
the asphalt highway market and the preventative maintenance of asphalt parking
lots and driveways. Henry Company produces polymerized asphalt, an asphalt
binder that is a key ingredient of paving asphalts.

The Company's air barrier systems are designed to reduce air flows through
exterior walls of buildings. The movement of air into a building (infiltration)
and out of a building (exfiltration) is caused by pressure differences produced
by wind, chimney effect and pressurization. If air flows through a building and
exfiltrates, it can deposit moisture on the cold masonry cladding, causing brick
or stone to undergo major changes due to moisture absorption. This dampness can
cause dimensional changes and accelerate the deterioration process.
Moisture-laden air from a humidified building can also develop into ice under
freezing conditions, causing displacement of the exterior masonry cladding,
corrosion, and lower energy efficiency. The advantage of the Company's
prefabricated modified bitumen sheet is that it provides a flexible air barrier
membrane capable of bridging construction gaps and absorbing deflection. The
Company's line of air barriers can be installed into existing buildings on
either internal or external walls or used in the construction of new buildings.
In 1986, Canada required air barriers in all buildings as an amendment to the
National Building Code. In the United States, however, there is no national
standard and the air barrier market remains in its infancy.

The Company's specialty products include protective coatings for a variety
of industrial and commercial applications, such as specialty asphalt coatings to
protect wood, metal, mortar or thermal insulation. The Company manufactures
undercoatings for mobile homes, as well as both solvent and water-based
rust-proofing products for the automobile industry. The Company also produces a
broad range of paint products for interior and exterior use and a number of
coatings for wood preservation and agricultural purposes.

The Company's sealant line has three distinct product categories: sealants
for construction applications, hatch cover sealants for ocean freighters, and
preformed adhesive waterstops for expansion joint applications on construction
projects. Products include a preformed plastic gasket for precast concrete
structures, which provides watertight sealing for joints such as those on
underground concrete drainage and manhole structures. These products are also
used for sealing hatch covers on ships to prevent water damage to cargoes that
can occur in heavy seas. There is also a preformed plastic adhesive waterstop
which is used as a construction joint sealant in poured-in-place concrete
structures. Henry Company believes this product allows for an easier, more
reliable and more efficient sealing method than the traditional PVC-type
waterstop.

MANUFACTURING

For purposes of organizing its manufacturing process, the Company uses seven
related product groups. The product groups are: cold applied liquid coatings,
cements and adhesives; asphalt, coal tar and wax emulsions; acrylic-based roof
and insulation coatings; hot melt rubberized asphalt roofing and waterproofing
products; styrene-butadiene-styrene ("SBS") modified bitumen membranes, air
barrier and waterproofing membranes; specialty adhesives; and specialty
preformed asphaltic tapes. The facilities at which these products are produced
are shown in Item 2 ("Properties").

The key materials used in the production of roofing and pavement products
are asphalt, mineral spirits, various fibers, resins, and polyester and glass
matting. For the production of industrial emulsions, the primary material is
refined wax. These raw materials are generally available on a regional basis and
supply disruptions are very rare. The Company maintains multiple sourcing
arrangements for all of its key materials and has experienced low price
volatility over the past several years. In addition to raw materials, packaging
supplies represent a meaningful portion of production cost.

The Company, like many of its competitors, uses fibers such as chrysotile
asbestos in its production process. Management believes that its use of
chrysotile asbestos is in accordance with regulations of the Occupational Safety
and Health Administration ("OSHA"). OSHA requires that chrysotile asbestos
fibers

not be exposed to an open-air environment. In the Company's production process,
the cellulose or chrysotile asbestos fiber is pumped through a negative pressure
fluffer that separates the fibers for optimal dispersion in the product mixture.
The fibers are then mixed into and fully encapsulated by the asphalt. Once
encapsulated the fibers are "locked" into the asphalt cutback and cannot be
physically separated from the product. OSHA and other regulatory bodies have
determined that encapsulation renders the chrysotile asbestos harmless. The
Environmental Protection Agency ("EPA") does not regulate or enforce any special
procedures for the application of chrysotile asbestos-containing roof coatings
or sealants.

Management believes that chrysotile asbestos-fibered roofing cements have
better application quality and durability as compared to those containing
chrysotile asbestos substitutes. The primary industries that currently continue
to use chrysotile asbestos are those manufacturing chrysotile asbestos-cement
pipe and shingles, automobile brake pads, gaskets and roof coatings and
sealants. Although chrysotile asbestos-cement pipe and shingles are no longer
manufactured in the United States, these products are still currently sold in
various parts of the country. Domestic manufacturers of brake pads, gaskets and
roof coatings used roughly 22,000 tons of chrysotile asbestos in 1996 because of
its strength, durability and heat resistance. Although some roofing products
manufacturers have switched to an exclusively non-asbestos line, some of the
leading firms in the industry continue to use asbestos in at least some of their
products.

SALES, MARKETING AND DISTRIBUTION

Due to the many products manufactured by the Henry Coatings Division, the
Company markets its products by focusing on four business segments. These
segments are: Retail; Industrial, Commercial and Institutional ("ICI");
Specialty Products; and International.

The Retail segment is focused on selling products to national home center
chains, retail building material suppliers, hardware distributors, paint and
sundry distributors, farm and hardware cooperatives, and mass merchandisers. To
reach customers, the Company employs a trained sales organization and has an
in-house Creative Services Department which produces customized brochures and
promotional materials and coordinates national and regional advertising
programs.

The ICI products are used by contractors throughout North America and sold
through both national and regional roofing distributors. Henry maintains a
technical selling staff engaged in both sales and training to help ensure that
the Company's products are applied properly.

The Specialty Products segment markets a broad array of products using a
technical sales force trained to help customers in the use of the various
products. The two leading products in the Specialty Products segment are wax
emulsions and asphalt emulsions. Wax emulsions are sold to the gypsum wallboard
industry while major roofing companies are the primary market for asphalt
emulsions for use as a sizing agent in insulation board.

The International segment is engaged in the sale of all Henry products to
the international market with special focus on the Company's basic product line
of roof coatings and cements and industrial emulsions.

ROOFING SYSTEMS

Henry Company has developed a roofing systems segment for one-stop
commercial roofing or re-roofing or roofing maintenance with warranty
protection. The Company's personnel work with architects, building owners and
contractors to develop custom specifications utilizing Henry products for the
design, construction and maintenance of commercial roofs. An important component
of the Company's roof systems program's success is that building owners are
assured that Henry Company will stand behind the roof from beginning to end. A
Henry Company sales consultant will write a custom specification for the roof
and the roofing system will be applied by a Henry Company-approved contractor
generally using Henry Company products. A Henry Company technical inspector will
inspect the roof application during

installation and regular follow-up inspections and in some instances maintenance
will be performed throughout the life of the warranty. Henry Company offers
20-year warranties on its reroofing systems and 5-year warranties on its
maintenance systems calculated on a fee per square-foot basis. Since its
inception, expenses for warranty claims experience has been very low. In part,
this is due to Henry Company's continuing inspection program. Management
believes that the roofing systems business represents a significant growth
opportunity.

RESIN TECHNOLOGY DIVISION

The Resin Technology Company ("RTC"), founded as an independent company in
1982 and now a division of the Company, produces polyurethane foam products for
roofing and other industrial applications. RTC also sells coating products
manufactured for it by third parties for application on foam. The acquisition of
RTC in 1988 has enabled the Company to offer a broader range of roofing products
to meet the needs of the commercial and residential roofing markets.

PRODUCTS

RTC's primary product categories are polyurethane foam and coatings.
Polyurethane foam has two liquid components, resin and hardener, which are mixed
together in a spray unit during application. A chemical reaction causes the
liquid to expand many times in thickness creating a rigid layer of closed-cell
foam. In roofing applications, this foam is strong enough to be walked on
minutes after the application. The result is a seamless barrier against water
penetration that is durable and easy to maintain. In roofing applications, an
elastomeric coating must be applied as protection against the sun's ultraviolet
radiation. RTC sells acrylic, urethane, silicone and polyurea coatings.

RTC's products offer users several advantages, including a seamless barrier
that minimizes the likelihood of leaks and provides superior insulation
characteristics that can reduce energy costs. It is relatively light in weight
and is therefore particularly adaptable to large arenas or other structures that
may benefit from a lighter weight roof. Furthermore, it can be applied directly
over an existing roof, potentially avoiding the costly "tear-offs" that may be
required with other roofing systems.

RTC's products are also used in a number of original equipment manufacturer
applications. The insulation and weight characteristics of polyurethane foam
make it an integral part of the thermal panel, spa and packaging industries,
among others.

MANUFACTURING

RTC manufactures all of its polyurethane foam products in its Ontario,
California manufacturing facility. Its polyurethane resin system is made up of
two components: a hardening agent that is purchased by the Company and resin
that is manufactured in the Ontario facility. Raw materials are automatically
pumped from one or more of the 11 raw material storage tanks within the
facility, blended and then poured into 55-gallon drums, tote capsules or bulk
tanker trucks. The production process is highly automated. The bulk of RTC's
coatings products for polyurethane foam applications are produced by a
third-party manufacturer also located in Ontario. The Company believes that it
derives its success in the polyurethane foam market from its superior
understanding of technology and the Company has secured a number of original
equipment manufacturer accounts because of its ability to produce products for a
customer's very specific technical requirements.

SALES, MARKETING AND DISTRIBUTION

The Resin Technology Company sells primarily to roofing contractors and
original equipment manufacturers in the western United States. RTC's roofing
products are sold directly to pre-qualified

contractors experienced in applying and spraying polyurethane foam onto roofs.
Sales to original equipment manufacturers include those to spa equipment
manufacturers, and management believes the Company is the leading supplier to
this market. RTC also supplies manufacturers in many other industries including
those producing freezer panels, thermal food transportation equipment, boat
floatation and packaging products. RTC's remaining sales are made to several
distributors, particularly in the Northwest and upper Midwest.

RTC supports its sales efforts with a sales staff organized according to
market segment and regional location. Henry Company believes that RTC's
marketing advantages are based on a commitment to technical development and
customer support and also believes that RTC has captured a number of original
equipment manufacturer accounts from its competitors by efficiently responding
to the customer's technical requirements. In both the roofing and original
equipment manufacturer segments Henry Company provides just-in-time delivery
capability which is essential in time and labor-sensitive roofing applications.

EMPLOYEES

As of December 31, 1998, Henry Company employed approximately 600 persons,
the majority of whom were involved in production and distribution, with the
balance engaged in administration, sales and clerical work. Of these employees,
approximately 485 were employed in the United States and 115 in Canada.
Approximately 48 employees located in Huntington Park, California, 31 employees
in Kimberton, Pennsylvania, 8 employees in Rock Hill, South Carolina, 28
employees in Ville St. Pierre, Quebec and 2 employees in Mirabel, Quebec are
unionized and covered by collective bargaining agreements. These collective
bargaining agreements expire on June 30, 2000, March 31, 2000, February 3, 2001,
June 30, 1999 and February 28, 2000, respectively. The Company believes that its
relationship with its employees is good. The Company has not experienced a work
stoppage at any of its facilities in over 20 years.

RISK FACTORS

SUBSTANTIAL LEVERAGE

The Company has consolidated indebtedness that is substantial in relation to
the book value of its shareholders' equity. As of December 31, 1998, Henry
Company had approximately $87.6 million of debt (the sum of long-term debt,
including current maturities of long-term debt, notes payable and capitalized
lease obligations) and approximately $5.8 million book value of shareholders'
equity.

The Company's significant borrowings have several important consequences for
the Company including but not limited to the following: (i) a substantial
portion of the Company's cash flow from operations must be dedicated to debt
service and will not be available for other purposes; (ii) the Company's ability
to obtain additional financing in the future for working capital, acquisitions
or capital expenditures may be significantly impaired and (iii) the Company's
substantial leverage may make it more vulnerable to economic downturns and limit
its ability to withstand competitive pressures or to take advantage of business
opportunities.

The Company's ability to make cash payments to satisfy its debt obligations
will depend on its future operating performance, which will be affected by
financial, business, competitive, general economic and other factors, many of
which are beyond the Company's control. Based upon current levels of operations
and anticipated cost savings and future growth, the Company believes that its
expected cash flow from operations, together with available borrowings under its
credit facility and its other sources of liquidity, will be adequate to meet its
anticipated requirements for working capital, scheduled principal and interest
payments, lease payments and capital expenditures. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".

ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS OR REVENUE GROWTH

Any statements concerning potential cost savings and revenue growth
contained in this annual report are forward-looking statements that are based on
estimates and assumptions made by the Company's management. Although believed to
be reasonable, such statements are inherently uncertain, and results are
difficult to predict. Therefore, undue reliance should not be placed upon such
statements. The following important factors, among others, could cause the
Company not to achieve the results contemplated herein or otherwise cause the
Company's business, financial condition or results of operations to be adversely
affected in future periods: (i) loss of key customers or continued or increased
competitive pressures; (ii) changes in customer spending levels; (iii)
unanticipated costs related to the acquisition of Monsey Bakor and the
integration of the companies; (iv) absence of inclement weather; (v) loss or
retirement of key members of management; (vi) increases in interest rates or the
Company's cost of borrowing or a default under any material debt agreement;
(vii) unavailability of funds for capital expenditures or research and
development; (viii) changes in governmental, environmental or other regulations
or (ix) changes in general economic conditions. Certain of these factors are
discussed in more detail elsewhere in this annual report. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.

FLUCTUATION OF RAW MATERIAL COST

The Company utilizes a number of raw materials in its manufacturing
processes, some of which have historically fluctuated in price at particular
times. These price fluctuations have been based on such factors as the capacity
of the raw material supply chain, demand in the market, weather, general
economic factors and the availability of alternative raw materials. Raw
materials utilized by the Company that have historically experienced some price
fluctuation include asphalt, aluminum paste, rubber and certain diisocynates,
among others. For example, asphalt, which is a byproduct of crude oil refining,
has fluctuated in price with changes in worldwide crude oil prices and capacity
and with changes in the supply and demand in the oil, gasoline and fossil fuel
markets. Significant increases in asphalt prices or in the prices of other raw
materials, if not offset by product price increases, could have a material
adverse impact on the profit of the Company. There can be no assurance that the
Company will be able to pass any future cost increases through to its customers
in the form of price increases.

IMPACT OF WEATHER

Because many of the Company's products are designed to patch or fix damaged
roofs, the Company's revenues are affected by weather conditions. Sales of
roofing products have historically tended to increase in areas which have
experienced severe weather. The results of severe weather or the anticipation of
severe weather may motivate property owners to undertake required roof
maintenance or to replace an old or worn roof. The absence of inclement weather
in some or all of the Company's markets could have an adverse impact on the
Company's business, financial condition or results of operations.

PRODUCT LIABILITY AND ASBESTOS LITIGATION

The Company's business entails an inherent risk of product liability claims,
including a particular risk with respect to chrysotile asbestos-containing
products that the Company manufactures. Although some roofing products
manufacturers have switched to an exclusively non-asbestos line, some of the
leading firms in the industry continue to use chrysotile asbestos in at least
some of their products. The Company believes that its use of chrysotile asbestos
fibers, which are encapsulated by asphalt in the manufacturing process, is in
accordance with applicable laws. However, the Company has been named as a
defendant in suits alleging certain asbestos-related injuries. Although the
Company has not paid any amounts in judgment or settlement of any
asbestos-related claim to date, there can be no assurance that any such

claim will not in the future result in a material adverse judgment against, or
settlement by, the Company. Other than these asbestos-related claims, no
material product liability claims are currently pending against Henry Company.
However, there can be no assurance that such claims will not arise in the
future. The costs of defending the pending asbestos-related suits are currently
funded by a joint defense arrangement among the Company's insurance carriers and
the Company believes such insurance coverage is adequate. However, Henry Company
is not covered by insurance for asbestos-related claims for injuries that are
alleged to have arisen after 1985.

The Company maintains product liability insurance for non-asbestos claims in
the amount of $21,000,000. However, there can be no assurance that the product
liability coverage maintained by the Company will be adequate to cover product
liability claims or that the applicable insurer will be solvent at the time of
any required payment. In addition, there can be no assurance that the Company
will be able to maintain its product liability coverage on current or otherwise
acceptable terms. A product liability or asbestos-related claim that results in
a judgment or settlement in excess of the Company's insurance coverage, or a
material judgment or settlement for an asbestos-related claim for injuries
alleged to have arisen after 1985, would have a material adverse effect on the
Company.

RELIANCE ON KEY PERSONNEL

The Company's future success will depend to a significant extent on its
executive officers and other key management personnel. In addition, the success
of any acquisitions by the Company may depend, in part, on the Company's ability
to retain management personnel of the acquired companies. Although the Company
has employment agreements with several of its executive officers and key
personnel, including its President, Monsey Bakor's former Chairman of the Board
and the former President of Monsey Bakor's Canadian operations, there can be no
assurance that the Company will be able to retain its executive officers and key
personnel or attract additional qualified management in the future. Although the
Company is the beneficiary under key-person life insurance policies on the lives
of the Company's President and Chief Operating Officer and Monsey Bakor's former
Chairman of the Board (who has become a Vice Chairman of the Board and an
executive officer of the Company following the Acquisition), there can be no
assurance that the proceeds of these policies would be adequate to compensate
the Company for the loss of services due to the death of these individuals.

COMPETITION

The roofing products and roofing systems industries are highly competitive
in most product categories and geographic regions. Competition is largely based
on quality, service, price and distribution capabilities. The Company competes
for retail and wholesale business with both large national manufacturers and
smaller regional producers. In certain circumstances, due primarily to factors
such as freight rates and customer preference for local brands, manufacturers
with better access to certain geographic markets may have a competitive
advantage in such markets. In addition, many of the Company's competitors within
the roofing products industry have greater financial, marketing, distribution,
management and other resources than the Company, and as the industry
consolidates, the Company's competitors may further enhance these resources. The
Company also believes that excess capacity in the roofing products and roofing
systems industry, especially during slow periods for the industry, could result
in downward pricing pressure and intensified competition. Given these factors,
there can be no assurance that the Company will be able to continue to compete
successfully against existing or new competitors, and the failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations.

ENVIRONMENTAL MATTERS

The past and present business operations of the Company and the past and
present ownership and operation of real property by the Company are subject to
extensive and changing federal, state, local and foreign environmental laws and
regulations pertaining to the discharge of materials into the environment,

the handling, storage, treatment and disposal of wastes (including solid and
hazardous wastes), the remediation of releases of toxic or hazardous materials
or otherwise relating to health, safety and protection of the environment
("Environmental Laws"). As such, the nature of the Company's operations as well
as previous operations by others at real property owned, leased or used by the
Company, expose the Company to the risk of claims under Environmental Laws, and
there can be no assurance that material costs or liabilities will not be
incurred in connection with such claims. Based on its experience to date, the
Company does not expect such claims or the costs of compliance with the scope or
enforcement of Environmental Laws to have a material impact on its earnings or
competitive position. The Company believes that it is in substantial compliance
with applicable Environmental Laws. No assurance can be given, however, that the
discovery of presently unknown environmental conditions, changes in the scope or
enforcement of Environmental Laws or their interpretation, or other
unanticipated events will not give rise to expenditures or liabilities that may
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company, through its acquisition of Monsey Bakor, has
been named as a potentially responsible party in litigation concerning
contamination at a former waste-oil recycling facility used by it in
Douglassville, Pennsylvania. The Company, also through its acquisition of Monsey
Bakor, is also a party to a consent decree issued by the federal Environmental
Protection Agency relating to remediation of contamination at its corporate
headquarters. It is sharing remediation costs with a former owner of the
facility that is also a party to the consent decree. Based on currently
available information, the Company believes that neither this litigation nor
this remediation will have a material adverse effect on the Company's business,
financial condition or results of operations.

GOVERNMENTAL REGULATION AND PERMITS

The Company is subject to regulation under various federal, state and local
laws, including laws regulating its manufacturing operations and laws relating
to employee health and safety. Permits are required for operation of the
Company's business, and such permits are subject to renewal, modification and,
in certain circumstances, revocation by governmental authorities. The loss of
certain of such permits could have a material adverse effect on the Company's
business, financial condition or results of operations. The Company expects to
incur ongoing capital and operating costs and administrative expenses to
maintain compliance with its permits and with applicable laws and regulations.
The Company cannot predict the legislation or regulations that may be enacted in
the future or how existing or future laws or regulations will be administered or
interpreted. Compliance with new laws or regulations, as well as more vigorous
enforcement policies of the regulatory agencies or stricter interpretation of
existing laws, may require additional expenditures by the Company, some or all
of which may be material.

ITEM 2. PROPERTIES

The Company's operations are conducted at the owned or leased facilities
described below:

FACILITY
SQUARE
LOCATIONS PRODUCTS MANUFACTURED/PRINCIPAL USE FOOTAGE OWNED/LEASED
- ---------------- ----------------------------------------------------- --------- -----------

UNITED STATES

Huntington Park, - Solvent and emulsion-based bituminous coatings 95,478 Leased
California - Mastics
- Pavement/driveway sealers
- Asphalt emulsions
- Acrylic coatings

Sacramento - Solvent and emulsion-based bituminous coatings 18,871 Leased
(Elk Grove), - Mastics
California - Pavement/driveway sealers
- Asphalt emulsions

FACILITY
SQUARE
LOCATIONS PRODUCTS MANUFACTURED/PRINCIPAL USE FOOTAGE OWNED/LEASED
- ---------------- ----------------------------------------------------- --------- -----------

El Paso, Texas - Distribution Center 10,583 Owned

Portland, Oregon - Solvent and emulsion-based bituminous coatings 55,735 Leased
- Mastics
- Pavement/driveway sealers
- Asphalt emulsions
- Acrylic coatings

Seattle - Distribution center 12,500 Leased
(Auburn), - Asphalt emulsions
Washington

Ontario, - Polyurethane foam 13,330 Leased
California - Coatings for polyurethane foam

Houston, Texas - Asphalt tape sealants 44,000 Owned

Kimberton, - Solvent and emulsion-based bituminous coatings 147,400 Owned
Pennsylvania - Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions

Indianapolis, - Solvent and emulsion-based bituminous coatings 63,000 Owned
Indiana - Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions

Waterford, - Solvent and emulsion-based bituminous coatings 120,000 Owned
New York - Mastics
- Pavement sealers
- Acrylic and solvent-based coatings

Rock Hill, - Solvent and emulsion-based bituminous coatings 40,000 Owned
South Carolina - Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions

Garland, Texas - Solvent and emulsion-based bituminous coatings 76,500 Owned
- Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
- Acrylic coatings

Bartow, Florida - Solvent based bituminous coatings 34,000 Owned
- Mastics
- Pavement sealers
- Acrylic coatings

Kingman, Arizona - Solvent and emulsion-based bituminous coatings 39,275 Owned
- Mastics
- Pavement sealers
- Asphalt and wax industrial emulsions
- Acrylic coatings

FACILITY
SQUARE
LOCATIONS PRODUCTS MANUFACTURED/PRINCIPAL USE FOOTAGE OWNED/LEASED
- ---------------- ----------------------------------------------------- --------- -----------

CANADA

Petrolia, - Roofing membranes 58,500 Owned
Ontario - Waterproofing
- Air barriers
- Protection/Recovery Board

Mirabel, - Insulation additives and coatings 6,100 Owned
Quebec - Liquid air barrier membranes
- Specialty primers

Ville St. Pierre - Insulating coatings and adhesives 44,000 Owned
(Montreal), - Air barriers
Quebec - Solvent and emulsion-based bituminous coatings
- Road emulsions
- Asphalt and wax industrial emulsions

The Company also owns or leases smaller sales and administration facilities
in Costa Mesa, California, Irvington, New Jersey and Mississauga, Ontario. In
addition, the Company owns a small facility in Troy, New York that it leases to
a third party. The Company believes that its facilities are in good operating
condition and are adequate to meet anticipated future requirements.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of business, the Company is periodically named as a
defendant in a variety of product liability lawsuits including "slip and fall"
claims relating to pavement sealants and claims for alleged product failure. The
Company does not believe these cases will have a material adverse effect on the
Company's business, financial condition or results of operations.

The Company, by way of its acquisition of Monsey Bakor, has been identified
as a participating responsible party by the EPA under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, in
litigation in the Federal District Court for the Eastern District of
Pennsylvania. The Company's involvement with the property, a former waste oil
recycling facility in Douglassville, Pennsylvania, was limited to the temporary
storage and treatment of certain solvents on the site. A proposed consent decree
covering the EPA's alleged response costs has been negotiated with the EPA which
would fix the responsibility for the Company and approximately 150 other
potentially responsible parties who were determined to be responsible for a
minor portion of such costs. The Company's portion of this settlement would be
approximately $372,000.

As of December 31, 1998, The Company was a party to approximately 55 state
court cases alleging certain asbestos-related injuries. There were seven new
cases filed in 1998, two in 1997 and four filed each in 1996 and 1995. The
Company believes that its use of chrysotile asbestos fibers, which are
encapsulated by asphalt in the manufacturing process, is in accordance with
applicable laws. Although the Company has not paid any amounts in judgment or
settlement of any asbestos-related claim to date, there can be no assurance that
any such claim will not in the future result in a material adverse judgment
against, or settlement by, the Company. The costs of these suits are currently
funded by a joint-defense arrangement among the Company's insurance carriers and
the Company believes that such insurance coverage is adequate. However, Henry
Company is not covered by insurance for asbestos-related claims for injuries
that are alleged to have arisen after 1985.

The Company does not believe, based in part on the advice of outside
counsel, that the outcome of these suits and legal proceedings will have a
material adverse effect on the Company's financial condition, results of
operations, or cash flows.

ENVIRONMENTAL MATTERS

The Company is subject to extensive and changing environmental laws and
regulations with which it believes it is in substantial compliance. However,
there can be no assurance that the discovery of presently unknown environmental
conditions or changes in the scope, interpretation or enforcement of
environmental laws and regulations will not have a material adverse effect on
the Company's business, financial condition or results of operations.

The Company's Kimberton facility was formerly occupied by a pharmaceutical
manufacturer whose operations resulted in groundwater contamination identified
on the site and surrounding area. The contaminant of concern was
trichloroethylene which required various remedial activities, including the
provision of alternate water supplies to users in the surrounding area and a
groundwater treatment program. Remedial work is being completed under a consent
decree the EPA negotiated in 1990 with the pharmaceutical manufacturer and the
Company and a confidential cost sharing agreement between these two companies.
The Company's costs under the consent decree in 1996, 1997 and 1998 were
approximately $63,000, $67,000 and $70,000, respectively, and are not expected
to be significantly different during 1999 and 2000. The Company has a liability
recorded for the entire expected costs to it of the remedial work over the
remaining term of the consent decree and cost-sharing agreement. Costs paid
under the consent decree and cost-sharing agreement of $70,000 in 1998 reduced
the liability to $3.4 million at December 31, 1998.

The Company is currently upgrading, replacing or closing underground storage
tanks that it owns or operates to meet certain corrosion protection and
overfill/spill containment standards. The Company estimates that the capital
expenditures required to comply with various regulatory programs in 1999 will
not have a material adverse effect on the Company's earnings, cash flows or
competitive position. Such estimates, however, are based on factors and
assumptions that are subject to change, including potential modifications of
regulatory requirements, detection of unanticipated environmental conditions or
other currently unexpected circumstances.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

There is no established public trading market for the Company's common
equity.

As of December 31, 1998, there were seven (7) beneficial holders of the
Company's Common Stock and one beneficial holder of the Company's Class A Common
Stock.

At the present time, the Company intends to retain all earnings for use in
the operation and development of its business and does not expect to declare or
pay any cash dividends in the foreseeable future. Any determination in the
future to pay dividends will depend on the Company's earnings, financial
condition, capital requirements, level of indebtedness and other factors deemed
relevant by the Company's Board of Directors, including any contractual or
statutory restrictions on the Company's ability to pay dividends.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with Henry Company's consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this document. The consolidated
statement of operations data for each of the years in the three-year period
ended December 31, 1998, and the consolidated balance sheet data at December 31,
1997 and 1998, are derived from the consolidated financial statements of Henry
Company which have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are included elsewhere in this document. The consolidated
statement of operations data for the years ended December 31, 1994 and 1995,
respectively, and the consolidated balance sheet data at December 31, 1994,
1995, and 1996 are derived from audited financial statements of Henry Company
not included in the document. Historical results are not necessarily indicative
of the results to be expected in the future.

YEAR ENDED DECEMBER 31
-----------------------------------------------------

1994 1995 1996 1997 1998(7)
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA(1):

Net sales....................................................... 51,163 61,059 59,186 67,424 150,156
Cost of sales................................................... 35,206 42,290 40,867 46,413 105,143
--------- --------- --------- --------- ---------
Gross Profit.................................................. 15,957 18,769 18,319 21,011 45,013

Operating expenses:
Selling, general and administrative........................... 14,849 17,518 16,934 17,509 35,028
Amortization of intangibles................................... 858 703 183 137 2,081
--------- --------- --------- --------- ---------
Operating income (loss)....................................... 250 548 1,202 3,365 7,904
--------- --------- --------- --------- ---------
Interest expense................................................ 1,158 1,454 1,475 1,465 6,567
Interest and other income, net.................................. (589) (402) (345) (321) (243)
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for taxes............ (319) (504) 72 2,221 1,580
Provision (benefit) for income taxes(2)......................... -- -- 1 33 509
--------- --------- --------- --------- ---------
Net income (loss)............................................. (319) (504) 71 2,188 1,071
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma provision (benefit) for income taxes(3)............... (127) (200) 29 882 484
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income (loss)(3).................................. (192) (304) 43 1,339 1,096
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------

YEAR ENDED DECEMBER 31
-----------------------------------------------------
1994 1995 1996 1997 1998(7)
--------- --------- --------- --------- ---------

Other Financial Data:

Capital expenditures............................................ 1,745 1,389 1,449 801 2,997
Depreciation and amortization (including amorization of
intangibles).................................................. 1,954 1,907 1,645 1,469 4,894
EBITDA(4)....................................................... 2,793 2,857 3,192 5,155 13,041
Ratio of earnings to fixed charges(5)........................... --(6) --(6) 1.0x 1.9x 1.2x

Cash flows provide by (used in):
Operating activities.......................................... (206) 2,224 1,171 4,781 9,981
Investing activities.......................................... (2,915) (1,342) (783) (949) (48,010)
Financing activities.......................................... 3,348 (785) (258) (4,013) 50,445

1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------

COMBINED BALANCE SHEET DATA(1):

Cash and cash equivalents....................................... 74 170 300 119 12,023
Working capital................................................. 4,236 2,699 5,121 7,204 32,380
Total assets.................................................... 29,247 30,730 31,204 30,418 125,514
Long-term debt, including current maturities and borrowings on
lines of credit............................................... 18,329 17,619 17,416 13,748 87,631
Total shareholders' equity...................................... 3,368 2,863 2,934 5,122 5,830

- ------------------------

(1) For periods prior to April 22, 1998, the Company's financial statements were
prepared on a combined basis with Warner Development Company of Texas
("Warner Development") as both entities were under common control with
identical shareholder ownership interests. On April 21, 1998, Warner
Development was merged into Henry Company and the outstanding shares of
Warner Development capital stock were cancelled.

(2) Prior to April 1998, Henry Company was operated as a subchapter "S"
Corporation under the Code. As a result, Henry Company did not incur Federal
and state income taxes (except with respect to certain states) and,
accordingly, the provision for income taxes only includes the applicable
state income tax. Federal and state income taxes (except with respect to
certain states) on the income of Henry Company have been incurred and paid
directly by the shareholders of Henry Company. It has been the policy of
Henry Company to make periodic distributions to the shareholders in respect
of such tax liabilities. During the year ended December 31, 1998, Henry
Company paid distributions of $1.2 million for the shareholders' 1997 tax
liabilities. On April 22, 1998, the Company converted to a "C" corporation
under the Code and will subsequently pay all future tax obligations of the
Company to the appropriate taxing authorities.

(3) As described in Note (2) above, Henry Company was operated as a Subchapter
"S" Corporation for the historical years presented through 1997. The pro
forma provision (benefit) for income taxes and pro forma net income (loss)
reflect the results as if Henry Company were operated as a "C" Corporation
for the historical periods presented.

(4) EBITDA, as defined in the indenture relating to the Company's outstanding
10% Senior Notes, represents net earning before taking into consideration
taxes on earnings, interest expense, depreciation and amortization, and
non-recurring, non-cash charges, less any cash expended that funds a non-
recurring, non-cash charge. While EBITDA should not be construed as a
substitute for operating earnings, net earnings, or cash flows from
operating activities in analyzing operating performance, financial position
or cash flows, EBITDA has been included because it is commonly used by
certain investors and analysts to analyze and compare companies on the basis
of operating performance, leverage and liquidity. This data is relevant to
an understanding of the economics of the Company's business as it indicates
cash flow available from operations (and/or trends in cash flow available
from operations) to service debt and satisfy certain fixed obligations. A
reconciliation of net income (loss) to EBITDA for the respective years and
related interim periods is as follows:

YEARS ENDED DECEMBER 31,
----------------------------------------------------------------

1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
Net income (loss)........................... $ 336 $ (319) $ (504) $ 71 $ 2,188 $ 1,071
Provision for income taxes.................. 5 -- -- 1 33 509
Interest expense............................ 765 1,158 1,454 1,475 1,465 6,567
Depreciation and amortization............... 1,961 1,954 1,907 1,645 1,469 4,894
--------- --------- --------- --------- --------- ---------
EBITDA...................................... $ 3,067 $ 2,793 $ 2,857 $ 3,192 $ 5,155 $ 13,041
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------

(5) For purposes of this ratio, "earnings" consist of earnings before income
taxes and fixed charges and "fixed charges" consist of interest expense and
the portion of rents representative of an interest factor. The ratio of
earnings to fixed charges is computed by adding earnings before income taxes
and fixed charges and dividing by fixed charges.

(6) The earnings were insufficient to cover fixed charges for these periods. The
amount of the deficiencies were $319 and $504 in 1994 and 1995,
respectively.

(7) On April 22, 1998, the Company acquired Monsey Bakor and its subsidiaries.
The acquisition was accounted for using the purchase method of accounting
and as such, the results of operations of Monsey Bakor since the acquisition
date have been included in the consolidated financial statements of the
Company.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis of the Company's consolidated results
of operations and consolidated financial position should be read in conjunction
with the Selected Financial Data and the Company's Consolidated Financial
Statements, including notes thereto, appearing elsewhere in this Annual Report.

GENERAL

The Company is a construction materials company focusing primarily on
products for roofing, sealing and paving applications. The Company develops,
manufactures and markets several separate but related product lines including
roof and driveway coatings and paving products, industrial emulsions, air
barriers, polyurethane foam for roofing and commercial uses, sealants for
construction and marine uses and specialty products. The Company has seventeen
manufacturing and distribution facilities throughout North America. The
Company's business is seasonal and is dependent on weather trends which vary by
geographic region.

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 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.

HENRY RESIN
COATINGS TECHNOLOGY
DIVISION DIVISION TOTAL
-------------- ------------- --------------

1998
Net sales........................................................ $ 130,054,094 $ 20,102,027 $ 150,150,121
Gross profit..................................................... 41,240,101 3,773,436 45,013,537
Operating income................................................. 7,491,372 412,360 7,903,741
Depreciation and amortization.................................... 4,666,246 227,548 4,893,794
Total assets..................................................... 112,978,409 12,535,391 125,513,800
Capital expenditures............................................. 2,875,566 121,154 2,996,720
1997
Net sales........................................................ $ 47,828,812 $ 19,594,791 $ 67,423,603
Gross profit..................................................... 17,494,453 3,516,322 21,010,775
Operating income................................................. 2,521,895 843,531 3,365,426
Depreciation and amortization.................................... 1,253,340 216,035 1,469,375
Total assets..................................................... 18,527,327 11,890,320 30,417,647
Capital expenditures............................................. 648,306 152,933 801,239
1996
Net sales........................................................ $ 40,939,371 $ 18,246,629 $ 59,186,000
Gross profit..................................................... 15,238,101 3,081,175 18,319,276
Operating income................................................. 890,060 312,070 1,202,130
Depreciation and amortization.................................... 1,438,345 206,345 1,644,690
Total assets..................................................... 20,102,365 11,101,354 31,203,719
Capital expenditures............................................. 1,281,277 167,416 1,448,693

The Company is domiciled in the United States with foreign operations based
in Canada which were acquired during 1998. Prior to the 1998 acquisition of
Monsey Bakor, the Company had no foreign operations. Summarized geographic data
related to the Company's operations for 1998 are as follows:

LONG-LIVED
NET SALES ASSETS
-------------- -------------

United States..................................................................... $ 129,492,180 $ 64,555,982
Canada............................................................................ 20,663,941 8,548,168
-------------- -------------
Total......................................................................... $ 150,156,121 $ 73,104,150
-------------- -------------
-------------- -------------

BUSINESS ACQUISITION, NOTE OFFERING, AND CHANGE IN TAX STATUS

On April 22, 1998, the Company completed the acquisition of Monsey Bakor and
its subsidiaries (the "Acquisition") which are engaged in the distribution and
manufacture of roof coatings, adhesives and membranes, and waterproofing and air
barrier systems for residential and commercial applications. The cash purchase
price was $42.8 million with an additional $3.2 million paid at closing to
certain selling shareholders of Monsey Bakor for noncompetition agreements. A
selling shareholder also purchased

22,500 of redeemable convertible preferred stock of the Company for $0.6 million
cash. The Acquisition has been accounted for using the purchase method of
accounting.

Concurrent with the Acquisition, the Company conducted a senior note
offering (the "Offering") in the aggregate principal amount of $85.0 million.
The proceeds of the Offering were used to acquire Monsey Bakor, retire a
substantial portion of Monsey Bakor's existing bank debt, and retire the
Company's existing bank debt and subordinated shareholder debt.

Concurrent with the Acquisition and Offering, the Company's bank credit line
was replaced with a $35.0 million credit facility, $25.0 million of which is
available in accordance with a borrowing base and is to be used for working
capital, and $10.0 million of which may be used for capital expenditures.

Concurrent with the Acquisition and the Offering, the Company converted its
tax status from an S Corporation under Section 1361 of the Code to C Corporation
status. Subsequent to this conversion the Company will be required to pay
federal and state corporate income taxes on its taxable income.

Upon conversion to C status, the Company recognized a net deferred tax asset
of $0.9 million in accordance with the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

RESULTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:

YEAR ENDED DECEMBER 31 (IN MILLIONS)
----------------------------------------------------------------------

1996 % OF SALE 1997 % OF SALE 1998 % OF SALE
--------- ----------- --------- ----------- --------- -----------
Net sales...................................... $ 59.2 100.0% $ 67.4 100.0% $ 150.1 100.0%
Cost of sales.................................. 40.9 69.1% 46.4 68.8% 105.1 70.0%
--------- ----- --------- ----- --------- -----
Gross profit................................. 18.3 30.9% 21.0 31.2% 45.0 30.0%

Operating expenses:
Selling, general and administrative.......... 16.9 28.6% 17.5 26.0% 35.0 23.3%
Amortization of intangibles.................. 0.2 0.3% 0.2 0.1% 2.1 1.4%
--------- ----- --------- ----- --------- -----
Operating income............................. 1.2 2.0% 3.4 5.0% 7.9 5.3%
--------- ----- --------- ----- --------- -----
Interest expense............................... 1.5 2.5% 1.5 2.2% 6.6 4.4%
Interest and other income, net................. (0.4) (0.6)% (0.3) (0.4)% (0.3) (0.2)%
--------- ----- --------- ----- --------- -----
Income (loss) before provision for taxes..... 0.1 0.1% 2.2 3.2% 1.6 1.1%
Provision for income taxes..................... 0.0 0.0% 0.0 0.0% 0.5 0.4%
--------- ----- --------- ----- --------- -----
Net income..................................... $ 0.1 0.1% $ 2.2 3.3% $ 1.1 0.7%
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

NET SALES. The Company's net sales increased to $150.1 million for the year
ended December 31, 1998, an increase of $82.7 million, or 122.7%, from $67.4
million for the year ended December 31, 1997. The acquisition of Monsey Bakor
(the "Acquisition") represented $84.4 million of the increase and was partially
offset by a decrease of $1.7 million due primarily to the lack of rainfall in
excess of annual averages, which resulted in decreased net sales in both the
professional and retail roofing business as the need to repair leaking roofs was
not as pronounced.

GROSS PROFIT. The Company's gross profit increased to $45.0 million for the
year ended December 31, 1998, an increase of $24.0 million, or 114.3%, from
$21.0 million for the year ended December 31, 1997. The acquisition of Monsey
Bakor represented $22.4 million of the increase. The remaining increase of $1.6
million was primarily due to a decrease in certain raw material prices and an
improved sales mix of higher margin products.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense as a percentage of net sales decreased to 23.3% for the year ended
December 31, 1998 from 26.0% for the year ended December 31, 1997. The decrease
was primarily due to the Company's ability to support increased levels of
revenues from the acquisition of Monsey Bakor without proportionately increasing
administrative costs. Selling, general and administrative expenses increased to
$35.0 million for the year ended December 31, 1998, an increase of $17.5
million, or 100.0%, from $17.5 million for the year ended December 31 1997. The
acquisition of Monsey Bakor represented $16.4 million of the increase. The
remaining increase of $1.1 million was primarily due to incremental selling,
general and administrative expenses associated with the Company's continued
expansion in both the retail roofing and the roofing systems business.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased to $2.1
million for the year ended December 31, 1998, an increase of $2.0 million or
2000%, from $0.1 million for the year ended December 31, 1997. The increase was
primarily due to the amortization of intangible assets created as a result of
the Acquisition.

OPERATING INCOME. Operating income increased to $7.9 million for the year
ended December 31, 1998, an increase of $4.5 million, or 132.4%, from $3.4
million for the year ended December 31, 1997. Operating income as a percentage
of net sales increased to 5.3% for the year ended December 31, 1998, from 5.0%
for the year ended December 31, 1997. The acquisition of Monsey Bakor
represented $5.7 million, or 126.7% of the increase in operating income. The
Monsey Bakor increase was partially offset by the amortization of intangible
assets created as a result of the Acquisition and increased selling, general and
administrative expenses mitigated by the improvements in the gross profit margin
as noted above.

INTEREST EXPENSE. Interest expense increased to $6.6 million for the year
ended December 31, 1998, an increase of $5.1 million, or 340.0%, from $1.5
million for the year ended December 31, 1997. The increase was attributable to
interest expense incurred on the Senior Notes used to finance the Acquisition.

PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$0.5 million for the year ended December 31, 1998 primarily due to the
Acquisition and the conversion of the Company from an "S" Corporation to a "C"
Corporation, which resulted in the Company becoming a fully taxable entity in
the year ended December 31, 1998. These factors were partially offset by a $0.9
million deferred tax benefit recognized upon conversion.

NET INCOME. Net income was $1.1 million for the year ended December 31
1998, a decrease of $1.1 million, or 50.0% from $2.2 million for the year ended
December 31, 1997. The Acquisition represented an increase of $3.9 million,
which was offset by increased amortization expense, increased interest expense
and other factors noted above.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996

NET SALES. The Company's net sales increased to $67.4 million in 1997, an
increase of $8.2 million, or 13.9%, from $59.2 million for the prior year. This
increase was primarily due to forecasted rainfall in excess of annual averages,
which increased sales in both the professional and retail roofing business as
property owners in California and Arizona repaired roofs during the third and
fourth quarters of 1997 in anticipation of significant rainfall. The increase in
revenues was also attributable to Henry Company's increased market penetration
into contiguous regions.

GROSS PROFIT. Gross profit increased to $21.0 million in 1997, an increase
of $2.7 million, or 14.8%, from $18.3 million for 1996. This increase was
primarily due to the increased revenues, but also reflects an increase in Henry
Company's gross profit margin increased to 31.2% from 30.9% in the prior year.
This increase in gross profit margin was primarily attributable to a higher
proportion of revenues from the sales of roof patching cement, which
historically has had higher gross profit margins than other roof coatings lines
and polyurethane foam applications. The increase in gross profit margin was
partially offset by decreased revenues from certain higher-margin segments of
the sealants business.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense as a percentage of revenue decreased to 26.0% in 1997 from 28.7% in
1996. The decrease was primarily due to Henry Company's ability to service
increased revenues without proportionately increasing administrative costs.
Selling, general and administrative expenses increased to $17.5 million in 1997,
an increase of $0.6 million, or 3.6%, from $16.9 million in 1996. The increase
was primarily due to incremental selling, general and administrative expenses
associated with Henry Company's continued expansion into the roofing systems
business as well as increased overhead related to the hiring of additional
employees in connection with the overall growth of Henry Company.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased slightly
to $0.1 million in 1997 as compared to $0.2 million in 1996. This decrease
represents amortization expense related to an acquisition completed in February
of 1994.

OPERATING INCOME. Operating income increased to $3.4 million in 1997, an
increase of $2.2 million, or 183.3%, from $1.2 million in 1996. Operating income
as a percentage of revenue increased to 5.0% in 1997 from 2.0% in the prior
year, primarily due to higher gross profit margins and lower operating expenses
as a percentage of revenues.

INTEREST EXPENSE. Interest expense remained flat from 1996 to 1997 and
relates principally to interest expense on Henry Company's debt utilized to fund
the working capital needs of the Company.

NET INCOME. Net income was $2.2 million in 1997, an increase of $2.1
million, from $0.1 million in 1996 due primarily from increased revenues. Net
income as a percentage of revenues increased to 3.2% in 1997, from a nominal
return in 1996, primarily due to an increase in net sales in 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company's historical requirements for capital have been primarily for
working capital, capital expenditures and acquisitions. The Company's primary
sources of capital to finance such needs have been cash flow from operations and
borrowings under bank credit facilities. Concurrently with the consummation of
the Offering and the Acquisition on April 22, 1998, the Company entered into a
new bank credit facility (the "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 December 31, 1998, there were no amounts outstanding under
the revolving line of credit and the capital expenditure facility. The Company
also maintains a credit line with a Canadian bank. Balances outstanding under
this line were $1.7 million at December 31, 1998.

CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997

The Company's cash flows from operations were $10.0 million and $4.8 million
for the years ended December 31, 1998 and 1997 respectively. The increase from
December 31, 1997 to December 31, 1998 of $5.2 million was primarily
attributable to a reduction in trade receivables and inventories. This reduction
is largely a result of the decline in trade receivables and inventories of
Monsey Bakor from the date of acquisition to December 31, 1998. Net cash
provided by (used in) financing activities during the year ended December 31,
1998 and the year ended December 31, 1997 was $50.4 million and $(4.0) million
respectively. The increase of $54.4 million from the year ended December 31,
1997 to the year ended

December 31, 1998 was primarily due to the issuance of $85.0 million of senior
notes, reduced by debt payments of $33.4 million. Net cash used for business
acquisitions for the year ended December 31, 1998 and for the year ended
December 31, 1997 were $45.1 million and $0.1 million, respectively. For the
year ended December 31, 1998 and the year ended December 31, 1997 additions for
capital expenditures were $3.0 million and $0.8 million, respectively. Scheduled
principal payments on debt were $16.7 million and $1.3 million for the year
ended December 31, 1998 and the year ended December 31, 1997, respectively.

The Company believes that the net proceeds from the Offerings, together with
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 March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use", which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not anticipate that the adoption of SOP No. 98-1 will have a material impact on
the Company's financial position, results of operations, or cash flows.

In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of
Start-up Activities". SOP No. 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard will not have a
significant impact on the Company's financial position, results of operations,
or cash flows.

In June 1998, the Financial Accounting Standard 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.

YEAR 2000 MODIFICATIONS

The Company is not highly dependent on its internal computer systems, and
does not generally interact electronically with its customers or suppliers. The
Company has been and is currently assessing its computer systems and
embedded-technology equipment in order to evaluate what, if any, corrections or
modifications may be necessary to respond to potential Year 2000 computer
issues. The Company currently expects to complete any necessary corrections or
modifications by April 30, 1999. The historical costs of this assessment and
correction have been less than $10,000 and future assessment and correction
(including replacement) costs are currently estimated to be less than $50,000.
The company relies upon computer systems primarily to invoice its customers,
some of whom are billed on an Electronic Data Interchange ("EDI") system. The
most reasonably likely risk to the Company for a Year 2000 failure is believed
to involve an interruption of this electronic invoicing system. The Company is
prepared to invoice its customers manually in the event of such an interruption.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk generally represents the risk that losses may occur in the value
of financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices. As part of its overall risk
management strategies, the Company monitors and manages these risks by reviewing
key trends and indicators on a continuous basis.

Interest Rate Risk--From time to time the Company temporarily invests its
excess cash in interest bearing temporary investments of high quality issuers or
with major financial institutions. Due to the short-term maturity of the
investments are outstanding and their general liquidity, these instruments are
classified as cash equivalents in the consolidated balance sheet and do not
represent a material interest rate risk to the Company. The Company's primary
market risk exposure for changes in interest rates relates to the Company's debt
obligations. The Company manages its exposure to changing interest rates
principally through the use of a combination of fixed and floating rate debt.
The majority of the Company's long-term debt is comprised of $85.0 million of
Series B Senior Notes which represent fixed rate borrowings. The fair value of
the Senior Notes at December 31, 1998 was approximately $101.0 million.

The Company believes that near term changes in interest rates would not have
a significant impact on the Company's financial position as the Company has a
limited amount of interest rate risk sensitive financial instruments at December
31, 1998.

Foreign Exchange Rate Risk--The Company conducts business principally in
North America and in U.S. and Canadian currencies. The Company's U.S. operations
denominates all sales transactions in U.S. dollars. The Company's Canadian
subsidiaries are paid in Canadian dollars for sales made in Canada. Excess
Canadian funds generally have been invested in the Canadian operation rather
than being remitted to the U.S. parent.

At December 31, 1998, the Company has no foreign currency exchange contracts
or hedging instruments.

Commodity Price Risk--The Company uses certain raw materials in its
manufacturing process that fluctuate with certain commodity prices. These raw
materials include asphalt, aluminum paste, rubber and certain dissoynates. The
Company continuously monitors key trends in the commodity prices impacting raw
materials. At December 31, 1998, the Company has no commodity risk hedges or
derivative instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of Henry Company are included in a
separate section of this Annual Report on Form 10-K as set forth in the "Index
to Consolidated Financial Statements" on Page F-1.

The consolidated financial statements of Monsey Bakor appearing on pages
F-29 through F-47 of the Henry Company Registration Statement on Form S-4
(Registration No. 333-59485) are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

NONE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding each of the
Company's directors and executive officers as of December 31, 1998:

NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------

Warner W. Henry(1)(2)...................... 60 Chairman of the Board and Chief Executive
Officer
Joseph T. Mooney, Jr.(1)................... 64 Vice Chairman of the Board
Paul H. Beemer(1)(2)....................... 76 Vice Chairman of the Board
Richard B. Gordinier(1)(2)................. 56 President, Chief Operating Officer and
Director
Jeffrey A. Wahba(1)(2)..................... 42 Chief Financial Officer, Secretary and
Director
S. Duncan Moffat........................... 51 President--Henry Coatings Division
James Doose................................ 50 President--Resin Technology Company
John R. Enright............................ 58 President--Henry Sealants Division
Larry A. Karasiuk.......................... 54 President--Bakor Division
Norman F. Nickerson........................ 58 Senior Vice President--Henry Coatings
Division
Frederick H. Muhs(1)....................... 60 Director
Carol F. Henry............................. 59 Director
Donald H. Ford............................. 91 Director
Terrill M. Gloege(2)....................... 63 Director

- ------------------------

(1) Member of the Executive Committee

(2) Member of the Audit Committee

WARNER W. HENRY has been Chairman of the Board, Chief Executive Officer and
a director of Henry Company or its parent since 1974, and has served in various
sales and sales management positions with Henry Company from 1963 to 1974. Mr.
Henry also serves on the board or is an Overseer of the following organizations:
The Employers Group, Hoover Institution, Los Angeles Music Center Opera and the
Los Angeles Chamber Orchestra. Mr. Henry received his A.B. in Economics from
Stanford University and his M.B.A. from Stanford University, Graduate School of
Business.

JOSEPH T. MOONEY, JR. has served as a Vice Chairman of the Board of the
Company since the closing of the Acquisition. Mr. Mooney began his career with
Monsey Bakor in 1960 and previously served as Chairman of the Board and
President of Monsey Bakor from 1972 to April 1998, where his responsibilities
included major strategic decisions regarding product and equipment purchases as
well as oversight of all of Monsey Bakor's financial operations. Mr. Mooney
received a B.S. from Villanova University.

PAUL H. BEEMER has served as Vice Chairman of Henry Company since 1983, and
as a director of Henry Company or its parent since 1964. Mr. Beemer began with
Henry Company in 1947, holding various technical and sales management positions,
and has also served as General Manager and President. Mr. Beemer was responsible
for the formulation and development of a number of Henry Company's key products
and continues to serve in a part-time technical consulting role. Mr. Beemer
received a B.S. from Loyola University in Los Angeles.

RICHARD B. GORDINIER has been President and a director of Henry Company
since 1988. From 1985 to 1988, Mr. Gordinier was President of Van De Kamp Dutch
Bakers. From 1979 to 1984, Mr. Gordinier

served as President of the International Division of Max Factor and Co., and
from 1964 to 1979 held senior management positions at Estee Lauder, Procter and
Gamble Co. and Bristol-Myers Squibb Co. Mr. Gordinier is currently a director of
The Raymond Company and Lawry's Restaurants, Inc. Mr. Gordinier received a B.S.
in Civil Engineering from Princeton University.

JEFFREY A. WAHBA has been Chief Financial Officer, Secretary and a director
of Henry Company since 1986. From 1984 to 1985, Mr. Wahba served as Chief
Financial Officer of Vault Corporation. From 1980 to 1984, Mr. Wahba was with
Max Factor and Co. and served as Controller of the International Division. Mr.
Wahba received a B.S. in Industrial Engineering and an M.S. in Industrial
Engineering and Engineering Management from Stanford University, as well as an
M.B.A. from the University of Southern California.

S. DUNCAN MOFFAT has served as President--Henry Coatings Division since
1997. From 1992 to 1997, Mr. Moffat was Senior Vice President of Coatings
Operations for Henry Company, and from 1989 to 1992 served as Director of West
Coast Operations for Esselte Pendaflex Corporation. Prior to that time, Mr.
Moffat served in various operations management capacities for Procter and Gamble
Co. Mr. Moffat received a B.S. in Mechanical Engineering from Princeton
University.

JAMES DOOSE has been the President of Resin Technology Company since 1994.
Mr. Doose and a partner founded Resin Technology Company in 1982. Mr. Doose
served as Executive Vice President of Resin Technology Company from 1982 to
1994. From 1973 to 1982, Mr. Doose was with Reichold Chemical Company in various
sales and technical positions. Mr. Doose received a B.S. in Chemistry from
California Polytechnic University at Pomona.

JOHN R. ENRIGHT has served as President--Henry Sealants Division, since
1993. From 1983 to 1992, Mr. Enright was Vice President of Sales and held other
management positions with Lennox Industries. From 1976 to 1983, Mr. Enright held
various sales management positions with Wallace Silversmiths Inc. Mr. Enright
received a B.S. in Business Management from San Jose State University.

LARRY A. KARASIUK has served as President--Monsey Bakor Canada since the
closing of the Acquisition. Mr. Karasiuk served as the President of Bakor
Holdings, Inc. and as the President of Monsey Bakor's Canadian operations
beginning in 1991. From 1982 to 1991, Mr. Karasiuk was the Vice President of
Marketing and Sales with the predecessor company of Bakor Holdings, Inc.,
Bakelite Thermosets Building Materials Division. Prior to that time, Mr.
Karasiuk served in various management positions with Hunter Douglas, a
subsidiary of Alcan. Mr. Karasiuk attended Simon Fraser University and York
University.

NORMAN F. NICKERSON has served as Vice President of Sales--Monsey Bakor U.S.
since the closing of the Acquisition. Mr. Nickerson served as Vice President of
Sales of Monsey Bakor from 1985 to 1998. From 1979 to 1985, Mr. Nickerson was
General Manager of Monsey Bakor's Southeastern division. From 1972 to 1979, Mr.
Nickerson was General Manager of Cosmicoat, Inc. Mr. Nickerson received his B.A.
in History from Allegheny College.

FREDERICK H. MUHS has been a director of Henry Company since 1996. Since
1991, Mr. Muhs has been a private investor and business consultant. From 1963 to
1990, Mr. Muhs held various positions in the investment and investment banking
operations of the Prudential Insurance Company of America, including as Managing
Director for its Prudential Bache Securities, Inc. subsidiary. Mr. Muhs received
an A.B. in Economics from Stanford University and his M.B.A. from Stanford
University, Graduate School of Business.

CAROL F. HENRY has been a director of Henry Company since 1970. She is
currently involved with several civic and charitable organizations. Mrs. Henry
received an A.B. and M.A. in Education from Stanford University.

DONALD H. FORD has been director of Henry Company since 1958. From 1933 to
the present, Mr. Ford has practiced law with the law firm of Overton, Lyman and
Prince in Los Angeles, California. Mr. Ford received a B.S. in Commerce from
Oregon State University and a J.D. from the University of Michigan.

TERRILL M. GLOEGE has been a director of Henry Company since 1993. He is
currently the Chief Financial Officer of the Carson Companies. Mr. Gloege is
currently a director of Dominguez Services Corporation, a water services utility
company. Mr. Gloege received a B.S. from the United States Coast Guard Academy
and an M.B.A. from Stanford University.

The Company's bylaws provide that the Board of Directors of the Company
shall consist of nine directors. The number of authorized directors may be
increased or decreased from time to time by an amendment to the bylaws adopted
by the Board of Directors or by the Company's shareholders. Directors are
elected at each annual meeting of the Company's shareholders to hold office
until the next annual meeting and until their successors have been elected and
qualified. Executive officers are appointed by the Board of Directors and serve
at the Board's discretion, subject to any contracts of employment with the
Company.

Warner W. Henry and Carol F. Henry are husband and wife.

BOARD COMMITTEES

The Executive Committee is comprised of Warner W. Henry, Paul H. Beemer,
Joseph T. Mooney, Jr., Richard B. Gordinier and Frederick H. Muhs. Jeffrey A.
Wahba serves as Secretary of the Executive Committee without a vote. The
Executive Committee has the full authority of the Board of Directors, except
with respect to the approval of any action for which shareholder approval is
required by law or for certain other fundamental corporate actions, which
require the act of the full Board. The Audit Committee is comprised of Warner W.
Henry, Paul H. Beemer, Richard B. Gordinier, Terrill M. Gloege and Jeffrey A.
Wahba. The Audit Committee oversees the activities of Henry Company's
independent accountants.

EXECUTIVE AND DIRECTOR COMPENSATION

The Company's directors do not receive any cash compensation for service on
the Board of Directors or any Committee thereof, but directors may be reimbursed
for certain expenses in connection with attendance at board and committee
meetings.

Henry Company does not have a compensation committee or other Board
committee performing equivalent functions. Executive and employee compensation
is determined by Richard B. Gordinier. Annual increases in compensation for Mr.
Gordinier are determined by the Executive Committee of the Board without the
participation of Mr. Gordinier and increases in Mr. Henry's annual compensation
is determined by the Executive Committee without the participation of Mr. Henry.
During the 1998 fiscal year, Messrs. Henry, Beemer, Gordinier and Wahba
participated in deliberations of the Executive Committee regarding compensation
of Henry Company executive officers. No executive officer of the Company serves
as a member of the Board of Directors of any other entity which has one or more
members serving as a member of the Company's Board of Directors.

Paul H. Beemer is compensated for consulting advisory services pursuant to a
consulting agreement with the Company. Mr. Beemer provides the Company with a
certain number of hours of consulting advisory services each quarter for
compensation of $100,000 per year. Mr. Beemer may also provide additional
services which are compensated at the rate of $105 per hour. The consulting
agreement also contains a noncompetition clause restricting Mr. Beemer's
employment or service with a business entity that competes with the Company in
its present or future marketing areas. Mr. Beemer's consulting agreement expired
June 30, 1998, but has been extended by the Company to June 30, 1999. In fiscal
year 1998, Mr. Beemer received $102,205 in compensation under his consulting
agreement.

In connection with services provided by The Muhs Company, Inc., Frederick H.
Muhs provides certain business and financial consulting services to Henry
Company. Henry Company pays The Muhs Company, Inc. a retainer of $8,000 per
month for these services. In fiscal year 1998, The Muhs Company, Inc. received
$36,000 for business and financial consulting services. See "Certain
Transactions."

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning compensation
received for services rendered to Henry Company in all capacities during the
fiscal year ended December 31, 1998 by Henry Company's Chief Executive Officer
and each of Henry Company's five other most highly compensated executive
officers whose annual salary and bonus for the year ended December 31, 1998
exceeded $100,000 (collectively, the "Named Executive Officers"):

LONG-TERM
ANNUAL COMPENSATION OTHER INCENTIVE
--------------------------------- ANNUAL PLAN ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMP.(1) LTIP PAYOUT COMPENSATION
- ----------------------------------------- --------- ---------- ---------- ----------- ----------- -------------

Warner W. Henry.......................... 1998 $ 330,000 $ -- $ 25,542 -- --
Chairman of the Board and 1997 330,000 21,450
Chief Executive Officer

Richard B. Gordinier..................... 1998 285,875 200,000 29,799 --
President and Chief 1997 245,415 122,523 23,888 30,187(2)
Operating Officer

James Doose.............................. 1998 237,450 40,800 6,155 -- --
President--Resin Technology 1997 229,400 3,000 --
Company

Joseph T. Mooney......................... 1998 241,760
Vice Chairman of the Board 1997 --

Jeffrey A. Wahba......................... 1998 158,250 41,000 15,201 6,654(3) 34,413(4)
Chief Financial Officer, 1997 151,400 29,000 11,381 11,168(3) 12,494(4)
Vice President and Secretary

- ------------------------

(1) "Other Annual Compensation" represents contributions to the accounts of the
Named Executive Officers under Henry Company's Nonqualified Executive
Deferral Plan and Profit Sharing/401(k) Plan. See "Executive Deferral Plan"
and "Profit Sharing/401(k) Plan."

(2) Included in this amount is $17,937 of debt owed to and forgiven by Henry
Company and $12,250 in annual compensation as a result of the difference
between the market rate and actual interest rate on certain loans from Henry
Company.

(3) For 1998, represents incentive plan compensation payments received in 1998
and earned in 1997. The 1997 amount represents incentive plan compensation
payments earned as follows: $5,629 in 1995 and $5,539 in 1996. See
"Employment Agreements and Compensation Arrangements."

(4) The 1998 amount represents an elected payout from Henry Company's Executive
Deferral Plan for contributions to such plan by Mr. Wahba and Henry Company
of $10,200 and $14,926, respectively, which were made in 1993. The remainder
of $9,287 represents interest earned on the contributed amounts. The 1997
amount represents a similar such elected payout for contributions made by
Mr. Wahba and Henry Company of $2,400 and $7,487, respectively, which were
made in 1992. The remainder of $2,607 represents interest earned on the
contributed amounts.

WARRANT GRANTS IN LAST FISCAL YEAR

The following table provides certain information regarding warrants to
purchase shares of Henry Company's capital stock granted to any Named Executive
Officer during the fiscal years ended December 31, 1997 and 1998:

WARRANT GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
-----------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES WARRANTS
UNDERLYING GRANTED TO GRANT DATE
WARRANTS EMPLOYEES IN EXERCISE EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR PRICE(2) DATE VALUE(3)
- ----------------------------------------------- ----------- --------------- ----------- ----------- ---------------

Warner W. Henry................................ 400,000(1) 100 $ 12.94 9/30/12 $ 44,000

- ------------------------

(1) On October 1, 1997 Henry Company granted the Warner W. Henry Living Trust
warrants to purchase an aggregate of 400,000 shares of Henry Company capital
stock, consisting of 12,000 shares of Class A Common Stock and 388,000
shares of Common Stock (the "Henry Warrants"). The Henry Warrants expire on
September 30, 2012 and may be exercised in whole or in part at variable and
increasing exercise prices over the term of the Henry Warrants. The current
and maximum exercise prices of the Henry Warrants for both Class A Common
Stock and Common Stock are $12.94 and $38.82 per share, respectively. Warner
W. Henry is the trustee of the Warner W. Henry Living Trust and may be
assumed to have beneficial ownership of the Henry Warrants and shares
purchasable upon exercise of the Henry Warrants. The Henry Warrants were
issued as further consideration for certain loans made to Henry Company by
Mr. Henry.

(2) The warrants have an exercise price that exceeded the fair value of the
capital stock at the date of grant.

(3) The grant date present value of each warrant is estimated at $0.11 using the
Black-Scholes pricing model with the following assumptions: risk-free rate
of return of 6.0%, expected warrant life of 15 years; forfeiture rate of
zero (0); volatility of 20%; no expected dividends; and no adjustments for
non-transferability.

EXECUTIVE DEFERRAL PLAN

Henry Company has adopted an Executive Deferral Plan (the "Plan") to allow
certain management personnel and highly compensated employees to defer a portion
of their annual salary and bonus to be paid at a future date chosen by them or
upon their retirement, death, disability or termination of employment.
Participants in the Plan are selected by an administrative committee (the "Plan
Committee") appointed by the Board of Directors which establishes eligibility
qualifications and manages and administers the Plan. To participate in the Plan
for any year, a participant must make an irrevocable election to defer at least
$2,000 to a maximum of 100% of his or her base salary and bonus for such year
prior to the beginning of the year for which the salary and bonus relate. For
each Plan year Henry Company may contribute to each participant's account at the
Plan Committee's discretion. Deferred amounts are credited with interest at the
September "Moody's Seasoned Corporate Bond" rate that is published prior to the
end of the Plan year preceding the Plan year for which the rate is used.
Participants are at all times fully vested in their deferred compensation
accounts except in the event of a termination of their employment, in which case
participants are vested to only a percentage of any Company contributions that
have been made, calculated according to the executive's number of years of
employment. At the time of deferral, participants may elect to receive future
short-term payouts with respect to each year's deferral, payable in a lump sum
not prior to the sixth Plan year following such deferral. Amounts payable to a
participant pursuant to the Plan are unfunded amounts to be paid from the
general assets of the Company

and are at all times subject to the risk of the Company's business. The Company
funds the Plan with whole life insurance policies.

PROFIT SHARING/401(k) PLAN

Henry Company's Profit Sharing/401(k) Plan, as amended and restated as of
January 1, 1995 (the "401(k) Plan") is a qualified profit sharing plan with a
401(k) feature covering salaried and hourly employees of Henry Company and its
affiliates, other than union employees, who have completed one year of service
and attained the age of 21. Participants in the 401(k) Plan may contribute up to
15% of their annual compensation to the 401(k) Plan through salary deferral up
to a maximum of $10,000. In addition, Henry Company may make annual
discretionary matching contributions not to exceed 10% of a participant's annual
compensation. Participating employees are 100% vested in participant
contributions and become vested to a certain percentage of any Henry Company
discretionary matching contributions according to the employee's years of
service with Henry Company or its affiliates.

EMPLOYMENT AGREEMENTS AND COMPENSATION ARRANGEMENTS

Henry Company has entered into employment agreements with Mr. Gordinier, Mr.
Doose, Mr. Enright, Mr. Mooney and Mr. Karasiuk, and into incentive compensation
agreements with Mr. Enright and Mr. Wahba.

Mr. Gordinier's employment agreement entitles him to a base salary and a
bonus, subject to annual review by the Executive Committee of the Board of
Directors, and to certain other benefits, including reimbursement of certain
club memberships. In 1998, Mr. Gordiner's base salary was $285,875 and his bonus
was $100,000. In addition, Mr. Gordinier received a bonus payment of $100,000 at
the closing of the acquisition of Monsey Bakor. Mr. Gordinier is also entitled
to a bonus if a distribution of money or assets is made to the shareholders of
the Company. If a distribution is made because of a sale of the Company, Mr.
Gordinier would receive 10% of the sale amount in excess of $5,895,595, reduced
by $200,000 and the outstanding balance of any outstanding loans to Mr.
Gordinier (the "Reduction Amount"). In connection with Mr. Gordiner's
employment, Henry Company has loaned him a total of $175,000 which does not bear
interest. As of December 31, 1998, the aggregate amount outstanding under these
loans was $175,000. If Mr.Gordinier voluntarily terminates his employment or if
the Company terminates his employment for any reason other than "for cause" (as
defined in the employment agreement), Mr. Gordinier is entitled to a one-year
severance payment equal to his then salary and guaranteed bonus and a
termination award (the "Termination Award"). The Termination Award is equal to
10% of the amount by which the fair market value of the Company exceeds
$5,895,595, such fair market value to be determined by appraisal, subject to
reduction by the Reduction Amount. The Company maintains a life insurance policy
on the life of Mr. Gordinier in the amount of $2,000,000 to assist in funding
the Termination Award. The Termination Award is payable in four equal annual
installments, with the unpaid balance bearing interest at the Bank of America
prime rate existing on the due date of the first installment. Mr. Gordinier's
employment agreement automatically renews annually, unless terminated earlier by
either party.

Mr. Doose's employment agreement provides for a base salary, subject to
annual cost-of-living and discretionary increases. For 1998, Mr. Doose's base
salary was $237,450. Mr. Doose also receives annual bonuses based on the net
operating profits of, and on the return on capital employed at, RTC. If Mr.
Doose is terminated without cause, he is entitled to base compensation plus the
bonus calculated on net operating profits for the remaining term of the
agreement. The agreement contains a covenant restricting Mr. Doose from
competing with Henry Company for two years after the termination of employment.
Mr. Doose's employment agreement terminates January 1, 2004.

Pursuant to his employment agreement, Mr. Enright receives an annual base
salary, currently $158,500, subject to annual discretionary increases, and an
annual incentive bonus based upon certain agreed-upon objectives, which totaled
$7,007 in 1998. During the term of Mr. Enright's employment, and

for twelve months following termination, Mr. Enright has agreed not to directly
or indirectly compete with or engage in a business competitive with the Company.
Mr. Enright's employment agreement is automatically extended for additional
one-year terms each July 1, unless terminated sooner.

Mr. Enright's incentive compensation agreement provides for deferred
compensation based upon an increase in the net book value of the Henry Sealants
Division. This amount is payable to Mr. Enright upon his termination or the
Division's cessation of operations (the "Termination Date"), although the
Company may accelerate the benefit in the event of Mr. Enright's death or
disability. Beginning January 1, 1998, Mr. Enright received annually 25% of the
deferred benefit amount that would be payable if the Termination Date had
occurred as of the end of the previous fiscal year. In addition, if Henry
Company sells all or substantially all of the assets of the Henry Sealants
Division, Mr. Enright is entitled to an amount equal to the greater of the
deferred benefit amount as of the month preceding such sale or an amount based
on the excess of the amount of sales proceeds over an initial defined book value
of the Division.

Henry Company has entered into an incentive compensation agreement with Mr.
Wahba providing for additional compensation to Mr. Wahba upon the termination of
his employment, Henry Company's liquidation or cessation of business, or a
change of control of Henry Company. Such compensation is based upon the
cumulative operating profit for certain Henry Company divisions from a starting
date in 1988 or 1990. A portion of the deferred benefit amount may be paid to
Mr. Wahba following each fiscal year. In addition, Mr. Wahba is entitled to
receive a payment based on the excess of the amount of proceeds received from
the sale of a Henry Company division over an initial defined book value for that
division.

Mr. Mooney is a Vice Chairman of the Board of the Company with an annual
base salary of $350,000, subject to annual review. The term of Mr. Mooney's
employment agreement is for two years from the closing of the Acquisition. With
respect to the capital stock of the Company that was purchased by Mr. Mooney in
connection with the Acquisition, Mr. Mooney has the right to require the Company
to repurchase one-sixth of such capital stock each year over a five-year period
beginning January 1, 2004 (except that the last one-sixth would be repurchased
July 1, 2008) for an aggregate purchase price of $3.0 million. Such capital
stock would also be repurchased upon Mr. Mooney's death, in which event the
purchase would be funded by the proceeds from the key person life insurance
policies the Company holds on Mr. Mooney's life.

Mr. Karasiuk is employed as the President of the Company's Monsey Bakor
division with an annual base salary of Canadian $250,000, subject to annual
review. Mr. Karasiuk is also entitled to an annual bonus of up to 50% of his
base salary in the discretion of the Company's Board of Directors. The term of
Mr. Karasiuk's employment agreement is for three years from the closing of the
Acquisition.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Articles of Incorporation authorize the indemnification of
Company officers and directors to the fullest extent permissible under
California law. Subject to the Articles of Incorporation and California law, the
Bylaws provide that Henry Company shall indemnify each of its directors and
officers against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that any person is or was a Company director or officer. The
Company also purchased a director's and officer's liability insurance policy
following the Acquisition.

KEY PERSON LIFE INSURANCE

Henry Company currently maintains a term life insurance policy in the amount
of $2,000,000 on the life of Richard B. Gordinier, under which Henry Company is
the sole beneficiary. The Company also maintains whole life insurance policies
in the amount of $7,770,000 on the life of Joseph T. Mooney, Jr., under which
the Company is the sole beneficiary.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following sets forth information regarding beneficial ownership of the
Common Stock and the Class A Common Stock of the Company as of December 31,
1998. Henry Company believes that persons and entities named in the table have
sole voting and investment power with respect to all shares of Class A Common
Stock and Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable. There is no established public trading market
for any class of Henry Company's equity securities. See "The Transactions."

BENEFICIAL OWNERSHIP OF
BENEFICIAL OWNERSHIP OF COMMON
STOCK CLASS A COMMON STOCK TOTAL VOTING
-------------------------------- ------------------------ POWER(1)(2)(3)(4)(5)
NAME AND ADDRESS NUMBER OF NUMBER OF -----------------------
OF BENEFICIAL OWNER SHARES PERCENT(1)(2)(3) SHARES PERCENT PERCENT
- ------------------------------ ----------- ------------------- ----------- ----------- -----------------------

Warner W. Henry, Trustee,
Warner W. Henry Living
Trust(6).................... 388,000(1) 53.0% 18,000(4) 100.0% 74.7%
2911 Slauson Ave.
Huntington Park, CA
90255

Terrill M. Gloege as Trustee
of the William Warner Henry
Trust established under the
Henry Trust dated 9/17/93... 64,106 8.8 -- -- 4.7
2911 Slauson Ave.
Huntington Park, CA 90255

Terrill M. Gloege as Trustee
of the Catherine Anne Henry
Trust established under the
Henry Trust dated 9/17/93... 64,106 8.8 -- -- 4.7
2911 Slauson Ave.
Huntington Park, CA 90255

Terrill M. Gloege as Trustee
of the Michael Andrew Henry
Trust established under the
Henry Trust dated 9/17/93... 64,106 8.8 -- -- 4.7
2911 Slauson Ave.
Huntington Park, CA 90255

Frederick H. Muhs............. 82,500(2) 11.3 -- -- 6.1

Joseph T. Mooney, Jr.......... 67,500(3) 9.2 -- -- 5.0

Carol F. Henry................ 1,682 0.2 -- -- 0.1

TOTAL ECONOMIC
INTEREST(1)(2)(3)(4)
NAME AND ADDRESS ---------------------
OF BENEFICIAL OWNER PERCENT
- ------------------------------ ---------------------

Warner W. Henry, Trustee,
Warner W. Henry Living
Trust(6).................... 54.1%
2911 Slauson Ave.
Huntington Park, CA
90255
Terrill M. Gloege as Trustee
of the William Warner Henry
Trust established under the
Henry Trust dated 9/17/93... 8.6
2911 Slauson Ave.
Huntington Park, CA 90255
Terrill M. Gloege as Trustee
of the Catherine Anne Henry
Trust established under the
Henry Trust dated 9/17/93... 8.6
2911 Slauson Ave.
Huntington Park, CA 90255
Terrill M. Gloege as Trustee
of the Michael Andrew Henry
Trust established under the
Henry Trust dated 9/17/93... 8.6
2911 Slauson Ave.
Huntington Park, CA 90255
Frederick H. Muhs............. 11.0
Joseph T. Mooney, Jr.......... 9.0
Carol F. Henry................ 0.2

- ------------------------------

(1) Assumes exercise of the Henry Warrants to purchase 388,000 shares of Common
Stock which expire on September 30, 2012. The warrants may be exercised in
whole or in part at variable exercise prices which increase over the term of
the warrant. The current and maximum exercise prices for such Common Stock
is $12.94 and $38.82 per share, respectively. See "Executive Compensation."

(2) Assumes the exercise of Mr. Muhs' right to purchase up to 55,000 shares of
Common Stock in amounts sufficient to maintain his current percentage of
economic interest in the Company following the exercise of any of the Henry
Warrants (and the purchase of shares of Common Stock by Mr. Mooney pursuant
to his similar rights).

(3) Assumes the conversion of Mr. Mooney's redeemable convertible preferred
stock into 22,500 shares of Common Stock and the exercise of Mr. Mooney's
right to purchase up to 45,000 shares of Common Stock in amounts sufficient
to maintain his current percentage of economic interest in the Company
following the exercise of any of the Henry Warrants (and the purchase of
shares of Common Stock by Mr. Muhs pursuant to his similar right).

(4) Assumes exercise of the Henry Warrants to purchase 12,000 shares of Class A
Common Stock which expire on September 30, 2012. The warrants may be
exercised in whole or in part at variable exercise prices which increase
over the term of the warrants.

The current and maximum exercise prices for such Class A Common Stock is
$12.94 and $38.82 per share, respectively. See "Executive Compensation."

(5) The Common Stock and the Class A Common Stock vote together as a single
class. However, each share of Class A Common Stock entities the holder to 35
votes on all matters for which there is a vote, while each share of Common
Stock entitles the holder to one vote on all such matters.

(6) Warner W. Henry is the trustee of the Warner W. Henry Living Trust and may
be assumed to have beneficial ownership of all shares and warrants held by
the trust. Amount shown does not include 1,682 shares owned by Carol Henry,
as to which shares Mr. Henry disclaims beneficial ownership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company leases its Huntington Park headquarters and certain operating
equipment from a family trust and living trust for which Warner W. Henry is the
trustee pursuant to three separate real property leases and one equipment lease.
These leases expire in 2002, 2006 and 2016. The total rent paid in 1997 and 1998
for the Huntington Park leases was approximately $424,904 each year. The Company
leases additional property at its Huntington Park headquarters from Alamo
Development Company. Frederick H. Muhs, a director of the Company, is a
shareholder of Alamo Development Company along with certain other members of his
family. The Company currently pays rent of $5,330 per month pursuant to this
lease which is subject to annual adjustments to reflect changes in the Bank of
America prime rate. The lease expires February 28, 2002 and provides for the
Company's option to purchase the property upon six months written notice. The
Company also leases certain warehouse facilities in Irvington, New Jersey, from
Sea Jay, Inc. The shareholders of Sea Jay, Inc. are Joseph T. Mooney, Jr. and
certain of his family members. The Company currently pays rent of $2,333 per
month pursuant to this lease which expires December 31, 1999. The Company has
the option to extend the lease for five additional consecutive one year terms at
increasing annual rental amounts. The Company believes that the rent paid under
the above leases represent substantially fair market value and that the other
terms and conditions of the leases are commercially reasonable.

Henry Company has made loans to Richard B. Gordinier for personal reasons
pursuant to various loan agreements and promissory notes originated at various
times since 1988 for one year terms that were subsequently extended for
successive one year terms. The loans currently bear interest at Bank of
America's prime rate, currently 7.75%, and may be prepaid without penalty. As of
December 31, 1998, an aggregate of $426,672 was outstanding on these loans. In
addition, Mr. Gordinier has received $175,000 of non-interest bearing loans in
connection with his employment. See "Management--Employment Agreements and
Compensation Arrangements."

Henry Company performs certain administrative services for an affiliate,
Henry II Company, a California corporation, pursuant to an administrative
services agreement that provides for payments from Henry II Company to Henry
Company. These payments totaled $1.1 million in 1998. Henry II Company's
shareholders are Warner W. Henry, Carol Henry, and certain trusts for the
benefit of their children.

At December 31, 1997, Henry Company received a note from Henry II Company
for $1.9 million representing the purchase price for its interest in certain
real property. Such real property related solely to the business of Henry II
Company and had a net book value of $1.9 million. The note bears interest at the
prime rate, and is repayable in a lump sum at any time up to December 31, 2002.
The balance of such note was $1.9 million at December 31, 1998. In addition, at
December 31, 1998, Henry II Company owed $2.4 million to Henry Company,
representing past advances made on behalf of Henry II Company. The note
evidencing this debt does not bear interest and is payable upon demand.

Henry Company receives business and financial consulting services from The
Muhs Company, Inc., of which Frederick H. Muhs, a director of the Company, is
the President and controlling shareholder. Henry Company paid $36,000 for these
services in 1997 and $36,000 in 1998. See "Executive Compensation."

Joseph T. Mooney, Jr. and certain of his family members are the shareholders
of Sea Jay, Inc. Monsey Bakor sold approximately $67,000 of products to Sea Jay
in fiscal year 1998.

The Company is a party to employment and consulting agreements with certain
directors and officers of the Company. See "Employment Agreements and
Compensation Arrangements."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(A) DOCUMENTS FILED AS PART OF THIS REPORT

1. FINANCIAL STATEMENTS

The Consolidated Financial Statements of Henry Company are contained herein
as listed on the "Index to Consolidated Financial Statements" on page F-1.

2. FINANCIAL STATEMENT SCHEDULES

The financial statement schedules of Henry Company have been omitted because
they are not applicable, not required, or the information is included in the
consolidated financial statement or notes there to.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and, therefore, have been omitted.

REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1998.

EXHIBITS

See Exhibit Index

HENRY COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
---------

Report Of Independent Accountants.......................................................................... F-2

Consolidated Balance Sheets As Of December 31, 1997 And 1998............................................... F-3

Consolidated Statements Of Operations For Each Of The Three Years In The Period Ended December 31, 1998.... F-4

Consolidated Statements Of Changes In Shareholders' Equity For Each Of The Three Years In The Period Ended
December 31, 1998........................................................................................ F-5

Consolidated Statements Of Cash Flows For Each Of The Three Years In The Period Ended December 31, 1998.... F-6

Notes To Consolidated Financial Statements................................................................. F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors,
Bond Holders and Shareholders
of Henry Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Henry Company and subsidiaries (the "Company") at December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Los Angeles, California
February 26, 1999

F-2

HENRY COMPANY

CONSOLIDATED BALANCE SHEETS

FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998

1997 1998
------------- --------------

ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 118,857 $ 12,022,676
Trade accounts receivable, net of allowance for doubtful accounts of $161,365
and $766,633 for 1997 and 1998, respectively.................................. 10,368,904 19,798,709
Inventories..................................................................... 5,882,262 14,787,345
Receivables from affiliate...................................................... 2,264,341 2,853,677
Notes receivable................................................................ 448,721 498,059
Prepaid expenses and other current assets....................................... 1,197,167 2,449,184
------------- --------------
Total current assets.......................................................... 20,280,252 52,409,650
Property and equipment, net....................................................... 5,483,188 35,370,224
Cash surrender value of life insurance, net....................................... 1,658,305 3,469,017
Intangibles, net.................................................................. 702,091 31,777,329
Notes receivable.................................................................. 299,654 376,308
Note receivable from affiliate.................................................... 1,863,072 1,863,072
Other............................................................................. 131,085 248,200
------------- --------------
Total assets.................................................................. $ 30,417,647 $ 125,513,800
------------- --------------
------------- --------------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................ $ 4,846,131 $ 9,640,787
Accrued expenses................................................................ 3,622,011 8,298,365
Income taxes payable............................................................ -- 103,094
Notes payable, current portion.................................................. 638,199 330,224
Borrowings under lines of credit................................................ 3,970,381 1,657,500
------------- --------------
Total current liabilities..................................................... 13,076,722 20,029,970
Notes payable..................................................................... 4,116,345 642,915
Environmental reserve............................................................. -- 3,432,371
Deferred income taxes............................................................. -- 5,711,071
Deferred warranty revenue......................................................... 2,002,569 2,190,938
Deferred compensation............................................................. 1,076,187 1,015,565
Subordinated shareholder debt..................................................... 5,023,466 --
Series B Senior notes............................................................. -- 85,000,000
------------- --------------
Total liabilities............................................................. 25,295,289 118,022,830
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock............................................ -- 1,660,874
Shareholders' equity:
Common stock.................................................................... 2,853,669 4,691,080
Additional paid-in capital...................................................... 2,682,152 2,622,867
Cumulative translation adjustment............................................... -- (892,724)
Accumulated deficit............................................................. (413,463) (591,127)
------------- --------------
Total shareholders' equity.................................................... 5,122,358 5,830,096
------------- --------------
Total liabilities and shareholders' equity.................................... $ 30,417,647 $ 125,513,800
------------- --------------
------------- --------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-3

HENRY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

1996 1997 1998
------------- ------------- --------------

Net sales.......................................................... $ 59,186,000 $ 67,423,603 $ 150,156,121
Cost of sales...................................................... 40,866,724 46,412,828 105,142,584
------------- ------------- --------------
Gross profit................................................... 18,319,276 21,010,775 45,013,537

Operating expenses:
Selling, general and administrative.............................. 16,934,453 17,508,108 35,028,475
Amortization of intangibles...................................... 182,693 137,241 2,081,321
------------- ------------- --------------
Operating income............................................... 1,202,130 3,365,426 7,903,741

Other expense (income):
Interest expense................................................. 1,474,899 1,464,665 6,566,680
Interest and other income, net................................... (344,841) (320,547) (243,493)
------------- ------------- --------------
Income before provision for income taxes....................... 72,072 2,221,308 1,580,554
Provision for income taxes......................................... 1,081 33,320 509,342
------------- ------------- --------------
Net income..................................................... $ 70,991 $ 2,187,988 $ 1,071,212
------------- ------------- --------------
------------- ------------- --------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

HENRY COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

COMMON STOCK
----------------------- ADDITIONAL CUMULATIVE
ISSUED PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
--------- ------------ ------------ ------------- ------------- ------------

Balance, December 31, 1995......... 200,100 $ 2,853,669 $ 2,682,152 -- $ (2,672,442) $ 2,863,379
Net income....................... -- -- -- -- 70,991 70,991
--------- ------------ ------------ ------------- ------------- ------------
Balance, December 31, 1996......... 200,100 2,853,669 2,682,152 (2,601,451) 2,934,370
Net income....................... -- -- -- 2,187,988 2,187,988
--------- ------------ ------------ ------------- ------------
Balance, December 31, 1997......... 200,100 2,853,669 2,682,152 -- (413,463) 5,122,358
Merger of Warner Development
Company of Texas into Henry
Company.......................... (100) (162,589) 162,589 -- -- --
Issuance of common stock........... 27,500 2,000,000 -- -- -- 2,000,000
Dividend to shareholders........... -- -- -- -- (1,248,876) (1,248,876)
Accretion on redeemable convertible
preferred stock.................. -- -- (221,874) -- (221,874)
Comprehensive income:
Net income....................... -- -- -- -- 1,071,212 1,071,212
Other comprehensive income:
Change in cumulative
translation adjustment....... -- -- -- $ (892,724) -- (892,724)
------------
Total comprehensive income... -- -- -- -- -- 178,488
--------- ------------ ------------ ------------- ------------- ------------
Balances, December 31, 1998........ 227,500 $ 4,691,080 $ 2,622,867 $ (892,724) $ (591,127) $ 5,830,096
--------- ------------ ------------ ------------- ------------- ------------
--------- ------------ ------------ ------------- ------------- ------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

HENRY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998

1996 1997 1998
----------- ----------- -------------

Cash flows from operating activities:
Net income........................................................... $ 70,991 $ 2,187,988 $ 1,071,212
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 1,582,974 1,404,361 3,269,260
Provision for doubtful accounts.................................... 178,963 179,374 501,840
Deferred income taxes.............................................. -- -- (388,118)
Noncompetition and goodwill amortization........................... 61,716 65,014 1,624,534
Interest on subordinated shareholder debt.......................... 377,205 345,441 176,506
(Gain) loss on disposal of property and equipment.................. (45,611) 2,278 (47,034)
Changes in operating assets and liabilities, net of assets
acquired:
Accounts receivable.............................................. (300,283) (1,402,006) 7,338,355
Inventories...................................................... (508,358) 64,126 2,040,917
Receivables from affiliates...................................... (265,047) 2,033,432 (589,336)
Notes receivable................................................. 271,888 23,859 24,008
Cash surrender value of life insurance........................... (129,479) (665,804) (138,712)
Other assets..................................................... (408,237) (150,535) (636,959)
Accounts payable and accrued expenses............................ (132,985) 378,293 (4,393,596)
Deferred warranty revenue........................................ 210,441 169,138 188,370
Deferred compensation............................................ 206,603 145,838 (60,622)
----------- ----------- -------------
Net cash provided by operating activities...................... 1,170,781 4,780,797 9,980,625
----------- ----------- -------------
Cash flows from investing activities:
Capital expenditures................................................. (1,448,693) (801,239) (2,996,720)
Proceeds from the disposal of property and equipment................. 666,224 50,874 131,532
Acquisition of business, net of cash acquired........................ -- (134,779) (45,113,700)
Investment in affiliate.............................................. -- (64,189) (30,645)
----------- ----------- -------------
Net cash used in investing activities.......................... (782,469) (949,333) (48,009,533)
----------- ----------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement........... (738,472) (3,091,147) (16,652,881)
Repayments under note payable agreements............................. (437,266) (604,370) (11,503,405)
Borrowings under note payable agreements............................. 1,908,333 427,278 --
Payments on subordinated shareholder debt............................ (827,947) (744,530) (5,199,972)
Payments under capital lease obligations............................. (162,950) -- --
Payments of finance fees for note offering........................... -- -- (2,550,000)
Proceeds from Series B Senior Notes.................................. -- -- 85,000,000
Proceeds from issuance of common stock............................... -- -- 2,000,000
Proceeds from issuance of preferred stock............................ -- -- 600,000
Dividends paid....................................................... -- -- (1,248,876)
----------- ----------- -------------
Net cash (used in) provided by financing activities............ (258,302) (4,012,769) 50,444,866
----------- ----------- -------------
Effect of exchange rate changes on cash................................ -- -- (512,139)
----------- ----------- -------------
Net increase (decrease) in cash and cash equivalents........... 130,010 (181,305) 11,903,819
Cash and cash equivalents, beginning of year........................... 170,152 300,162 118,857
----------- ----------- -------------
Cash and cash equivalents, end of year................................. $ 300,162 $ 118,857 $ 12,022,676
----------- ----------- -------------
----------- ----------- -------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The consolidated financial statements of Henry Company (the "Company")
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

For periods prior to April 21, 1998, the Company's financial statements were
prepared on a combined basis with Warner Development Company of Texas ("Warner
Development") as both entities were under common control with identical
shareholder ownership interests. On April 21, 1998, Warner Development was
merged into Henry Company and the outstanding shares of Warner Development
capital stock were cancelled.

As more fully described in Note 2, the consolidated financial statements for
the year ended December 31, 1998 include the financial results and accounts of
Monsey Bakor and its subsidiaries which were acquired (the "Acquisition") by the
Company on April 22, 1998. The Acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations of Monsey Bakor
since the acquisition date have been included in the consolidated financial
statements of the Company.

The Company develops, manufactures and markets materials for the
construction industry focusing primarily on roofing, sealing and paving
applications. The Company's products include: roof/driveway coatings and paving
products, industrial emulsions, air barriers, specialty products, polyurethane
foam for residential and commercial uses, and sealants for the construction and
marine industries.

REVENUE RECOGNITION

Revenues are recognized when products are shipped. The Company has
established programs which, under specified conditions, allow customers to
return products. The Company establishes liabilities for estimated returns and
allowances at the time of shipment. In addition, accruals for customer discounts
and returns are recorded when revenues are recognized.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Under the Company's cash management system, checks issued but not presented
to banks frequently result in overdraft balances for accounting purposes and are
included in "Accounts Payable" in the accompanying balance sheet. At December
31, 1997, these overdraft balances amounted to $1,488,003. There were no
overdraft balances at December 31, 1998.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or market.
Cost is determined using standard cost which approximates actual costs on a
first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Leasehold improvements are
amortized on a straight-line basis over the remaining lease term, or the asset's
estimated useful life, whichever is shorter. All other

F-7

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , CONTINUED:
depreciable assets are depreciated using the double-declining-balance method or
the straight-line method, over the assets' estimated useful lives.

Depreciation periods are as follows:

Buildings............................................. 25 to 30 years
Machinery and equipment............................... 6 years
Office furniture and equipment........................ 5 years
Automotive equipment.................................. 3 to 5 years
Primary term of
Leasehold improvements................................ lease
Other................................................. 5 years

Additions, major renewals and betterments are capitalized. Repair and
maintenance costs are expensed as incurred. Upon sale or retirement of property
and equipment, the cost and accumulated depreciation are removed from the
appropriate accounts and any corresponding gain or loss is included in income in
the year the asset is disposed.

INTANGIBLES

Intangibles are comprised primarily of costs in excess of the fair value of
net assets acquired, acquisition-related costs, financing fees and
noncompetition agreements related to acquisitions. Intangible assets are being
amortized over periods ranging from 10 to 25 years. At December 31, 1997 and
1998, accumulated amortization related to intangibles totalled $65,014 and
$1,624,534, respectively.

LONG-LIVED ASSETS

The carrying value of long-lived assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value. During the year ended December 31, 1996, the Company
adopted Statement of Financial Accounting Standards "SFAS" No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". SFAS No. 121 requires that long-lived assets and certain identifiable
intangible assets to be held and used be reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount of such assets may not
be recoverable. The adoption of SFAS No. 121 did not have any impact on the
financial position, results of operations or cash flows of the Company.

INCOME TAXES

In April 1998, the Company converted its tax status from an S Corporation
under Section 1361 of the Internal Revenue Code to a C Corporation status (the
"Conversion"). Upon conversion, the Company is required to pay federal and state
corporate income taxes on its taxable income.

Upon the completion of the Conversion, the Company recognized deferred taxes
in accordance with the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.

F-8

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , CONTINUED:
For periods prior to the Conversion, the Company did not pay federal
corporate income taxes on its taxable income. Instead the shareholders were
individually liable for the federal and state income taxes based on the
Company's taxable income. For state income tax purposes, the Company was
required to pay an S Corporation tax based on 1.5% of taxable income. This state
tax liability is included in the provision for income taxes for periods prior to
the Conversion.

DEFERRED WARRANTY INCOME

The Company offers its customers an optional separately purchased warranty
program for its commercial roofing systems. Revenue from the warranty program is
recognized over the 20 year warranty period. Warranty repair expenses under the
program are charged to expense as incurred.

ENVIRONMENTAL RESERVE

The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Cost of future expenditures for environmental remediation obligations are not
discounted.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses include all costs associated
with marketing and distributing the Company's products. Also included in
selling, general and administrative expenses are research and development costs.
Research and development costs incurred in developing and improving product
formulae are charged to expense in the year incurred. Total research and
development costs were $320,961, $320,275 and $1,037,703 for the years ended
December 31, 1996, 1997 and 1998, respectively.

ADVERTISING AND PROMOTION COSTS

All costs associated with advertising and promoting products are expensed in
the year incurred and are included in selling, general and administrative
expenses. Advertising and promotion expenses were $1,026,698, $1,004,221 and
$3,025,741 for the years ended December 31, 1996, 1997 and 1998, respectively.

FOREIGN CURRENCY TRANSLATION

The assets and liabilities of the Company's wholly-owned Canadian
subsidiaries are translated from Canadian dollars to U.S. dollars using exchange
rates in effect at the balance sheet date. Revenues and expenses are translated
using average exchange rates prevailing during the period. The effect of the
unrealized exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as a separate component of
shareholders' equity. Gains and losses resulting from foreign currency
transactions are included in operations. The aggregate foreign exchange gains
included in operations were $48,700 for the year ended December 31, 1998.

F-9

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , CONTINUED:
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company currently maintains substantially all of its day-to-day
operating cash balances with major financial institutions. At times, cash
balances may be in excess of Federal Depository Insurance Corporation ("FDIC")
insurance limits. Cash equivalents principally consist of money market funds on
deposit with major financial institutions.

Concentration of credit risk with respect to trade receivables is derived
from the Company's largest customer, which represents approximately 15% and 8.2%
at December 31, 1997 and 1998, respectively. This customer also accounted for
approximately 12% of net sales in fiscal year 1996, 15% of net sales in fiscal
year 1997 and 8% of net sales in fiscal year 1998. However, the majority of the
Company's customers are geographically diverse roofing distributors and
contractors located throughout the United States and eastern Canada, which
limits the extent of trade credit risk. The Company also maintains credit
insurance that provides substantial reimbursement for actual credit losses
relating to its Henry Coatings Division. In addition, the Company controls
credit risk through credit approvals, credit limits and monitoring procedures.

THE VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of fair value information about most financial instruments
both on and off the balance sheet, if it is practicable to estimate. SFAS No.
107 excludes certain financial instruments such as certain insurance contracts
and all non-financial instruments from its disclosure requirements. A financial
instrument is defined as a contractual obligation that ultimately ends with the
delivery of cash or an ownership interest in an entity. Disclosures regarding
the fair value of financial instruments are derived using external market
sources, estimates using present value or other valuation techniques. Cash,
accounts receivable, accounts payable, accrued liabilities and short-term debt
are reflected in the financial statements at fair value because of the
short-term maturity of these instruments. The Company's long-term debt is
primarily comprised of senior notes with a carrying value of $85 million at
December 31, 1998. The fair value of the senior notes was $100.5 million at
December 31, 1998.

The Company has issued a standby letter of credit relating to its business
insurance and is contingently liable for approximately $409,000. The standby
letter of credit is in force for the term of the insurance policy, and reflects
the current fair value.

USE OF ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

COMPREHENSIVE INCOME

During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes guidelines for the reporting and
display of comprehensive income and

F-10

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES , CONTINUED:
its components in the financial statements. Comprehensive income, as defined,
includes all changes in shareholders' equity during a period from non-owner
sources. The only component of comprehensive income not included in the
Company's operating results relates to the change in the cumulative translation
adjustment related to the foreign currency effects of the Canadian operations
acquired during 1998 as part of the Acquisition as discussed in Note 2.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities". SOP No. 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard will not have a
significant impact on the Company's financial position, results of operations or
cash flows.

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
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.

2. BUSINESS ACQUISITION AND NOTE OFFERING:

On April 22, 1998, the Company completed the acquisition of Monsey Bakor and
its subsidiaries (the "Acquisition") which are engaged in the distribution and
manufacture of roof coatings, adhesives and membranes, and waterproofing and air
barrier systems, for residential and commercial applications. The cash purchase
price was $42,750,000 with an additional $3,227,000 paid at closing to certain
selling shareholders of Monsey Bakor for noncompetition agreements. A selling
shareholder also purchased 22,500 shares of redeemable convertible preferred
stock of the Company for $600,000 cash as more fully discussed in Note 12. The
Acquisition was accounted for using the purchase method of accounting.

Concurrent with the Acquisition, the Company conducted a senior note
offering the (the "Offering") in the aggregate principal amount of $85,000,000
as more fully discussed in Note 5.

In accordance with the requirements of Accounting Principles Board ("APB")
Opinion No. 16 "Business Combinations," the following unaudited pro forma
summary presents the results of operations of the Company as if the Acquisition
and Offering had occurred as of the beginning of each period presented. The pro
forma adjustments include the results of operations for Monsey Bakor for the
period prior to the Acquisition, adjustment for compensation expense in excess
of amounts paid under new employment agreements, amortization of intangible
assets created as a result of the Acquisition, interest

F-11

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

2. BUSINESS ACQUISITION AND NOTE OFFERING , CONTINUED:

expense on the debt issued as part of the Offering, and related income tax
effects. The unaudited pro forma financial information is presented for
information purposes only and may not be indicative of the results of operations
as they would have been if the Company and Monsey Bakor had been a single entity
during the years ended December 31, 1997 and 1998, nor is such information
indicative of the results of operations which may occur in the future.

UNAUDITED
------------------------
FOR THE YEAR
ENDED DECEMBER 31,
------------------------
1997 1998
----------- -----------

Net sales..................................... $180,598,592 $183,996,121
----------- -----------
----------- -----------
Net loss...................................... $(2,688,548) $ (970,175)
----------- -----------
----------- -----------

The intangible assets created as a result of the Acquisition and aggregate
amortizable lives are as follows:

AMORTIZABLE
AMOUNT LIFE
------------- -----------

Excess of cost over the estimated fair value of net assets
acquired....................................................... $ 20,329,420 15 years
Noncompetition agreements........................................ 3,227,000 10 years
Financing fees................................................... 2,550,000 10 years
Acquisition-related costs........................................ 2,188,700 10 years
-------------
$ 28,295,120
-------------
-------------

3. INVENTORIES:

Inventories consist of the following:

DECEMBER 31,
---------------------------

1997 1998
------------ -------------
Raw materials.................................................... $ 2,232,684 $ 7,240,227
Finished goods................................................... 3,649,578 7,547,118
------------ -------------
$ 5,882,262 $ 14,787,345
------------ -------------
------------ -------------

F-12

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

4. PROPERTY AND EQUIPMENT, NET:

Property and equipment consist of the following:

DECEMBER 31,
----------------------------

1997 1998
------------- -------------
Buildings...................................................... $ 463,375 $ 13,634,579
Machinery and equipment........................................ 10,129,940 23,898,403
Office furniture and equipment................................. 2,344,253 3,241,389
Automotive equipment........................................... 1,447,456 1,635,230
Leasehold improvements......................................... 3,047,521 3,145,244
Other.......................................................... 330,695 330,695
------------- -------------
17,763,240 45,885,540
Less, accumulated depreciation and amortization................ 13,207,170 16,338,442
------------- -------------
4,556,070 29,547,098
Land........................................................... 472,162 3,298,139
Construction-in-progress....................................... 454,956 2,524,987
------------- -------------
$ 5,483,188 $ 35,370,224
------------- -------------
------------- -------------

5. LONG-TERM DEBT AND CREDIT FACILITIES:

On April 22, 1998, the Company privately issued and sold $85,000,000 of
senior notes (the "Senior Notes") due in 2008. Interest on the Senior Notes is
payable semi-annually a 10% per annum. In October 1998, the Company completed an
exchange offer for all of the Senior Notes. The terms of the new Senior Notes
are identical in all material respects to the original private issue. The
proceeds from the offering were used to (i) retire existing Company bank debt,
(ii) retire existing Company subordinated shareholder debt, (iii) acquire Monsey
Bakor, (iv) retire a substantial portion of Monsey Bakor's then-existing bank
debt with (v) the remainder providing additional working capital.

F-13

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

5. LONG-TERM DEBT AND CREDIT FACILITIES , CONTINUED:
Long-term debt and credit facilities consists of the following:

DECEMBER 31,
---------------------------

1997 1998
------------ -------------
10.0% Series B Senior Notes due April 2008........................................... -- $ 85,000,000
Canadian bank line of credit borrowings, subject to annual confirmation, interest
rate at prime plus 0.5% (7.75% at December 31, 1998)............................... -- 1,657,500
Line of credit borrowing, at the bank's prime interest rate (8.75% at December 31,
1997). Retired in April 1998....................................................... $ 3,970,381 --
Term note payable to bank, with interest at 9.0% at December 31, 1997, interest
payable monthly, principal payable in monthly installments of $41,667. Retired in
April 1998......................................................................... 3,499,996 --
Term note payable to bank, with interest at 9%, interest and principal payable
quarterly, principal installments of $31,250. Retired in April 1998................ 427,278 --
Term note payable, with interest at 9.25% and 8.75% at December 31, 1997 and 1998,
respectively, interest and principal payable quarterly, principal installments of
$75,000, due in fiscal year 1999................................................... 331,250 75,000
Term note payable to third party, with interest at 8.0% and 8.5% at December 31, 1997
and 1998, respectively, principal and interest payable monthly in installments of
$4,848, due in fiscal year 2007.................................................... 495,147 478,279
Other notes payable, with unpaid amounts of interest ranging from 6.0% to 8.5%, at
December 31, 1997 and 1998 total monthly payments amount to $21,014, due in the
fiscal years 2000 through 2003..................................................... 873 419,860
------------ -------------
8,724,925 87,630,639
Less, current maturities............................................................. 4,608,580 1,987,724
------------ -------------
$ 4,116,345 $ 85,642,915
------------ -------------
------------ -------------

The Company's Senior Notes are guaranteed by all of the Company's United
States subsidiaries, Monsey Products Co., Kimberton Enterprises, Inc. and Monsey
Products of Arizona LLC (the "Subsidiary Guarantors"). The guarantee obligations
of the Subsidiary Guarantors are full, unconditional and joint and several. See
Note 14 for the Guarantor Condensed Consolidating Financial Statements.

Concurrent with the Offering, the Company's bank credit line was replaced
with a $35 million credit facility, $25 million of which is available in
accordance with a borrowing base and to be used for working capital needs and
$10 million of which may be used for capital expenditures. The credit facility
expires on April 22, 2003 with interest charged at prime or LIBOR plus 2.25%. At
December 31, 1998, there were no balances outstanding under the credit facility.

The notes payable and long-term debt agreements limit the Company's ability
to make dividend payments and require the maintenance of certain financial
ratios, including limitations on incurring additional debt, maintenance of
certain fixed charge ratios, and the maintenance of specified net worth amounts.

F-14

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

5. LONG-TERM DEBT AND CREDIT FACILITIES , CONTINUED:
The following are future maturities of long-term debt and credit facilities
for each of the next five years ending December 31 and total thereafter:

1999........................................................... $1,987,724
2000........................................................... 124,286
2001........................................................... 51,434
2002........................................................... 53,462
2003........................................................... 44,165
Thereafter..................................................... 85,369,568
----------
Total........................................................ $87,630,639
----------
----------

6. INCOME TAXES:

The significant components of the provision (benefit) for income taxes for
the year ended December 31, 1998 are as follows:

Current:
Federal........................................................ $ 534,973
State.......................................................... 169,891
Foreign........................................................ 293,544
---------
998,408
---------
Deferred:
Federal........................................................ (537,001)
State.......................................................... (117,521)
Foreign........................................................ 165,456
---------
(489,066)
---------
$ 509,342
---------
---------

The Company's effective tax rate differs from the federal statutory tax rate
for the year ended December 31, 1998 as follows:

Provision for income taxes at the federal statutory tax rate........... 34%
State taxes net of federal tax benefit................................. 7
Foreign income taxes in excess of U.S. statutory rate.................. 6
Recognition of deferred tax benefits upon conversion to C status....... (56)
Nondeductible intangibles.............................................. 43
Income not subject to federal and state income tax prior to conversion
to C status.......................................................... (7)
Nondeductible business expenses........................................ 6
Nondeductible life insurance........................................... 4
Other, net............................................................. (5)
--
32%
--
--

F-15

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

6. INCOME TAXES , CONTINUED:
Income before income taxes of the Company's Canadian operations was
$1,083,430 for the year ended December 31, 1998.

The deferred tax provision (benefit) recognized as a result of the
conversion from S corporation status to a C Corporation status and the related
recognition of deferred taxes is as follows:

Allowance and reserves deductible in the future.................. $(172,218)
Deferred revenue................................................. (871,597)
Depreciation..................................................... 644,825
Other accruals................................................... (483,447)
---------
Net deferred tax benefit from conversion....................... $(882,437)
---------
---------

The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 are as follows:

Deferred tax assets:
Environmental reserve......................................... $1,441,596
Allowances and reserves deductible in the future.............. 259,405
Inventory capitalization...................................... 130,490
Deferred revenue.............................................. 1,011,460
Other accruals................................................ 439,740
----------
Deferred tax assets........................................... 3,282,691
----------
Deferred tax liabilities:
Depreciation.................................................. (3,159,887)
Deferred gain on discharge of liability....................... (1,106,891)
Asset step-up due to valuation increase....................... (4,109,519)
Affiliate losses.............................................. (529,912)
Other accruals................................................ (87,553)
----------
Deferred tax liabilities...................................... (8,993,762)
----------
Net deferred tax liability.................................. $(5,711,071)
----------
----------

F-16

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

7. COMMITMENTS AND CONTINGENCIES:

The Company conducts certain operations out of leased facilities, including
the corporate office and divisional warehouses. The lease terms range from 1 to
6 years and begin to expire in 1999. Certain of the Company's operating lease
agreements provide for escalation of payments, which are based on fluctuations
of certain published cost-of-living indices. The Company also leases certain
land, buildings and equipment from related parties, with terms expiring in 1999.
Various leases also contain certain renewal options.

Total rent expense was $896,465 and $1,223,744 for the years ended December
31, 1997 and 1998, respectively. Included in rent expense is rent paid to
related parties of $735,960 and $757,539 for the years ended December 31, 1997
and 1998, respectively. The minimum rental commitments for land, buildings and
equipment under all noncancelable operating leases, with lease terms in excess
of one year, are as follows:

1999............................................................ 1,446,540
2000............................................................ 1,116,187
2001............................................................ 988,683
2002............................................................ 795,861
2003............................................................ 702,051
Thereafter...................................................... 432,316
---------
$5,481,638
---------
---------

Included in the annual minimum rental commitments are operating lease
payments due to related parties of $764,202 in 1999, $763,250 in 2000, $763,250
in 2001, $708,470 in 2002, $697,514 in 2003 and $432,316 thereafter.

The Company is involved in various lawsuits, claims and inquiries, most of
which are routine to the nature of its business. In the opinion of management,
the resolution of these matters will not materially affect the financial
position, results of operations or cash flows of the Company.

8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

CASH PAID DURING THE YEAR FOR: 1996 1997 1998
- ---------------------------------------------------- ------------ ------------ ------------

Interest............................................ $ 1,912,996 $ 1,461,977 $ 4,893,760
------------ ------------ ------------
------------ ------------ ------------
Income taxes........................................ $ 1,600 $ 1,600 $ 2,098,969
------------ ------------ ------------
------------ ------------ ------------

NON-CASH TRANSACTIONS

At December 31, 1997, the Company sold property to the Henry II division of
The Henry Wine Group ("Wine Group") for the net book value of $1,863,072. This
transaction is excluded from the statement of cash flows for the year ended
December 31, 1997 as the consideration was received in the form of a note, as
more fully described in Note 10.

9. PROFIT-SHARING AND PENSION PLAN:

The Company sponsors a deferred profit-sharing plan for employees.
Contributions into the plan are maintained in a trust. Contributions are
discretionary and determined by the Board of Directors each year.

F-17

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

9. PROFIT-SHARING AND PENSION PLAN , CONTINUED:
Participants are salaried regular employees with at least one year of continuous
Company employment. Contributions made by the Company are based on the Company's
performance and are at the discretion of the Board of Directors. Total Company
contributions for fiscal years ended December 31, 1996, 1997 and 1998 were
$282,632, $320,830 and $444,631, respectively.

Hourly employees at the Huntington Park, Kimberton and Rock Hill facilities
are covered by multi-employer union plans to which the Company makes periodic
contributions as determined by collective bargaining agreements. The Company is
also subject to additional charges as determined by the plans' trustees during
the term of the agreement to maintain the current level of health and welfare
benefits. The information with respect to the plans' net assets and actuarial
present value of accumulated plan benefits are not determinable due to the
nature of the plans. The costs incurred during the years ended December 31,
1996, 1997 and 1998 were $75,766, $71,532 and $271,244, respectively. The
increase in 1998 is primarily due to the Monsey Bakor acquisition.

10. RELATED PARTIES:

The Company is obligated under certain leases at December 31, 1998 and has
incurred rent expense in 1997 and 1998 with related parties, as more fully
described in Note 7.

Receivables from affiliate represents amounts due from The Henry Wine Group,
an affiliated group of companies under common control, and relates to operating
advances made to the Wine Group.

The note receivable from affiliate relates to proceeds due the Company on
the sale of property to the Wine Group at its then net book value at December
31, 1997. The note receivable is repayable by December 31, 2002, bears interest
at the prime interest rate and is secured by an interest in the property.

The Company charges the Wine Group certain direct administrative costs for
services provided by the Company's finance, human resources, and management
information systems departments. The administrative costs charged totaled
$110,000 and $199,000 for the years ended 1996 and 1997, respectively. In 1998,
the Company entered into a new administrative services agreement with the Wine
Group for reimbursement of administrative services provided by the Company. The
administrative cost charged in 1998 totalled $1,255,130.

As of December 31, 1997 and 1998, notes receivable in the accompanying
balance sheet include outstanding principal and accrued interest due from the
Company's President in the amount of $559,557 and $601,672, respectively. The
notes bear interest at Bank of America's First Rate and are payable in
installments or lump sum payments due through December 31, 1998 with the
exception of $175,000 which is noninterest-bearing and is due and payable upon
termination of the President's employment.

Subordinated shareholder debt financing had been obtained from the Chairman
of the Board. The subordinated shareholder debt was repaid in full during fiscal
year 1998, in conjunction with the Acquisition.

11. CAPITAL STOCK:

On April 21, 1998, Warner Development Company of Texas ("Warner
Development") was merged into the Company. The outstanding shares of Warner
Development were canceled in the merger. For periods prior to this date, the
financial results of the Company and Warner Development were presented

F-18

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

11. CAPITAL STOCK , CONTINUED:
on a combined basis as both entities were under common control with identical
management and shareholder ownership and interest.

In addition, on April 21, 1998, the number of authorized shares of Company
Common Stock was increased to 1,000,000 shares.

On April 22, 1998, the Company issued 27,500 shares of Common Stock to
Frederick Muhs, a director of the Company, for $2,000,000 in cash.

As of December 31, 1997 and 1998, common stock is composed of the following:

1997 1998
------------ ------------

Henry Company, common stock, no par value, stated value $5 per share, 100,000 shares
authorized, issued and outstanding.................................................. $ 500,000 $ 500,000
Henry Company, common stock, no par value, stated value $21.78 per share, 94,000
shares authorized, issued and outstanding........................................... 2,047,320 2,047,320
Henry Company, common stock, no par value, stated value $72.73 per share, 27,500 share
authorized, issued and outstanding.................................................. -- 2,000,000
Warner Development of Texas, common stock, no par value, stated value $1,616.20 per
share, 94 shares authorized, issued and outstanding................................. 151,922 --
Henry Company, super voting class A common stock, no par value, stated value $23.96
per share, 6,000 shares authorized, issued and outstanding.......................... 143,760 143,760
Warner Development of Texas, super voting class A common stock, no par value, stated
value $1,777.82 per share, 6 shares authorized, issued and outstanding.............. 10,667 --
------------ ------------
$ 2,853,669 $ 4,691,080
------------ ------------
------------ ------------

On October 1, 1997, Henry Company granted the Warner W. Henry Living Trust
warrants to purchase an aggregate of 400,000 shares of Henry Company capital
stock, consisting of 12,000 shares of Class A common stock and 388,000 shares of
common stock (the "Warrants"). The Warrants expire on September 30, 2012 and may
be exercised in whole or in part at variable and increasing exercise prices over
the term of the warrants. The current and maximum exercise prices for both Class
A common stock and common stock are $12.94 and $38.82 per share, respectively.

The warrants have an initial exercise price that exceeds the fair value of
the capital stock at the date of grant. The grant date present value of each
warrant is estimated at 11 CENTS or an aggregate of $44,000 using the
Black-Scholes pricing model, using the following assumptions: risk-free interest
rate at 6.0%; expected warrant life of 15 years; volatility of 20.0%; forfeiture
rate zero (0); no expected dividends; and no adjustments for nontransferability.
As of December 31, 1998, no warrants have been exercised.

12. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

In connection with the Acquisition, the Company sold 22,000 shares of
redeemable convertible preferred stock in the Company to Joseph T. Mooney, Jr.
for $600,000. The Company is obligated, upon the exercise of Mr. Mooney's put
option, to redeem the stock for cash in annual amounts of $500,000 beginning in
2004 and aggregating $3,000,000, or for $3,000,000 upon the death of Mr. Mooney.
The shares

F-19

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

12. REDEEMABLE CONVERTIBLE PREFERRED STOCK , CONTINUED:
are convertible into shares of Common Stock. The fair value recorded for the
issuance of the preferred stock represents the estimated present value of the
redemption payments.

The carrying amount of the Preferred Stock is being increased by periodic
accretions so that the amount reflected in the balance sheet will equal the
mandatory redemption amount at the redemption date.

13. SEGMENT AND GEOGRAPHIC INFORMATION:

During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which requires the Company to report
information about its operating segments using a management approach.

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 primary business units 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 uses.

The accounting policies of the reportable segments are the same as those
described in Note 1 of the Notes to Consolidated Financial Statements. 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.

F-20

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

13. SEGMENT AND GEOGRAPHIC INFORMATION , CONTINUED:
Summarized financial information concerning the Company's reportable
segments is shown below.

HENRY RESIN
COATINGS TECHNOLOGY
DIVISION DIVISION TOTAL
-------------- ------------- --------------

1998
Net sales........................................................ $ 130,054,094 $ 20,102,027 $ 150,156,121
Gross profit..................................................... 41,240,101 3,773,436 45,013,537
Operating income................................................. 7,491,372 412,369 7,903,741
Depreciation and amortization.................................... 4,666,246 227,548 4,893,794
Total assets..................................................... 112,978,409 12,535,391 125,513,800
Capital expenditures............................................. 2,875,566 121,154 2,996,720

1997
Net sales........................................................ $ 47,828,812 $ 19,594,791 $ 67,423,603
Gross profit..................................................... 17,494,453 3,516,322 21,010,775
Operating income................................................. 2,521,895 843,531 3,365,426
Depreciation and amortization.................................... 1,253,340 216,035 1,469,375
Total assets..................................................... 18,527,327 11,890,320 30,417,647
Capital expenditures............................................. 648,306 152,933 801,239

1996
Net sales........................................................ $ 40,939,371 $ 18,246,629 $ 59,186,000
Gross profit..................................................... 15,238,101 3,081,175 18,319,276
Operating income................................................. 890,060 312,070 1,202,130
Depreciation and amortization.................................... 1,438,345 206,345 1,644,690
Total assets..................................................... 20,102,365 11,101,354 31,203,719
Capital expenditures............................................. 1,281,277 167,416 1,448,693

The Company is domiciled in the United States with foreign operations based
in Canada which were acquired during 1998. Prior to the Acquisition, the Company
had no foreign operations. Summarized geographic data related to the Company's
operations for 1998 are as follows:

LONG-LIVED
NET SALES ASSETS
-------------- -------------

United States................................................. $ 129,492,180 $ 64,555,982
Canada........................................................ 20,663,941 8,548,168
-------------- -------------
Total....................................................... $ 150,156,121 $ 73,104,150
-------------- -------------
-------------- -------------

F-21

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

14. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:

In connection with the Offering in April 1998, the Company's United States
subsidiaries, Monsey Products Co., Kimberton Enterprises, Inc. and Monsey
Products of Arizona LLC (the "Guarantor Subsidiaries") are unconditional
guarantors, on a full, joint and several basis, of the Company's debt
represented by the Senior Notes. The Company's Canadian subsidiaries are not
guarantors of the Senior Notes. Effective December 31, 1998, the Company merged
Monsey Products Co. and Monsey Products of Arizona LLC into Henry Company; as a
result, Kimberton Enterprises Inc. is the only Guarantor.

Condensed consolidating financial statements of the Guarantors, from the
date of the Acquisition, 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.

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998

HENRY COMPANY
(PARENT
CORPORATION) CONSOLIDATED
AND GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------------- ------------- -------------- --------------

ASSETS:
Current assets:
Cash and cash equivalents...................... $ 11,303,580 $ 719,096 -- $ 12,022,676
Accounts receivable, net....................... 17,479,050 2,319,659 -- 19,798,709
Inventories.................................... 12,592,192 2,195,153 -- 14,787,345
Receivables from affiliate..................... 3,289,079 435,402 $ (870,804) 2,853,677
Notes receivable............................... 498,059 -- -- 498,059
Prepaid expenses and other current assets...... 2,146,003 303,181 -- 2,449,184
--------------- ------------- -------------- --------------
Total current assets......................... 47,307,963 5,972,491 (870,804) 52,409,650
Property and equipment, net...................... 27,964,877 5,871,529 1,533,818 35,370,224
Investment in subsidiaries....................... 10,781,378 -- (10,686,544) 94,834
Cash surrender value of life insurance, net...... 3,469,017 -- -- 3,469,017
Intangibles, net................................. 29,139,311 2,638,018 -- 31,777,329
Notes receivable................................. 376,308 -- -- 376,308
Note receivable from affiliate................... 1,863,072 -- -- 1,863,072
Other............................................ 114,745 38,621 -- 153,366
--------------- ------------- -------------- --------------
Total assets................................. $ 121,016,671 $ 14,520,659 $ (10,023,530) $ 125,513,800
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------

F-22

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

14. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS , CONTINUED:
CONDENSED CONSOLIDATING BALANCE SHEET, CONTINUED
AS OF DECEMBER 31, 1998

HENRY COMPANY
(PARENT
CORPORATION) CONSOLIDATED
AND GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------------- ------------- -------------- --------------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............................... $ 8,917,200 $ 723,587 -- $ 9,640,787
Accrued expenses............................... 7,353,610 944,755 -- 8,298,365
Intercompany payables.......................... 211,356 1,247,445 $ (1,458,801) --
Income taxes payable........................... (168,731) 271,285 -- 103,094
Notes payable, current portion................. 146,924 183,300 -- 330,224
Borrowings under line of credit................ -- 1,657,500 -- 1,657,500
--------------- ------------- -------------- --------------
Total current liabilities.................... 16,460,359 5,028,412 (1,458,801) 20,029,970
Notes payable.................................... 591,890 51,025 -- 642,915
Environmental reserve............................ 3,432,371 -- -- 3,432,371
Deferred income taxes............................ 3,941,854 1,769,217 -- 5,711,071
Deferred warranty revenue........................ 2,190,938 -- -- 2,190,938
Deferred compensation............................ 1,015,565 -- -- 1,015,565
Senior notes..................................... 85,000,000 -- -- 85,000,000
--------------- ------------- -------------- --------------
Total liabilities............................ 112,632,977 6,848,654 (1,458,801) 118,022,830
Redeemable convertible preferred stock........... 1,839,000 -- -- 1,660,874
Shareholders' equity:
Common stock................................... 4,691,080 7,194,402 (7,194,402) 4,691,080
Additional paid-in capital..................... 2,622,867 -- -- 2,622,867
Cumulative translation adjustment.............. -- (1,480,724) 588,000 (892,724)
Accumulated (deficit) retained earnings........ (591,127) 1,958,327 (1,958,327) (591,127)
--------------- ------------- -------------- --------------
Total shareholders' equity................... 6,722,820 7,672,005 (8,564,729) 5,830,096
--------------- ------------- -------------- --------------
Total liabilities and shareholders'
deficit.................................... $ 121,016,671 $ 14,520,659 $ (10,023,530) $ 125,513,800
--------------- ------------- -------------- --------------
--------------- ------------- -------------- --------------

F-23

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

14. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS , CONTINUED:

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998

HENRY COMPANY
(PARENT
CORPORATION) CONSOLIDATED
AND GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
---------------- ------------- ------------- --------------

Net sales....................................... $ 134,318,475 $ 20,663,941 $ (4,826,295) $ 150,156,121
Cost of sales................................... 94,586,709 15,507,978 (4,952,103) 105,142,584
---------------- ------------- ------------- --------------
Gross profit................................ 39,731,766 5,155,963 125,808 45,013,537
Operating expenses:
Selling, general and administrative........... 30,487,104 3,791,133 750,238 35,028,475
Amortization of intangibles................... 1,945,252 136,069 -- 2,081,321
---------------- ------------- ------------- --------------
Operating income............................ 7,299,410 1,228,761 (624,430) 7,903,741
Other expense (income):
Interest expense.............................. 6,421,349 145,331 -- 6,566,680
Interest and other income, net................ (243,493) -- -- (243,493)
---------------- ------------- ------------- --------------
Income before provision for income taxes...... 1,121,554 1,083,430 (624,430) 1,580,554
Provision for income taxes...................... 50,342 459,000 -- 509,342
---------------- ------------- ------------- --------------
Net income.................................. $ 1,071,212 $ 624,430 $ (624,430) $ 1,071,212
---------------- ------------- ------------- --------------
---------------- ------------- ------------- --------------

F-24

HENRY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED

14. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS , CONTINUED:
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998

HENRY COMPANY
(PARENT
CORPORATION) CONSOLIDATED
AND GUARANTOR NONGUARANTOR ELIMINATION CONSOLIDATED
SUBSIDIARIES SUBSIDIARIES ENTRIES TOTAL
--------------- ------------- ------------- --------------

Net cash provided by (used in) operating
activities...................................... $ 5,385,914 $ 4,594,711 -- $ 9,980,625
Cash flows from investing activities:
Capital expenditures............................ (2,680,354) (316,366) -- (2,996,720)
Proceeds from the disposal of property and
equipment..................................... 119,112 12,420 -- 131,532
Acquisition of business, net of cash acquired... (48,165,012) -- $ 3,051,312 (45,113,700)
Investment in affiliate......................... (30,645) -- -- (30,645)
--------------- ------------- ------------- --------------
Net cash (used in) provided by investing
activities.................................. (50,756,899) (303,946) 3,051,312 (48,009,533)
--------------- ------------- ------------- --------------
Cash flows from financing activities:
Net repayments under line-of-credit agreement... (13,734,381) (2,918,500) -- (16,652,881)
Repayments under notes payable agreements....... (11,358,730) (144,675) -- (11,503,405)
Borrowings under notes payable agreements....... -- -- -- --
Payments on subordinated shareholder debt....... (5,199,972) -- -- (5,199,972)
Payments of finance fees for note offering...... (2,550,000) -- -- (2,550,000)
Proceeds from Series B Senior Notes............. 85,000,000 -- -- 85,000,000
Proceeds from issuance of common stock.......... 2,000,000 -- -- 2,000,000
Proceeds from issuance of preferred stock....... 600,000 -- -- 600,000
Dividends paid.................................. (1,248,876) -- -- (1,248,876)
--------------- ------------- ------------- --------------
Net cash provided by (used in) financing
activities.................................. 53,508,041 (3,063,175) -- 50,444,866
--------------- ------------- ------------- --------------
Effect of changes in exchange rate on cash.... -- (512,139) -- (512,139)
--------------- ------------- ------------- --------------
Net increase in cash and cash equivalents..... 8,137,056 715,451 3,051,312 11,903,819
Cash and cash equivalents, beginning of period.... 3,166,524 3,645 (3,051,312) 118,857
--------------- ------------- ------------- --------------
Cash and cash equivalents, end of period.......... $ 11,303,580 $ 719,096 $ -- $ 12,022,676
--------------- ------------- ------------- --------------
--------------- ------------- ------------- --------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

HENRY COMPANY
---------------------------------------------
(REGISTRANT)

By /s/ WARNER W. HENRY
-----------------------------------------
Warner W. Henry
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

/s/ RICHARD B. GORDINIER
- ------------------------------ President, Chief Operating March 31, 1999
Richard B. Gordinier Officer and Director

/s/ JEFFREY A. WAHBA
- ------------------------------ Chief Financial Officer, March 31, 1999
Jeffrey A. Wahba Secretary and Director

/s/ GARY T. SPENCE
- ------------------------------ Corporate Controller March 31, 1999
Gary T. Spence

/s/ JOSEPH T. MOONEY JR.
- ------------------------------ Vice Chairman of the Board March 31, 1999
Joseph T. Mooney Jr.

/s/ FREDERICK H. MUHS
- ------------------------------ Director March 31, 1999
Frederick H. Muhs

HENRY COMPANY
INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------

2.1 * Stock Purchase Agreement between Henry Company and the Shareholders of Monsey Products Co. of
February 27, 1998

2.2 * Amendment to Stock Purchase Agreement between Henry Company

3.1 * Certificate of Amendment and Restatement of Articles of Incorporation of Henry Company

3.2 * Bylaws of Henry Company

4.1 * Indenture dated as of April 22, 1998 between the Company, each of the guarantors named therein and
U.S. Trust Company of California, N.A., as Trustee, including forms of Senior Notes

4.2 * Registration Rights Agreement dated as of April 22, 1998 by and among the Company, each of the
Guarantors named therein and BT Alex.Brown Incorporated as Initial Purchaser

10.1 * Amended and Restated Financing and Security Agreement dated April 22, 1998, by and between Henry
Company and Monsey Products Co., Kimberton Enterprises, Inc. Monsey Products of Arizona LLC and
Nationsbank, N.A.

10.2 * Administrative Services Agreement, dated as of January 1, 1998, between Henry Company and Central
Coast Wine Company dba The Henry Wine Group

10.3 * Lease, dated September 5, 1996, between Warner Wheeler Henry Living Trust and Henry Family Trust B
and Henry Company

10.4 * Ground Lease, dated April 30, 1976, (as extended on December 11, 1996) between The Warner W. Henry
Family Trust, the Declaration of Trust for Dorothy H. Floyd and The W.W. Henry Company.

10.5 * Machinery Lease, dated August 1, 1958 and Amendment to Machinery Lease, dated August 1, 1968,
between Warner White Henry and The W.W. Henry Company

10.6 * Lease, dated February 27, 1992, between Alamo Development Company and Henry Company

10.7 * Lease Agreement and Addendum to Lease Agreement dated December 23, 1994, by and between Seaboard
Supply Co. and Monsey Products Co.

10.8 * Warrant Agreement between Henry Company and the Warner W. Henry Living Trust dated as of October 1,
1997

10.9 * Convertible Preferred Stock Purchase Agreement between Henry Company and Joseph T. Mooney, Jr. dated
as of April 22, 1998

10.10* Stock Purchase Agreement between Henry Company and Frederick Muhs dated as of April 22, 1998

10.11* Henry Company Executive Deferral Plan

10.12* Employment and Incentive Agreement between Henry Company, Henry II, Warner Development Company of
Texas and Richard B. Gordinier, dated September 30, 1992

10.13* Amendment No. 1 to Employment and Incentive Agreement between Henry Company, Henry II, Warner
Development Company of Texas and Richard B. Gordinier, dated October 16, 1997

EXHIBIT
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------

10.14* Amendment No. 2 to Employment and Incentive Agreement between Henry Company, Henry II, Warner
Development Company of Texas and Richard B. Gordinier, dated April 21, 1998

10.15* Non-Negotiable Promissory Notes, between Henry Company and Richard B. Gordinier, dated July 11,
August 24 and December 15, 1997

10.16* Employment Agreement between Henry Company and Joseph T. Mooney, Jr. dated as of April 22, 1998

10.17* Employment Agreement between Henry Company and Larry A. Karasiuk dated as of April 22, 1998

10.18* Employment Agreement between Henry Company and John R. Enright dated July 1, 1993

10.19* Amended and Restated Employment Agreement between Henry Company and James Doose dated May 27, 1994

10.20* Incentive Compensation Agreement between Henry Company and Jeffrey A. Wahba dated August 1, 1994

10.21* Incentive Compensation Agreement between Henry Company and John R. Enright dated July 1, 1993

10.22* Noncompetition Agreement between Henry Company and James F.C. Stewart dated as of February 27, 1998

10.23* Noncompetition Agreement between Henry Company and Edward P. Mooney dated as of April 22, 1998

10.24* Noncompetition Agreement between Henry Company and Larry Karasiuk dated as of April 22, 1998

10.25* Consulting Agreement between Henry Company and Paul Beemer dated November 24, 1993

10.26* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated July 29, 1996

10.26(A)* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated June 1, 1995

10.26(B)* Amendment to Consulting Agreement between Henry Company and Paul Beemer dated August 27, 1998

10.27* Custodial Agreement between Henry Company the Shareholders of Monsey Products Co. and PNC Bank

12.1 Statement of Computation of Ratio of Earnings to Fixed Charges

21.1 Subsidiaries of the Registrant

23.1 Consent of Ernst & Young LLP, Independent Auditors

27.1 Financial Data Schedule for the period ended December 31, 1998 (filed in electronic form only)

- ------------------------

* Incorporated by reference from Registrant's Statement of Form S-4, filed
September 11, 1998 (Registration No. 333-59485).