SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 333-59485
HENRY COMPANY
-----------------------------------------------------
(Exact Name of Registrant as Specific in Its Charter)
California 95-3618402
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2911 Slauson Avenue, Huntington Park, California 90255
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (323) 583-5000
--------------
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check X whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of May 15,
1999, there were 221,500 shares of the registrant's common stock and 6,000
shares of Class A Common Stock, no par value, outstanding.
1
HENRY COMPANY
FORM 10-Q
TABLE OF CONTENTS
MARCH 31, 1999
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 (Unaudited)......................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1999 (Unaudited).............................. 4
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 1999 (Unaudited).................. 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and March 31, 1999 (Unaudited).......................... 6
Notes to Consolidated Financial Statements.............................. 7
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 21
PART II. OTHER INFORMATION................................................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 21
SIGNATURES.................................................................. 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HENRY COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1998 1999
------------ -------------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents.................................................................. $ 12,022,676 $ 11,094,865
Trade accounts receivable, net of allowance for
doubtful accounts of $766,633 and $798,287 for
1998 and 1999, respectively............................................................. 19,798,709 23,208,326
Inventories................................................................................ 14,787,345 17,484,088
Receivables from affiliate................................................................. 2,853,677 2,731,622
Notes receivable........................................................................... 498,059 516,025
Prepaid expenses and other current assets.................................................. 2,449,184 2,109,588
Income tax receivable...................................................................... - 1,529,292
------------ ------------
Total current assets.................................................................. 52,409,650 58,673,806
Property and equipment, net................................................................... 35,370,224 35,754,515
Cash surrender value of life insurance, net................................................... 3,469,017 3,581,353
Intangibles, net.............................................................................. 31,777,329 33,620,143
Notes receivable.............................................................................. 376,308 356,576
Note receivable from affiliate................................................................ 1,863,072 1,863,072
Other......................................................................................... 248,200 740,848
------------ ------------
Total assets.......................................................................... $125,513,800 $134,590,313
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable........................................................................... $ 9,640,787 $ 11,703,104
Accrued expenses........................................................................... 8,298,365 10,385,020
Income taxes payable....................................................................... 103,094 93,367
Notes payable, current portion............................................................. 330,224 425,260
Borrowings under lines of credit........................................................... 1,657,500 9,307,416
------------ ------------
Total current liabilities............................................................. 20,029,970 31,914,167
Notes payable................................................................................. 642,915 385,454
Environmental reserve......................................................................... 3,432,371 3,414,209
Deferred income taxes......................................................................... 5,711,071 5,702,133
Deferred warranty revenue..................................................................... 2,190,938 2,241,595
Deferred compensation......................................................................... 1,015,565 1,028,252
Series B Senior Notes......................................................................... 85,000,000 85,000,000
------------ ------------
Total liabilities..................................................................... 118,022,830 129,685,810
Commitments and contingencies
Redeemable convertible preferred stock........................................................ 1,660,874 1,660,874
Shareholders' equity:
Common stock............................................................................. 4,691,080 4,691,080
Additional paid-in capital............................................................... 2,622,867 2,622,867
Cumulative translation adjustment........................................................ (892,724) (884,724)
Accumulated deficit...................................................................... (591,127) (3,185,594)
------------ ------------
Total shareholders' equity............................................................ 5,830,096 3,243,629
------------ ------------
Total liabilities and shareholders' equity............................................ $125,513,800 $134,590,313
------------ ------------
------------ ------------
The accompanying notes are an integral part
of these consolidated financial statements.
3
HENRY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
---------------------
1998 1999
---- ----
Net sales............................................... $14,933,512 $35,570,696
Cost of sales........................................... 9,815,800 25,515,405
----------- -----------
Gross profit...................................... 5,117,712 10,055,291
Operating expenses:
Selling, general and administrative............... 4,193,449 10,801,154
Amortization of intangibles....................... 26,840 880,091
----------- -----------
Operating income (loss)........................... 897,423 (1,625,954)
Other expense (income):
Interest expense.................................. 322,169 2,144,625
Interest and other income, net.................... (21,180) (49,809)
----------- ----------
Income (loss) before provision (benefit) for
income taxes..................................... 596,434 (3,720,770)
Provision (benefit) for income taxes.................... -- (1,126,303)
----------- -----------
Net income (loss)................................. $596,434 ($2,594,467)
----------- -----------
----------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
4
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF MARCH 31, 1999
(UNAUDITED)
Common Stock
-------------------- Cumulative Retained
Issued Additional Translation Earnings
Shares Amount Paid-in Capital Adjustment (Deficit) Total
------ ------ --------------- ----------- --------- -----
Balance, December 31, 1998...... 227,500 $4,691,080 $2,622,867 ($892,724) ($ 591,127) $5,830,096
Accretion on redeemable
convertible preferred stock.. -- -- -- -- -- --
Comprehensive income (loss):
Net loss..................... -- -- -- -- (2,594,467) (2,594,467)
Other comprehensive
income:
Change in cumulative
translation adjustment.. -- -- -- 8,000 -- 8,000
----------
Total comprehensive
income (loss)................ -- -- -- -- -- (2,586,467)
------- ---------- ---------- --------- ----------- ----------
Balance, March 31, 1999......... 227,500 $4,691,080 $2,622,867 ($884,724) ($3,185,594) $3,243,629
------- ---------- ---------- --------- ----------- ----------
------- ---------- ---------- --------- ----------- ----------
The accompanying notes are an integral part
of these consolidated financial statements.
5
HENRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1999
(UNAUDITED)
1998 1999
---- ----
Cash flows from operating activities:
Net income (loss)...................................................................... $ 596,434 ($2,594,467)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................................... 326,718 1,018,705
Provision for doubtful accounts..................................................... 29,717 48,685
Deferred income taxes............................................................... -- (8,938)
Noncompetition and goodwill amortization............................................ 16,252 812,303
Interest on subordinated shareholder debt........................................... 95,207 --
Gain on disposal of property and equipment.......................................... (5,500) --
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable............................................................... 1,083,729 (3,458,302)
Inventories....................................................................... (214,860) (2,696,743)
Receivables from affiliates....................................................... (231,324) 122,055
Notes receivable.................................................................. 7,371 1,766
Cash surrender value of life insurance............................................ (314,729) (112,336)
Other assets...................................................................... 126,343 (138,620)
Income tax receivable............................................................. -- (1,529,292)
Accounts payable and accrued expenses............................................. (527,988) 4,121,083
Deferred warranty revenue......................................................... (3,261) 50,657
Deferred compensation............................................................. 37,052 12,687
---------- -----------
Net cash provided by (used in) operating activities......................... 1,021,161 (4,350,757)
---------- -----------
Cash flows from investing activities:
Capital expenditures................................................................... (356,018) (1,402,996)
Proceeds from the disposal of property and equipment................................... 5,500 --
Acquisition of business, net of cash acquired.......................................... -- (2,655,117)
Investment in affiliate................................................................ (4,435) (14,432)
---------- -----------
Net cash used in investing activities....................................... (354,953) (4,072,545)
---------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreements............................ (324,579) 7,649,916
Repayments under notes payable agreements.............................................. (187,882) (311,162)
Borrowings under notes payable agreements.............................................. 5,154 148,737
Payments on subordinated shareholder debt.............................................. (95,196) --
---------- -----------
Net cash (used in) provided by financing activities......................... (602,503) 7,487,491
---------- -----------
Effect of exchange rate changes on cash and cash equivalents.............................. -- 8,000
---------- -----------
Net increase (decrease) in cash and cash equivalents........................ 63,705 (927,811)
Cash and cash equivalents, beginning of period............................................ 118,857 12,022,676
---------- -----------
Cash and cash equivalents, end of period.................................................. $ 182,562 $11,094,865
---------- -----------
---------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
6
HENRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial
statements of Henry Company, a California corporation (the "Company"),
include all adjustments (consisting of normal recurring entries) which
management believes are necessary for a fair presentation of the financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with quarterly
reporting guidelines. The year-end condensed balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The accompanying
financial statements should be read in conjunction with the Company's audited
financial statements and footnotes as of and for the year ended December 31,
1998 as included in the Company's Annual Report on Form 10-K. Operating
results for the three months ended March 31, 1999 are not necessarily
indicative of the operating results for the full fiscal year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
As more fully described in Note 3, the interim financial statements
for the three months ended March 31, 1999 include the financial results and
accounts of Monsey Bakor and its subsidiaries which were acquired by the
Company on April 22, 1998. The Acquisition was accounted for using the
purchase method of accounting and accordingly the results of operations of
Monsey Bakor since the acquisition date have been included in the
consolidated financial statements of the Company.
2. 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 adopted the provisions of SOP No. 98-1 with
no 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 historically expensed these costs, the adoption of this standard
did 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 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.
3. 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. The Acquisition was accounted for using the purchase method of accounting.
Concurrent with the Acquisition, the Company conducted a senior note
offering (the "Offering") in the aggregate principal amount of $85,000,000,
and converted its tax status from an S Corporation under Section 1361 of the
Internal Revenue Code (the "Code") to a C Corporation status. Since the
conversion, the Company has been required to pay federal and state corporate
income taxes on its taxable income.
7
In accordance with the requirements of APB Opinion No. 16 "Business
Combinations," the following unaudited pro forma summary presents the results
of operations of the Company as if the Acquisition and Offering had occurred
as of the beginning of the period presented prior to the acquisition date.
The pro forma adjustments include the results of operations for Monsey Bakor
for the period prior to the acquisition, adjustment for compensation expense
in excess of amounts paid under new employment agreements, amortization of
intangible assets created as a result of the Acquisition, interest expense on
the debt issued as part of the Offering, and related income tax effects. The
pro forma financial information is presented for informational purposes only
and may not be indicative of the results of operations as they would have
been if the Company and Monsey Bakor had been a single entity during the
three month period ended March 31, 1998, nor is such information indicative
of the results of operations which may occur in the future.
PRO FORMA
THREE MONTHS ENDED
MARCH 31, 1998
(UNAUDITED)
------------------
Net sales........................... $ 36,378,512
------------
------------
Net loss............................ ($1,602,712)
------------
------------
4. INVENTORIES:
Inventories consist of the following:
December 31, March 31,
1998 1999
------------ -------------
Raw materials............................ $ 7,240,227 $ 8,890,413
Finished goods........................... 7,547,118 8,593,675
---------- -----------
$14,787,345 $17,484,088
---------- -----------
---------- -----------
8
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, March 31,
1998 1999
------------ -------------
Buildings..................................... $13,634,579 $13,676,903
Machinery and equipment....................... 23,898,403 23,734,110
Office furniture and equipment................ 3,241,389 4,391,660
Automotive equipment.......................... 1,635,230 1,635,230
Leasehold improvements........................ 3,145,244 3,149,375
Other......................................... 330,695 330,695
----------- -----------
45,885,540 46,917,973
Less, accumulated depreciation and
amortization.............................. 16,338,442 17,277,306
----------- -----------
29,547,098 29,640,667
Land.......................................... 3,298,139 3,300,139
Construction-in-progress...................... 2,524,987 2,813,709
----------- -----------
$35,370,224 $35,754,515
----------- -----------
----------- -----------
6. LONG-TERM DEBT AND CREDIT FACILITIES:
In 1998 the Company privately issued and sold $85,000,000 of Series
B Senior Notes (the "Senior Notes") due in 2008. Interest on the Notes is
payable semi-annually at 10% per annum. In October 1998, the Company
completed an exchange offer for all of the Senior Notes. The terms of the new
Senior Notes are identical in all material respects to the original private
issue. The proceeds from the offering were used to (i) retire existing Henry
Company bank debt, (ii) retire existing Henry Company subordinated
shareholder debt, (iii) acquire Monsey Bakor, (iv) retire a substantial
portion of Monsey Bakor's then-existing bank debt with (v) the remainder
providing additional working capital.
Long-term debt consists of the following at March 31, 1999:
Long-Term debt consists of the following at March 31, 1999:
10.0% Series B Senior Notes due 2008.......................... $85,000,000
Various term notes payable to third parties with interest
rates ranging from 6% to 9.25%, maturing from 1999 to 2013... 810,714
-----------
85,810,714
Less, current maturities...................................... 425,260
-----------
$85,385,454
-----------
-----------
The Company's Senior Notes are guaranteed by all of the Company's
United States subsidiaries (the "Subsidiary Guarantors"). The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint
and several. See Note 9 for the Guarantor Condensed Consolidating Financial
Statements.
The Company has a $35 million credit facility, $25 million of which
is available in accordance with a borrowing base and to be used for working
capital needs and $10 million of which may be used for capital expenditures.
The credit facility expires on April 22, 2003 with interest charged at prime
or LIBOR plus 2.25% (7.75% at March 31, 1999). At March 31, 1999, $6,674,916
was outstanding under the credit facility. At December 31, 1998, there were
no amounts outstanding under the credit facility.
9
The Company also has a Canadian bank line of credit, subject to
annual confirmation, aggregating $4,440,000 with interest charged at prime
plus 0.5% (7.75% at December 31, 1998 and 7.25% at March 31, 1999). At
December 31, 1998 and March 31, 1999, there was $1,657,500 and $2,632,500,
respectively, outstanding under this Canadian line.
7. INCOME TAXES:
Concurrent with the Acquisition and the Offering, the Company
converted its tax status from an S Corporation under Section 1361 of the
Internal Revenue Code to a C Corporation status. Since conversion, the
Company has been required to pay federal and state corporate income taxes on
its taxable income.
Upon conversion to C status the Company recognized deferred taxes
amounting to $882,437 as a deferred tax benefit in 1998 in accordance with
the liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The significant components of the provision (benefit) for income
taxes are as follows:
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
Current:
Federal.......................... $ 534,973 ($999,855)
State............................ 169,891 (176,445)
Foreign.......................... 293,544 49,997
--------- -----------
998,408 (1,126,303)
--------- -----------
Deferred:
Federal.......................... (537,001) --
State............................ (117,521) --
Foreign.......................... 165,456 --
--------- -----------
(489,066) --
--------- -----------
$ 509,342 ($1,126,303)
--------- -----------
--------- -----------
The Company's effective tax rate differs from the federal statutory
tax rate for the year ended December 31, 1998 and the three months ended
March 31, 1999 as follows:
Year Three Months
Ended Ended
December 31, March 31,
1998 1999
----------- ------------
Provision (benefit) for income taxes at the federal statutory tax rate................. 34.0% (34.0%)
State taxes, net of federal tax benefit................................................ 7.0 (6.0)
Foreign income taxes in excess of U.S. statutory rate.................................. 6.0 1.3
Recognition of deferred tax benefits upon conversion to C status....................... (56.0) -
Nondeductible intangibles.............................................................. 43.0 8.7
Income not subject to federal and state income tax prior to conversion to C status..... (7.0) -
Nondeductible business expense......................................................... 6.0 -
Nondeductible life insurance........................................................... 4.0 -
Other, net............................................................................. (5.0) (0.3)
---- ------
32.0% (30.3%)
---- ------
---- ------
Income (Loss) before income taxes of the Company's Canadian
operations was $1,083,430 and $(476,297) for the year ended December 31, 1998
and the three month period ended March 31, 1999 respectively.
10
8. RELATED PARTY TRANSACTIONS:
During the three month period ended March 31, 1999, the Company has
charged the Henry Wine Group approximately $194,000 for reimbursement of
administrative services provided by the Company pursuant to an administrative
services agreement that was effective as of January 1, 1998.
9. 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. Company management has determined that separate financial
statements and other disclosures concerning the Guarantor Subsidiaries are
not material to investors.
11
9. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
The following summarizes the Condensed Consolidating Financial
Statements of the Subsidiary Guarantors subsequent to the date of the Company's
acquisition of Monsey Bakor:
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1999
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
--------------- ------------ ------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents... $ 10,545,120 $ 549,745 -- $ 11,094,865
Accounts receivable, net.... 20,302,413 2,905,913 -- 23,208,326
Inventories................. 13,989,404 3,494,684 -- 17,484,088
Receivables from affiliate.. 4,596,327 833,337 ($2,698,042) 2,731,622
Notes receivable............ 516,025 -- -- 516,025
Prepaid expenses and
other current assets....... 1,902,510 207,078 -- 2,109,588
Income tax receivable....... 1,529,292 -- -- 1,529,292
------------ ----------- ------------ ------------
Total current assets.... 53,381,091 7,990,757 (2,698,042) 58,673,806
Property and equipment, net... 28,554,575 5,946,679 1,253,261 35,754,515
Investment in subsidiaries.... 9,927,256 -- (9,817,990) 109,266
Cash surrender value
of life insurance, net...... 3,581,353 -- -- 3,581,353
Intangibles, net.............. 31,011,422 2,608,721 -- 33,620,143
Notes receivable.............. 356,576 -- -- 356,576
Note receivable from
affiliate................... 1,863,072 -- -- 1,863,072
Other......................... 601,086 30,496 -- 631,582
------------ ----------- ------------ ------------
Total assets.................. $129,276,431 $16,576,653 ($11,262,771) $134,590,313
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............ $ 9,636,173 $ 2,066,931 -- $ 11,703,104
Accrued expenses............ 9,555,373 829,647 -- 10,385,020
Intercompany payables....... 833,337 1,864,705 ($2,698,042) --
Income taxes payable........ -- 93,367 -- 93,367
Notes payable, current
portion.................... 241,960 183,300 -- 425,260
Borrowings under line
of credit.................. 6,674,916 2,632,500 -- 9,307,416
------------ ----------- ------------ ------------
Total current liabilities. 26,941,759 7,670,450 (2,698,042) 31,914,167
Notes payable................. 380,254 5,200 -- 385,454
Environmental reserve......... 3,414,209 -- -- 3,414,209
Deferred income taxes......... 3,954,841 1,747,292 -- 5,702,133
Deferred warranty revenue..... 2,241,595 -- -- 2,241,595
Deferred compensation......... 1,028,252 -- -- 1,028,252
Series B Senior Notes......... 85,000,000 -- -- 85,000,000
------------ ----------- ------------ ------------
Total liabilities......... 122,960,910 9,422,942 (2,698,042) 129,685,810
Redeemable convertible
preferred stock.............. 1,660,874 -- -- 1,660,874
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................. -- (1,472,724) 588,000 (884,724)
Accumulated (deficit)
retained earnings.......... (2,659,300) 1,432,033 (1,958,327) (3,185,594)
------------ ----------- ------------ ------------
Total shareholders'
equity.................. 4,654,647 7,153,711 (8,564,729) 3,243,629
------------ ----------- ------------ ------------
Total liabilities and
shareholders' deficit... $129,276,431 $16,576,653 ($11,262,771) $134,590,313
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
12
9. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------
Net sales............................. $31,667,435 $ 5,549,478 ($1,646,217) $ 35,570,696
Cost of sales......................... 23,127,080 4,065,994 (1,677,669) 25,515,405
------------- ------------ ------------ ------------
Gross profit.................... 8,540,355 1,483,484 31,452 10,055,291
Operating expenses:
Selling, general and
administrative.................. 8,866,279 1,903,423 31,452 10,801,154
Amortization of intangibles........ 850,793 29,298 -- 880,091
------------- ------------ ------------ ------------
Operating income (loss)......... (1,176,717) (449,237) -- (1,625,954)
Other expense (income):
Interest expense................... 2,117,565 27,060 -- 2,144,625
Interest and other income, net..... (49,809) -- -- (49,809)
------------- ------------ ------------ ------------
Income (loss) before
provision (benefit) for
income taxes.................. (3,244,473) (476,297) -- (3,720,770)
Provision (benefit) for income taxes.. (1,176,300) 49,997 -- (1,126,303)
------------- ------------ ------------ ------------
Net income (loss)................. ($2,068,173) ($526,294) -- ($2,594,467)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
13
9. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS: (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
Henry Company
(Parent
Corporation) Consolidated
And Guarantor Nonguarantor Elimination Consolidated
Subsidiaries Subsidiaries Entries Total
------------- ------------ ------------ ------------
Net cash used in operating
activities......................... ($3,479,022) ($871,735) -- ($4,350,757)
------------- ---------- ------------ ------------
Cash flows from investing
activities:
Capital expenditures............... (1,168,205) (234,791) -- (1,402,996)
Acquisition of business, net of
cash acquired................... (2,655,117) -- -- (2,655,117)
Investment in affiliate............ (14,432) -- -- (14,432)
------------- ---------- ------------ ------------
Net cash used in investing
activities.................... (3,837,754) (234,791) -- (4,072,545)
------------- ---------- ------------ ------------
Cash flows from financing
activities:
Net borrowings under
line-of-credit agreements...... 6,674,916 975,000 -- 7,649,916
Repayments under notes payable
agreements..................... (265,337) (45,825) -- (311,162)
Borrowings under notes payable
agreements.................... 148,737 -- -- 148,737
------------- ---------- ------------ ------------
Net cash provided by
financing activities........ 6,558,316 929,175 -- 7,487,491
------------- ---------- ------------ ------------
Effect of changes in
exchange rate on cash and
cash equivalents............ -- 8,000 -- 8,000
------------- ---------- ------------ ------------
Net decrease in cash and
cash equivalents............ (758,460) (169,351) -- (927,811)
Cash and cash equivalents,
beginning of period.............. 11,303,580 719,096 -- 12,022,676
------------- ---------- ------------ ------------
Cash and cash equivalents,
end of period.................... $ 10,545,120 $549,745 -- $11,094,865
------------- ---------- ------------ ------------
------------- ---------- ------------ ------------
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information
management believes to be relevant to understanding the financial condition
and results of operations of the Company. This discussion should be read in
conjunction with the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1999, of which this commentary is a part, the unaudited
condensed consolidated financial statements and the related notes thereto.
GENERAL
The Company manages its business through two reportable segments or
primary business units with separate management teams, infrastructures,
marketing strategies and customers. The Company's reportable segments are:
the Henry Coatings Division, which develops, manufactures and markets roof
and driveway coatings and paving products, industrial emulsions, air
barriers, and specialty products; and the Resin Technology Division, which
develops, manufactures and sells polyurethane foam for roofing and commercial
construction. The Company evaluates the performance of its operating segments
based on net sales, gross profit and operating income. Intersegment sales and
transfers are not significant.
Summarized financial information concerning the Company's reportable
segments is shown below.
Three Months Ended March 31, 1999
---------------------------------------
Henry Resin
Coatings Technology
Division Division Total
----------- ---------- -----------
Net sales $ 32,324,287 $ 3,246,409 $ 35,570,696
Gross profit 9,489,649 565,642 10,055,291
Operating income (Loss) (1,383,679) (242,275) (1,625,954)
Depreciation and amortization 1,769,128 61,880 1,831,008
Total assets 122,812,201 11,778,112 134,590,313
Capital expenditures 1,320,463 82,533 1,402,996
The Company is domiciled in the United States with foreign
operations based in Canada which were acquired in April 1998. Prior to the
April 1998 acquisition of Monsey Bakor, the Company had no foreign
operations. Summarized geographic data related to the Company's operations
for the three months ended March 31, 1999 are as follows:
LONG-LIVED
NET SALES ASSETS
----------- -----------
United States................................. $30,021,218 $67,330,611
Canada........................................ 5,549,478 8,585,896
----------- -----------
Total................................... $35,570,696 $75,916,507
----------- -----------
----------- -----------
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. The Acquisition was accounted for using the
purchase method of accounting.
Concurrent with the Acquisition, the Company conducted a senior note
offering (the "Offering") in the aggregate principal amount of $85.0 million,
and converted it's tax status from an S Corporation to a C Corporation. Since
the conversion, the Company has been required to pay federal and state
corporate income taxes on its taxable income.
15
RESULTS OF OPERATIONS
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF HENRY COMPANY
Consolidated Statements of Operations Data:
Three Months Ended March 31
($ in millions)
-----------------------------------------
1998 % of sales 1999 % of sales
-----------------------------------------
Net sales $14.9 100.0% $35.6 100.0%
Cost of sales 9.8 65.8% 25.5 71.6%
----------------------------------------
Gross Profit 5.1 34.2% 10.1 28.4%
Operating expenses:
Selling, general and administrative 4.2 28.2% 10.8 30.4%
Amortization of intangibles -- -- 0.9 2.5%
----------------------------------------
Operating income (Loss) 0.9 6.0% (1.6) (4.5%)
----------------------------------------
Interest expense 0.3 2.0% 2.1 5.9%
Interest and other income, net -- -- -- --
----------------------------------------
Income (loss) before provision
(benefit) for taxes 0.6 4.0% (3.7) (10.4%)
Provision (benefit) for income taxes -- -- (1.1) (3.1%)
----------------------------------------
Net income (loss) $0.6 4.0% ($2.6) (7.3%)
----------------------------------------
----------------------------------------
16
FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1998
NET SALES. The Company's net sales increased to $35.6 million for the three
months ended March 31, 1999, an increase of $20.7 million, or 138.9%, from
$14.9 million for the three months ended March 31, 1998. The acquisition of
Monsey Bakor represented $24.1 million of the increase and was partially
offset by a decrease of $3.4 million due primarily to the lack of rainfall in
excess of annual averages. The significantly reduced rainfall amounts in much
of the western United States in the first quarter of 1999 versus the first
quarter of 1998 resulted in decreased 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 $10.1 million for the
three months ended March 31, 1999, an increase of $5.0 million, or 98.0%,
from $5.1 million for the three months ended March 31, 1998. The acquisition
of Monsey Bakor represented $5.2 million of the increase. The remaining
decrease of $0.2 million was primarily due to decreased net sales as
discussed partially offset by a reduction of raw material prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of revenue increased to 30.4% for the
three months ended March 31, 1999 from 28.2% for the three months ended March
31, 1998. Selling, general and administrative expenses increased to $10.8
million for the three months ended March 31, 1999, an increase of $6.6
million, or 157.1%, from $4.2 million for the three months ended March 31,
1998. The acquisition of Monsey Bakor represented $6.1 million, or 92.4% of
the increase. The remaining increase of $0.5 million was primarily due to an
increase of selling and general and administrative expenses associated with
the Company's continued expansion in the retail and roofing systems segments
of the business.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles amounted to $0.9
million for the three months ended March 31, 1999. The increase in
amortization expense was primarily due to the amortization of intangible
assets created as a result of the acquisition of Monsey Bakor.
OPERATING INCOME (LOSS). Operating income decreased to a loss of $1.6 million
for the three months ended March 31, 1999, a decrease of $2.5 million, or
277.8%, from income of $0.9 million for the three months ended March 31,
1998. Operating income as a percentage of net sales decreased to a negative
of 4.5% for the three months ended March 31, 1999, from income of 6.0% as a
percentage of net sales for the three months ended March 31, 1998. The
acquisition of Monsey Bakor represented $0.1 million increase in operating
income. The remaining decrease of $2.6 million was primarily attributable to
decreased net sales, amortization of intangible assets as a result of the
Acquisition and lower sales of higher margined products sold primarily during
periods of wet weather.
INTEREST EXPENSE. Interest expense increased to $2.1 million for the three
months ended March 31, 1999, an increase of $1.8 million, or 600.0%, from
$0.3 million for the three months ended March 31, 1998. The acquisition of
Monsey Bakor represented $1.8 million, or 100% of the increase.
PROVISION (BENEFIT) FOR INCOME TAXES. The benefit for income taxes of $1.1
million for the three months ended March 31, 1999 is primarily related to the
tax benefit associated with the Company's operating loss for the three months
ended March 31, 1999. The Company was not subject to income taxes for the
three months ended March 31, 1998 which was prior to its tax conversion from
an S Corporation to a C Corporation status.
NET INCOME (LOSS). The net loss was $2.6 million for the three months ended
March 31, 1999, a decrease of $3.2 million, or 533.3% from the income of $0.6
million for the three months ended March 31, 1998. The acquisition of Monsey
Bakor represented $0.1 million, or 3.1% of the decrease. The remaining
decrease of $3.1 million was primarily due to increased interest expense
incurred to finance the acquisition of Monsey Bakor and other factors
discussed above.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical requirements for capital have been
primarily for working capital, capital expenditures and acquisitions. Henry
Company's primary sources of capital to finance such needs have been cash
flow from operations and borrowings under bank credit facilities.
Concurrently with the consummation of the Offering and the acquisition of
Monsey Baker on April 22, 1998, the Company entered into a new bank credit
facility (the "Credit Facility") which provides for $25.0 million which is
available in accordance with a borrowing base and is to be used for working
capital, and $10.0 million which may be used for capital expenditures. As of
March 31, 1999 outstanding balances were $6.7 million for the revolving line
of credit facility, and no amounts were outstanding under for the capital
expenditure facility. The Company also had $2.6 million outstanding under its
Canadian line of credit at March 31, 1999.
Cash flows for the Three Months Ended March 31, 1999 Compared to Three
Months Ended March 31, 1998
The Company's cash flows from operations were ($4.3) million and
$1.0 million for the three months ended March 31, 1999 and 1998,
respectively. The decrease from March 31, 1999 to March 31, 1998 of $5.3
million was primarily attributable to increased inventories and receivables
related to the Acquisition. Cash from financing activities during the three
months ended March 31, 1999 and the three months ended March 31, 1998 was
$7.5 million and ($0.6) million, respectively. The increase of $8.1 million
from the three months ended March 31, 1998 to the three months ended March
31, 1999 was primarily due to borrowings under the line of credit agreement.
Cash flows used in investing activities were ($4.1) million and ($0.4)
million for the three months ended March 31, 1999 and 1998, respectively. The
increase in cash used in investing activities was due primarily to the
acquisition of a business for $2.7 million and an increase in capital
expenditures of $1.0 million.
The Company believes that available cash and cash equivalents, cash
generated from operations and available borrowings under the Credit Facility,
will be sufficient to finance working capital, capital expenditures,
acquisitions, and scheduled principal and interest payments for the next
twelve months. There can be no assurance, however, that such resources will
be sufficient to meet the Company's anticipated working capital, capital
expenditure and acquisition financing requirements or that the Company will
not require additional financing within this time frame.
RECENT ACCOUNTING PRONOUNCEMENTS
In 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 adopted the provisions of SOP No. 98-1 with no
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 December 15, 1998, provides guidance on 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 did 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 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 October 31, 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 to respond to such an interruption.
19
SAFE HARBOR STATEMENT
Investors are cautioned that certain statements contained in this
document, as well as some statements by the Company in periodic press
releases and some oral statements by Company officials to ratings agencies
and bondholders during presentations about the Company are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 (the "Act"). Statements which are predictive in nature, which
depend upon or refer to future events or conditions, or which include words
such as "expects," "anticipates," "intends," "plans," "believes,"
"estimates," "hopes," and similar expressions constitute forward-looking
statements. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects, and possible future Company actions, which
may be provided by management are also forward-looking statements as defined
by the Act. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and
assumptions about the Company, economic and market factors and the
20
construction materials industry, among other things. These statements are not
guaranties of future performance, and the Company has no specific intention to
update these statements.
Actual events and results may differ materially from those expressed
or forecasted in the forward-looking statements made by the Company or
Company officials due to a number of factors. The principal important risk
factors that could cause the Company's actual performance and future events
and actions to differ materially from such forward-looking statements
include, but are not limited to, changes in general economic conditions
either nationally or in regions where the Company operates or may commence
operations, employment growth or unemployment rates, fluctuations in asphalt
or other raw material costs, labor costs, the impact of weather, product
liability and asbestos litigation, reliance on key personnel, environmental
matters, costs and effects of unanticipated legal or administrative
proceedings or governmental regulation and capital or credit market
conditions affecting the Company's cost of capital; as well as competition,
and unanticipated delays in the Company's operations. See the Company's
Amendment No. 2 to Registration Statement on Form S-4 filed September 11,
1998 (Registration No. 333-59485) for a further discussion of risks and
uncertainties applicable to the Company's business.
The Company undertakes no obligation to update any forward-looking
statements in this Report on Form 10-Q or elsewhere.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk exposures that
affect the quantitative and qualitative disclosures presented in the notes to
the Company's December 31, 1998 audited financial statements and management's
discussion and analysis included in the Company's Annual Report on Form 10-K.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Election of Directors
The board of directors, consisting of Messrs. Warner W. Henry,
Terrill M. Gloege, Frederick H. Muhs, Paul H. Beemer, Richard B. Gordinier,
Jeffrey A. Wahba, Donald M. Ford, Joseph A. Mooney, Jr. and Mrs. Carol F.
Henry, was re-elected in its entirety to serve as directors until the next
annual meeting of Shareholders or until otherwise replaced. One hundred
percent (100%) of the votes cast by the Shareholders were voted in favor of
the reelection of each director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
21
The registrant has filed herewith the following exhibits:
27 Financial Data Schedule for the three month period ended
March 31, 1999 (filed in electronic form only).
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarterly
period ended March 31, 1999:
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 17, 1999 HENRY COMPANY
/s/ Jeffrey A. Wahba
-------------------------------
By: JEFFREY A. WAHBA
Its: Vice President, Secretary
and Chief Financial Officer
23