**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)**                                                                                                              |   |   |
| **ý**                                                                                                                  |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                        |   |   |
| **For the fiscal year ended December 31, 2002**                                                                             |
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| **OR**                                                                                                                      |
|                                                                                                                        |   |   |
| **o**                                                                                                                       |   | **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**                                                                                       |
|                                                                                                                             |  |  |  |  |

 

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| **HENRY  COMPANY**                                                          |
|-----------------------------------------------------------------------------|
|  (Exact Name of Registrant as Specified in its Charter)                |
|                                                                        |
| **California**                                                              |   | **95-3618402** |
| (State or Other Jurisdiction of  Incorporation or Organization)             |   | (I.R.S. Employer Identification No.) |
|                                                                        |   |   |
| **2911 Slauson  Avenue, Huntington Park, California**                       |   | **90255** |
| (Address of Principal Executive Offices)                                    |   | (Zip Code) |
|                                                                        |   |   |
| Registrant’s telephone number, including  area code **(323) 583-5000** |
|                                                                        |   |   |
| Securities registered pursuant to Section  12(b) of the Act:                |

 

| **Title of  Each Class**                                     |   | **Name of  Each Exchange on Which Registered** |
|--------------------------------------------------------------|--------|------------------------------------------------|
| None                                                         |   |                                           |
|                                                         |   |                                           |
| Securities registered pursuant to Section  12(g) of the Act: |
| **None**                                                     |

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   ý  No   o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 informationstatements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes  o    No ý

 

 

As of  June 28, 2002, there were outstanding 221,500 shares of theRegistrant’s common stock (“Common Stock”) and 6,000 shares of the Registrant’sclass A common stock (“Class A Common Stock”). As of June 28, 2002, noshares of the Common Stock or the Class A Common Stock were held bynon-affiliates of the Registrant.

 

By virtue of Section 15(d) of the Securities Act of 1934, theRegistrant is not required to file this Annual Report pursuant thereto, but hasfiled all reports as if required to do so during the prior 12 months.

 

 

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** **

**HENRY COMPANY**

**ANNUAL REPORT ON FORM10-K**

**FOR FISCAL YEAR ENDEDDECEMBER 31, 2002**

 

**TABLE OF CONTENTS**

 
| **Item No.** |
|--------------|
|         |   |   |
|         |   | PART I |
| 1.           |   | Business |
| 2.           |   | Properties |
| 3.           |   | Legal Proceedings |
| 4.           |   | Submission of Matters to a Vote of Security  Holders |
|         |   | PART II |
| 5.           |   | Market for the Registrant’s Common Equity  and Related Shareholder Matters |
| 6.           |   | Selected Financial Data |
| 7.           |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| 7A.          |   | Quantitative and Qualitative Disclosures  About Market Risk |
| 8.           |   | Financial Statements and Supplementary Data |
| 9.           |   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure |
|         |   | PART III |
| 10.          |   | Directors and Executive Officers of the  Registrant |
| 11.          |   | Executive Compensation |
| 12.          |   | Security Ownership of Certain Beneficial  Owners and Management |
| 13.          |   | Certain Relationships and Related  Transactions |
| 14.          |   | Controls and Procedures |
|         |   | PART IV |
| 15.          |   | Exhibits,  Financial Statements, Schedules and Reports on Form 8-K |

 

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**FORWARD LOOKINGSTATEMENTS**

 

Any statementsset forth herein that are not historical facts are hereby identified as“forward-looking statements” for the purpose of the safe harbor provided by thePrivate Securities Litigation Reform Act of 1995.  These “forward-looking statements” are found at various placesthroughout this document and include without limitation those relating to theHenry Company’s (“Henry” or the “Company”) future business prospects, revenues,working capital, liquidity, capital needs and income.  In addition, forward-looking statements generally can beidentified by the use of forward-looking terminology such as “may,” “will”,“expect,” “should,” “intend,” “estimate,” “anticipate,” “believe,” or“continue” or similar terminology. Undue reliance should not be placed on these forward-looking statementsand Henry cautions that such statements are necessarily estimates reflectingthe current views of the Company’s senior management and involve a number ofrisks and uncertainties that could cause actual results to differ materiallyfrom those suggested by the forward-looking statements.  Such statements should, therefore, beconsidered in light of various important factors set forth in this report andothers set forth from time to time in the Company’s reports filed with theSecurities and Exchange Commission (the “SEC”).

 

There are manyfactors that could cause actual results to differ materially from thosecontained in the forward-looking statements. These factors include:  (i) theability to generate sufficient cash flow to service the Company’s debt serviceand working capital needs; (ii) the ability to achieve future cost savings andrevenue growth; (iii) fluctuations in raw material costs; (iv) the absence ofinclement weather, (v) adverse changes in the Company’s relationship with itsmost significant customers, including Home Depot, (vi) the impact of product liabilityand asbestos litigation, disruptions in asbestos supply (and possible reductionin demand for asbestos-bearing products); (vii) competitive factors; and (viii)changes in general economic conditions or the hostilities in the Middle East.  Additional information concerning factorsthat could cause actual results to differ materially from those in theforward-looking statement will be contained from time to time in documentsfiled by the Henry Company with the SEC, including, but not limited to the Company’sreports on Forms 10-Q.  Some of thesefactors are described under the section entitled “Business/Risk Factors” in theCompany’s Annual Report on this Form 10-K for the period ending December 31,2002.

 

The Company,through its senior management or persons acting on its behalf, may from time totime make oral or written “forward-looking statements” about the mattersdescribed herein or other matters concerning the Company and such statementsare subject to the qualifications set forth herein.  The Company disclaims any intent or obligation to update publiclyor revise “forward-looking statements.”

 

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**PART I**

 

ITEM 1.        BUSINESS

 

*General*

 

The Company is a specialty chemicals company focusing primarily on productsfor roofing, sealing and paving applications. The Company develops,manufactures and markets several separate but related product lines includingroof and driveway coatings and paving products, industrial emulsions, airbarriers, polyurethane foam for roofing and commercial uses, sealants forconstruction and marine uses and specialty products.

 

Beginning in 1988, the Company’s management focused on expanding theHenry brand from its Southern California base initially through the acquisitionof regional roof coatings manufacturers and distributors in contiguous regionsof the Southwest, the Northwest, Northern California and the Rocky Mountainregion. In 1998, the Company became a national organization by acquiring MonseyBakor, which has served the U.S. and Canadian markets for over 50 years as aleading manufacturer and distributor of a broad spectrum of building productsfor residential and commercial use with a product line consisting of roofcoatings, adhesives and membranes, roofing and air barrier systems as well asspecialized industrial emulsions. In 1999, the Company acquired GrundyIndustries, a leading roof coatings manufacturer focused on servicing theprofessional trade in the Midwest and Rocky Mountain region of the U.S.

 

*Divisions*

 

The Company’s two major divisions are the Henry Building ProductsDivision and the Resin Technology Division.

 

*Henry BuildingProducts Division*

 

The Henry Building Products Division, which represents the majority ofthe Company’s 2002 net sales, develops, manufactures and markets coatings,sealants and membranes for construction, industrial, building materials andother specialty applications. The Company also manufactures wax–based emulsionsfor the gypsum industry.

 

*Products*

 

Roofing products represent the majority of the Building ProductsDivision’s total revenues. Henry’s roofing products are designed to address theproblems of water invasion, wind erosion and ultraviolet damage. Henry offers afull line of liquid roof coatings and adhesives including both solvent andwater-based products. In addition to roof coatings and mastics, Henrymanufactures high-quality styrene-butadiene-styrene (SBS) modified bitumenroofing membrane products designed to be used in roofing systems that can meetthe challenge of the elements encountered throughout North America.

 

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

 

Henry’s industrial emulsions are used as coating, sizing, strengtheningand moisture-proofing additives by manufacturers of fiber products such asgypsum wallboard, insulation board, gaskets, paper board, and glass fibers. TheCompany’s primary emulsion product, wax-based industrial emulsions, arespecifically used by manufacturers of gypsum wallboards. Sales of industrialemulsions have increased in recent years partially due to increasedenvironmental restrictions on volatile organic compound emissions, which havecreated a demand for emulsion–based products over solvent-based products. TheCompany’s wax-based emulsions are manufactured with proprietary and patentedprocesses that management believes contributes to higher margins relative tothose of competitors.

 

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

 

The Company’s air barrier systems are designed to reduce air flowsthrough exterior walls of buildings. The movement of air into a building(infiltration) and out of a building (exfiltration) is caused by pressuredifferences produced by wind,

 

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chimneyeffect and pressurization. If air flows through a building and exfiltrates, itcan deposit moisture on the cold masonry cladding, causing brick or stone toundergo major changes due to moisture absorption. This dampness can causedimensional changes and accelerate the deterioration process. Moisture–ladenair from a humidified building can also develop into ice under freezingconditions, causing displacement of the exterior masonry cladding, corrosion,and lower energy efficiency. The advantage of the Company’s prefabricatedmodified bitumen sheet is that it provides a flexible air barrier membranecapable of bridging construction gaps and absorbing deflection.

 

The Company’s line of air barriers can be installed into existingbuildings on either internal or external walls or used in the construction ofnew buildings. In 1986, Canada required air barriers in all buildings as anamendment to the National Building Code. In the United States, however, thereis no national standard and the air barrier market remains in its infancy.

 

The Company’s specialty products include protective coatings for avariety of industrial and commercial applications, such as specialty asphaltcoatings to protect wood, metal, mortar or thermal insulation. The Companymanufactures undercoatings for mobile homes, as well as both solvent andwater-based rust-proofing products for the automobile industry.

 

The Company’s sealant line has three distinct product categories:sealants for construction applications, hatch cover sealants for oceanfreighters, and preformed adhesive waterstops for expansion joint applicationson construction projects. Products include preformed plastic gaskets forprecast concrete structures, which provides watertight sealing for joints suchas those on underground concrete drainage and manhole structures. Theseproducts are also used for sealing hatch covers on ships to prevent waterdamage to cargoes that can occur in heavy seas. There is also a preformedplastic adhesive waterstop which is used as a construction joint sealant inpoured-in-place concrete structures. Henry Company believes this product allowsfor an easier, more reliable and more efficient sealing method than thetraditional PVC-type waterstop.

 

*Manufacturing*

 

For purposes of organizing its manufacturing process, the Company usesseven related product groups. The product groups are: cold applied liquidcoatings, cements and adhesives; asphalt, coal tar and wax emulsions;acrylic-based roof and insulation coatings; hot melt rubberized asphalt roofingand waterproofing products; SBS modified bitumen membranes, air barrier andwaterproofing membranes; specialty adhesives; and specialty preformed asphaltictapes.

 

The key materials used in the production of roofing and pavementproducts are asphalt, mineral spirits, various fibers, resins, and polyesterand glass matting. For the production of industrial emulsions, the primarymaterial is refined wax. These raw materials are generally available on aregional basis and supply disruptions are very rare. The Company maintainsmultiple sourcing arrangements for all of its key raw materials helping tomitigate price increases.  In addition to raw materials, packagingsupplies represent a meaningful portion of production cost.

 

The Company, like a number of its competitors, uses fibers such aschrysotile asbestos in its production process. Management believes that its useof chrysotile asbestos is in accordance with regulations of the OccupationalSafety and Health Administration (“OSHA”). OSHA requires that chrysotileasbestos fibers not be exposed to an open-air environment. In the Company’sproduction process, the cellulose or chrysotile asbestos fiber is pumpedthrough a negative pressure fluffer that separates the fibers for optimaldispersion in the product mixture. The fibers are then mixed into and fullyencapsulated by the asphalt. Once encapsulated the fibers are “locked” into theasphalt cutback and cannot be physically separated from the product. OSHA andother regulatory bodies have determined that encapsulation renders the chrysotileasbestos harmless. The Environmental Protection Agency (“EPA”) does notregulate or enforce any special procedures for the application of chrysotileasbestos–containing roof coatings or sealants.

 

*Sales,Marketing and Distribution*

 

Due to the many products manufactured by the Henry Building ProductsDivision, the Company markets its products by focusing on four primary saleschannels. These channels are: Retail; Industrial, Commercial and Institutional(“ICI”); Specialty Products; and International.

 

The Retail channel consists of national home center chains, retailbuilding material suppliers, hardware distributors, paint and sundrydistributors, farm and hardware cooperatives, and mass merchandisers. To reachcustomers, the Company employs a trained sales organization and has an in-houseCreative Services Department that produces customized brochures and promotionalmaterials and coordinates national and regional advertising programs.

 

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The ICI channel consists of national and regional roofing distributorsthat sell to contractors throughout North America.  Henry maintains atechnical selling staff engaged in both sales and training to help ensure thatthe Company’s products are applied properly.

 

The Specialty Products channel consists of the gypsum wallboardindustry, which buys wax emulsions, and major roofing companies, which are theprimary market for asphalt emulsions for use as a sizing agent in insulationboard.  The Company markets a broad array of products using a technicalsales force trained to help customers in the use of the various products.

 

The International channel consists of international retailers anddistributors.  Henry products are marketed to the international saleschannel with special focus on the Company’s basic product line of roof coatingsand cements and industrial emulsions.

 

In January2002, the Company entered into a three-year agreement with Home Depot thatsignificantly expands the Company’s relationship with Home Depot.  Theagreement contains performance targets, which, if not achieved, could trigger apayment from the Company to Home Depot in 2005.  In the first quarter of2002, the Company’s relationship with Lowes, its second largest customer, wasterminated.  During 2002, the incremental revenue resulting from the HomeDepot agreement exceeded the revenue lost as a result of the loss of Lowes as acustomer.

 

*RoofingSystems*

 

Henry Company has developed a roofing systems segment for one-stopcommercial roofing or re-roofing or roofing maintenance with warrantyprotection. The Company’s personnel work directly with architects, buildingowners and contractors to develop custom specifications utilizing Henryproducts for the design, construction and maintenance of commercial roofs. Animportant component of the Company’s roof systems program’s success is thatbuilding owners are assured that Henry Company will stand behind the roof frombeginning to end.  A Henry Company salesconsultant will write a custom specification for the roof and the roofingsystem will be applied by a Henry Company-approved contractor generally usingHenry Company products. A Henry Company technical inspector will inspect theroof application during installation and regular follow-up inspections and insome instances maintenance will be performed throughout the life of thewarranty. Henry Company offers 5 to 20-year warranties on its re-roofingsystems and 5-year warranties on its maintenance systems calculated on a feeper square-foot basis. Since its inception, expenses for warranty claimsexperience has been very low. In part, this is due to Henry Company’scontinuing inspection program. Management believes that the roofing systemsbusiness represents a significant growth opportunity.

 

*Resin TechnologyDivision*

 

The Resin Technology Company (“RTC”), founded as an independent companyin 1982 and now a division of the Company, produces polyurethane foam productsfor roofing and other industrial applications. RTC also sells coating productsmanufactured for it by third parties for application on foam. The acquisitionof RTC in 1988 has enabled the Company to offer a broader range of roofingproducts 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 aremixed together in a spray unit during application. A chemical reaction causesthe liquid to expand many times in thickness creating a rigid layer ofclosed-cell foam. In roofing applications, this foam is strong enough to bewalked on minutes after the application. The result is a seamless barrieragainst water penetration that is durable and easy to maintain. In roofingapplications, an elastomeric coating must be applied as protection against thesun’s ultraviolet radiation. RTC sells acrylic, urethane, silicone and polyureacoatings.

 

RTC’s products offer users several advantages, including a seamlessbarrier that minimizes the likelihood of leaks and provides superior insulationcharacteristics that can reduce energy costs. It is relatively light in weightand is therefore particularly adaptable to large arenas or other structuresthat may benefit from a lighter weight roof. Furthermore, it can be applieddirectly over an existing roof, potentially avoiding the costly “tear-offs”that may be required with other roofing systems.

 

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RTC’s products are also used in a number of original equipmentmanufacturer applications. The insulation and weight characteristics ofpolyurethane foam make it an integral part of the thermal panel, spa andpackaging 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 oftwo components: a hardening agent that is purchased by the Company and resinthat is manufactured in the Ontario facility. Raw materials are automaticallypumped from one or more of the 11 raw material storage tanks within thefacility, blended and then poured into 55-gallon drums, tote capsules or bulktanker trucks. The production process is highly automated. The bulk of RTC’scoatings products for polyurethane foam applications are produced by athird-party manufacturer also located in Ontario. The Company believes that itderives its success in the polyurethane foam market from its superiorunderstanding of technology and the Company has secured a number of originalequipment manufacturer accounts because of its ability to produce products fora customer’s very specific technical requirements.

 

*Sales,Marketing and Distribution*

 

The Resin Technology Company sells primarily to roofing contractors andoriginal equipment manufacturers in the western United States. RTC’s roofingproducts are sold directly to pre-qualified contractors experienced in applyingand spraying polyurethane foam onto roofs. Sales to original equipmentmanufacturers include those to spa equipment manufacturers, and managementbelieves the Company is the leading supplier to this market. RTC also suppliesmanufacturers in many other industries including those producing freezerpanels, thermal food transportation equipment, boat floatation and packagingproducts. RTC’s remaining sales are made to several distributors, particularlyin the Northwest and upper Midwest.

 

RTC supports its sales efforts with a sales staff organized accordingto market segment and regional location. Henry Company believes that RTC’smarketing advantages are based on a commitment to technical development andcustomer support and also believes that RTC has captured a number of originalequipment manufacturer accounts from its competitors by efficiently respondingto the customer’s technical requirements. In both the roofing and originalequipment manufacturer segments Henry Company provides just-in-time deliverycapability which is essential in time and labor – sensitive roofingapplications.

 

**Employees**

 

As of December 31, 2002, Henry Company employed approximately 560persons, the majority of whom were involved in production and distribution,with the balance engaged in administration, sales and clerical work. Of theseemployees, approximately 415 were employed in the United States and 145 inCanada. Approximately 25 employees in Kimberton, Pennsylvania, 38 employeeslocated in Huntington Park, California, 8 employees in Rock Hill, SouthCarolina, 28 employees in Lachine (formerly Ville St. Pierre), Quebec and 2employees in Mirabel, Quebec are unionized and covered by collective bargainingagreements. These collective bargaining agreements expire on March 31, 2003,June 30, 2003, February 1, 2004, June 30, 2005 and June 30, 2005, respectively.The Company believes that its relationship with its employees is good. TheCompany has not experienced a work stoppage at any of its facilities in over 20years.

 

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**Risk Factors**

 

***SubstantialLeverage***

 

The Company has consolidated indebtedness that is substantial inrelation to the book value of its shareholders’ equity. As of December 31,2002, Henry Company had approximately $87.6 million of debt (the sum oflong-term debt, including current maturities of long-term debt, notes payable,borrowings under the lines of credit, and capitalized lease obligations) and ashareholders’ deficit of approximately $30.9 million.

 

The Company’s significant level of borrowings has several importantconsequences for the Company including but not limited to the following: (i) asubstantial portion of the Company’s cash flow from operations must bededicated to debt service and is not available for other purposes; (ii) theCompany’s ability to obtain additional financing in the future for workingcapital, acquisitions or capital expenditures has been significantly impairedand (iii) the Company’s substantial leverage may make it more vulnerable toeconomic downturns and may limit its ability to withstand competitive pressuresor to take advantage of business opportunities.

 

The Company’s ability to make cash payments to satisfy its debtobligations will depend on its future operating performance, which will beaffected by financial, business, competitive, general economic and otherfactors, many of which are beyond the Company’s control. Based upon currentlevels of operations and anticipated cost savings and future growth, theCompany believes that its expected cash flows from operations, together withavailable borrowings under its credit facility will be adequate to meet itsanticipated requirements for working capital, scheduled principal and interestpayments, lease payments and capital expenditures for the next twelve months.See “Management’s Discussion and Analysis of Financial Condition, Results ofOperations, and Liquidity and Capital Resources”.

 

***Abilityto Achieve Anticipated Cost Savings or Revenue Growth***

 

During 2001, the Company instituted a number of initiatives to improveoperating results including, but not limited to (i) a change in executive levelmanagement, appointing Mr. Baribault as President and Chief Operating Officer(ii) the implementation of a restructuring plan in which the Company closed amanufacturing plant, reorganized or eliminated certain administrativefunctions, and restructured its selling organization. Many of the benefits ofthese initiatives were realized in 2002. Although financial results improvedfrom 2001 to 2002 there can be no assurance that any of these actions willresult in further improvement in the Company’s future financial and operatingresults. Any statements concerning potential cost savings and revenue growthcontained in this annual report are forward-looking statements that are basedon estimates and assumptions made by the Company’s management.

 

 

***CostFluctuations and Supply of Certain Raw Materials***

 

The Company utilizes a number of raw materials in its manufacturingprocesses, some of which have historically fluctuated in price at particulartimes. These price fluctuations have been based on such factors as the capacityof the raw material supply chain, demand in the market, weather, generaleconomic factors and the availability of alternative raw materials. Rawmaterials utilized by the Company that have historically experienced some pricefluctuation include asphalt, aluminum paste, rubber and certain diisocyanates,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 capacityand with changes in the supply and demand in the oil, gasoline and fossil fuelmarkets. Significant increases in asphalt prices or in the prices of other rawmaterials, if not offset by product price increases, could have a materialadverse impact on the profits of the Company.  There can be no assurancethat the Company will be able to pass any future cost increases through to itscustomers in the form of price increases.

 

In addition, shortages of some of these same raw materials can and mayforce the Company to find alternative replacements which most probably will bemore costly. In particular, there are only two mines in North America thatproduce asbestos fibers that are used in the Company’s products. Dueto a protracted work stoppage at one of the mines and a cessation of operationsat the other, the asbestos used in the Company’s products became temporarilyunavailable in the fourth quarter of 2002. By the beginning of 2003, this raw material was once again available,although there is no certainty that this raw material will be readily availablethroughout 2003 and further into the future.

 

Despite thisdisruption in the supply of asbestos, the Company was able to meet itscommitments to customers because it has equivalent non-asbestos formulationswhich were readily substituted for the products containing asbestos.

 

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Accordingly, the Companybelieves that its competitive position did not suffer, although the Company wasunable to entirely pass on the increased cost of the raw material change duringthis period.

 

Currently theCompany’s costs for petroleum related raw materials such as asphalt and mineralspirits are higher than they were at the comparable period one year ago,largely as a result of the increased price of oil.  With the current conflict in the Middle East, it is possible thatthe price of oil could rise significantly from current levels, as has occurredin prior outbreaks of war in this region. If this occurred, the costs of asphalt and mineral spirits would mostprobably increase as well.  The Companywould endeavor to pass these increased costs on to its customers but it isprobable that there would be at least a short term negative cost impact to theCompany. Even further, there is also the possibility that there could be a lackof supply of certain petroleum based raw materials as a result of the outbreakof war. If this is the case, there is no certainty that the Company would beable to obtain adequate raw material replacements to produce many of itsproducts

 

***Impactof Weather***

 

Because many of the Company’s products are designed to patch or fixdamaged roofs, the Company’s revenues are directly affected by weatherconditions. Sales of roofing products have historically tended to increase inareas that have experienced severe weather. The results of severe weather orthe anticipation of severe weather may motivate property owners to undertakerequired roof maintenance or to replace an old or worn roof. The absence ofinclement weather in some or all of the Company’s markets could have an adverseimpact on the Company’s business, financial condition, results of operations orcash flows.

** **

***Dependence on KeyCustomer***

 

The Company issubstantially dependent on Home Depot, the Company’s largest customer. Home Depot represented approximately 11.4% of gross sales in fiscal year 2000, 13.3% of gross sales in fiscal year2001, and 25.9% of gross sales in fiscal year 2002, and also accounted forapproximately 23.3% and 40.0% of accounts receivable at December 31, 2001 and2002, respectively. In January 2002, the Company entered into a three-yearagreement with Home Depot that significantly expanded the Company’srelationship with Home Depot.  The agreement contains performance targets,which, if not achieved, could trigger a payment from the Company to Home Depotin 2005.  In the first quarter of 2002, the Company’s relationship withLowes, its second largest customer, was terminated.  During fiscal year2002, the incremental revenue resulting from the Home Depot agreement exceededthe revenue lost as a result of the loss of Lowes as a customer.  Anydeterioration of the Company’s relationship with Home Depot, or any failure ofHome Depot to purchase and pay for product shipped by the Company to Home Depotcould have a material adverse affect on the Company.

 

***ProductLiability and Asbestos Litigation***

 

The Company’s business entails an inherent risk of product liabilityclaims, including a particular risk with respect to chrysotileasbestos-containing products that the Company manufactures. Although someroofing products manufacturers have switched to an exclusively non-asbestosline, some of the leading firms in the industry continue to use chrysotileasbestos in at least some of their products. The Company believes that its useof chrysotile asbestos fibers, which are encapsulated by asphalt in themanufacturing process, is in accordance with applicable laws, and that,consistent with Federal regulatory findings, its products are not hazardous.However, the Company has been named as a defendant in suits alleging certainasbestos-related injuries. Although the Company has not incurred any expense injudgment or settlement of any asbestos–related injury claim to date, there canbe no assurance that any such claim will not in the future result in a materialadverse judgment against, or settlement by, the Company. Other than theseasbestos-related claims, no material product liability claims are currentlypending against Henry Company. However, there can be no assurance that suchclaims will not arise in the future. The costs of defending the pendingasbestos-related suits are currently funded by a joint defense arrangementamong the Company’s insurance carriers and the Company believes such insurancecoverage is adequate. However, Henry Company is not covered by insurance forasbestos-related claims for injuries that are alleged to have arisen afterDecember 1, 1985.

 

The Company maintains product liability insurance for non-asbestosclaims.  However, there can be noassurance that the product liability coverage maintained by the Company will beadequate to cover product liability claims or that the applicable insurer willbe financially solvent at the time of any required payment. In addition, therecan be no assurance that the Company will be able to maintain its productliability coverage on current or otherwise acceptable terms.

 

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A product liability or asbestos-related claim that results in ajudgment or settlement in excess of the Company’s insurance coverage, or amaterial judgment or settlement for an asbestos-related claim for injuriesalleged to have arisen after 1985, could have a material adverse effect on theCompany.   With respect to the asbestos related cases filed againstthe Company, the Company knows of none that is either not covered by liabilityinsurance or is claiming exposure after December 1, 1985, although in somecases, the claimed date of exposure is unknown.

 

***Relianceon Key Personnel***

 

The Company’s future success will depend to a significant extent on itsexecutive officers and other key management personnel. Although the Company hasemployment agreements with three of its key executives, there can be noassurance that the Company will be able to retain its executive officers andkey personnel or attract additional qualified management in the future.

 

***Competition***

 

The roofing products and roofing systems industries are highlycompetitive in most product categories and geographic regions. Competition islargely based on quality, service, price and distribution capabilities. TheCompany competes for retail and wholesale business with both large nationalmanufacturers and smaller regional producers. In certain circumstances, dueprimarily to factors such as freight rates and customer preference for localbrands, manufacturers with better access to certain geographic markets may havea competitive advantage in such markets. In addition, many of the Company’scompetitors within the roofing products industry have greater financial,marketing, distribution, management and other resources than the Company, andas the industry consolidates, the Company’s competitors may further enhancetheir competitive advantages.

 

The Company also believes that excess capacity in the roofing productsand roofing systems industry, especially during slow periods for the industry,could result in downward pricing pressure and intensifiedcompetition.   Additionally, it appears that the Company is facingincreased competition in the wax emulsion segment of its business.  Giventhese factors, there can be no assurance that the Company will be able tocontinue to compete successfully against existing or new competitors, and thefailure to do so would have a material adverse effect on the Company’s business,financial condition, results of operations or cash flows.

 

***EnvironmentalMatter****s*

 

The past and present business operations of the Company and the pastand present ownership and operation of real property by the Company are subjectto extensive and changing federal, state, local and foreign environmental lawsand regulations pertaining to the discharge of materials into the environment,the handling, storage, treatment and disposal of wastes (including solid andhazardous wastes), the remediation of releases of toxic or hazardous materialsor otherwise relating to health, safety and protection of the environment(“Environmental Laws”). As such, the nature of the Company’s operations as wellas previous operations by others at real property owned, leased or used by theCompany, expose the Company to the risk of claims under Environmental Laws, andthere can be no assurance that material costs or liabilities will not beincurred in connection with such claims. Based on its experience to date, theCompany does not expect such claims or the costs of compliance with the scopeor enforcement of Environmental Laws to have a material impact on its earningsor competitive position. The Company believes that it is in substantialcompliance 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 theirinterpretation, or other unanticipated events will not give rise to expendituresor liabilities that may have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

The Company, through its acquisition of Monsey Bakor, has been named asa potentially responsible party in litigation concerning contamination at aformer waste–oil recycling facility used by it in Douglassville, Pennsylvaniaand at an EPA superfund remediation site in Rock Hill, South Carolina. TheCompany, also through its acquisition of Monsey Bakor, is also a party to a consentdecree issued by the federal Environmental Protection Agency relating toremediation of contamination at its Kimberton, Pennsylvania facility. It issharing remediation costs with a former owner of the facility that is also aparty to the consent decree. Based on currently available information, theCompany believes that these matters will not have a material adverse effect onthe Company’s business, financial condition, results of operations or cashflows.

 

10

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**GovernmentalRegulation and Permits**

 

The Company is subject to regulation under various federal, state andlocal laws, including laws regulating its manufacturing operations and lawsrelating to employee health and safety. Permits are required for operation ofthe Company’s business, and such permits are subject to renewal, modificationand, in certain circumstances, revocation by governmental authorities. The lossof certain of such permits could have a material adverse effect on the Company’sbusiness, financial condition or results of operations. The Company expects toincur ongoing capital and operating costs and administrative expenses tomaintain compliance with its permits and with applicable laws and regulations.The Company cannot predict the legislation or regulations that may be enactedin the future or how existing or future laws or regulations will beadministered or interpreted. Compliance with new laws or regulations, as wellas more vigorous enforcement policies of the regulatory agencies or stricterinterpretation of existing laws, may require additional expenditures by theCompany, some or all of which may be material.

 

ITEM 2.        PROPERTIES

TheCompany’s operations are conducted at the owned or leased facilities describedbelow:

 
| **Locations**                       |   | **Facility  Square Footage** |   | **Owned/Leased** |   |
|-------------------------------------|--------|------------------------------|--------|------------------|--------|
| **United States**                   |   |                         |   |             |   |
| Huntington Park, California         |   | 95,478                       |   | Leased           |   |
| Sacramento (Elk Grove),  California |   | 18,871                       |   | Leased           |   |
| Portland, Oregon                    |   | 55,735                       |   | Leased           |   |
| Seattle (Auburn), Washington        |   | 12,500                       |   | Leased           |   |
| Ontario, California                 |   | 13,330                       |   | Leased           |   |
| Houston, Texas                      |   | 44,000                       |   | Owned            |   |
| Kimberton, Pennsylvania             |   | 147,400                      |   | Owned            |   |
| Indianapolis, Indiana               |   | 63,000                       |   | Owned            |   |
| Waterford, New York (closed)        |   | 120,000                      |   | Owned            |   |
| Rock Hill, South Carolina           |   | 40,000                       |   | Owned            |   |
| Garland, Texas                      |   | 76,500                       |   | Owned            |   |
| Bartow, Florida                     |   | 34,000                       |   | Owned            |   |
| Kingman, Arizona                    |   | 39,275                       |   | Owned            |   |
| Denver, Colorado                    |   | 13,112                       |   | Owned            |   |
| **Canada**                          |   |                         |   |             |   |
| Petrolia, Ontario                   |   | 58,500                       |   | Owned            |   |
| Mirabel, Quebec                     |   | 6,100                        |   | Owned            |   |
| Lachine (Montreal), Quebec          |   | 44,000                       |   | Owned            |   |

 

The Company also leases a small administration facility in Mississauga,Ontario. In addition, the Company owns a small facility in Troy, New York thatit leases to a third party. The Company believes that its facilities are ingood operating condition and are adequate to meet anticipated futurerequirements.

 

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ITEM 3.  LEGAL PROCEEDINGS

 

In the ordinary course of business, the Company is periodically namedas a defendant in a variety of product liability lawsuits including “slip andfall” claims relating to pavement sealants and claims for alleged productfailure. The Company does not believe these cases will have a material adverseeffect on the Company’s business, financial condition, results of operations orcash flows.

 

As of December 31, 2002, the Company was a party to approximately 70active state court cases alleging certain asbestos-related injuries. There werethirty-four new cases filed in 2002, eleven filed in 2001, five in 2000, six in1999, seven in 1998 and two in 1997. The Company believes that its use ofchrysotile asbestos fibers, which are encapsulated by asphalt in themanufacturing process, is in accordance with applicable laws, and thatconsistent with Federal regulatory filings, its products are not hazardous.Although the Company has not incurred any expense in judgment or settlement ofany asbestos-related  injury claim todate, there can be no assurance that any such claim will not in the futureresult in a material adverse judgment against, or settlement by, theCompany.  The Company’s insurance carriers currently fund the legal costsof these suits and the Company believes that such insurance coverage isadequate. However, Henry Company is not covered by insurance forasbestos-related claims for injuries that are alleged to have arisen afterDecember 1, 1985.   With respect to the cases filed, the Companyknows of none that is either not covered by liability insurance or is claimingexposure after December 1, 1985, although in a few cases, the claimed date ofexposure is unknown.

 

The Company does not believe that the outcome of these suits and legalproceedings will have a material adverse effect on the Company’s financialcondition, results of operations, or cash flows.

 

**Environmental Matters**

 

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

 

The Company’s Kimberton facility was formerly occupied by apharmaceutical manufacturer whose operations resulted in groundwatercontamination identified on the site and surrounding area. The contaminant ofconcern was trichloroethylene which required various remedial activities,including the provision of alternate water supplies to users in the surroundingarea and a groundwater treatment program. Remedial work is being completedunder a consent decree the EPA negotiated in 1990 with the pharmaceuticalmanufacturer and the Company and a confidential cost sharing agreement betweenthese two companies. The Company’s costs under the consent decree in 2000, 2001and 2002 were approximately $73,000, $60,000 and $64,000, respectively, and arenot expected to be significantly different during 2003 and 2004. The Companyhas a liability recorded for the entire expected costs of the remedial workover the remaining term of the consent decree and cost-sharing agreement. Costspaid under the consent decree and cost-sharing agreement of $64,000 in 2002reduced the liability to $3.2 million at December 31, 2002.

 

The Company is currently closing certain of its underground storagetanks. The Company estimates that the capital expenditures required to complywith various regulatory programs in 2003 will not have a material adverseeffect on the Company’s earnings, cash flows or competitive position. Suchestimates, however, are based on factors and assumptions that are subject tochange, including potential modifications of regulatory requirements, detectionof unanticipated environmental conditions or other currently unexpectedcircumstances.

 

ITEM 4.        SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

No matterswere submitted to a vote of the Company’s shareholders during the fourthquarter of the fiscal year covered by this report.

 

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**PART II**

 

ITEM 5.        MARKET FOR THEREGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

There isno established public trading market for the Company’s common equity.

 

As of December 31, 2002, there were seven (7) beneficial holders of theCompany’s Common Stock and one beneficial holder of the Company’s Class ACommon Stock.

 

At the present time, the Company intends to retain all earnings for usein the operation and development of its business and does not expect to declareor pay any cash dividends in the foreseeable future. The Company’s currentcredit facility also prohibits the payment of any dividends. Any determinationin the future to pay dividends will depend on the Company’s earnings, financialcondition, capital requirements, level of indebtedness and other factors deemedrelevant by the Company’s Board of Directors, including any contractual orstatutory restrictions on the Company’s ability to pay dividends.

 

 

ITEM 6.        SELECTED FINANCIALDATA

 

Thefollowing selected consolidated financial data should be read in conjunctionwith Henry Company’s consolidated financial statements and related notesthereto and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this document. The consolidatedstatement of operations data for each of the years in the three-year periodended December 31, 2002, and the consolidated balance sheet data at December 31,2001 and 2002, are derived from the consolidated financial statements of HenryCompany which have been audited by PricewaterhouseCoopers LLP, independentaccountants, and are included elsewhere in this document. The consolidatedstatement of operations data for the years ended December 31, 1998 and 1999 andthe consolidated balance sheet data at December 31, 1998, 1999, and 2000 arederived from audited financial statements of Henry Company not included in thisAnnual Report on Form 10-K.  Historical results are not necessarilyindicative of the results to be expected in the future.

 

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|                                                                                   |   | **Year Ended  December 31** |    |
|----------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                   |   | **1998(7)**                 |    | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                                                   |   | **(In  thousands)**         |    |
| **Consolidated  Statement of Operations Data(1):**                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Net sales                                                                              |   | $                           | 148,512 |   | $ | 175,712 |   | $ | 191,513 |   | $ | 191,848 |   | $ | 200,806 |   |
| Cost of sales                                                                          |   | 105,143                     |    | 124,906 |   | 143,266 |   | 138,473 |   | 138,254 |   |
| Gross profit                                                                           |   | 43,369                      |    | 50,806 |   | 48,247 |   | 53,375 |   | 62,552 |   |
| Operating expenses:                                                                    |   |                        |    |   |   |   |   |   |   |   |   |
| Selling, general and  administrative                                                   |   | 33,836                      |    | 44,871 |   | 46,595 |   | 47,384 |   | 51,122 |   |
| Restructuring charges(2)                                                               |   | —                      |    | — |   | 735 |   | 569 |   | — |   |
| Amortization of intangibles                                                            |   | 1,629                       |    | 2,928 |   | 2,550 |   | 2,525 |   | 742 |   |
| Operating income (loss)                                                                |   | 7,904                       |    | 3,007 |   | (1,633 | ) | 2,897 |   | 10,688 |   |
| Interest expense                                                                       |   | 6,567                       |    | 9,194 |   | 9,889 |   | 10,060 |   | 9,696 |   |
| Interest and other income, net                                                         |   | (243                        | )       | (224 | ) | (260 | ) | (191 | ) | (107 | ) |
| Income (loss) before  extraordinary item                                               |   | 1,580                       |    | (5,963 | ) | (11,262 | ) | (6,972 | ) | 1,099 |   |
| Extraordinary gain related to  early extinguishments of debt(3)                        |   | —                      |    | (601 | ) | — |   | — |   | — |   |
| Income (loss) before provision  (benefit) for taxes and change in accounting principle |   | 1,580                       |    | (5,362 | ) | (11,262 | ) | (6,972 | ) | 1,099 |   |
| Provision (benefit) for income  taxes(4)                                               |   | 509                         |    | 304 |   | (4,596 | ) | (1,634 | ) | (213 | ) |
| Income (loss) before  cumulative effect of change in  accounting principle             |   | 1,071                       |    | (5,666 | ) | (6,666 | ) | (5,338 | ) | 1,312 |   |
| Cumulative effect of change inaccounting principle(5)                                  |   | —                      |    | — |   | — |   | — |   | (19,686 | ) |
| Net income (loss)                                                                      |   | $                           | 1,071   |   | $ | (5,666 | ) | $ | (6,666 | ) | $ | (5,338 | ) | $ | (18,374 | ) |
|                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                                                             |   |                        |    |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                   |   | $                           | 2,997   |   | $ | 4,184 |   | $ | 3,052 |   | $ | 1,358 |   | $ | 2,206 |   |
| Depreciation and amortization  (including amortization of intangibles)                 |   | 4,894                       |    | 7,171 |   | 7,591 |   | 7,315 |   | 5,225 |   |
| EBITDA(6)                                                                              |   | 12,971                      |    | 10,329 |   | 6,145 |   | 10,343 |   | 15,956 |   |
| Cash flows provided by (used  in):                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Operating activities                                                                   |   | 9,981                       |    | (3,387 | ) | (10,114 | ) | 6,507 |   | 6,294 |   |
| Investing activities                                                                   |   | (48,010                     | )       | (6,783 | ) | (2,801 | ) | (1,326 | ) | (2,082 | ) |
| Financing activities                                                                   |   | 50,445                      |    | (1,374 | ) | 13,354 |   | (5,710 | ) | (3,684 | ) |

 
|                                                                            |   | **1998** |       | **1999** | ** ** | **2000** | ** ** | **2001** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                            |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| **Combined  Balance Sheet Data(1):**                                            |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| Cash and cash equivalents                                                       |   | $        | 12,023     |     | $          | 685      |       | $        | 1,046      |     | $          | 426 |   | $ | 1,013 |   |
| Working capital                                                                 |   | 32,380   |       | 23,862   |       | 20,797   |       | 20,518   |       | 26,586   |       |
| Total assets                                                                    |   | 125,514  |       | 119,325  |       | 125,288  |       | 110,899  |       | 91,636   |       |
| Long-term debt, including  current maturities and borrowings on lines of credit |   | 87,631   |       | 84,671   |       | 95,370   |       | 91,297   |       | 87,623   |       |
| Total shareholders’ equity  (deficit)                                      |   | 5,830    |       | 804      |       | (6,365   | )          | (12,440  | )          | (30,851  | )          |
|                                                                                 |        |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

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(1)                                  For periods prior to April 22, 1998, the Company’sfinancial statements were prepared on a combined basis with Warner DevelopmentCompany of Texas (“Warner Development”) as both entities were under commoncontrol with

 

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identical shareholder ownership interests. On April 21, 1998, WarnerDevelopment was merged into Henry Company and the outstanding shares of WarnerDevelopment capital stock were cancelled.

 

(2)                                  The Company recorded a $735,127 and a $568,808restructuring charge in 2000 and 2001 respectively, related to plant closingsand the reorganization or elimination of certain administrative and sellingfunctions. The charges represent severance and other personnel payments relatedto the streamlining of operations associated with the implementation of costreduction initiatives noted above.

 

(3)                                  In 1999, the Company repurchased $3.6 million ofthe Senior Notes which were issued in conjunction with the acquisition ofMonsey Bakor. The resulting gain is shown net of taxes.

 

(4)                                  Prior to April 1998, Henry Company was operated asa subchapter “S” Corporation under the Code. As a result, Henry Company did notincur federal and state income taxes (except with respect to certain states)and, accordingly, the provision for income taxes only includes the applicablestate income tax. Federal and state income taxes (except with respect tocertain states) on the income of Henry Company have been incurred and paiddirectly by the shareholders of Henry Company. It had been the policy of HenryCompany to make periodic distributions to the shareholders in respect of suchtax liabilities. During the year ended December 31,1998, Henry Company paiddistributions of $1.2 million for the shareholders’ 1997 tax liabilities. OnApril 22, 1998, the Company converted to a “C” corporation under the Code andwill subsequently pay all future tax obligations of the Company to theappropriate taxing authorities.

 

(5)                                  The Company recorded a $19.7 million charge forthe year ended December 31, 2002, resulting from the impairment of goodwillassociated with the Company’s adoption of SFAS No. 142 which changes theaccounting for goodwill from an amortization method to an impairment-onlyapproach.  SFAS No. 142 changed themethod for assessing goodwill impairments from an undiscounted cash flow methodprescribed by SFAS No. 121 to a fair market value approach. See Note 1 to theConsolidated Financial Statements.

 

(6)                                  EBITDA, as defined in the indenture relating tothe Company’s outstanding 10% Senior Notes, represents net earnings beforetaking into consideration taxes on earnings, interest expense, depreciation andamortization, and non-recurring, non-cash charges, less any cash expended thatfunds a non-recurring, non-cash charge. Also excluded are cash payments of prior accruals for environmentalcharge associated with the Monsey Products Company. While EBITDA should not beconstrued as a substitute for operating earnings, net earnings, or cash flowsfrom operating activities in analyzing operating performance, financialposition or cash flows, EBITDA has been included because it is commonly used bycertain investors and analysts to analyze and compare companies on the basis ofoperating performance, leverage and liquidity. This data is relevant to anunderstanding of the economics of the Company’s business as it indicates cashflow available from operations (and/or trends in cash flow available fromoperations) to service debt and satisfy certain fixed obligations. Areconciliation of net income (loss) to EBITDA for the respective years andrelated interim periods is as follows:

 
|                                                                   |   | **Years  Ended December 31,** |   |
|------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                   |   | **1998**                      |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                                                   |   | **(In  thousands)**           |   |
| Net income (loss)                                                      |   | $                             | 1,071  |   | $ | (5,666 | ) | $ | (6,666 | ) | $ | (5,338 | ) | $ | (18,374 | ) |
| Provision (benefit) for income  taxes                                  |   | 509                           |   | 304 |   | (4,596 | ) | (1,634 | ) | (213 | ) |
| Interest expense                                                       |   | 6,567                         |   | 9,194 |   | 9,889 |   | 10,060 |   | 9,696 |   |
| Depreciation and amortization                                          |   | 4,894                         |   | 7,171 |   | 7,591 |   | 7,315 |   | 5,225 |   |
| Cumulative effect of change in  accounting principle                   |   | —                        |   | — |   | — |   | — |   | 19,686 |   |
| Adjustment for cash payment of  prior accrual for environmental charge |   | (70                           | )      | (73 | ) | (73 | ) | (60 | ) | (64 | ) |
| Extraordinary gain on debt  extinguishment                             |   | —                        |   | (601 | ) | — |   | — |   | — |   |
| EBITDA                                                                 |   | $                             | 12,971 |   | $ | 10,329 |   | $ | 6,145 |   | $ | 10,343 |   | $ | 15,956 |   |

 

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

 

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 ITEM 7.       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of theCompany’s consolidated results of operations and consolidated financialposition should be read in conjunction with the Selected Financial Data and theCompany’s Consolidated Financial Statements, including notes thereto, appearingelsewhere in this Annual Report.

 

**GENERAL**

 

The Company is a specialty chemicals company focusing primarily onproducts for roofing, sealing and paving applications. The Company develops,manufactures and markets several separate but related product lines includingroof and driveway coatings and paving products, industrial emulsions, airbarriers, polyurethane foam for roofing and commercial uses, sealants forconstruction and marine uses and specialty products. The Company has seventeenmanufacturing and distribution facilities throughout North America. TheCompany’s business is seasonal and is dependent on weather trends that vary bygeographic region.

 

** **

**CRITICAL ACCOUNTING POLICIES**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions for the reporting period and as of the financial statementdate.  These estimates and assumptions affect the reported amounts ofassets and liabilities, the disclosure of contingent liabilities and thereported amounts of revenues and expenses.  Actual results could differfrom those amounts.

 

Critical accounting policies are those that are important to theportrayal of the Company’s financial condition and results of operations, andwhich require management to make difficult, subjective and/or complexjudgments.  Critical accounting policies cover accounting matters that areinherently uncertain because in many instances, the future resolution of suchmatters is unknown.  The Company believes that critical accountingpolicies include accounting for sales rebates and discounts, accounting forallowances for doubtful accounts, accounting for inventory, deferred incometaxes, accounting for intangible and other long lived assets, andcontingencies.

 

•                       Sales rebates and discounts are common practice inthe industries in which the Company operates.  Volume, promotional, price,cash and other discounts and customer incentives are accounted for as areduction to gross sales.  Rebates and discounts are estimated andrecorded when sales of products are made.  These provisions for rebatesand discounts are adjusted, if necessary, when additional information becomesavailable.

 

•                       Management is required to make judgments, based onhistorical experience and future expectations, as to the collectibility ofaccounts receivable.  The allowances for doubtful accounts and salesreturns represent allowances for customer trade accounts receivable that areestimated to be partially or entirely uncollectible.  These allowances areused to reduce gross trade accounts receivable to their net realizablevalue.  The Company records these allowances based on estimates related tothe following factors:  i) customer specific allowances; ii) amounts basedupon an aging schedule and iii) an estimated amount, based on the Company’shistorical experience, for collectibilility issues not yet identified.

 

•                       Inventories are stated at the lower of cost ormarket value and are categorized as raw materials or finished goods. Inventory is periodically reviewed for damaged, obsolete, excess andslow-moving inventory and reserves are provided as necessary.  The Companyhas the ability to rework slow-moving inventory into more saleable product.

 

•                       The Company recognizes deferred taxes inaccordance with the liability method of accounting for income taxes. Under thismethod,**deferred taxes are determined based on thedifferences between the financial statement and tax bases of assets andliabilities, using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Valuation allowances are established when necessary to reduce deferredtax assets to the amounts expected to be realized.  In assessing the need for a valuation allowance, managementconsiders estimates of future taxable income and ongoing prudent and feasibletax planning strategies.  The provisionfor income taxes represents income taxes payable for the period and the changeduring the period in deferred tax assets and liabilities

 

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•                       Management evaluates the recoverability ofidentifiable intangible assets and other long-lived assets in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144 adopted on January1, 2002 as discussed below in “Recently Issued Accounting Pronouncements.”  This statement generally requires theCompany to assess these assets for recoverability when events or circumstancesindicate a potential impairment by estimating the undiscounted cash flow to begenerated from the use and ultimate disposition of these assets.

 

•                       On January 1, 2002, the Company adopted theaccounting requirements set forth in SFAS No. 142, “Goodwill and Other IntangibleAssets.”  Upon adoption of SFAS No. 142the Company ceased amortization of goodwill and reclassified intangible assetsacquired prior to July 1, 2001 that did not meet the criteria for recognitionunder SFAS No. 141.  Additionally, theinitial application of this statement resulted in an impairment of goodwill ofapproximately $19.7 million to write down goodwill.  The amount of the impairment was estimated based on anindependent valuation process that combined estimating the present value of theseparate future cash flow of the Company’s U.S. and Canadian operations and wasreported as a cumulative effect of change in accounting principle.  As a result of this impairment write down,the Company no longer has any goodwill balance.

 

•                       Management evaluates contingent liabilitiesincluding threatened or pending litigation in accordance with SFAS No. 5,“Accounting for Contingencies” and record accruals when the outcome of thesematters is deemed probable and the liability is reasonably estimable.  Management makes these assessments based onthe facts and circumstances and in some instances based in part on the adviceof outside legal counsel.

 

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**RECENTBUSINESS DEVELOPMENTS RELATING TO RAW MATERIALS**

 

A significant portion of the Company’s product line containsencapsulated asbestos, which meets all current environmental safetystandards.  The only North Americansources of asbestos for the industry have been two mines located inCanada.  Due to a protracted workstoppage at one of the mines and a cessation of operations at the other, theasbestos used in the Company’s products became temporarily unavailable duringthe fourth quarter of fiscal year 2002. Despite this disruption in the supplyof asbestos, the Company was able to meet its commitments to customers becauseit has equivalent non-asbestos formulations which can be readily substitutedfor the products containing asbestos. Accordingly, the Company believes that its competitive position did notsuffer.  By the beginning of 2003, theCompany was once again able to obtain asbestos for use in its products fromboth mines, although there is no certainty that this raw material will bereadily available throughout 2003 and further.

 

In addition tothe asbestos shortage, during fiscal 2002 several customers that havetraditionally purchased asbestos-bearing products indicated a preference for anon-asbestos product line. The non-asbestos formulas typically have higher rawmaterial costs than asbestos-bearing products. If the Company is not able to pass higher raw material costs on to itscustomers, gross profit margins could be affected.  On the other hand, since this issue affects many other makers ofroof coatings, it is possible that the prices of roofing materials, generally,will increase and mitigate these cost increases.  At this juncture, it is not possible to accurately assess thelong term financial impact of the raw material component change.

 

Currently theCompany’s costs for petroleum related raw materials such as asphalt and mineralspirits are higher than they were at the comparable period one year ago,largely as a result of the increased price of oil.   With the conflict in the Middle East, it is possible that theprice of oil could rise significantly from current levels, as has occurred inprior outbreaks of war in this region. If this occurred, the costs of asphalt and mineral spirits wouldprobably increase as well.  The Companywould endeavor to pass these increased costs on to its customers but it isprobable that there would be at least a short term negative cost impact to theCompany.  Even further, there is alsothe possibility that there could be a lack of supply of certain petroleum basedraw materials as a result of the outbreak of war. If this is the case there isno certainty that the Company would be able to find adequate raw materialreplacements to produce many of its products.

 

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**BUSINESSSEGMENTS**

 

The Company manages its business through two reportable segments orprimary business units with separate management teams, infrastructures,marketing strategies and customers. The Company’s reportable segments are: theHenry Building Products Division, which develops, manufactures and markets roofand 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 commercialconstruction. The Company evaluates the performance of its operating segmentsbased on sales, gross profit and operating income. Intersegment sales andtransfers are not significant.

 

Summarized financial information concerning the Company’s reportablesegments is shown below.

 
|                                                |   | **Henry Building  Products  Division** |        | **Resin  Technology  Division** |   | **Total**   |   |
|-----------------------------------------------------|--------|----------------------------------------|-------------|---------------------------------|--------|-------------|--------|
| **2002**                                            |   |                                   |        |                            |   |        |   |
| Net sales                                           |   | $                                      | 177,453,819 |                            | $      | 23,353,009  |   | $ | 200,806,828 |   |
| Gross profit                                        |   | 57,544,293                             |        | 5,008,145                       |   | 62,552,438  |   |
| Operating income                                    |   | 9,766,842                              |        | 921,135                         |   | 10,687,977  |   |
| Depreciation and amortization                       |   | 5,056,396                              |        | 168,705                         |   | 5,225,101   |   |
| Cumulative effect of change in  accountingprinciple |   | (19,686,055                            | )      | —                          |   | (19,686,055 | )      |
| Total assets                                        |   | 76,435,507                             |        | 15,199,978                      |   | 91,635,485  |   |
| Capital expenditures                                |   | 2,079,395                              |        | 126,754                         |   | 2,206,149   |   |
| **2001**                                            |   |                                   |        |                            |   |        |   |
| Net sales                                           |   | $                                      | 169,715,332 |                            | $      | 22,132,860  |   | $ | 191,848,192 |   |
| Gross profit                                        |   | 48,868,768                             |        | 4,506,093                       |   | 53,374,861  |   |
| Operating income                                    |   | 2,116,708                              |        | 779,839                         |   | 2,896,547   |   |
| Depreciation and amortization                       |   | 7,126,923                              |        | 187,725                         |   | 7,314,648   |   |
| Total assets                                        |   | 97,469,792                             |        | 13,429,469                      |   | 110,899,261 |   |
| Capital expenditures                                |   | 1,232,511                              |        | 125,495                         |   | 1,358,006   |   |
| **2000**                                            |   |                                   |        |                            |   |        |   |
| Net sales                                           |   | $                                      | 169,479,365 |                            | $      | 22,033,865  |   | $ | 191,513,230 |   |
| Gross profit                                        |   | 44,330,136                             |        | 3,916,938                       |   | 48,247,074  |   |
| Operating income (loss)                             |   | (2,054,982                             | )           | 422,296                         |   | (1,632,686  | )      |
| Depreciation and amortization                       |   | 7,424,855                              |        | 166,043                         |   | 7,590,898   |   |
| Total assets                                        |   | 112,346,023                            |        | 12,941,546                      |   | 125,287,569 |   |
| Capital expenditures                                |   | 2,755,164                              |        | 297,286                         |   | 3,052,450   |   |

 

The Company is domiciled in the United States with foreign operationsbased in Canada which were acquired during 1998. Prior to the 1998 acquisitionof Monsey Bakor, the Company had no foreign operations. Summarized geographicdata related to the Company’s operations for 2002, 2001 and 2000 are asfollows:

 

|          |   | **Net Sales** |        | **Long-Lived Assets** |   |
|---------------|--------|---------------|-------------|-----------------------|--------|
| **2002**      |   |          |        |                  |   |
| United States |   | $             | 166,017,612 |                  | $      | 36,674,077 |   |
| Canada        |   | 34,789,216    |        | 5,250,788             |   |
| Total         |   | $             | 200,806,828 |                  | $      | 41,924,865 |   |
| **2001**      |   |          |        |                  |   |
| United States |   | $             | 158,919,033 |                  | $      | 59,583,273 |   |
| Canada        |   | 32,929,159    |        | 7,515,720             |   |
| Total         |   | $             | 191,848,192 |                  | $      | 67,098,993 |   |
| **2000**      |   |          |        |                  |   |
| United States |   | $             | 158,691,494 |                  | $      | 62,725,434 |   |
| Canada        |   | 32,821,736    |        | 8,478,534             |   |
| Total         |   | $             | 191,513,230 |                  | $      | 71,203,968 |   |

 

19

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**RESULTS OF OPERATIONS**

** **

**Consolidated Statements of Operations Data:**

** **
|                                                                       |   | **2000** |   | **% of  Sales** |   | **2001** |   | **% of  Sales** |   | **2002** |    | **% of  Sales** |   |
|----------------------------------------------------------------------------|--------|----------|--------|-----------------|--------|----------|--------|-----------------|--------|----------|---------|-----------------|--------|
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Net sales                                                                  |   | $        | 191.5  |            | 100.0  | %        | $      | 191.9           |   | 100.0    | %       | $               | 200.8  |   | 100.0 | % |
| Cost of sales                                                              |   | 143.3    |   | 74.8            | %      | 138.5    |   | 72.2            | %      | 138.3    |    | 68.9            | %      |
| Gross profit                                                               |   | 48.3     |   | 25.2            | %      | 53.4     |   | 27.8            | %      | 62.5     |    | 31.1            | %      |
| Operating expenses:                                                        |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Selling, general and  administrative                                       |   | 46.6     |   | 24.3            | %      | 47.4     |   | 24.7            | %      | 51.1     |    | 25.4            | %      |
| Restructuring charges                                                      |   | 0.7      |   | 0.4             | %      | 0.6      |   | 0.3             | %      | 0.0      |    | 0.0             | %      |
| Amortization of intangibles                                                |   | 2.6      |   | 1.4             | %      | 2.5      |   | 1.3             | %      | 0.7      |    | 0.4             | %      |
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Operating income (loss)                                                    |   | (1.6     | )      | (0.8            | )%     | 2.9      |   | 1.5             | %      | 10.7     |    | 5.3             | %      |
| Interest expense                                                           |   | 9.9      |   | 5.2             | %      | 10.1     |   | 5.3             | %      | 9.7      |    | 4.8             | %      |
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Interest and other income, net                                             |   | (0.3     | )      | (0.2            | )%     | (0.2     | )      | (0.1            | )%     | (0.1     | )       | (0.0            | )%     |
| Income (loss) before benefit  for taxes and change in accounting principle |   | (11.3    | )      | (5.9            | )%     | (7.0     | )      | (3.6            | )%     | 1.1      |    | 0.5             | %      |
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Benefit for income taxes                                                   |   | (4.6     | )      | (2.4            | )%     | (1.6     | )      | (0.8            | )%     | (0.2     | )       | (0.1            | )%     |
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Income (loss) before cumulative  effect of change in accounting principle  |   | (6.7     | )      | (3.5            | )%     | (5.3     | )      | (2.8            | )%     | 1.3      |    | 0.6             | %      |
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Cumulative effect of change in  accounting principle                       |   | 0.0      |   | 0.0             | %      | 0.0      |   | 0.0             | %      | (19.7    | )  | 9.8             | %      |
|                                                                       |   |     |   |            |   |     |   |            |   |     |    |            |   |
| Net loss                                                                   |   | $        | (6.7   | )               | (3.5   | )%       | $      | (5.3            | )      | (2.8     | )%      | $               | (18.4  | ) | (9.2 | )% |

 

20

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**Year Ended December 31, 2002 Compared to YearEnded December 31, 2001**

 

*Net Sales.*  The Company’s net sales increased to $200.8million for the year ended December 31, 2002, an increase of $8.9 million, or4.6%, from $191.9 million for the year ended December 31, 2001. The increasewas primarily due to increased sales resulting from the Home Depot agreementand product sales price increases enacted during the second quarter of 2002.

 

*Gross Profit.*  The Company’s gross profit increased to$62.5 million for the year ended December 31, 2002, an increase of $9.1million, or 17.0%, from $53.4 million for the year ended December 31, 2001.Gross profit increased as a percentage of net sales to 31.1% for the year endedDecember 31, 2002 from 27.8% for the year ended December 31, 2001. Despiterising raw material costs during the second, third and fourth quarters of 2002,the Company's gross profit increased, primarily due to the Company’s success inincreasing sales of its premium “Henry” branded products, passing on rawmaterial cost increases (primarily related to petroleum based products) to itscustomers during 2002, and rationalization or elimination of certain lowermargin items. 

 

*Selling, General andAdministrative.* Selling, general and administrative expenses as a percentage of net salesincreased to 25.4% for the year ended December 31, 2002 from 24.7% for the yearended December 31, 2001. The Company’s selling, general and administrativeexpense increased to $51.1 million for the year ended December 31, 2002, anincrease of $3.7 million, or 7.8%, from $47.4 million for the year endedDecember 31, 2001.  Included in selling, general and administrativeexpenses were increased distribution costs of $2.6 million or 20.3% from 2001to 2002, primarily due to increased costs associated with servicing the newHome Depot stores.

 

*Amortization ofIntangibles.* Amortization of intangibles decreased to $0.7 million for the year endedDecember 31, 2002, a decrease of $1.8 million, from $2.5 million for the yearended December 31, 2001. The decrease in amortization expense is primarilydue to an accounting change associated with the Company’s adoption of SFAS No.142 on January 1, 2002 that changes the accounting for goodwill from anamortization method to an impairment-only approach. Amortization expense isprimarily due to the amortization of intangibles resulting from the acquisitionof Monsey Bakor in 1998.

 

*Operating Income.*  The Company’s operating income amounted to$10.7 million for the year ended December 31, 2002, an increase of $7.8million, from operating income of $2.9 million for the year ended December 31,2001. The increase of $7.8 million was primarily attributable to higher salesvolume, an improvement in gross margins, and the cessation of goodwillamortization.

 

*Interest Expense.*  Interest expense decreased to $9.7 millionfor the year ended December 31, 2002, a decrease of $0.4 million, or 4.0%, from$10.1 million for the year ended December 31, 2001. The decrease was primarilyattributable to reduced working capital borrowings and declining interest ratesassociated with the generally lower interest rate environment in 2002.

 

*Benefit for IncomeTaxes.*  Thebenefit for income taxes decreased to $0.2 million for the year ended December31, 2002, a decrease of $1.4 million, from a benefit of $1.6 million for theyear ended December 31, 2001. The decrease was primarily due to the increase inoperating income and decrease in interest expense.

 

*Cumulative effect ofchange in accounting principle.*  The Company recorded a $19.7million charge for the year ended

December31, 2002, resulting from the impairment of goodwill associated with theCompany’s adoption of SFAS No. 142 that

changesthe accounting for goodwill from an amortization method to an impairment-onlyapproach.  SFAS No. 142 changed the

method forassessing goodwill impairments from an undiscounted cash flow method prescribedby SFAS No. 121 to a fair

marketvalue approach. See Note 1 to the Consolidated Financial Statements.

 

*Net Loss.*  The net loss was $18.4 million for the yearended December 31, 2002, an increase of $13.1 million, from a $5.3 million netloss for the year ended December 31, 2001. The increase in the net loss wasprimarily due the cumulative effect of accounting change, partially offset byan increase in operating income.

 

21

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**Year Ended December 31, 2001 Compared to YearEnded December 31, 2000**

 

*Net Sales.*  The Company’s net sales increased to $191.9million for the year ended December 31, 2001, an increase of $0.4 million, or0.2%, from $191.5 million for the year ended December 31, 2000. The increasewas primarily due to product sales price increases enacted during the latterpart of 2000 and 2001 partially offset by a decrease in unit sales volume in2001.

 

*Gross Profit.*  The Company’s gross profit increased to$53.4 million for the year ended December 31, 2001, an increase of $5.1million, or 10.6%, from $48.3 million for the year ended December 31, 2000.Gross profit increased as a percentage of net sales to 27.8% for the year endedDecember 31, 2001 from 25.2% for the year ended December 31, 2000. The increasewas primarily attributable to the increased success of the Company in passingon raw material cost increases (primarily related to petroleum based products)to its customers during 2001, increased sales of its premium “Henry” brandedproducts, rationalization or elimination of certain lower margin items and adecline in raw material costs during the fourth quarter of 2001.

 

*Selling, General andAdministrative.* Selling, general and administrative expenses as a percentage of net salesincreased to 24.7% for the year ended December 31, 2001 from 24.3% for the yearended December 31, 2000. The Company’s selling, general and administrativeexpense increased to $47.4 million for the year ended December 31, 2001, anincrease of $0.8 million, or 1.7%, from $46.6 million for the year endedDecember 31, 2000.  Included in selling, general and administrativeexpenses were expenses of $0.5 million for the transition to a new employeemedical plan in mid-2001, and severance and related expenses of  $0.8million not otherwise included in restructuring charges.

 

*RestructuringCharges.* Restructuring charges amounted to $0.6 million for the year ended December 31,2001.  These charges primarily relate to a plant closing, restructuring ofthe selling organization, the reorganization of certain operational andmarketing functions and the related severance costs.

 

*Amortization ofIntangibles.* Amortization of intangibles decreased to $2.5 million for the year endedDecember 31, 2001, a decrease of $0.1 million, or 3.9%, from $2.6 million forthe year ended December 31, 2000.  Amortization expense is primarily dueto the amortization of intangibles resulting from the acquisition of MonseyBakor in 1998.

 

*Operating Income(Loss).* Operating income amounted to $2.9 million for the year ended December 31, 2001,an increase of $4.5 million, from the operating loss of $1.6 million for theyear ended December 31, 2000. The increase of $4.5 million was primarilyattributable to the increased gross profit, discussed above.

 

*Interest Expense.*  Interest expense increased to $10.1 millionfor the year ended December 31, 2001, an increase of $0.2 million, or 2.0%,from $9.9 million for the year ended December 31, 2000. The increase wasprimarily attributable to additional working capital borrowings, partiallyoffset by declining interest rates due to the new credit facility and agenerally lower interest rate environment in 2001.

 

*Benefit for IncomeTaxes.*  Thebenefit for income taxes decreased to a benefit of $1.6 million for the yearended December 31, 2001, a decrease of $3.0 million, from a benefit of $4.6million for the year ended December 31, 2000. The decrease was primarily due tothe decreased loss before income taxes and the decrease in related taxbenefits.

 

*Net Loss.*  The net loss was $5.3 million for the yearended December 31, 2001, a decrease of $1.4 million, or 20.9% from a $6.7million net loss for the year ended December 31, 2000. The reduction in the netloss was primarily due to sales price increases and the improvement in grossmargin as noted above.

 

22

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**Liquidity and Capital Resources**

 

The Company’s current requirements for capital are primarily forworking capital, capital expenditures and debt service. The Company’s primarysources of capital to finance such needs are cash flow from operations andborrowings under bank credit facilities. In August 2001, the Company enteredinto a replacement credit facility agreement and received funding from two newlending institutions. The replacement credit facility provides for a $25million revolving credit facility and a $10 million term loan. Upon closing,$3.5 million of the term loan was drawn down. As of December 31, 2002, $3.0 million was outstanding on each of theterm loan and the revolving line of credit. The remaining availability ofcredit under the revolver was $11.5 million at December 31, 2002. This seniorcredit facility expires in August 2006 and is collateralized by substantiallyall of the Company’s United States assets. Term loan and line of credit borrowings both bear interest at the primerate with an option to borrow based on the LIBOR rate. Both the Company’scredit facility and its bond indenture relating to its 10% Senior Notesoutstanding include, among other restrictions, certain restrictions on theincurrence of additional debt.

 

The Company also maintains a $5.2 million credit line with a Canadianbank to finance Canadian operations. There was no balance outstanding underthis revolving line at December 31, 2002. Availability under this facility atDecember 31, 2002 was $3.5 million. There are certain financial covenantsassociated with this credit line, including minimum interest coverage andworking capital ratios, and maximum tangible net worth and debt to net worth measures.The Company was in compliance with all debt covenants as of year end. 

 

The Company believes that cash from operations and fundings on its banklines of credit will be sufficient to meet its working capital, capitalexpenditure, and debt service requirements for the next twelve months. Therecan be no assurance, however, that such resources will be sufficient to meetthe Company’s anticipated working capital, capital expenditure, debt service orother financing requirements or that the Company will not require additionalfinancing within this time frame.  The Company’s contractual obligationsduring the next few years and total contractual obligations are as follows:

 

 
|                               |   | **Contractual  Payments Due by Period** |      |
|------------------------------------|--------|-----------------------------------------|-----------|
| **Contractual Obligations**        |   | **Less than  1  Year**                  |      | **1-3 years** |   | **4-5 years** |   | **After 5  years** |   | **Total** |   |
| Long-Term Debt and Credit Facility |   | $                                       | 3,603,740 |   | $ | 1,258,126 |   | $ | 1,511,440 |   | $ | 81,250,000 |   | $ | 87,623,306 |   |
|                               |   |                                    |      |   |   |   |   |   |   |   |   |
| Capital Lease Obligations          |   | —                                  |      | — |   | — |   | — |   | — |   |
|                               |   |                                    |      |   |   |   |   |   |   |   |   |
| Operating Leases(a)                |   | 1,363,399                               |      | 1,399,082 |   | 744,642 |   | 2,205,109 |   | 5,712,232 |   |
|                               |   |                                    |      |   |   |   |   |   |   |   |   |
| Unconditional Purchase Obligations |   | —                                  |      | — |   | — |   | — |   | — |   |
|                               |   |                                    |      |   |   |   |   |   |   |   |   |
| Other Long-Term Obligations(b)     |   | —                                  |      | 1,000,000 |   | 1,000,000 |   | 1,000,000 |   | 3,000,000 |   |
|                               |   |                                    |      |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations |   | $                                       | 4,967,139 |   | $ | 3,657,208 |   | $ | 3,256,082 |   | $ | 84,455,109 |   | $ | 96,335,538 |   |

 

----

(a)        Consistsof property and auto leases.

(b)                        Assumes Mr. Mooney, a director and shareholder ofthe Company, will exercise his put option on redeemable convertible preferredstock.  This put is first exercisable byMr. Mooney in January 2004.

 

 

The Company’s primary sources of capital are cash flows from operationsand borrowings under bank credit facilities, each of which could be negativelyimpacted by a reduction in demand for the Company’s products.  Demand forthe Company’s products is affected by many factors, including weather,competition, and the competitive position of the Company’s customers.  Areduction in demand for the Company’s products in some or all of the Company’smarkets could have an adverse impact on the Company’s liquidity.  See Part I, Item 1 “Business - Risk Factors”of the Annual Report on Form 10-K for more detail.

 

23

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**Cash Flows for the Year Ended December 31,2002 Compared to the Year Ended December 31, 2001**

 

The Company’s net cash provided by operations was $6.3 million comparedto $6.5 million for the years ended December 31, 2002 and 2001, respectively.The decrease in cash provided by operations from December 31, 2001 to December31, 2002 of $0.2 million was primarily attributable to increases in tradereceivables and inventories, partially offset by collections of receivablesfrom affiliate and an increase in accounts payable and accrued liabilities. Netcash used in investing activities during the year ended December 31, 2002 andthe year ended December 31, 2001 was  $2.1 million and $1.3 million,respectively. The increase in cash used in investing activities of $0.8 millionfrom the year ended December 31, 2001 to the year ended December 31, 2002 wasprimarily due to increased capital expenditures of $0.8 million.  Cash flows used in financing activitiesduring the year ended December 31, 2002 were $3.7 million compared to $5.7million used in financing activities for the year ended December 31, 2001. Thedecrease in cash used by financing activities of $2.0 million from the yearended December 31, 2001 to December 31, 2002 was primarily due to a smallerreduction in borrowings under the line of credit agreement and a smallerreduction in book overdrafts from 2001 to 2002.

 

**Recently Issued Accounting Pronouncements**

 

In July 2001,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) Nos. 141 and 142 (“SFAS No. 141” and “SFAS No.142”), “Business Combinations” and “Goodwill and Other Intangible Assets”.   SFAS No. 141 replaces APB 16 and eliminatespooling-of-interests accounting prospectively. It also provides guidance onpurchase accounting related to the recognition of intangible assets andaccounting for negative goodwill. SFAS No. 142 changes the accounting forgoodwill from an amortization method to an impairment-only approach. Under SFASNo. 142, goodwill is tested annually and whenever events or circumstances occurindicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 areeffective for all business combinations completed after June 30, 2001. Uponadoption of SFAS No. 142, amortization of goodwill recorded for businesscombinations consummated prior to July 1, 2001 ceased, and intangible assetsacquired prior to July 1, 2001 that do not meet the criteria for recognitionunder SFAS No. 141 were reclassified to goodwill. The Company adopted SFAS No.142 on January 1, 2002 and completed its goodwill impairment test during thesecond quarter of 2002.  Based on theresults of the impairment test, the Company recorded a cumulative effect ofchange in accounting principle transitional impairment loss of approximately$19.7 million in 2002.

 

In August2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations,” which addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This Statement requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of thecarrying amount of the long-lived asset. All provisions of this Statement will be effective at the beginning offiscal year 2003.  The Company is in theprocess of determining the impact of this Statement on the Company’s financialstatements.

 

InOctober 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  This Statement supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of” and amends APB Opinion No. 30, “Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions.”  This Statement requiresthat long-lived assets that are to be disposed of by sale be measured at thelower of book value or fair value less costs to sell.  SFAS No. 144retains the fundamental provisions of SFAS No. 121 for (a) recognition andmeasurement of the impairment of long-lived assets to be held and used and (b)measurement of long-lived assets to be disposed of by sale.  ThisStatement also retains APB Opinion No. 30’s requirement that companies reportdiscontinued operations separately from continuing operations.  Allprovisions of this Statement were effective in the first quarter of fiscal year2002.  The adoption of this standard did not have a significant impact onthe Company’s financial position, results of operations, or cash flows.

 

In May 2002,the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds FASB Statement No.4, “Reporting Gains and

 

24

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Losses from Extinguishment ofDebt,” and an amendment of that Statement, FASB Statement No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.”  This Statement amends FASB Statement No. 13,“Accounting for Leases,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  ThisStatement also amends other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The provisions of this Statement related to the rescission of StatementNo.4 are effective beginning in fiscal year 2003.  All other provisions were effective after May 15, 2002.  The provisions adopted on May 15, 2002 didnot have a significant impact on the Company’s financial results.  The Company is in the process of determiningthe impact of this Statement on the Company’s financial results for thoseprovisions effective in fiscal year 2003.

 

In June 2002,the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.”SFAS No. 146 addresses significant issues regarding the recognition,measurement, and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forpursuant to the guidance that the Emerging Issues Task Force (EITF) has setforth in the EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The scope of SFAS No. 146 also includes (1) costs related to terminatinga contract that is not a capital lease and (2) termination benefits thatemployees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not an ongoing benefit arrangement or anindividual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002 with earlier adoption encouraged.  The Company does not anticipate that theadoption of SFAS No. 146 will have a significant impact on the Company’s financial position, results of operations, or cashflows.

 

In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  ThisInterpretation clarifies the requirements for a guarantor’s accounting for anddisclosures of certain guarantees issued and outstanding.  This Interpretation also clarifies therequirements related to the recognition of a liability by a guarantor at the inceptionof a guarantee for the obligations the guarantor has undertaken in issuing thatguarantee.  The disclosure provisions ofthe Interpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. The Company has adopted thedisclosure provisions of this Interpretation as disclosed in Note 1 and Note 5to the consolidated financial statements. The initial recognition and initialmeasurement provisions of this Interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002.  The Company is currently in the process ofdetermining the impact of this Interpretation on the Company’s financialresults for those provisions effective in 2003.

 

The Company iscurrently reviewing the requirements of EITF Issue No. 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21addresses certain aspects of the accounting by a vendor for arrangements underwhich it will perform multiple revenue-generating activities.  Specifically, EITF Issue No. 00-21 addresseshow to determine whether an arrangement involving multiple deliverablescontains more than one unit of accounting. The provisions of EITF Issue No. 00-21 will be effective in fiscal periodsbeginning after June 15, 2003. The Company is in the process of determining the impact of EITF IssueNo. 00-21 on the Company’s financial results when effective.

 

25

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ITEM 7A.     QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk generally represents the riskthat losses may occur in the value of financial instruments as a result ofmovements in interest rates, foreign currency exchange rates and commodityprices. As part of its overall risk management strategies, the Company monitorsand manages these risks by reviewing key trends and indicators on a continuousbasis.

 

*Interest RateRisk—*From time totime, the Company temporarily invests its excess cash in interest bearingtemporary investments of high quality issuers or with major financialinstitutions. Due to the short–term maturity of the investments are outstandingand their general liquidity, these instruments are classified as cashequivalents in the consolidated balance sheet and do not represent a materialinterest rate risk to the Company. The Company’s primary market risk exposurefor changes in interest rates relates to the Company’s debt obligations. TheCompany manages its exposure to changing interest rates principally through theuse of a combination of fixed and floating rate debt. The majority of theCompany’s long–term debt is comprised of $81.3 million of Series B Senior Noteswhich represent fixed rate borrowings. The reported fair value of the SeniorNotes at December 31, 2002 was approximately $52.8 million. The Companybelieves that near term changes in interest rates would not have a significantimpact on the Company’s financial position as the Company had a limited amountof interest rate risk sensitive financial instruments at December 31, 2002.

 

*ForeignExchange Rate Risk—*TheCompany conducts business principally in North America and in U.S. and Canadiancurrencies. The Company’s U.S. operations denominate all sales transactions inU.S. dollars. The Company’s Canadian subsidiaries are paid in Canadian dollarsfor sales made in Canada. Excess Canadian funds generally have been invested inthe Canadian operation rather than being remitted to the U.S. parent. AtDecember 31, 2002, the Company had no foreign currency exchange contracts orhedging instruments.

 

*CommodityPrice Risk—*TheCompany uses certain raw materials in its manufacturing process that fluctuatewith certain commodity prices. These raw materials include asphalt, aluminumpaste, rubber and certain diisocyanates. The Company continuously monitors key trends in the commodity pricesimpacting raw materials. At December 31, 2002, the Company had no commodityrisk hedges or derivative instruments.

 

 

ITEM 8.        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

Theconsolidated financial statements of Henry Company are included in a separatesection of this Annual Report on Form

10–K.

 

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

 

NONE

 

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**PART III**

 

ITEM 10.      DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

 

Thefollowing table sets forth certain information regarding each of the Company’sdirectors and executive officers as of December 31, 2002:

 
| **Name**                      |   | **Age** |   | **Position**                                      |
|-------------------------------|--------|---------|--------|---------------------------------------------------|
| Warner W. Henry(1)(2)(3)      |   | 64      |   | Chairman of the Board and Chief Executive Officer |
| Joseph T. Mooney, Jr.(1)      |   | 68      |   | Vice Chairman of the Board                        |
| Paul H. Beemer(1)             |   | 80      |   | Vice Chairman of the Board                        |
| William H. Baribault(1)(2)(4) |   | 57      |   | President, Chief Operating Officer and Director   |
| Jeffrey A. Wahba(1)(2)        |   | 46      |   | Chief Financial Officer, Secretary and Director   |
| James Doose                   |   | 54      |   | President—Resin Technology Company           |
| Larry A. Karasiuk             |   | 58      |   | President—Bakor Division                     |
| Norman F. Nickerson(5)        |   | 62      |   | President—Henry Building Products Division   |
| Frederick H. Muhs(1)(2)(3)    |   | 64      |   | Director                                          |
| Carol F. Henry                |   | 63      |   | Director                                          |
| Terrill M. Gloege(1)(2)(3)    |   | 67      |   | Director                                          |

 

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(1)           Memberof the Executive Committee

 

(2)           Memberof the Audit Committee

 

(3)           Memberof the Compensation Committee

 

(4)                                  In January 2001, William H. Baribault wasappointed the acting President and Chief Operating Officer, and in August 2001Mr. Baribault was appointed President and Chief Operating Officer.

 

(5)           InDecember 2002, Mr. Nickerson retired.

 

*Warner W.Henry* has beenChairman of the Board, Chief Executive Officer and a director of Henry Companyor its parent since 1974, and has served in various sales and sales managementpositions with Henry Company from 1963 to 1974. Mr. Henry also serves on theboard or is an Overseer of the following organizations: The Employers Group,The Henry Wine Group, Hoover Institution, Los Angeles Music Center Opera andthe Los Angeles Chamber Orchestra. Mr. Henry received his A.B. in Economicsfrom Stanford University and his M.B.A. from Stanford University, GraduateSchool of Business.

 

*William H.Baribault* has beenPresident, Chief Operating Officer, and a director of Henry Company sinceAugust 2001.  Prior to joining Henry, he was a partner of EagleAssociates, an investment banking and consulting firm.  From 1975 to 1999,Mr. Baribault held various positions including Chairman and CEO of Elect///Air,The Fornaciari Company, and Fluid Power Locator, and Vice President of AppliedIndustrial Technologies, all distributors and manufacturers of pneumatic andhydraulic automation components.  Mr. Baribault also serves as Chairman ofProfessional Business Bank. He is director or trustee on the boards ofArchitectural Woodworking Company, Chief Executives Organization, DescansoGardens, Eagle Investments, Flintridge Preparatory School, M Chemical Company,Phillips Plywood, and Supplypro.  Mr. Baribault received his A.B. degreefrom Stanford University.

 

*Joseph T.Mooney, Jr.* hasserved as a Vice Chairman of the Board of the Company since the closing of theMonsey Bakor acquisition. Mr. Mooney began his career with Monsey Bakor in 1960and previously served as Chairman of the Board and President of Monsey Bakorfrom 1972 to April 1998, where his responsibilities included major strategicdecisions regarding product and equipment purchases as well as oversight of allof Monsey Bakor’s financial operations. Mr. Mooney received a B.S. fromVillanova University.

 

*Paul H. Beemer* has served as Vice Chairman of Henry Companysince 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 salesmanagement

 

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positions,and has also served as General Manager and President. Mr. Beemer wasresponsible for the formulation and development of a number of Henry Company’skey products and continues to serve in a part–time technical consulting role.Mr. Beemer received a B.S. from Loyola University in Los Angeles.

 

*Jeffrey A.Wahba* has beenChief Financial Officer, Secretary and a director of Henry Company since 1986.From 1984 to 1985, Mr. Wahba served as Chief Financial Officer of VaultCorporation. From 1980 to 1984, Mr. Wahba was with Max Factor and Co. andserved as Controller of the International Division.  He is also a director of The Henry Wine Group.  Mr. Wahba received a B.S. in IndustrialEngineering and an M.S. in Industrial Engineering and Engineering Managementfrom Stanford University, as well as an M.B.A. from the University of SouthernCalifornia.

 

*James Doose* has been the President of Resin TechnologyCompany since 1994. Mr. Doose and a partner founded Resin Technology Company in1982. Mr. Doose served as Executive Vice President of Resin Technology Companyfrom 1982 to 1994. From 1973 to 1982, Mr. Doose was with Reichold ChemicalCompany in various sales and technical positions. Mr. Doose received a B.S. inChemistry from California Polytechnic University at Pomona.

 

*Larry A.Karasiuk* has servedas President—Bakor Canada since the closing of the Monsey Bakor acquisition.Mr. Karasiuk served as the President of Bakor Holdings, Inc. and as thePresident of Monsey Bakor’s Canadian operations beginning in 1991. From 1982 to1991, Mr. Karasiuk was the Vice President of Marketing and Sales with thepredecessor company of Bakor Holdings, Inc., Bakelite Thermosets BuildingMaterials Division. Prior to that time, Mr. Karasiuk served in variousmanagement positions with Hunter Douglas, a subsidiary of Alcan. Mr. Karasiukattended Simon Fraser University and York University.

 

*Norman F.Nickerson* hasserved as Executive Vice President of the Henry Building Products Divisionsince the closing of the Monsey Bakor acquisition until February 2001 when hewas named President of the Henry Building Products Division. Mr. Nickersonserved as Vice President of Sales of Monsey Bakor from 1985 to 1998. From 1979to 1985, Mr. Nickerson was General Manager of Monsey Bakor’s Southeasterndivision. From 1972 to 1979, Mr. Nickerson was General Manager of Cosmicoat,Inc. Mr. Nickerson received his B.A. in History from Allegheny College.  In December 2002, Mr. Nickerson retired.

 

*Frederick H.Muhs* has been adirector of Henry Company since 1996. Since 1991, Mr. Muhs has been a privateinvestor and business consultant. From 1963 to 1990, Mr. Muhs held variouspositions in the investment and investment banking operations of the PrudentialInsurance Company of America, including as Managing Director for its PrudentialBache Securities, Inc. subsidiary.  Heis also a director of The Henry Wine Group. Mr. Muhs received an A.B. inEconomics 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.

 

*Terrill M.Gloege* has been adirector of Henry Company since 1993. From 1963 to 2001 Mr. Gloege held variousmanagement consulting and financial positions including Chief Financial Officerof Six Flags Corporation, International Technology Corporation and CarsonEstate Trust, from which he retired in 2001. He is currently Consultant to the Board of Trustees of Carson EstateTrust and director of The Henry Wine Group. Mr. Gloege received a B.S. from the United States Coast Guard Academyand an M.B.A. from Stanford University.

 

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

 

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

 

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**Board Committees**

 

The Executive Committee is comprised of Warner W. Henry, Paul H.Beemer, Joseph T. Mooney, Jr., William H. Baribault, Terrill M. Gloege, andFrederick H. Muhs. Jeffrey A. Wahba serves as Secretary of the ExecutiveCommittee without a vote. The Executive Committee has the full authority of theBoard of Directors, except with respect to the approval of any action for whichshareholder approval is required by law or for certain other fundamentalcorporate actions, which require the act of the full Board. The Audit Committeeis comprised of Warner W. Henry, Terrill M. Gloege, Jeffrey A. Wahba, WilliamH. Baribault, and Frederick H. Muhs. The Audit Committee oversees the activitiesof Henry Company’s independent accountants. Mr. Gloege serves as Chairman ofthe Audit Committee. The Compensation Committee is comprised of Warner W.Henry, Terrill M. Gloege and Frederick H. Muhs.

 

**Executive and Director Compensation**

 

The Company’s directors do not receive any cash compensation forservice on the Board of Directors or any Committee thereof, but directors maybe reimbursed for certain expenses in connection with attendance at board andcommittee meetings.

 

The Compensation Committee and William H. Baribault monitor theCompany’s compensation policies and review executive and employee annualcompensation increases. Mr. Baribault’s compensation was determined by theCompensation Committee without the participation of Mr. Baribault and increasesin Mr. Henry’s annual compensation are determined by the Executive Committeewithout the participation of Mr. Henry. No executive officer of the Companyserves as a member of the Board of Directors of any other entity that has oneor more members serving as a member of the Company’s Board of Directors.

 

Paul H. Beemer is compensated for consulting advisory services pursuantto a consulting agreement with the Company with compensation established at$100,000 per year. The consulting agreement contains a noncompetition clauserestricting Mr. Beemer’s employment or service with a business entity thatcompetes with the Company in its present or future marketing areas. Mr.Beemer’s consulting agreement expires on June 30, 2003. In fiscal years 2002, 2001,and 2000, Mr. Beemer received $100,000 in compensation under his consultingagreement.

 

Mr. Mooney is also an employee of the Companyand receives an annual salary.  Mr.Mooney recieved $180,250 in salary and bonus for each of fiscal years 2002 and2001, and $236,672 for fiscal year 2000.

 

In connection with services provided by TheMuhs Company, Inc., Frederick H. Muhs provides certain business and financialconsulting services to Henry Company. Henry Company pays The Muhs Company, Inc.a retainer of $8,333 per month for these services. In fiscal year 2002, TheMuhs Company, Inc. received $100,000 for business and financial consultingservices. See “Certain Transactions.”

 

Henry Company receives business and financial consulting services fromTerrill M. Gloege, a director of the Company, who is also as the Trustee of theWilliam Warner Henry, Catherine Anne Henry, and Michael Andrew Henry Trustsestablished under the Henry Trust dated 9/17/93. Henry Company paid $30,000 for these services in2002 and $10,000 in 2001.

 

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ITEM 11.      EXECUTIVECOMPENSATION

 

The following table sets forth certaininformation concerning compensation received for services rendered to HenryCompany in all capacities during the fiscal year ended December 31, 2002 byHenry Company’s Chief Executive Officer and each of Henry Company’s four othermost highly compensated executive officers whose annual salary and bonus forthe year ended December 31, 2002 exceeded $100,000 (collectively, the “NamedExecutive Officers”):

 
|                                   |   | **Annual Compensation** |   |       |    |      |   |                        |   |
|----------------------------------------|--------|-------------------------|--------|------------|---------|-----------|--------|-----------------------------|--------|
| **Name and Principal Position**        |   | **Year**                |   | **Salary** |    | **Bonus** |   | **Other  Annual  Comp.(1)** |   | **Long-Term  Incentive Plan  LTIP Payout** |   | **All Other****Compensation** |   |
| Warner W. Henry                        |   | 2002                    |   | $          | 395,000 |      | $      | 250                         |   | — |   | — |   | $ | 4,035 |   |
| Chairman of the Board and  Chief       |   | 2001                    |   | 285,000    |    | 250       |   | —                      |   | — |   | 4,013 |   |
| Executive Officer                      |   | 2000                    |   | 285,000    |    | —    |   | —                      |   | — |   | 4,022 |   |
|                                   |   |                    |   |       |    |      |   |                        |   |   |   |   |   |
| William H. Baribault                   |   | 2002                    |   | 310,000    |    | 402,720   |   | —                      |   | — |   | 12,600 |   |
| President and Chief Operating          |   | 2001                    |   | 117,115    |    | 150,000   |   | —                      |   | — |   | 181,400 |   |
| Officer                                |   | 2000                    |   | —     |    | —    |   | —                      |   | — |   | — |   |
|                                   |   |                    |   |       |    |      |   |                        |   |   |   |   |   |
| James Doose                            |   | 2002                    |   | 268,320    |    | 104,535   |   | 7,507                       |   | — |   | 9,600 |   |
| President—Resin Technology        |   | 2001                    |   | 257,692    |    | 82,436    |   | —                      |   | — |   | 778 |   |
| Company                                |   | 2000                    |   | 250,307    |    | 60,900    |   | —                      |   | — |   | 778 |   |
|                                   |   |                    |   |       |    |      |   |                        |   |   |   |   |   |
| Steve Gast Products                    |   | 2002                    |   | 200,000    |    | 134,441   |   | 10,969                      |   | — |   | 4,015 |   |
| Vice President—Building  Products |   | 2001                    |   | 164,558    |    | 41,000    |   | 2,671                       |   | — |   | 3,532 |   |
| Division                               |   | 2000                    |   | 154,000    |    | 28,000    |   | 3,394                       |   | — |   | 25,675 |   |
|                                   |   |                    |   |       |    |      |   |                        |   |   |   |   |   |
| Jeffrey A. Wahba                       |   | 2002                    |   | 192,500    |    | 129,400   |   | 3,419                       |   | — |   | 6,003 |   |
| Chief Financial Officer                |   | 2001                    |   | 182,050    |    | 10,000    |   | 4,049                       |   | 11,517 |   | 5,997 |   |
|                                   |   | 2000                    |   | 170,950    |    | 5,000     |   | 4,383                       |   | 9,129 |   | 5,887 |   |
|                                        |        |                         |        |            |         |           |        |                             |        |  |  |  |  |  |  |  |

 

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(1)                                  “Other Annual Compensation” representscontributions to the accounts of the Named Executive Officers under HenryCompany’s Nonqualified Executive Deferral Plan and Profit Sharing/401(k) Plan.See “Executive Deferral Plan” and “Profit Sharing/401(k) Plan.”

 

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**Warrant Grants Outstanding**

 

The following table provides certain information regarding warrants topurchase shares of Henry Company’s capital stock outstanding to any NamedExecutive Officer during the fiscal years ended December 31, 2001 and 2002:

 

**Warrant Grants**

 
|            |   | **Individual Grants**                                  |   |
|-----------------|--------|--------------------------------------------------------|--------|
| **Name**        |   | **Number of Securities  Underlying Warrants  Granted** |   | **% of Total Warrants  Granted to Employees  in Fiscal Year** |   | **Exercise Price(2)** |   | **Expiration Date** |   | **Grant Date Present  Value(3)** |   |
| Warner W. Henry |   | 400,000                                                | (1)    | 100 |   | $ | 15.53 |   | 9/30/12 |   | $ | 44,000 |   |
|                 |        |                                                        |        |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  On October 1, 1997 Henry Company granted theWarner W. Henry Living Trust warrants to purchase an aggregate of 400,000shares of Henry Company capital stock, consisting of 12,000 shares of Class ACommon Stock and 388,000 shares of Common Stock (the “Henry Warrants”). TheHenry Warrants expire on September 30, 2012 and may be exercised in whole or inpart at variable and increasing exercise prices over the term of the HenryWarrants. The current and maximum exercise prices of the Henry Warrants forboth Class A Common Stock and Common Stock are $15.53 and $38.82 per share,respectively. Warner W. Henry is the trustee of the Warner W. Henry LivingTrust and may be assumed to have beneficial ownership of the Henry Warrants andshares purchasable upon exercise of the Henry Warrants. The Henry Warrants wereissued as further consideration for certain loans made to Henry Company by Mr.Henry.

 

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

 

(3)                                  The grant date present value of each warrant isestimated at $0.11 using the Black-Scholes pricing model with the followingassumptions: risk-free rate of return of 6.0%, expected warrant life of 15years; 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”) toallow certain management personnel and highly compensated employees to defer aportion of their annual salary and bonus to be paid at a future date chosen bythem or upon their retirement, death, disability or termination of employment.Participants in the Plan are selected by an administrative committee (the “PlanCommittee”) appointed by the Board of Directors which establishes eligibilityqualifications and manages and administers the Plan. To participate in the Planfor 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 yearprior to the beginning of the year for which the salary and bonus relate. Foreach Plan year Henry Company may contribute to each participant’s account atthe Plan Committee’s discretion. Deferred amounts are credited with interest atthe September “Moody’s Seasoned Corporate Bond” rate that is published prior tothe 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 compensationaccounts except in the event of a termination of their employment, in whichcase participants are vested to only a percentage of any Company contributionsthat have been made, calculated according to the executive’s number of years ofemployment. At the time of deferral, participants may elect to receive futureshort–term payouts with respect to each year’s deferral, payable in a lump sumnot prior to the sixth Plan year following such deferral. Amounts payable to aparticipant pursuant to the Plan are unfunded amounts to be paid from thegeneral assets of the Company and are at all times subject to the risk of theCompany’s business. The Company funds the Plan with whole life insurancepolicies.

 

**Profit Sharing/401(k) Plan**

 

The Company sponsors a deferred qualifiedprofit–sharing plan with a 401(k) feature covering salaried and hourlyemployees of Henry Company and its affiliates, other than union employees, whohave completed six months of service. Contributions made to the profit–sharingplan by the Company are based on the Company’s performance and are at thediscretion of the Board of Directors.  The Company has not made anycontributions to the profit-sharing plan during the years 2000 through2002. In 2000 and 2001 participants in the 401(k) Plan were permitted tocontribute up to 15% of their annual compensation to the 401(k) Plan throughsalary deferral up to a maximum of $10,500 of a participant’s annualcompensation.

 

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Commencingin 2002, participants could contribute up to 60% of their annualcompensation up to a maximum $11,000; additionally participants overage 50 could make catch-up contributions up to maximum $1,000.  In1999, the 401(k) plan was amended to include a discretionary Company matchingcontribution to eligible participants. The Company has provided matching contributions to its eligible U.S.based employees from 1999 through 2002.

 

**Employment Agreements and CompensationArrangements**

 

Henry Companyhas entered into employment agreements with Mr. Baribault and Mr. Doose, and anincentive compensation agreement with Mr. Wahba.

 

Mr.Baribault’s employment agreement provides for an annual base salary of$300,000, subject to annual review by the Company’s Board of Directors. Mr. Baribault also receives annual bonuses based on the Company’s operatingperformance relative to the target performance set forth in the Company’sannual operating plan.  If Mr. Baribault is terminated without cause, heis entitled to earned base compensation plus any earned performance bonusduring the year of termination.  He is also entitled to severance pay thatis a multiple of annual base salary, determined by years of service.  Mr.Baribault’s employment agreement terminates December 31, 2005.

 

Mr. Doose’s employment agreement provides for a base salary, subject toannual cost–of–living and discretionary increases. For 2002, Mr. Doose’s basesalary was $268,320. Mr. Doose also receives annual bonuses based on the netoperating profits of RTC.  If Mr. Doose is terminated without cause, he isentitled to base compensation plus the bonus calculated on net operatingprofits for the remaining term of the agreement.  Mr. Doose’s employmentagreement was revised in December, 2002 and among other changes, was extendedto terminate on January 1, 2006.

 

Mr. Wahba and the Company entered into an Incentive CompensationAgreement in 1988 which was subsequently revised in 1994.  In December, 2002 the Company and Mr. Wahbaagreed to terminate the Incentive Compensation Agreement upon payment of theaccrued Deferred Benefit Amount in 2003. Since Mr. Wahba was the last remaining executive with this type ofincentive compensation plan, the Company and Mr. Wahba mutually agreed toterminate the plan.  Mr. Wahba is nowpart of a bonus plan that is similar to that of a number of the Company’s othersenior executives.  In consideration forthis change, the Company has agreed to certain minimum bonus payments through2008 as long as Mr. Wahba is employed with the Company.

 

**Indemnification of Directors and Officers**

 

The Company’s Articles of Incorporation authorize the indemnificationof Company officers and directors to the fullest extent permissible underCalifornia law. Subject to the Articles of Incorporation and California law,the Bylaws provide that Henry Company shall indemnify each of its directors andofficers against expenses, judgments, fines, settlements and other amountsactually and reasonably incurred in connection with any proceeding arising by reasonof the fact that any person is or was a Company director or officer. TheCompany maintains directors and officers liability insurance coverage.

 

ITEM 12.      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following sets forth information regarding beneficial ownership ofthe Common Stock and the Class A Common Stock of the Company as of December 31,2002. Henry Company believes that persons and entities named in the table havesole voting and investment power with respect to all shares of Class A CommonStock and Common Stock shown as beneficially owned by them, subject tocommunity property laws, where applicable. There is no established publictrading market for any class of Henry Company’s equity securities.

 

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|                                                                                                                                                         |   | **Beneficial Ownership of  Common Stock** |   | **Beneficial Ownership of Class  A Common Stock** |   | **Total Voting  Power  (1)(2)(3)  (4)(5)** |   | **Total  Economic****Interest  (1)(2)(3)(4)** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------|--------|-----------------------------------------------|--------|
| **Name and Address of Beneficial Owner**                                                                                                                     |   | **Number of  Shares**                     |   | **Percent  (1)(2)(3)**                            |   | **Number of  Shares**                      |   | **Percent**                                   |   | **Percent** |   | **Percent** |   |
| Warner W. Henry, Trustee,  Warner W. Henry Living Trust(6) 2911 Slauson Ave. Huntington Park, CA 90255                                                       |   | 388,000                                   | (1)    | 53.0                                              | %      | 18,000                                     | (4)    | 100.0                                         | %      | 74.7 | % | 54.1 | % |
| Terrill M. Gloege as Trustee  of the William Warner Henry Trust established under the Henry Trust dated  9/17/932911 Slauson Ave.  Huntington Park, CA 90255 |   | 64,106                                    |   | 8.8                                               |   | —                                     |   | —                                        |   | 4.7 |   | 8.6 |   |
| Terrill M. Gloege as Trustee  of the Catherine Anne Henry Trust established under the Henry Trust dated  9/17/93 2911 Slauson Ave. Huntington Park, CA 90255 |   | 64,106                                    |   | 8.8                                               |   | —                                     |   | —                                        |   | 4.7 |   | 8.6 |   |
| Terrill M. Gloege as Trustee  of the Michael Andrew Henry Trust established under the Henry Trust dated  9/17/93 2911 Slauson Ave. Huntington Park, CA 90255 |   | 64,106                                    |   | 8.8                                               |   | —                                     |   | —                                        |   | 4.7 |   | 8.6 |   |
| Frederick H. Muhs                                                                                                                                            |   | 82,500                                    | (2)    | 11.3                                              |   | —                                     |   | —                                        |   | 6.1 |   | 11.0 |   |
| Joseph T. Mooney, Jr                                                                                                                                         |   | 67,500                                    | (3)    | 9.2                                               |   | —                                     |   | —                                        |   | 5.0 |   | 9.0 |   |
| Carol F. Henry                                                                                                                                               |   | 1,682                                     |   | 0.2                                               |   | —                                     |   | —                                        |   | 0.1 |   | 0.2 |   |

 

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(1)                                  Assumes exercise of the Henry Warrants to purchase388,000 shares of Common Stock which expire on September 30, 2012. The warrantsmay be exercised in whole or in part at variable exercise prices which increaseover the term of the warrant. The current and maximum exercise prices for suchCommon Stock is $15.53 and $38.82 per share, respectively. See “ExecutiveCompensation.”

 

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

 

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

 

(4)                                  Assumes exercise of the Henry Warrants to purchase12,000 shares of Class A Common Stock which expire on September 30, 2012. Thewarrants may be exercised in whole or in part at variable exercise prices whichincrease over the term of the warrants. The current and maximum exercise pricesfor such Class A Common Stock is $15.53 and $38.82 per share, respectively. See“Executive Compensation.”

 

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

 

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

 

 

ITEM 13.      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

The Company leases its Huntington Park headquarters from a family trustand living trust for which Warner W. Henry is the trustee pursuant to threeseparate real property leases. These leases expire in 2006 and 2016. The totalrent paid in 2001 and 2002 for the Huntington Park leases was approximately$424,900 each year.  The Companybelieves that the rent paid under the above leases represent substantially fairmarket value and that the other terms and conditions of the leases arecommercially reasonable.

 

The Company leased additional property at its Huntington Parkheadquarters from Alamo Development Company until February, 2003 at which timeit purchased the property for $773,362.  In 2002, theCompany paid rent of $39,371 pursuant to this lease which was subject to annualadjustments to reflect changes in the Bank of America prime rate. Frederick H. Muhs, a director of the Company, isa shareholder of Alamo Development Company along with certain other members ofhis family. At the same time as the purchase of the Huntington Parkproperty, the Company sold property located in Kimberton, Pennsylvania to AlamoDevelopment Company for $750,000.  At one time this property wasutilized by the Company for its own operations, but more recently it hasbeen leased to two separate third parties for their own use. TheCompany believes that both the purchase of the Huntington Park propertyand the sale of the Kimberton property were completed at their fair marketvalue.

 

Henry Company performs certain administrative services for anaffiliate, Henry II Company a California corporation, pursuant to anadministrative services agreement that provides for payments from Henry IICompany to Henry Company for such services. These payments totaled $0.8 millionin 2000 and 2001, and $0.4 million in 2002. The administrative servicesfee was reduced in 2002 as certain administrative functions were no longer performedby the Company for Henry II.  Henry II Company’s shareholders are Warner W. Henry, Carol Henry, andcertain trusts for the benefit of their children.

 

At December 31, 1997, Henry Company received a note from Henry IICompany for $1.9 million representing the purchase price for its interest incertain real property. Such real property related solely to the business ofHenry II, Inc. and had a net book value of $1.9 million. The note bearsinterest at the prime rate, and is repayable in a lump sum at any time up toDecember 31, 2004. The principal balance of such note was $1.9 million atDecember 31, 2001 and 2002.

 

In addition, at December 31, 2002, Henry II Company owed $0.3 millionto Henry Company, representing past advances made on behalf of Henry II, Inc.The note evidencing this debt does not bear interest and is payable upondemand.

 

Henry Company receives business and financial consulting services fromThe Muhs Company, Inc., of which Frederick H. Muhs, a director of the Company,is the President and controlling shareholder. Henry Company paid $75,000 forthese services in 2000 and 2001 and $100,000 in 2002. See “ExecutiveCompensation.”

 

Joseph T. Mooney, Jr. is a Director and alsoan employee of the Company and receives an annual salary.  Mr. Mooney recieved $180,250 in salary andbonus for each of fiscal years 2002 and 2001, and $236,672 for fiscal year2000.

 

Paul H. Beemer is compensated for consulting advisory services pursuantto a consulting agreement with the Company with compensation established at$100,000 per year. The consulting agreement contains a noncompetition clauserestricting Mr. Beemer’s employment or service with a business entity thatcompetes with the Company in its present or future marketing areas. Mr.Beemer’s consulting agreement expires on June 30, 2003. In fiscal years 2000,2001, and 2002 Mr. Beemer received $100,000 in compensation under hisconsulting agreement.

 

Henry Company receives business and financial consulting services fromTerrill M. Gloege, a director of the Company, who is also as the Trustee of theWilliam Warner Henry, Catherine Anne Henry, and Michael Andrew Henry Trustsestablished under the Henry Trust dated 9/17/93. Henry Company paid $30,000 for these services in2002 and $10,000 in 2001.

 

In connection with the Monsey Bakor acquisition, the Company sold22,500 shares of redeemable convertible preferred stock in the Company toJoseph T. Mooney, Jr., a director of the Company, for $600,000. The Company isobligated, upon the exercise of Mr. Mooney’s put option, to redeem the stockfor cash in annual amounts of $500,000 beginning in 2004 and

 

34

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aggregating $3,000,000, or for$3,000,000 upon the death of Mr. Mooney. The shares are convertible into sharesof Common Stock.

 

The Company is a party to employment and consulting agreements withcertain directors and officers of the Company. See “ExecutiveCompensation-Employment Agreements and Compensation Arrangements.”

 

ITEM 14.      CONTROLS ANDPROCEDURES

 

Based on their evaluation as of a date within 90 days of the filingdate of this Annual Report on Form 10-K, the principal executive officer andprincipal financial officer of Henry Company have concluded that the Company’sdisclosure controls and procedures (as defined in Rules 13a-14[c] and 15d-14[c]under the Securities Exchange Act of 1934) are effective to ensure that theinformation required to be disclosed by the Company in reports that it files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms.

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect those controls subsequent tothe date of their most recent evaluation.

 

35

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**PART IV**

 

ITEM 15.                 EXHIBITS,FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8–K                                                              (A)DOCUMENTS FILED AS PART OF THIS REPORT

 

**(a) (1) Financial Statements**

 

The Consolidated Financial Statements of Henry Company are containedherein.

 

**(2) FinancialStatement Schedules**

 

The financial statement Schedule II Valuation and Qualifying Accountsand Reserves of Henry Company is contained herein.  All other schedules for which provision is made in the applicableaccounting regulations of the Securities and Exchange Commission have beenomitted because they are not applicable, not required, or the information isincluded in the consolidated financial statement or notes there to.

 

**(3) Exhibits**

 

See Exhibit Index

 

Since the Company does not have securities registered under Section 12of the Securities Exchange Act of 1934 and is not required to file periodicreports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,the Company is not an "issuer" as defined in the Sarbanes-Oxley Actof 2002, and therefore the Company is not filing the written certificationstatement pursuant to Section 906 of such Act. The Company files periodic reports with the Securities and ExchangeCommission because it is required to do so by the terms of the indenturegoverning its senior subordinated notes.

 

**(b) Reports on Form 8-K**

 

The Company did not file any reports on Form 8–K during the quarterended December 31, 2002.

 

HENRY COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
| **Henry Company**                                     |
|-------------------------------------------------------|
| Report Of Independent Accountants                     |
| Consolidated Balance Sheets                           |
| Consolidated Statements Of Operations                 |
| Consolidated Statements Of Shareholders’  Equity |
| Consolidated Statements Of Cash Flows                 |
| Notes To Consolidated Financial Statements            |
|                                                  |
| **Schedule**                                          |
| II. Valuation and Qualifying Accounts and  Reserves   |

 

36

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**REPORT OFINDEPENDENT ACCOUNTANTS**

 

To theBoard of Directors,

BondHolders and Shareholders

of HenryCompany

 

In our opinion, the consolidated financial statements listed in theaccompanying index present fairly, in all material respects, the financialposition of Henry Company and its subsidiaries (the “Company’) at December 31,2002 and December 31, 2001, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in ouropinion, the financial statement schedule listed in the accompanying index,presents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financialstatements.  These financial statementsand financial statement schedule are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1, the Company adoptedStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” and recorded a cumulative effect of change in accountingprinciple of $19.7 million for the impairment of goodwill upon adoption.

 
| /s/    PRICEWATERHOUSECOOPERS LLP |   |
|-------------------------------------------------------|--------|
|                                                  |
| Los Angeles, California                               |
| March 14, 2003                                        |

 

37

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HENRY COMPANYCONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2001 AND 2002

 
|                                                                                                                                        |   | **2001**    |        | **2002**    |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| ASSETS:                                                                                                                                     |   |        |        |        |   |
| Current assets:                                                                                                                             |   |        |        |        |   |
| Cash and cash equivalents                                                                                                                   |   | $           | 425,695     |        | $      | 1,013,102 |   |
| Trade accounts receivable, net  of allowance for doubtful accounts of  $2,760,591 and  $2,330,194 for 2001 and 2002, respectively |   | 23,643,661  |        | 28,091,213  |   |
| Inventories, net                                                                                                                            |   | 13,260,850  |        | 15,909,609  |   |
| Receivables from affiliate                                                                                                                  |   | 1,476,147   |        | 281,362     |   |
| Notes receivable                                                                                                                            |   | 42,849      |        | 29,144      |   |
| Prepaid expenses and other  current assets                                                                                                  |   | 1,393,403   |        | 2,264,405   |   |
| Income tax receivable                                                                                                                       |   | 2,416,536   |        | 745,519     |   |
| Deferred income taxes                                                                                                                       |   | 1,141,127   |        | 1,376,266   |   |
| Total current assets                                                                                                                        |   | 43,800,268  |        | 49,710,620  |   |
| Property and equipment, net                                                                                                                 |   | 30,276,860  |        | 27,612,817  |   |
| Cash surrender value of life  insurance, net                                                                                                |   | 3,597,967   |        | 2,218,204   |   |
| Intangibles, net                                                                                                                            |   | 24,158,525  |        | 3,763,007   |   |
| Notes receivables                                                                                                                           |   | 113,315     |        | 460,451     |   |
| Notes receivable from  affiliate                                                                                                            |   | 1,863,072   |        | 1,863,072   |   |
| Deferred income taxes                                                                                                                       |   | 5,995,008   |        | 5,208,918   |   |
| Other assets                                                                                                                                |   | 1,094,246   |        | 798,396     |   |
| Total assets                                                                                                                                |   | $           | 110,899,261 |        | $      | 91,635,485 |   |
|                                                                                                                                        |   |        |        |        |   |
| LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDER’S  DEFICIT:                                                        |   |        |        |        |   |
| Current liabilities:                                                                                                                        |   |        |        |        |   |
| Accounts payable                                                                                                                            |   | $           | 4,842,204   |        | $      | 5,532,015 |   |
| Accrued expenses                                                                                                                            |   | 10,059,005  |        | 13,646,352  |   |
| Book overdrafts                                                                                                                             |   | 1,389,858   |        | —      |   |
| Income taxes payable                                                                                                                        |   | 339,228     |        | 342,252     |   |
| Notes payable, current portion                                                                                                              |   | 523,495     |        | 625,572     |   |
| Borrowings under lines of  credit                                                                                                           |   | 6,128,519   |        | 2,978,168   |   |
| Total current liabilities                                                                                                                   |   | 23,282,309  |        | 23,124,359  |   |
| Notes payable                                                                                                                               |   | 3,395,139   |        | 2,769,566   |   |
| Environmental reserve                                                                                                                       |   | 3,241,144   |        | 3,177,015   |   |
| Deferred income taxes                                                                                                                       |   | 6,669,024   |        | 5,899,112   |   |
| Deferred warranty revenue                                                                                                                   |   | 2,516,229   |        | 2,643,401   |   |
| Deferred compensation                                                                                                                       |   | 903,114     |        | 1,358,624   |   |
| Series B Senior notes                                                                                                                       |   | 81,250,000  |        | 81,250,000  |   |
| Total liabilities                                                                                                                           |   | 121,256,959 |        | 120,222,077 |   |
|                                                                                                                                        |   |        |        |        |   |
| Commitments and contingencies  (Note 7)                                                                                                     |   |        |        |        |   |
|                                                                                                                                        |   |        |        |        |   |
| Redeemable convertible  preferred stock                                                                                                     |   | 2,082,773   |        | 2,264,000   |   |
|                                                                                                                                        |   |        |        |        |   |
| Shareholders’ deficit:                                                                                                                 |   |        |        |        |   |
|                                                                                                                                        |   |        |        |        |   |
| Common stock                                                                                                                                |   | 4,691,080   |        | 4,691,080   |   |
| Additional paid-in capital                                                                                                                  |   | 2,200,968   |        | 2,019,741   |   |
| Cumulative translation  adjustment                                                                                                          |   | (1,071,590  | )           | (926,609    | )      |
| Accumulated deficit                                                                                                                         |   | (18,260,929 | )           | (36,634,804 | )      |
| Total shareholders’ deficit                                                                                                            |   | (12,440,471 | )           | (30,850,592 | )      |
| Total liabilities, redeemable  convertible preferred stock and shareholders’ deficit                                                   |   | $           | 110,899,261 |        | $      | 91,635,485 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

38

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HENRY COMPANYCONSOLIDATED STATEMENTS OFOPERATIONS

 
|                                                                              |   | **Years  ended December 31,** |        |
|-----------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                              |   | **2000**                      |        | **2001** |   | **2002** |   |
| Net sales                                                                         |   | $                             | 191,513,230 |   | $ | 191,848,192 |   | $ | 200,806,828 |   |
| Cost of sales                                                                     |   | 143,266,156                   |        | 138,473,331 |   | 138,254,390 |   |
| Gross profit                                                                      |   | 48,247,074                    |        | 53,374,861 |   | 62,552,438 |   |
| Operating expenses:                                                               |   |                          |        |   |   |   |   |
| Selling, general and  administrative                                              |   | 46,594,828                    |        | 47,384,647 |   | 51,121,932 |   |
| Restructuring charges                                                             |   | 735,127                       |        | 568,808 |   | — |   |
| Amortization of intangibles                                                       |   | 2,549,805                     |        | 2,524,859 |   | 742,529 |   |
| Operating income (loss)                                                           |   | (1,632,686                    | )           | 2,896,547 |   | 10,687,977 |   |
| Other expense (income):                                                           |   |                          |        |   |   |   |   |
| Interest expense                                                                  |   | 9,889,325                     |        | 10,059,608 |   | 9,695,926 |   |
| Interest and other income, net                                                    |   | (260,524                      | )           | (191,023 | ) | (107,321 | ) |
| Income (loss) before benefit  for income taxes and change in accounting principle |   | (11,261,487                   | )           | (6,972,038 | ) | 1,099,372 |   |
| Benefit for income taxes                                                          |   | (4,595,913                    | )           | (1,633,806 | ) | (212,808 | ) |
| Income (loss) before  cumulative effect of change in accounting principle         |   | (6,665,574                    | )           | (5,338,232 | ) | 1,312,180 |   |
| Cumulative effect of change in  accounting principle                              |   | —                        |        | — |   | (19,686,055 | ) |
| Net loss                                                                          |   | $                             | (6,665,574  | ) | $ | (5,338,232 | ) | $ | (18,373,875 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

39

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HENRY COMPANY CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ DEFICITFOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

 
|                                                      |   |       |   |      |      | **Additional  Paid-In  Capital** |   | **Cumulative  Translation  Adjustment** |   | **Accumulated  Deficit** |     | **Total  Shareholder’s  Equity (Deficit)** |   |
|-----------------------------------------------------------|--------|------------|--------|-----------|-----------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|----------|-------------------------------------------------|--------|
| **Common Stock**                                          |
| **Issued Shares**                                         |   | **Amount** |
| Balances, December 31, 1999                               |   | 227,500    |   | $         | 4,691,080 |                             | $      | 2,519,147                               |   | $                        | (149,083 | )                                               | $      | (6,257,123 | ) | $ | 804,021 |   |
| Accretion on redeemable  convertible preferred stock |   | —     |   | —    |      | (154,839                         | )      | —                                  |   | —                   |     | (154,839                                        | )      |
| Comprehensive loss:                                       |   |       |   |      |      |                             |   |                                    |   |                     |     |                                            |   |
| Net loss                                                  |   | —     |   | —    |      | —                           |   | —                                  |   | (6,665,574               | )        | (6,665,574                                      | )      |
| Other comprehensive  loss:                           |   |       |   |      |      |                             |   |                                    |   |                     |     |                                            |   |
| Change in cumulative  translation adjustment         |   | —     |   | —    |      | —                           |   | (348,145                                | )      | —                   |     | (348,145                                        | )      |
| Total comprehensive loss                                  |   | —     |   | —    |      | —                           |   | —                                  |   | —                   |     | (7,013,719                                      | )      |
| Balances, December 31, 2000                               |   | 227,500    |   | 4,691,080 |      | 2,364,308                        |   | (497,228                                | )      | (12,922,697              | )        | (6,364,537                                      | )      |
| Accretion on redeemable  convertible preferred stock      |   | —     |   | —    |      | (163,340                         | )      | —                                  |   | —                   |     | (163,340                                        | )      |
| Comprehensive loss:                                       |   |       |   |      |      |                             |   |                                    |   |                     |     |                                            |   |
| Net loss                                                  |   | —     |   | —    |      | —                           |   | —                                  |   | (5,338,232               | )        | (5,338,232                                      | )      |
| Other comprehensive loss:                                 |   |       |   |      |      |                             |   |                                    |   |                     |     |                                            |   |
| Change in cumulative  translation adjustment         |   | —     |   | —    |      | —                           |   | (574,362                                | )      | —                   |     | (574,362                                        | )      |
| Total comprehensive  loss                            |   | —     |   | —    |      | —                           |   | —                                  |   | —                   |     | (5,912,594                                      | )      |
| Balances, December 31, 2001                               |   | 227,500    |   | 4,691,080 |      | 2,200,968                        |   | (1,071,590                              | )      | (18,260,929              | )        | (12,440,471                                     | )      |
| Accretion on redeemable  convertible preferred stock      |   | —     |   | —    |      | (181,227                         | )      | —                                  |   | —                   |     | (181,227                                        | )      |
| Comprehensive loss:                                       |   |       |   |      |      |                             |   |                                    |   |                     |     |                                            |   |
| Net loss                                                  |   | —     |   | —    |      | —                           |   | —                                  |   | (18,373,875              | )        | (18,373,875                                     | )      |
| Other comprehensive income  (loss):                       |   |       |   |      |      |                             |   |                                    |   |                     |     |                                            |   |
| Change in cumulative  translation adjustment         |   | —     |   | —    |      | —                           |   | 144,981                                 |   | —                   |     | 144,981                                         |   |
| Total comprehensive loss                                  |   | —     |   | —    |      | —                           |   | —                                  |   | —                   |     | (18,228,894                                     | )      |
| Balances, December 31, 2002                               |   | 227,500    |   | $         | 4,691,080 |                             | $      | 2,019,741                               |   | $                        | (926,609 | )                                               | $      | (36,634,804 | ) | $ | (30,850,592 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

40

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HENRY COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                                       |   | **Years ended December 31,** |       |
|--------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                       |   | **2000**                     |       | **2001** |   | **2002** |   |
| Cash flows from operating  activities:                                                     |   |                         |       |   |   |   |   |
| Net loss                                                                                   |   | $                            | (6,665,574 | ) | $ | (5,338,232 | ) | $ | (18,373,875 | ) |
| Adjustments to reconcile net  loss to net cash provided by (used in) operating activities: |   |                         |       |   |   |   |   |
| Depreciation and amortization                                                              |   | 5,041,093                    |       | 4,789,789 |   | 4,482,572 |   |
| Provision for doubtful  accounts                                                           |   | 1,016,333                    |       | 716,433 |   | (430,397 | ) |
| Deferred income taxes                                                                      |   | (5,166,097                   | )          | (649,096 | ) | (218,961 | ) |
| Noncompetition and other  intangibles amortization                                         |   | 2,549,805                    |       | 2,524,859 |   | 742,529 |   |
| Cumulative effect of change in  accounting principle                                       |   | —                       |       | — |   | 19,686,055 |   |
| Loss (gain) on disposal of  property and equipment                                         |   | 240,205                      |       | (7,391 | ) | (84,388 | ) |
| Gain on sale of investment                                                                 |   | (86,542                      | )          | — |   | — |   |
| Changes in operating assets  and liabilities, net of assets acquired:                      |   |                         |       |   |   |   |   |
| Accounts receivable                                                                        |   | (4,919,876                   | )          | 893,205 |   | (4,017,155 | ) |
| Inventories                                                                                |   | (2,406,346                   | )          | 4,752,248 |   | (2,648,759 | ) |
| Receivables from affiliates                                                                |   | 20,302                       |       | 647,763 |   | 1,194,785 |   |
| Notes receivable                                                                           |   | (41,875                      | )          | 879,383 |   | 66,569 |   |
| Other assets                                                                               |   | 482,112                      |       | (769,972 | ) | (575,152 | ) |
| Income tax receivable                                                                      |   | 243,183                      |       | (2,282,601 | ) | 1,671,017 |   |
| Accounts payable and accrued  expenses                                                     |   | (3,209                       | )          | 148,176 |   | 4,216,053 |   |
| Deferred warranty revenue                                                                  |   | (284,410                     | )          | 237,408 |   | 127,172 |   |
| Deferred compensation                                                                      |   | (133,165                     | )          | (34,794 | ) | 455,510 |   |
| Net cash provided by (used in)  operating activities                                       |   | (10,114,061                  | )          | 6,507,178 |   | 6,293,575 |   |
| Cash flows from investing  activities:                                                     |   |                         |       |   |   |   |   |
| Capital expenditures                                                                       |   | (3,052,450                   | )          | (1,358,006 | ) | (2,206,149 | ) |
| Proceeds from the disposal of  property and equipment                                      |   | 40,217                       |       | 32,301 |   | 124,487 |   |
| Proceeds from sale of  investment                                                          |   | 204,423                      |       | — |   | — |   |
| Investment in affiliate                                                                    |   | 7,080                        |       | — |   | — |   |
| Net cash used in investing  activities                                                     |   | (2,800,730                   | )          | (1,325,705 | ) | (2,081,662 | ) |
| Cash flows from financing  activities:                                                     |   |                         |       |   |   |   |   |
| Net borrowings (repayments)  under line-of-credit agreements                               |   | 10,824,257                   |       | (7,325,575 | ) | (3,150,351 | ) |
| Repayments under note payable  agreements                                                  |   | (124,994                     | )          | (97,580 | ) | (623,496 | ) |
| Borrowings under notes payable  agreements                                                 |   | —                       |       | 3,500,000 |   | 100,000 |   |
| Increase (decrease) in book overdrafts                                                     |   | 3,402,153                    |       | (3,126,421 | ) | (1,389,858 | ) |
| Cash surrender value of life  insurance                                                    |   | (746,996                     | )          | 1,489,417 |   | 1,379,763 |   |
| Purchase of Series B Senior  Notes                                                         |   | —                       |       | (150,000 | ) | — |   |
| Net cash provided by (used in)  financing activities                                       |   | 13,354,420                   |       | (5,710,159 | ) | (3,683,942 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                              |   | (78,558                      | )          | (91,734 | ) | 59,436 |   |
| Net increase (decrease) in  cash and cash equivalents                                      |   | 361,071                      |       | (620,420 | ) | 587,407 |   |
| Cash and cash equivalents,  beginning of year                                              |   | 685,044                      |       | 1,046,115 |   | 425,695 |   |
| Cash and cash equivalents, end  of year                                                    |   | $                            | 1,046,115  |   | $ | 425,695 |   | $ | 1,013,102 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

41

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HENRY COMPANY NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

The Henry Company (the “Company”) develops, manufactures and marketsmaterials for the construction industry focusing primarily on roofing, sealingand paving applications. The Company’s products include: roof/driveway coatingsand paving products, industrial emulsions, air barriers, specialty products,polyurethane foam for residential and commercial uses, and sealants for theconstruction and marine industries.

 

The consolidated financial statements of the Company include theaccounts of the Company and its subsidiaries. All significant intercompanyaccounts and transactions have been eliminated.

 

**Revenue Recognition**

 

Revenues are recognized when product is shipped and title transfers.The Company has established programs, which, under specified conditions, allowcustomers to return products. The Company establishes liabilities for estimatedreturns and allowances at the time of shipment. In addition, accruals forcustomer discounts and allowances are recorded when revenues are recognized.

 

The Company also offers its customers an optional separately purchasedwarranty program for its commercial roofing systems. Revenue from the warrantyprogram is recognized over the warranty periods that range from 5 to 20 years.Warranty repair expenses under the program are charged to expense asincurred.  A reconciliation of extendedwarranty programs is as follows:

 
|                                    |   | **For the year ended December 31,**              |       |
|-----------------------------------------|--------|--------------------------------------------------|------------|
|                                    |   | **2001**                                         |       | **2002** |   |
|                                    |   | **Dollar Amount of  Deferred Warranty  Revenue** |       | **Dollar Amount of  Deferred Warranty  Revenue** |   |
|                                    |   | **Debit/(Credit)**                               |       | **Debit/(Credit)** |   |
| Balance at the beginning of  the period |   | $                                                | (2,278,821 | ) | $ | (2,516,229 | ) |
| Warranties issued during the  period    |   | (503,075                                         | )          | (477,672 | ) |
| Costs incurred during the  period       |   | (235,355                                         | )          | (310,713 | ) |
| Settlements made during the  period     |   | 235,355                                          |       | 310,713 |   |
| Amortization of deferred  revenue       |   | 265,667                                          |       | 350,500 |   |
| Balance at the end of the  period       |   | $                                                | (2,516,229 | ) | $ | (2,643,401 | ) |

 

**Cash and CashEquivalents**

 

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

 

Under the Company’s cash management system, checks issued but notpresented to banks frequently result in overdraft balances for accountingpurposes and are included in “book overdrafts” in the accompanying balancesheet. At December 31, 2001, and 2002 these overdraft balances amounted to$1,389,858 and $0, respectively.

 

**Inventories**

 

Inventories are valued at the lower of cost (first-in, first-out) ormarket. Cost is determined using standard cost that approximates actual costson a first-in, first-out method.

 

42

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**Property andEquipment**

 

Property and equipment are stated at cost. Leasehold improvements areamortized on a straight-line basis over the remaining lease term, or theasset’s estimated useful life, whichever is shorter. All other depreciableassets are depreciated using the double-declining-balance method or thestraight-line method, over the assets’ estimated useful lives.  Management evaluates the recoverability oflong-lived assets in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 144 adopted on January 1, 2002 as discussed below in“Recently Issued Accounting Standards.” These standards generally require the Company to assess these assets forrecoverability when events or circumstances indicate a potential impairment byestimating the undiscounted cash flow to be generated from the use and ultimatedisposition of these assets.

 

Depreciation periods are as follows:

 
| Buildings                      |   | 20 to 40 years        |   |
|--------------------------------|--------|-----------------------|--------|
| Machinery and equipment        |   | 6 years               |   |
| Office furniture and equipment |   | 5 years               |   |
| Automotive equipment           |   | 3 to 5 years          |   |
| Leasehold improvements         |   | Primary term of lease |   |
| Other assets                   |   | 5 years               |   |

 

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

 

**Intangibles**

 

The Company adopted SFAS No. 142 effective at the beginning of fiscal2002 and as a result, the Company ceased amortization of goodwill as of thatdate and reclassified intangible assets acquired prior to July 1, 2001 that didnot meet the criteria for recognition under SFAS No. 141.  SFAS No. 142 also changed the method forassessing goodwill impairments from an undiscounted cash flow method prescribedby SFAS No. 121 to a fair market value approach.  Additionally, the initial application of this statement resultedin an impairment of goodwill of approximate $19.7 million primarily related togoodwill from the Monsey Bakor acquisition. The amount of the impairment was estimated based on an independentvaluation process that estimated the present value of the separate future cashflows of the U.S. and Canadian operations and was reported as a cumulativeeffect of change in accounting principle during 2002.  Changes in the net carrying amount of goodwill for the year-endedDecember 31, 2002, are as follows:

 
|                             |   | **Building Products  Division** |       | **Resin Technology  Division** |   | **Total**   |   |
|----------------------------------|--------|---------------------------------|------------|--------------------------------|--------|-------------|--------|
| Balance as of December 31,  2001 |   | $                               | 19,652,989 |                           | — |        | $      | 19,652,989 |   |
| Translation adjustments          |   |                            | 33,066     |                           | — |        |   | 33,066 |   |
| Impairment charges               |   | (19,686,055                     | )          | —                         |   | (19,686,055 | )      |
| Balance as of December 31,  2002 |   | —                          |       | —                         |   | —      |   |

 

43

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The followingtable sets forth the Company’s acquired intangible assets, which will continueto be amortized, for the periods ended December 31, 2001 and December 31, 2002:

 
|                                        |   | **December 31, 2001**       |      | **December 31, 2002**         |   |
|---------------------------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
|                                        |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   | **Net Carrying  Amount** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net Carrying  Amount** |   |
| Amortizing  identifiable intangible assets: |   |                        |      |                          |   |   |   |   |   |   |   |   |   |
| Noncompetition agreements                   |   | $                           | 4,727,199 |                          | $      | 1,937,142 |   | $ | 2,790,057 |   | $ | 4,727,199 |   | $ | 2,414,860 |   | $ | 2,312,339 |   |
| Financing fees                              |   | 2,442,000                   |      | 912,158                       |   | 1,529,842 |   | 2,442,000 |   | 1,153,712 |   | 1,288,288 |   |
| Tradenames and trademarks                   |   | 297,283                     |      | 111,646                       |   | 185,637 |   | 297,283 |   | 134,903 |   | 162,380 |   |
|                                        |   | $                           | 7,466,482 |                          | $      | 2,960,946 |   | $ | 4,505,536 |   | $ | 7,466,482 |   | $ | 3,703,475 |   | $ | 3,763,007 |   |

 

Amortizationexpense on acquired intangible assets was $768,767, $749,615 and $742,529 forthe years ended December 31, 2000, 2001 and 2002, respectively.  Amortization expense on goodwill was$1,781,038 and $1,775,244 for years ended December 31, 2000 and 2001,respectively.  The weighted-averageamortization periods for identifiable intangible assets were 11 years fornoncompetition agreements, 10 years for financing fees and 13 years fortradenames and trademarks.  Based oncurrent information, estimated amortization expense for acquired intangibleassets for each of the five succeeding fiscal years, starting 2003, is expectedto be $742,529, $742,529, $681,416, $650,861 and $650,861, respectively.

 

As required bySFAS No. 142, the results for the prior years ended December 31, 2000 and 2001have not been restated.  Had the Companybeen accounting for its goodwill under SFAS No. 142 for all periods presented,the Company’s net loss would have been as follows:

 
|                              |   | **For the  Year Ended December 31,** |       |
|-----------------------------------|--------|--------------------------------------|------------|
|                              |   | **2000**                             |       | **2001** |   | **2002** |   |
| Reported net loss                 |   | $                                    | (6,665,574 | ) | $ | (5,338,232 | ) | $ | (18,373,875 | ) |
| Goodwill amortization, net of tax |   | 1,781,038                            |       | 1,775,244 |   | — |   |
| Adjusted net loss                 |   | $                                    | (4,884,536 | ) | $ | (3,562,988 | ) | $ | (18,373,875 | ) |

 

**Income Taxes**

 

The Company recognizes deferred taxes in accordance with the liabilitymethod of accounting for income taxes. Under this method,**deferredtaxes are determined based on the differences between the financial statementand tax bases of assets and liabilities, using enacted tax rates in effect forthe year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amounts expected to be realized.  In assessing the need for a valuationallowance management considers estimates of future taxable income and ongoingprudent and feasible tax planning strategies. The provision for income taxes represents income taxes payable for theperiod and the change during the  periodin deferred tax assets and liabilities

 

**Environmental Reserve**

 

The Company’s Kimberton facility was formerly occupied by apharmaceutical manufacturer whose operations resulted in groundwatercontamination identified on the site and surrounding area. The contaminant ofconcern was trichloroethylene which required various remedial activities,including the provision of alternate water supplies to users in the surroundingarea and a groundwater treatment program. Remedial work is being completedunder a consent decree the EPA

 

44

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negotiated in 1990 with thepharmaceutical manufacturer and the Company and a confidential cost sharingagreement between these two companies. The Company’s costs under the consentdecree in 2000, 2001 and 2002 were approximately $73,000, $60,000 and $64,000,respectively, and are not expected to be significantly different during 2003and 2004. The Company has a liability recorded for the entire expected costs ofthe remedial work over the remaining term of the consent decree andcost-sharing agreement. Costs paid under the consent decree and cost-sharingagreement of $64,000 in 2002 reduced the liability to $3.2 million at December31, 2002.

 

The Company is currently closing certain of its underground storagetanks. The Company estimates that the capital expenditures required to complywith various regulatory programs in 2003 will not have a material adverseeffect on the Company’s earnings, cash flows or competitive position. Suchestimates, however, are based on factors and assumptions that are subject tochange, including potential modifications of regulatory requirements, detectionof unanticipated environmental conditions or other currently unexpectedcircumstances.

 

The Company accrues for losses associated with environmentalremediation obligations when such losses are probable and reasonably estimable.Accruals for estimated losses from environmental remediation obligationsgenerally are recognized no later than completion of the remedial feasibilitystudy. Such accruals are adjusted as further information develops or ascircumstances change. Any costs for future expenditures for environmentalremediation obligations are not discounted.

 

**Selling, General andAdministrative Expenses**

 

Selling, general and administrative expenses include all costsassociated with marketing and distributing the Company’s products. Distributioncosts were $9,604,960, $9,011,277, and $10,669,031 for the years ended December31, 2000, 2001 and 2002, respectively.  Also included in selling, general andadministrative expenses are research and development costs. Research anddevelopment costs incurred in developing and improving product formulas arecharged to expense in the year incurred. Total research and development costswere $1,545,855, $1,388,156, and $1,490,506 for the years ended December31, 2000, 2001 and 2002, respectively.

 

**Advertising andPromotion Costs**

 

All costs associated with advertising and promoting products areexpensed in the year incurred and are included in selling, general andadministrative expenses. Advertising and promotion expenses were $2,776,309,$2,082,145, and $2,078,364 for the years ended December 31, 2000, 2001 and2002, respectively.

 

**Foreign CurrencyTranslation**

 

The assets and liabilities of the Company’s wholly-owned Canadiansubsidiaries are translated from Canadian dollars to U.S. dollars usingexchange rates in effect at the balance sheet date. Revenues and expenses aretranslated using average exchange rates prevailing during the period. Theeffect of the unrealized exchange rate fluctuations on translating foreigncurrency assets and liabilities into U.S. dollars are accumulated as a separatecomponent of shareholders’ equity. Gains and losses resulting from foreigncurrency transactions are included in operations.  For the years endedDecember 31, 2000, 2001 and 2002, the aggregate foreign exchange gains (losses)included in operations were $(31,050), $(233,383) and $76,775, respectively.

 

**Financial Instrumentsand Risk Management**

 

Financial instruments, which potentially expose the Company toconcentration of credit risk, consist primarily of cash and cash equivalentsand trade receivables. The Company currently maintains substantially all of itsday-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 marketfunds on deposit with major financial institutions.

 

45

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**Dependence on Key Customer**

 

The Company issubstantially dependent on Home Depot, the Company’s largest customer. Home Depot represented approximately 11.4% of gross sales in fiscal year 2000,13.3% of gross sales in fiscal year 2001 and 25.9% of gross sales in fiscalyear 2002 and also accounted for approximately 23.3% and 40.0% of  accounts receivable at December 31, 2001 and2002, respectively.  In January 2002, the company entered into athree-year agreement with Home Depot that significantly expands the Company’srelationship with Home Depot.  The agreement contains performance targets,which, if not achieved, could trigger a payment from the Company to Home Depotin 2005.  In the first quarter of 2002, the Company’s relationship withLowes, its second largest customer, was terminated.  In 2002, theincremental revenue resulting from the Home Depot agreement exceeded therevenue lost as a result of the loss of Lowes as a customer. Any deteriorationof the Company’s relationship with Home Depot or any failure of Home Depot topurchase and pay for product shipped by the Company to Home Depot could have amaterial adverse effect on the Company.

 

**The Value ofFinancial Instruments**

 

SFAS No. 107, “Disclosure About Fair Value of Financial Instruments”,requires disclosure of fair value information about most financial instrumentsboth on and off the balance sheet, if it is practicable to estimate. SFAS No.107 excludes certain financial instruments such as certain insurance contractsand all non-financial instruments from its disclosure requirements. A financialinstrument is defined as a contractual obligation that ultimately ends with thedelivery of cash or an ownership interest in an entity. Disclosures regardingthe fair value of financial instruments are derived using external marketsources, estimates using present value or other valuation techniques. Cash,accounts receivable, accounts payable, accrued liabilities and short-term debtare reflected in the financial statements at fair value because of theshort-term maturity of these instruments. The Company’s long-term debt isprimarily comprised of Senior Notes with a carrying value of $81.3 million atDecember 31, 2002. The reported fair value of the Senior Notes was $52.8million at December 31, 2002.

 

The Company has issued a standby letter of credit relating to itsbusiness insurance and is contingently liable for approximately $1,141,207. Thestandby letter of credit is in force for the term of the insurance policy, andreflects the current fair value.

 

**Use of Estimates andAssumptions**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from thoseestimates.

 

**Reclassifications**

 

Certain previously reported amounts have been reclassified to conformwith the current year’s presentation.

 

**Comprehensive Income(Loss)**

 

During 1998, the Company adopted the provisions of SFAS No. 130,“Reporting Comprehensive Income.” SFAS No. 130 establishes guidelines for thereporting and display of comprehensive income and its components in thefinancial statements.

 

Comprehensive income (loss) as defined, includes all changes inshareholders’ equity during a period from non-owner sources. The only componentof comprehensive loss not included in the Company’s operating results relatesto the change in the cumulative translation adjustment related to the foreigncurrency effects of the Canadian operations acquired during 1998 as part of theMonsey Bakor acquisition as discussed in Note 2.

 

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**Recently IssuedAccounting Pronouncements**

 

In July 2001,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) Nos. 141 and 142 (“SFAS No. 141” and “SFAS No.142”), “Business Combinations” and “Goodwill and Other Intangible Assets”.   SFAS No. 141 replaces APB 16 and eliminatespooling-of-interests accounting prospectively. It also provides guidance onpurchase accounting related to the recognition of intangible assets andaccounting for negative goodwill. SFAS No. 142 changes the accounting forgoodwill from an amortization method to an impairment-only approach. Under SFASNo. 142, goodwill is tested annually and whenever events or circumstances occurindicating that goodwill might be impaired. SFAS No. 141 and SFAS No. 142 areeffective for all business combinations completed after June 30, 2001. Uponadoption of SFAS No. 142, amortization of goodwill recorded for businesscombinations consummated prior to July 1, 2001 ceased, and intangible assetsacquired prior to July 1, 2001 that do not meet the criteria for recognitionunder SFAS No. 141 were reclassified to goodwill. The Company adopted SFAS No.142 on January 1, 2002 and completed its goodwill impairment test during thesecond quarter of 2002.  Based on theresults of the impairment test, the Company recorded a cumulative effect of changein accounting principle transitional impairment of approximately $19.7 millionin 2002.

 

In August2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations,” which addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. This Statement requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of thecarrying amount of the long-lived asset. All provisions of this Statement will be effective at the beginning offiscal year 2003.  The Company is in theprocess of determining the impact of this Statement on the Company’s financialstatements.

 

InOctober 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  This Statement supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of” and amends APB Opinion No. 30, “Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions.”  This Statement requiresthat long-lived assets that are to be disposed of by sale be measured at thelower of book value or fair value less costs to sell.  SFAS No. 144retains the fundamental provisions of SFAS No. 121 for (a) recognition andmeasurement of the impairment of long-lived assets to be held and used and (b)measurement of long-lived assets to be disposed of by sale.  ThisStatement also retains APB Opinion No. 30’s requirement that companies reportdiscontinued operations separately from continuing operations.  All provisionsof this Statement were effective in the first quarter of fiscal year2002.  The adoption of this standard did not have a significant impact onthe Company’s financial position, results of operations, or cash flows.

 

In May 2002,the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.”  This Statement rescinds FASB Statement No.4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendmentof that Statement, FASB Statement No. 64, “Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements.” This Statement amends FASB Statement No. 13, “Accounting for Leases,” toeliminate an inconsistency between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions.  The provisions of this Statement related tothe rescission of Statement No.4 are effective beginning in fiscal year 2003.  All other provisions were effective afterMay 15, 2002.  The provisions adopted onMay 15, 2002 did not have a significant impact on the Company’s financialresults.  The Company is in the processof determining the impact of this Statement on the Company’s financial resultsfor those provisions effective in fiscal year 2003.

 

In June 2002,the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.”SFAS No. 146 addresses significant issues regarding the recognition,measurement, and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forpursuant to the guidance that the Emerging Issues Task Force (EITF) has setforth in the EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The scope of SFAS No. 146 also includes (1) costs related to terminatinga contract that is not a capital lease and (2) termination benefits thatemployees who are involuntarily terminated receive under the terms of aone-time benefit arrangement that is not an ongoing benefit arrangement or anindividual deferred-compensation contract. SFAS No. 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002 with earlier adoption encouraged.  The Company does not anticipate that theadoption of SFAS No. 146 will have a significant impact on the Company’s financial position, results of operations, or cashflows.

 

47

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In November2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  ThisInterpretation clarifies the requirements for a guarantor’s accounting for anddisclosures of certain guarantees issued and outstanding.  This Interpretation also clarifies therequirements related to the recognition of a liability by a guarantor at theinception of a guarantee for the obligations the guarantor has undertaken inissuing that guarantee.  The disclosureprovisions of the Interpretation are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The Company has adopted the disclosure provisionsof this Interpretation as disclosed in Note 1 and Note 5 to the consolidatedfinancial statements. The initial recognition and initial measurementprovisions of this Interpretation are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  The Company is currently in the process ofdetermining the impact of this Interpretation on the Company’s financialresults for those provisions effective in 2003.

 

The Company iscurrently reviewing the requirements of EITF Issue No. 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21addresses certain aspects of the accounting by a vendor for arrangements underwhich it will perform multiple revenue-generating activities.  Specifically, EITF Issue No. 00-21 addresseshow to determine whether an arrangement involving multiple deliverablescontains more than one unit of accounting. The provisions of EITF Issue No. 00-21 will be effective in fiscalperiods beginning after June 15, 2003.  The Company is in the process of determining the impact of EITFIssue No. 00-21 on the Company’s financial results when effective.

 

**2. BUSINESSACQUISITION AND NOTE OFFERING:**

 

On April 22, 1998, the Company completed the acquisition of MonseyBakor and its subsidiaries, which are engaged in the distribution andmanufacture of roof coatings, adhesives and membranes, and waterproofing andair barrier systems, for residential and commercial applications. The cashpurchase price was $42,750,000 with an additional $3,227,000 paid at closing tocertain selling shareholders of Monsey Bakor for noncompetition agreements. Aselling shareholder also purchased 22,500 shares of redeemable convertiblepreferred stock of the Company for $600,000 in cash as more fully discussed inNote 12. The acquisition was accounted for using the purchase method ofaccounting.

 

Concurrent with the Monsey Bakor acquisition, the Company conducted asenior note offering (the “Offering”) in the aggregate principal amount of$85,000,000 as more fully discussed in Note 5.

 

**3. INVENTORIES:**

 

Inventories consist of the following:

 
|                               |   | **December 31,** |       |
|------------------------------------|--------|------------------|------------|
|                               |   | **2001**         |       | **2002** |   |
| Raw materials                      |   | $                | 6,811,265  |   | $ | 8,123,137 |   |
| Finished goods                     |   | 6,699,585        |       | 8,036,472 |   |
| Total gross inventory              |   | 13,510,850       |       | 16,159,609 |   |
| Reserve for slow moving  inventory |   | (250,000         | )          | (250,000 | ) |
|                               |   | $                | 13,260,850 |   | $ | 15,909,609 |   |

 

48

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**4. PROPERTY ANDEQUIPMENT, NET:**

 

Property and equipment consist of the following:

 
|                                             |   | **December 31,** |       |
|--------------------------------------------------|--------|------------------|------------|
|                                             |   | **2001**         |       | **2002** |   |
| Buildings                                        |   | $                | 14,707,437 |   | $ | 14,478,008 |   |
| Machinery and equipment                          |   | 27,935,954       |       | 29,024,564 |   |
| Office furniture and equipment                   |   | 8,204,948        |       | 8,713,856 |   |
| Automotive equipment                             |   | 1,207,485        |       | 1,087,381 |   |
| Leasehold improvements                           |   | 2,938,283        |       | 3,003,151 |   |
| Other assets                                     |   | 486,535          |       | 510,346 |   |
|                                             |   |             |       |   |   |
|                                             |   | 55,480,642       |       | 56,817,306 |   |
| Less, accumulated depreciation  and amortization |   | (29,025,424      | )          | (32,965,029 | ) |
|                                             |   |             |       |   |   |
|                                             |   | 26,455,218       |       | 23,852,277 |   |
| Land                                             |   | 3,219,585        |       | 3,180,755 |   |
| Construction-in-progress                         |   | 602,057          |       | 579,785 |   |
|                                             |   | $                | 30,276,860 |   | $ | 27,612,817 |   |

 

**5. LONG–TERM DEBT ANDCREDIT FACILITIES:**

 

On April 22, 1998, the Company privately issued and sold $85,000,000 ofsenior notes (the “Senior Notes”) due in 2008. Interest on the Senior Notes ispayable semi–annually at 10% per annum. In October 1998, the Company completedan exchange offer for all of the Senior Notes with identical terms in allmaterial respects to the original private issue. The proceeds from the offeringwere used to (i) retire existing Company bank debt, (ii) retire existingCompany subordinated shareholder debt, (iii) acquire Monsey Bakor, (iv) retirea substantial portion of Monsey Bakor’s then-existing bank debt with (v) theremainder providing additional working capital.

 

Long-term debt and credit facilities consist of the following:

 
|                                                                                                                                                                               |   | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                                               |   | **2001**         |       | **2002** |   |
| 10.0% Series B Senior Notes  due April 2008                                                                                                                                        |   | $                | 81,250,000 |   | $ | 81,250,000 |   |
| Line of credit borrowings, at  the bank’s prime interest rate (4.75% at December 31, 2001 4.25% at December  31, 2002)                                                        |   | 6,003,444        |       | 2,978,168 |   |
| Canadian bank line of credit  borrowings, interest rate charged at prime plus 0.5% (4.5% at December 31,  2001)                                                                    |   | 125,075          |       | — |   |
| Term note payable to third  party, with interest at 8.5% at December 31, 2001 and 2002, principal and  interest payable monthly in installments of $4,848, due in fiscal year 2007 |   | 418,634          |       | 395,138 |   |
| Term note payable to bank,  with interest at 4.75% at December 31, 2001 and 4.25% at December 31, 2002,  principal payable monthly in installments of $50,000 beginning March 2002 |   | 3,500,000        |       | 3,000,000 |   |
|                                                                                                                                                                               |   | 91,297,153       |       | 87,623,306 |   |
| Less, current maturities                                                                                                                                                           |   | (6,652,014       | )          | (3,603,740 | ) |
|                                                                                                                                                                               |   | $                | 84,645,139 |   | $ | 84,019,566 |   |

 

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The Company’s Senior Notes are guaranteed by the Company’s UnitedStates subsidiary, Kimberton Enterprises, Inc. The guarantee obligations of theSubsidiary Guarantor are full, unconditional and joint and several. See Note 15for the Guarantor Condensed Consolidating Financial Statements. The notespayable agreement limits the Company’s ability to make dividend payments andincur additional debt.

 

In 1999, the Company repurchased and retired $3.6 million of the SeniorNotes which resulted in a gain of $0.6 million, net of income taxes. In 2001,the Company repurchased and retired $150,000 of the Senior Notes at face valuewhich resulted in no gain or loss.  Thebond indenture includes, among other restrictions, certain restrictions on theincurrence of additional debt.

 

In August 2001, the Company entered into a replacement credit facilityagreement with two new financial institutions and received funding. Thereplacement credit facility provides for a $25 million revolving creditfacility and a $10 million term loan. Upon closing, $3.5 million of the termloan was funded. The replacement facility expires in August 2006 and iscollateralized by substantially all of the Company’s United States assets.Balances outstanding under the revolving line of credit and the term loan were$3.0 million each at December 31, 2002.  The remaining availability ofcredit under the revolver was $11.5 million at December 31, 2002. Term loan andline of credit borrowings both bear interest at the prime rate with an optionto borrow based on the LIBOR rate.

 

The Company also maintains a credit line with a Canadian bank.  There was no balance outstanding under thisline at December 31, 2002. Availability under this facility at December 31,2002 was $3.5 million. There are certain financial covenants associated withthis credit line, including minimum interest coverage and working capitalratios, and maximum tangible net worth and debt to net worth measures.  The Company was in compliance with all debtcovenants as of year end.

 

The following are future maturities of long–term debt and creditfacilities for each of the next five years ending December 31 and totalthereafter:

 
| 2003       |   | $          | 3,603,740  |   |
|------------|--------|------------|------------|--------|
| 2004       |   | 627,833    |       |
| 2005       |   | 630,293    |       |
| 2006       |   | 632,970    |       |
| 2007       |   | 878,470    |       |
| Thereafter |   | 81,250,000 |       |
| Total      |   | $          | 87,623,306 |   |

 

The fair value of the Company’s debt is calculated based on theestimated market value of the Senior Notes and the discounted amount of futurecash flows of the remaining debt obligations using the current rates offered tothe Company for debts of the same remaining maturities and market values.  At year end 2001 and 2002, the estimatedfair value of the Company’s total debt, including short term borrowings, was$47.2 million and $62.5 million, respectively.

 

**6. INCOME TAXES:**

 

The significant components of the benefit for income taxes for theyears ended December 31, 2000, 2001 and 2002 are as follows:

 
|      |   | **2000**   |       | **2001** |   | **2002**   |    |
|-----------|--------|------------|------------|----------|--------|------------|---------|
| Current:  |   |       |       |     |   |       |    |
| State     |   | —     |       | —   |   | $          | 269,780 |   |
| Foreign   |   | $          | 650,918    |     | $      | (770,293   | )       |   | 376,184 |   |
|      |   | 650,918    |       | (770,293 | )      | 645,964    |    |
| Deferred: |   |       |       |     |   |       |    |
| Federal   |   | (4,754,626 | )          | (485,238 | )      | (656,760   | )       |
| State     |   | (271,295   | )          | (378,275 | )      | (202,012   | )       |
| Foreign   |   | (220,910   | )          | —   |   | —     |    |
|      |   | (5,246,831 | )          | (863,513 | )      | (858,772   | )       |
|      |   | $          | (4,595,913 | )        | $      | (1,633,806 | )       | $ | (212,808 | ) |

 

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The Company’seffective tax rate differs from the federal statutory tax rate for the yearsended December 31, 2000, 2001 and 2002 as follows:

 
|                                                          |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Provision for income taxes at  the federal statutory tax rate |   | (34      | )%     | (34      | )%     | (34      | )%     |
| State taxes net of federal tax  benefit                       |   | (3       | )      | (3       | )      | (6       | )      |
| Foreign income taxes in excess  of U.S. statutory rate        |   | 1        |   | 3        |   | —   |   |
| Prior year net operating loss  adjustment                     |   | (8       | )      | 8        |   | (4       | )      |
| Nondeductible intangibles                                     |   | 5        |   | 8        |   | 44       |   |
| Nondeductible life insurance                                  |   | 1        |   | (1       | )      | —   |   |
| Nondeductible business  expenses                              |   | —   |   | 1        |   | —   |   |
| Other, net                                                    |   | (3       | )      | (5       | )      | (1       | )      |
|                                                          |   | (41      | )%     | (23      | )%     | (1       | )%     |

 

The Company’s Canadian operation’s income (loss) before income taxes,net of cumulative change in accounting principle, was ($1,499,096), $1,704,589and ($1,272,779) for the years ended December 31, 2000, 2001 and 2002,respectively.

 

The significant components of the Company’s deferred tax assets andliabilities as of December 31, 2001 and 2002 are as follows:

 
|                                                    |   | **2001**   |      | **2002**   |   |
|---------------------------------------------------------|--------|------------|-----------|------------|--------|
| Deferred tax assets:                                    |   |       |      |       |   |
| Environmental reserve                                   |   | $          | 1,388,506 |       | $      | 1,361,033 |   |
| Allowances and reserves  deductible in the future       |   | 1,091,955  |      | 1,138,867  |   |
| Inventory capitalization                                |   | 87,978     |      | 101,937    |   |
| Deferred revenue                                        |   | 999,217    |      | 1,016,363  |   |
| Net operating loss                                      |   | 3,040,340  |      | 1,618,212  |   |
| Other accruals                                          |   | 528,139    |      | 1,348,772  |   |
|                                                    |   |       |      |       |   |
| Deferred tax assets                                     |   | 7,136,135  |      | 6,585,184  |   |
|                                                    |   |       |      |       |   |
| Deferred tax liabilities:                               |   |       |      |       |   |
| Depreciation                                            |   | (1,565,609 | )         | (975,978   | )      |
| Deferred gain on discharge of  liability                |   | (1,582,985 | )         | (1,614,842 | )      |
| Amortization of acquired  intangibles and asset step-up |   | (3,520,430 | )         | (3,256,536 | )      |
| State tax benefit                                       |   | —     |      | (51,756    | )      |
|                                                    |   |       |      |       |   |
| Deferred tax liabilities                                |   | (6,669,024 | )         | (5,899,112 | )      |
|                                                    |   |       |      |       |   |
| Net deferred tax assets                                 |   | $          | 467,111   |       | $      | 686,072 |   |

 

**7. COMMITMENTS ANDCONTINGENCIES:**

 

The Company conducts certain operations out of leased facilities,including the corporate office and divisional warehouses. The lease terms rangefrom 1 to 6 years and begin to expire in 2002. Certain of the Company’soperating lease agreements provide for escalation of payments, which are basedon fluctuations of certain published cost-of-living indices. The Company alsoleases certain land, buildings and equipment from related parties. The variousleases also contain certain renewal options.

 

51

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Total rent expense was, $1,721,660, $1,722,051 and $1,991,379 for theyears ended December 31, 2000, 2001 and 2002, respectively. Included in rentexpense is rent paid to related parties of $771,433, $789,543 and $760,772 forthe years ended December 31, 2000, 2001 and 2002, respectively The minimumrental commitments for land, buildings and equipment under all noncancelableoperating leases, with lease terms in excess of one year, are as follows:

 
| 2003       |   | $         | 1,363,399 |   |
|------------|--------|-----------|-----------|--------|
| 2004       |   | 817,575   |      |
| 2005       |   | 581,507   |      |
| 2006       |   | 470,982   |      |
| 2007       |   | 273,660   |      |
| Thereafter |   | 2,205,109 |      |
|       |   | $         | 5,712,232 |   |

 

Included in the annual minimum rental commitments are operating leasepayments due to related parties of $734,851 in 2003, $433,693 in 2004, $424,904  in 2005, $404,024 in 2006, $264,613 in 2007and $2,205,109 thereafter.

 

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

 

**8. SUPPLEMENTALDISCLOSURE OF CASH FLOW INFORMATION:**

 
|                                                               |   | **2000** |      | **2001** |   | **2002**   |   |
|--------------------------------------------------------------------|--------|----------|-----------|----------|--------|------------|--------|
| Cash paid during the year for:                                     |   |     |      |     |   |       |   |
| Interest                                                           |   | $        | 9,617,073 |     | $      | 9,768,530  |   | $ | 8,877,162 |   |
| Income taxes paid                                                  |   | 889,820  |      | 785,574  |   | 256,989    |   |
| Income taxes recovered                                             |   | —   |      | —   |   | (1,925,358 | )      |
| Non-cash transactions:                                             |   |     |      |     |   |       |   |
| Note receivable from sale of  assets                               |   | 123,000  |      | —   |   | 400,000    |   |
| Note receivable forgiven                                           |   | —   |      | 501,000  |   | —     |   |
| Note receivable exchanged for  interest in Executive Deferred Plan |   | —   |      | 253,544  |   | —     |   |
|                                                                    |        |          |           |          |        |            |        |  |  |  |

 

**9. PROFIT-SHARING ANDPENSION PLAN:**

 

The Company sponsors a deferred qualified profit–sharing plan with a401(k) feature covering salaried and hourly employees of Henry Company and itsaffiliates, other than union employees, who have completed six months ofservice. Contributions made to the profit–sharing plan by the Company are basedon the Company’s performance and are at the discretion of the Board of Directors. The Company has not made any contributions to the profit-sharing plan duringthe years 2000 through 2002. In 2000 and 2001, participants in the 401(k)Plan were permitted to contribute up to 15% of their annual compensation to the401(k) Plan through salary deferral up to a maximum of $10,500 of aparticipant’s annual compensation. Commencing in 2002, participants may contribute up to 60% of theirannual compensation up to a maximum $11,000; additionallyparticipants over age 50 may make catch-up contributions up to maximum$1,000.  In 1999, the 401(k) plan was amended to include a discretionaryCompany matching contribution to eligible participants.  For 2000, 2001, and 2002, participantcontributions were matched at the rate of $.50 for each dollar up to 4% of theparticipants’ compensation. Total Company matching contributions for yearsending December 31, 2000, 2001 and 2002 were $211,698, $165,314, and$249,581, respectively.

 

Hourly employees at the Huntington Park, Kimberton and Rock Hill facilitiesare covered by multi-employer union plans to which the Company makes periodiccontributions as determined by collective bargaining agreements. The Company isalso subject to additional charges as determined by the plans’ trustees duringthe term of the agreement to maintain the current level of health and welfarebenefits. The information with respect to the plans’ net assets and actuarialpresent value of

 

52

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accumulated plan benefits arenot determinable due to the nature of the plans.   Prior to 2002, eligible U.S. hourly employees at the othernon-union facilities participated in a noncontributory defined pensionplan.  Company contributions were basedupon predetermined hourly rates.  Thecombined costs incurred for both plans during the years ended December 31,2000, 2001 and 2002 were $313,905, $396,912, $151,018, respectively.  Beginning in 2002, the non-union hourlyemployees became participants in the deferred qualified profit-sharing planwith 401(k) feature noted above.

 

 

**10. RELATED PARTIES:**

 

The Company leases its Huntington Park headquarters from a family trustand living trust for which Warner W. Henry is the trustee pursuant to threeseparate real property leases. These leases expire in 2006 and 2016. The totalrent paid in 2002 and 2001 for the Huntington Park leases was approximately$424,900 each year.  The Companybelieves that the rent paid under the above leases represent substantially fairmarket value and that the other terms and conditions of the leases arecommercially reasonable.

 

The Company leased additional property at its Huntington Parkheadquarters from Alamo Development Company until February, 2003 at which timeit purchased the property for $773,362.  In 2002, theCompany paid rent of $39,791 pursuant to this lease which was subject to annualadjustments to reflect changes in the Bank of America prime rate. Frederick H. Muhs, a director of the Company, isa shareholder of Alamo Development Company along with certain other members ofhis family. At the same time as the purchase of the Huntington Parkproperty, the Company sold property located in Kimberton, Pennsylvania to AlamoDevelopment Company for $750,000.  At one time this property wasutilized by the Company for its own operations, but more recently it hasbeen leased to two separate third parties for their own use. TheCompany believes that both the purchase of the Huntington Park propertyand the sale of the Kimberton property were completed at their fair marketvalue.

 

Henry Company performs certain administrative services for anaffiliate, Henry II Company a California corporation, pursuant to anadministrative services agreement that provides for payments from Henry IICompany to Henry Company for such services. These payments totaled $0.8 millionin 2000 and 2001, and $0.4 million in 2002. The administrative servicesfee was reduced in 2002 as certain administrative functions were no longerperformed by the Company for Henry II.  Henry II Company’s shareholders are Warner W. Henry, Carol Henry, andcertain trusts for the benefit of their children.

 

At December 31, 1997, Henry Compny received a note from Henry IICompany for $1.9 million representing the purchase price for its interest incertain real property. Such real property related solely to the business ofHenry II, Inc. and had a net book value of $1.9 million. The note bearsinterest at the prime rate, and is repayable in a lump sum at any time up toDecember 31, 2003. The principal balance of such note was $1.9 million atDecember 31, 2001 and 2002.

 

In addition, at December 31, 2002, Henry II Company owed $0.3 millionto Henry Company, representing past advances made on behalf of Henry II, Inc.The note evidencing this debt does not bear interest and is payable upondemand.

 

Joseph T. Mooney, Jr. is a Director and alsoan employee of the Company and receives an annual salary.  Mr. Mooney recieved $180,250 in salary andbonus for each of fiscal years 2002 and 2001, and $236,672 for fiscal year2000.

 

Henry Company receives business and financial consulting services fromThe Muhs Company, Inc., of which Frederick H. Muhs, a director of the Company,is the President and controlling shareholder. Henry Company paid $75,000 forthese services in 2000 and 2001 and $100,000 in 2002. See “ExecutiveCompensation.”

 

Paul H. Beemer is compensated for consulting advisory services pursuantto a consulting agreement with the Company with compensation established at$100,000 per year. The consulting agreement contains a noncompetition clauserestricting Mr. Beemer’s employment or service with a business entity thatcompetes with the Company in its present or future marketing areas. Mr.Beemer’s consulting agreement expires on June 30, 2003. In fiscal years 2002,2001 and 2000, Mr. Beemer received $100,000 in compensation under hisconsulting agreement.

 

Henry Company receives business and financial consulting services fromTerrill M. Gloege, a director of the Company, who is also as the Trustee of theWilliam Warner Henry, Catherine Anne Henry, and Michael Andrew Henry Trustsestablished under the Henry Trust dated 9/17/93. Henry Company paid $30,000 for these services in2002 and $10,000 in 2001.

 

In connection with the Monsey Bakor acquisition, the Company sold22,500 shares of redeemable convertible preferred stock in the Company toJoseph T. Mooney, Jr., a director of the Company, for $600,000. The Company isobligated, upon the exercise of Mr. Mooney’s put option, to redeem the stockfor cash in annual amounts of $500,000 beginning in 2004 and

 

53

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aggregating $3,000,000, or for$3,000,000 upon the death of Mr. Mooney. The shares are convertible into sharesof Common Stock.

 

The Company is a party to employment and consulting agreements withcertain directors and officers of the Company. See “ExecutiveCompensation-Employment Agreements and Compensation Arrangements.”

 

 

**11. CAPITAL STOCK:**

 

On April 21, 1998, Warner Development Company of Texas (“WarnerDevelopment”) was merged into the Company. The outstanding shares of WarnerDevelopment were canceled in the merger. For periods prior to this date, thefinancial results of the Company and Warner Development were presented on acombined basis as both entities were under common control with identicalmanagement and shareholder ownership and interest.

 

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

 

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

 

As of December 31, 2001 and 2002, common stock is composed of thefollowing:

 
|                                                                                                                                             |   | **2001**  |      | **2002**  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| 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 |      | 2,000,000 |   |
| 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   |   |
|                                                                                                                                             |   | $         | 4,691,080 |      | $      | 4,691,080 |   |

 

On October 1, 1997, Henry Company granted the Warner W. Henry LivingTrust warrants to purchase an aggregate of 400,000 shares of Henry Companycapital stock, consisting of 12,000 shares of Class A common stock and 388,000shares of common stock (the “Warrants”). The Warrants expire on September 30,2012 and may be exercised in whole or in part at variable and increasingexercise prices over the term of the warrants. The current and maximum exerciseprices for both Class A common stock and common stock are $15.53 and $38.82 pershare, respectively.

 

The warrants have an initial exercise price that exceeds the fair valueof the capital stock at the date of grant. The grant date present value of eachwarrant is estimated at $114 or an aggregate of $44,000 using the Black-Scholespricing model, using the following assumptions: risk-free interest rate at6.0%; expected warrant life of 15 years; volatility of 20.0%; forfeiture ratezero (0); no expected dividends; and no adjustments for nontransferability. Asof December 31, 2002, no warrants have been exercised.

 

**12. REDEEMABLECONVERTIBLE PREFERRED STOCK:**

 

In connection with the Monsey Bakor acquisition, the Company sold22,500 shares of redeemable convertible preferred stock in the Company toJoseph T. Mooney, Jr. for $600,000. The Company is obligated, upon the exerciseof 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 uponthe death of Mr. Mooney. The shares are convertible into shares of CommonStock. The fair value recorded for the issuance of the preferred stockrepresents the estimated present value of the redemption payments.

 

The carrying amount of the Preferred Stock is being increased byperiodic accretions so that the amount reflected in the balance sheet willequal the mandatory redemption amount at the redemption date.

 

54

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**13. RESTRUCTURINGCHARGES**

 

TheCompany recorded $735,127 and $568,808 for restructuring charges for yearsended December 31, 2000 and 2001, respectively.  The charges pertain toplant closings and the reorganization or elimination of certain administrativeand selling functions.  The charges represent severance and otherpersonnel payments as well as other costs related to the plant closures andstreamlining of operations associated with the implementation of cost reductioninitiatives noted above.  As of December 31, 2002, the restructuring wascomplete, and therefore no accruals were necessary.

 

**14. SEGMENT ANDGEOGRAPHIC INFORMATION:**

 

During 1999, the Company adopted SFAS No. 131, “Disclosures AboutSegments of an Enterprise and Related Information”, which requires the Companyto report information about its operating segments using a management approach.

 

The Company manages its business through two reportable segments, orprimary business units with separate management teams, infrastructures,marketing strategies and customers. The Company’s primary business units are:the Henry Building Products Division, which develops, manufactures and marketsroof and driveway coatings and paving products, industrial emulsions, airbarriers, 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 asthose described in Note 1 of the Notes to Consolidated Financial Statements.The Company evaluates the performance of its operating segments based on netsales, gross profit and operating income. Intersegment sales and transfers arenot significant.

 

Summarized financial information concerning the Company’s reportablesegments is shown below.

 
|                                                 |   | **Henry Building  Products  Division** |        | **Resin  Technology  Division** |   | **Total**   |    |   |
|------------------------------------------------------|--------|----------------------------------------|-------------|---------------------------------|--------|-------------|---------|--------|
| 2002                                                 |   |                                   |        |                            |   |        |    |   |
| Net sales                                            |   | $                                      | 177,453,819 |                            | $      | 23,353,009  |    | $      | 200,806,828 |   |   |
| Gross profit                                         |   | 57,544,293                             |        | 5,008,145                       |   | 62,552,438  |    |   |
| Operating income                                     |   | 9,766,842                              |        | 921,135                         |   | 10,687,977  |    |   |
| Depreciation and amortization                        |   | 5,056,396                              |        | 168,705                         |   | 5,225,101   |    |   |
| Cumulative effect of change in  accounting principle |   | (19,686,055                            | )      | —                          |   | (19,686,055 | )  |
| Total assets                                         |   | 76,435,507                             |        | 15,199,978                      |   | 91,635,485  |    |   |
| Capital expenditures                                 |   | 2,079,395                              |        | 126,754                         |   | 2,206,149   |    |   |
|                                                 |   |                                   |        |                            |   |        |    |   |
| 2001                                                 |   |                                   |        |                            |   |        |    |   |
| Net sales                                            |   | $                                      | 169,715,332 |                            | $      | 22,132,860  |    | $      | 191,848,192 |   |   |
| Gross profit                                         |   | 48,868,768                             |        | 4,506,093                       |   | 53,374,861  |    |   |
| Operating income                                     |   | 2,116,708                              |        | 779,839                         |   | 2,896,547   |    |   |
| Depreciation and amortization                        |   | 7,126,923                              |        | 187,725                         |   | 7,314,648   |    |   |
| Total assets                                         |   | 97,469,792                             |        | 13,429,469                      |   | 110,899,261 |    |   |
| Capital expenditures                                 |   | 1,232,511                              |        | 125,495                         |   | 1,358,006   |    |   |
|                                                 |   |                                   |        |                            |   |        |    |   |
| 2000                                                 |   |                                   |        |                            |   |        |    |   |
| Net sales                                            |   | $                                      | 169,479,365 |                            | $      | 22,033,865  |    | $      | 191,513,230 |   |   |
| Gross profit                                         |   | 44,330,136                             |        | 3,916,938                       |   | 48,247,074  |    |   |
| Operating income (loss)                              |   | (2,054,982                             | )           | 422,296                         |   | (1,632,686  | )       |   |
| Depreciation and amortization                        |   | 7,424,855                              |        | 166,043                         |   | 7,590,898   |    |   |
| Total assets                                         |   | 112,346,023                            |        | 12,941,546                      |   | 125,287,569 |    |   |
| Capital expenditures                                 |   | 2,755,164                              |        | 297,286                         |   | 3,052,450   |    |   |

 

55

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The Company isdomiciled in the United States with foreign operationsbased in Canada.  Summarized geographic data related to the Company’soperations for 2000, 2001 and 2002 are as follows:

 
|          |   | **Net Sales** |        | **Long-Lived  Assets** |   |
|---------------|--------|---------------|-------------|------------------------|--------|
| 2002          |   |          |        |                   |   |
| United States |   | $             | 166,017,612 |                   | $      | 36,674,077 |   |
| Canada        |   | 34,789,216    |        | 5,250,788              |   |
| Total         |   | $             | 200,806,828 |                   | $      | 41,924,865 |   |
| 2001          |   |          |        |                   |   |
| United States |   | $             | 158,919,033 |                   | $      | 59,583,273 |   |
| Canada        |   | 32,929,159    |        | 7,515,720              |   |
| Total         |   | $             | 191,848,192 |                   | $      | 67,098,993 |   |
| 2000          |   |          |        |                   |   |
| United States |   | $             | 158,691,494 |                   | $      | 62,725,434 |   |
| Canada        |   | 32,821,736    |        | 8,478,534              |   |
| Total         |   | $             | 191,513,230 |                   | $      | 71,203,968 |   |

 

**15. GUARANTORCONDENSED CONSOLIDATING FINANCIAL STATEMENTS:**

 

The Company’s United States subsidiary, Kimberton Enterprises, Inc.(the “Guarantor Subsidiary”) is an unconditional guarantor, on a full, jointand several basis, of the Company’s debt represented by the Senior Notes. TheCompany’s Canadian subsidiaries are not guarantors of the Senior Notes.

 

Condensed consolidating financial statements of the Guarantor arecombined with the Henry Company and are presented below. Separate financialstatements of the Guarantor Subsidiary are not presented and the GuarantorSubsidiary is not filing separate reports under the Exchange Act because theSubsidiary Guarantor has fully and unconditionally guaranteed the Senior Noteson a full, joint and several basis under the guarantees and management hasdetermined that separate financial statements and other disclosures concerningthe Guarantor Subsidiary are not material to investors.

 

56

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**CONSOLIDATINGBALANCE SHEET**

**AS OF DECEMBER 31,2002**

 
|                                                                                             |   | **Henry Company  (Parent Corporation)  and  Guarantor Subsidiary** |       | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination  Entries** |       | **Consolidated Total** |        |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|------------|--------------------------------|--------|----------------------------------------|------------|------------------------|-------------|
| **ASSETS:**                                                                                      |   |                                                               |       |                           |   |                                   |       |                   |        |
| Current assets:                                                                                  |   |                                                               |       |                           |   |                                   |       |                   |        |
| Cash and cash equivalents                                                                        |   | $                                                                  | 232,030    |                           | $      | 781,072                                |       | —                 |        | $ | 1,013,102 |   |
| Accounts receivable, net                                                                         |   | 25,020,552                                                         |       | 3,070,661                      |   | —                                 |       | 28,091,213             |        |
| Inventories, net                                                                                 |   | 11,897,343                                                         |       | 4,012,266                      |   | —                                 |       | 15,909,609             |        |
| Receivables from affiliate                                                                       |   | 5,413,959                                                          |       | 2,180,799                      |   | $                                      | (7,313,396 | )                      | 281,362     |   |
| Notes receivable                                                                                 |   | 29,144                                                             |       | —                         |   | —                                 |       | 29,144                 |        |
| Prepaid expenses and other  current assets                                                       |   | 2,064,620                                                          |       | 199,785                        |   | —                                 |       | 2,264,405              |        |
| Income tax receivable                                                                            |   | 595,564                                                            |       | 149,955                        |   | —                                 |       | 745,519                |        |
| Deferred income taxes                                                                            |   | 1,298,309                                                          |       | 77,957                         |   | —                                 |       | 1,376,266              |        |
| Total current assets                                                                             |   | 46,551,521                                                         |       | 10,472,495                     |   | (7,313,396                             | )          | 49,710,620             |        |
| Property and equipment, net                                                                      |   | 22,362,029                                                         |       | 5,250,788                      |   | —                                 |       | 27,612,817             |        |
| Investment in subsidiaries                                                                       |   | 8,564,729                                                          |       | —                         |   | (8,564,729                             | )          | —                 |        |
| Cash surrender value of life  insurance, net                                                     |   | 2,218,204                                                          |       | —                         |   | —                                 |       | 2,218,204              |        |
| Other intangibles                                                                                |   | 3,763,007                                                          |       | —                         |   | —                                 |       | 3,763,007              |        |
| Notes receivable                                                                                 |   | 460,451                                                            |       | —                         |   | —                                 |       | 460,451                |        |
| Note receivable from affiliate                                                                   |   | 1,863,072                                                          |       | —                         |   | —                                 |       | 1,863,072              |        |
| Deferred income taxes                                                                            |   | 5,208,918                                                          |       | —                         |   | —                                 |       | 5,208,918              |        |
| Other assets                                                                                     |   | 798,396                                                            |       | —                         |   | —                                 |       | 798,396                |        |
|                                                                                             |   |                                                               |       |                           |   |                                   |       |                   |        |
| Total assets                                                                                     |   | $                                                                  | 91,790,327 |                           | $      | 15,723,283                             |       | $                      | (15,878,125 | ) | $ | 91,635,485 |   |
|                                                                                             |   |                                                               |       |                           |   |                                   |       |                   |        |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY(DEFICIT):** |   |                                                               |       |                           |   |                                   |       |                   |        |
| Current liabilities:                                                                             |   |                                                               |       |                           |   |                                   |       |                   |        |
| Accounts payable                                                                                 |   | $                                                                  | 4,218,189  |                           | $      | 1,313,826                              |       | —                 |        | $ | 5,532,015 |   |
| Accrued expenses                                                                                 |   | 12,168,592                                                         |       | 1,477,760                      |   | —                                 |       | 13,646,352             |        |
| Intercompany payables                                                                            |   | 2,180,799                                                          |       | 5,132,597                      |   | $                                      | (7,313,396 | )                      | —      |   |
| Income taxes payables                                                                            |   | —                                                             |       | 342,252                        |   | —                                 |       | 342,252                |        |
| Notes payable, current portion                                                                   |   | 625,572                                                            |       | —                         |   | —                                 |       | 625,572                |        |
| Borrowings under line of  credit                                                                 |   | 2,978,168                                                          |       | —                         |   | —                                 |       | 2,978,168              |        |
| Total current liabilities                                                                        |   | 22,171,320                                                         |       | 8,266,435                      |   | (7,313,396                             | )          | 23,124,359             |        |
| Notes payable                                                                                    |   | 2,769,566                                                          |       | —                         |   | —                                 |       | 2,769,566              |        |
| Environmental reserve                                                                            |   | 3,177,015                                                          |       | —                         |   | —                                 |       | 3,177,015              |        |
| Deferred income taxes                                                                            |   | 4,284,269                                                          |       | 1,614,843                      |   | —                                 |       | 5,899,112              |        |
| Deferred warranty revenue                                                                        |   | 2,372,460                                                          |       | 270,941                        |   | —                                 |       | 2,643,401              |        |
| Deferred compensation                                                                            |   | 1,358,624                                                          |       | —                         |   | —                                 |       | 1,358,624              |        |
| Senior notes                                                                                     |   | 81,250,000                                                         |       | —                         |   | —                                 |       | 81,250,000             |        |
| Total liabilities                                                                                |   | 117,383,254                                                        |       | 10,152,219                     |   | (7,313,396                             | )          | 120,222,077            |        |
| Redeemable convertible  preferred stock                                                          |   | 2,264,000                                                          |       | —                         |   | —                                 |       | 2,264,000              |        |
| Shareholders’ equity  (deficit):                                                            |   |                                                               |       |                           |   |                                   |       |                   |        |
| Common stock                                                                                     |   | 4,691,080                                                          |       | 7,194,402                      |   | (7,194,402                             | )          | 4,691,080              |        |
| Additional paid-in capital                                                                       |   | 2,019,741                                                          |       | —                         |   | —                                 |       | 2,019,741              |        |
| Cumulative translation adjustment                                                                |   | —                                                             |       | (1,514,609                     | )      | 588,000                                |       | (926,609               | )           |
| Accumulated deficit                                                                              |   | (34,567,748                                                        | )          | (108,729                       | )      | (1,958,327                             | )          | (36,634,804            | )           |
| Total shareholders’ equity  (deficit)                                                       |   | (27,856,927                                                        | )          | 5,571,064                      |   | (8,564,729                             | )          | (30,850,592            | )           |
| Total liabilities and  shareholders’ equity (deficit)                                       |   | $                                                                  | 91,790,327 |                           | $      | 15,723,283                             |       | $                      | (15,878,125 | ) | $ | 91,635,485 |   |

 

57

----

 

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**FORTHE YEAR ENDED DECEMBER 31, 2002**

 
|                                                                                         |   | **Henry Company****(Parent  Corporation) and  Guarantor  Subsidiary** |        | **Nonguarantor  Subsidiaries** |   | **Consolidated   Elimination Entries** |   | **Consolidated Total** |       |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|-------------|--------------------------------|--------|----------------------------------------|--------|------------------------|------------|
| Net sales                                                                                    |   | $                                                                     | 175,851,784 |                           | $      | 34,789,216                             |   | $                      | (9,834,172 | ) | $ | 200,806,828 |   |
| Cost of sales                                                                                |   | 121,422,697                                                           |        | 26,665,865                     |   | (9,834,172                             | )      | 138,254,390            |       |
| Gross profit                                                                                 |   | 54,429,087                                                            |        | 8,123,351                      |   | —                                 |   | 62,552,438             |       |
| Operating expenses:                                                                          |   |                                                                  |        |                           |   |                                   |   |                   |       |
| Selling, general and  administrative                                                         |   | 44,168,119                                                            |        | 6,953,813                      |   | —                                 |   | 51,121,932             |       |
| Amortization of intangibles                                                                  |   | 742,529                                                               |        | —                         |   | —                                 |   | 742,529                |       |
| Operating income                                                                             |   | 9,518,439                                                             |        | 1,169,538                      |   | —                                 |   | 10,687,977             |       |
| Other expense (income):                                                                      |   |                                                                  |        |                           |   |                                   |   |                   |       |
| Interest expense                                                                             |   | 9,496,447                                                             |        | 199,479                        |   | —                                 |   | 9,695,926              |       |
| Interest and other income, net                                                               |   | (107,321                                                              | )           | —                         |   | —                                 |   | (107,321               | )          |
| Income before provision  (benefit) for income taxes and change in  accounting principle |   | 129,313                                                               |        | 970,059                        |   | —                                 |   | 1,099,372              |       |
| Provision (benefit) for income  taxes                                                        |   | (588,992                                                              | )           | 376,184                        |   | —                                 |   | (212,808               | )          |
| Net income before cumulative  effect of change in accounting principle                       |   | 718,305                                                               |        | 593,875                        |   | —                                 |   | 1,312,180              |       |
| Cumulative effect of change in  accounting principle                                         |   | (17,443,217                                                           | )           | (2,242,838                     | )      | —                                 |   | (19,686,055            | )          |
| Net loss                                                                                     |   | $                                                                     | (16,724,912 | )                              | $      | (1,648,963                             | )      | —                 |       | $ | (18,373,875 | ) |
|                                                                                              |        |                                                                       |             |                                |        |                                        |        |                        |            |  |  |  |  |

 

58

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE YEAR ENDED DECEMBER 31, 2002**

 
|                                                             |   | **Henry Company  (Parent  Corporation) and  Guarantor Subsidiary** |      | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination Entries** |   | **Consolidated Total** |   |
|------------------------------------------------------------------|--------|--------------------------------------------------------------------|-----------|--------------------------------|--------|---------------------------------------|--------|------------------------|--------|
| Net cash provided by operating  activities                       |   | $                                                                  | 5,378,159 |                           | $      | 915,416                               |   | —                 |   | $ | 6,293,575 |   |
| Cash flows from investing  activities:                           |   |                                                               |      |                           |   |                                  |   |                   |   |
| Capital expenditures                                             |   | (1,748,745                                                         | )         | (457,404                       | )      | —                                |   | (2,206,149             | )      |
| Proceeds from the disposal of  property and equipment            |   | 120,969                                                            |      | 3,518                          |   | —                                |   | 124,487                |   |
| Net cash used in  investing  activities                     |   | (1,627,776                                                         | )         | (453,886                       | )      | —                                |   | (2,081,662             | )      |
| Cash flows from financing  activities:                           |   |                                                               |      |                           |   |                                  |   |                   |   |
| Net borrowings under  line-of-credit agreements                  |   | (3,025,276                                                         | )         | (125,075                       | )      | —                                |   | (3,150,351             | )      |
| Repayments under notes payable  agreements                       |   | (623,496                                                           | )         | —                         |   | —                                |   | (623,496               | )      |
| Borrowings under notes payable  agreements                       |   | 100,000                                                            |      | —                         |   | —                                |   | 100,000                |   |
| Decrease in book overdraft                                       |   | (1,389,858                                                         | )         | —                         |   | —                                |   | (1,389,858             | )      |
| Cash surrender value life  insurance                             |   | 1,379,763                                                          |      | —                         |   | —                                |   | 1,379,763              |   |
| Net cash used in financing  activities                           |   | (3,558,867                                                         | )         | (125,075                       | )      | —                                |   | (3,683,942             | )      |
| Effect of changes in exchange  rate on cash and cash equivalents |   | —                                                             |      | 59,436                         |   | —                                |   | 59,436                 |   |
| Net increase in cash and cash  equivalents                       |   | 191,516                                                            |      | 395,891                        |   | —                                |   | 587,407                |   |
| Cash and cash equivalents,  beginning of year                    |   | 40,514                                                             |      | 385,181                        |   | —                                |   | 425,695                |   |
| Cash and cash equivalents, end  of  year                    |   | $                                                                  | 232,030   |                           | $      | 781,072                               |   | —                 |   | $ | 1,013,102 |   |

 

59

----

 

**CONSOLIDATINGBALANCE SHEET**

**AS OF DECEMBER 31,2001**

 
|                                                                                             |   | **Henry Company  (Parent Corporation)  and  Guarantor Subsidiary** |        | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination  Entries** |       | **Consolidated  Total** |        |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|-------------|--------------------------------|--------|----------------------------------------|------------|-------------------------|-------------|
| **ASSETS:**                                                                                      |   |                                                               |        |                           |   |                                   |       |                    |        |
| Current assets:                                                                                  |   |                                                               |        |                           |   |                                   |       |                    |        |
| Cash and cash equivalents                                                                        |   | $                                                                  | 40,514      |                           | $      | 385,181                                |       | —                  |        | $ | 425,695 |   |
| Accounts receivable, net                                                                         |   | 20,424,397                                                         |        | 3,219,264                      |   | —                                 |       | 23,643,661              |        |
| Inventories, net                                                                                 |   | 10,352,068                                                         |        | 2,908,782                      |   | —                                 |       | 13,260,850              |        |
| Receivables from affiliate                                                                       |   | 7,309,244                                                          |        | 1,264,529                      |   | $                                      | (7,097,626 | )                       | 1,476,147   |   |
| Notes receivable                                                                                 |   | 42,849                                                             |        | —                         |   | —                                 |       | 42,849                  |        |
| Prepaid expenses and other  current assets                                                       |   | 1,280,657                                                          |        | 112,746                        |   | —                                 |       | 1,393,403               |        |
| Income tax receivable                                                                            |   | 318,175                                                            |        | 2,098,361                      |   | —                                 |       | 2,416,536               |        |
| Deferred income taxes                                                                            |   | 1,097,153                                                          |        | 43,974                         |   | —                                 |       | 1,141,127               |        |
| Total current assets                                                                             |   | 40,865,057                                                         |        | 10,032,837                     |   | (7,097,626                             | )          | 43,800,268              |        |
| Property and equipment, net                                                                      |   | 24,970,912                                                         |        | 5,305,948                      |   | —                                 |       | 30,276,860              |        |
| Investment in subsidiaries                                                                       |   | 8,564,729                                                          |        | —                         |   | (8,564,729                             | )          | —                  |        |
| Cash surrender value of life  insurance, net                                                     |   | 3,597,967                                                          |        | —                         |   | —                                 |       | 3,597,967               |        |
| Intangibles, net                                                                                 |   | 21,948,753                                                         |        | 2,209,772                      |   | —                                 |       | 24,158,525              |        |
| Notes receivable                                                                                 |   | 113,315                                                            |        | —                         |   | —                                 |       | 113,315                 |        |
| Note receivable from affiliate                                                                   |   | 1,863,072                                                          |        | —                         |   | —                                 |       | 1,863,072               |        |
| Deferred income taxes                                                                            |   | 5,995,008                                                          |        | —                         |   | —                                 |       | 5,995,008               |        |
| Other assets                                                                                     |   | 1,094,246                                                          |        | —                         |   | —                                 |       | 1,094,246               |        |
|                                                                                             |   |                                                               |        |                           |   |                                   |       |                    |        |
| Total assets                                                                                     |   | $                                                                  | 109,013,059 |                           | $      | 17,548,557                             |       | $                       | (15,662,355 | ) | $ | 110,899,261 |   |
|                                                                                             |   |                                                               |        |                           |   |                                   |       |                    |        |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY(DEFICIT):** |   |                                                               |        |                           |   |                                   |       |                    |        |
| Current liabilities:                                                                             |   |                                                               |        |                           |   |                                   |       |                    |        |
| Accounts payable                                                                                 |   | $                                                                  | 3,663,079   |                           | $      | 1,179,125                              |       | —                  |        | $ | 4,842,204 |   |
| Accrued expenses                                                                                 |   | 8,828,794                                                          |        | 1,230,211                      |   | —                                 |       | 10,059,005              |        |
| Book overdrafts                                                                                  |   | 1,389,858                                                          |        | —                         |   | —                                 |       | 1,389,858               |        |
| Intercompany payables                                                                            |   | 1,264,529                                                          |        | 5,833,097                      |   | $                                      | (7,097,626 | )                       | —      |   |
| Income taxes payables                                                                            |   | —                                                             |        | 339,228                        |   | —                                 |       | 339,228                 |        |
| Notes payable, current portion                                                                   |   | 523,495                                                            |        | —                         |   | —                                 |       | 523,495                 |        |
| Borrowings under line of  credit                                                                 |   | 6,003,444                                                          |        | 125,075                        |   | —                                 |       | 6,128,519               |        |
| Total current liabilities                                                                        |   | 21,673,199                                                         |        | 8,706,736                      |   | (7,097,626                             | )          | 23,282,309              |        |
| Notes payable                                                                                    |   | 3,395,139                                                          |        | —                         |   | —                                 |       | 3,395,139               |        |
| Environmental reserve                                                                            |   | 3,241,144                                                          |        | —                         |   | —                                 |       | 3,241,144               |        |
| Deferred income taxes                                                                            |   | 5,086,039                                                          |        | 1,582,985                      |   | —                                 |       | 6,669,024               |        |
| Deferred warranty revenue                                                                        |   | 2,332,439                                                          |        | 183,790                        |   | —                                 |       | 2,516,229               |        |
| Deferred compensation                                                                            |   | 903,114                                                            |        | —                         |   | —                                 |       | 903,114                 |        |
| Senior notes                                                                                     |   | 81,250,000                                                         |        | —                         |   | —                                 |       | 81,250,000              |        |
| Total liabilities                                                                                |   | 117,881,074                                                        |        | 10,473,511                     |   | (7,097,626                             | )          | 121,256,959             |        |
| Redeemable convertible  preferred stock                                                          |   | 2,082,773                                                          |        | —                         |   | —                                 |       | 2,082,773               |        |
| Shareholders’ equity  (deficit):                                                            |   |                                                               |        |                           |   |                                   |       |                    |        |
| Common stock                                                                                     |   | 4,691,080                                                          |        | 7,194,402                      |   | (7,194,402                             | )          | 4,691,080               |        |
| Additional paid-in capital                                                                       |   | 2,200,968                                                          |        | —                         |   | —                                 |       | 2,200,968               |        |
| Cumulative translation  adjustment                                                               |   | —                                                             |        | (1,659,590                     | )      | 588,000                                |       | (1,071,590              | )           |
| Accumulated (deficit) retained  earnings                                                         |   | (17,842,836                                                        | )           | 1,540,234                      |   | (1,958,327                             | )          | (18,260,929             | )           |
| Total shareholders’ equity  (deficit)                                                       |   | (10,950,788                                                        | )           | 7,075,046                      |   | (8,564,729                             | )          | (12,440,471             | )           |
| Total liabilities and  shareholders’ equity (deficit)                                       |   | $                                                                  | 109,013,059 |                           | $      | 17,548,557                             |       | $                       | (15,662,355 | ) | $ | 110,899,261 |   |

 

60

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**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**FORTHE YEAR ENDED DECEMBER 31, 2001**

 
|                                           |   | **Henry Company****(Parent  Corporation) and  Guarantor Subsidiary** |        | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination Entries** |   | **Consolidated Total** |       |
|------------------------------------------------|--------|----------------------------------------------------------------------|-------------|--------------------------------|--------|---------------------------------------|--------|------------------------|------------|
| Net sales                                      |   | $                                                                    | 167,300,883 |                           | $      | 32,929,159                            |   | $                      | (8,381,850 | ) | $ | 191,848,192 |   |
| Cost of sales                                  |   | 121,629,864                                                          |        | 25,225,317                     |   | (8,381,850                            | )      | 138,473,331            |       |
| Gross profit                                   |   | 45,671,019                                                           |        | 7,703,842                      |   | —                                |   | 53,374,861             |       |
| Operating expenses:                            |   |                                                                 |        |                           |   |                                  |   |                   |       |
| Selling, general and  administrative           |   | 41,710,397                                                           |        | 5,674,250                      |   | —                                |   | 47,384,647             |       |
| Restructuring charges                          |   | 568,808                                                              |        | —                         |   | —                                |   | 568,808                |       |
| Amortization of intangibles                    |   | 2,408,483                                                            |        | 116,376                        |   | —                                |   | 2,524,859              |       |
| Operating income                               |   | 983,331                                                              |        | 1,913,216                      |   | —                                |   | 2,896,547              |       |
| Other expense (income):                        |   |                                                                 |        |                           |   |                                  |   |                   |       |
| Interest expense                               |   | 9,850,981                                                            |        | 208,627                        |   | —                                |   | 10,059,608             |       |
| Interest and other income, net                 |   | (191,023                                                             | )           | —                         |   | —                                |   | (191,023               | )          |
| Income (loss) before benefit  for income taxes |   | (8,676,627                                                           | )           | 1,704,589                      |   | —                                |   | (6,972,038             | )          |
| Benefit for income taxes                       |   | (863,513                                                             | )           | (770,293                       | )      | —                                |   | (1,633,806             | )          |
| Net income (loss)                              |   | $                                                                    | (7,813,114  | )                              | $      | 2,474,882                             |   | —                 |       | $ | (5,338,232 | ) |
|                                                |        |                                                                      |             |                                |        |                                       |        |                        |            |  |  |  |  |

 

61

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE YEAR ENDED DECEMBER 31, 2001**

 
|                                                             |   | **Henry Company  (Parent  Corporation) and****Guarantor Subsidiary** |      | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination Entries** |   | **Consolidated Total** |   |
|------------------------------------------------------------------|--------|----------------------------------------------------------------------|-----------|--------------------------------|--------|---------------------------------------|--------|------------------------|--------|
| Net cash provided by operating  activities                       |   | $                                                                    | 1,921,652 |                           | $      | 4,585,526                             |   | —                 |   | $ | 6,507,178 |   |
| Cash flows from investing  activities:                           |   |                                                                 |      |                           |   |                                  |   |                   |   |
| Capital expenditures                                             |   | (1,104,091                                                           | )         | (253,915                       | )      | —                                |   | (1,358,006             | )      |
| Proceeds from the disposal of  property and equipment            |   | 29,073                                                               |      | 3,228                          |   | —                                |   | 32,301                 |   |
| Net cash used in  investing  activities                     |   | (1,075,018                                                           | )         | (250,687                       | )      | —                                |   | (1,325,705             | )      |
| Cash flows from financing  activities:                           |   |                                                                 |      |                           |   |                                  |   |                   |   |
| Net borrowings under  line-of-credit agreements                  |   | (3,814,543                                                           | )         | (3,511,032                     | )      | —                                |   | (7,325,575             | )      |
| Repayments under notes payable  agreements                       |   | (97,580                                                              | )         | —                         |   | —                                |   | (97,580                | )      |
| Borrowings under notes payable  agreements                       |   | 3,500,000                                                            |      | —                         |   | —                                |   | 3,500,000              |   |
| Decrease in book overdraft                                       |   | (2,777,690                                                           | )         | (348,731                       | )      | —                                |   | (3,126,421             | )      |
| Cash surrender value life  insurance                             |   | 1,489,417                                                            |      | —                         |   | —                                |   | 1,489,417              |   |
| Purchase of Series B Senior  Notes                               |   | (150,000                                                             | )         | —                         |   | —                                |   | (150,000               | )      |
| Net cash used in financing  activities                           |   | (1,850,396                                                           | )         | (3,859,763                     | )      | —                                |   | (5,710,159             | )      |
| Effect of changes in exchange  rate on cash and cash equivalents |   | —                                                               |      | (91,734                        | )      | —                                |   | (91,734                | )      |
| Net increase (decrease) in  cash and cash equivalents            |   | (1,003,762                                                           | )         | 383,342                        |   | —                                |   | (620,420               | )      |
| Cash and cash equivalents,  beginning of year                    |   | 1,044,276                                                            |      | 1,839                          |   | —                                |   | 1,046,115              |   |
| Cash and cash equivalents, end  of  year                    |   | $                                                                    | 40,514    |                           | $      | 385,181                               |   | —                 |   | $ | 425,695 |   |

 

62

----

 

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**FORTHE YEAR ENDED DECEMBER 31, 2000**

 
|                                  |   | **Henry Company****(Parent  Corporation) and  Guarantor  Subsidiary** |        | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination  Entries** |   | **Consolidated  Total** |       |
|---------------------------------------|--------|-----------------------------------------------------------------------|-------------|--------------------------------|--------|----------------------------------------|--------|-------------------------|------------|
| Net sales                             |   | $                                                                     | 167,907,454 |                           | $      | 32,821,736                             |   | $                       | (9,215,960 | ) | $ | 191,513,230 |   |
| Cost of sales                         |   | 126,184,981                                                           |        | 26,297,135                     |   | (9,215,960                             | )      | 143,266,156             |       |
| Gross profit                          |   | 41,722,473                                                            |        | 6,524,601                      |   | —                                 |   | 48,247,074              |       |
| Operating expenses:                   |   |                                                                  |        |                           |   |                                   |   |                    |       |
| Selling, general and  administrative  |   | 39,008,174                                                            |        | 7,586,654                      |   | —                                 |   | 46,594,828              |       |
| Restructuring charges                 |   | 735,127                                                               |        | —                         |   | —                                 |   | 735,127                 |       |
| Amortization of intangibles           |   | 2,427,624                                                             |        | 122,181                        |   | —                                 |   | 2,549,805               |       |
| Operating loss                        |   | (448,452                                                              | )           | (1,184,234                     | )      | —                                 |   | (1,632,686              | )          |
| Other expense (income):               |   |                                                                  |        |                           |   |                                   |   |                    |       |
| Interest expense                      |   | 9,574,463                                                             |        | 314,862                        |   | —                                 |   | 9,889,325               |       |
| Interest and other income, net        |   | (260,524                                                              | )           | —                         |   | —                                 |   | (260,524                | )          |
| Loss before income taxes              |   | (9,762,391                                                            | )           | (1,499,096                     | )      | —                                 |   | (11,261,487             | )          |
| Provision (benefit) for income  taxes |   | (5,025,922                                                            | )           | 430,009                        |   | —                                 |   | (4,595,913              | )          |
| Net loss                              |   | $                                                                     | (4,736,469  | )                              | $      | (1,929,105                             | )      | —                  |       | $ | (6,665,574 | ) |
|                                       |        |                                                                       |             |                                |        |                                        |        |                         |            |  |  |  |  |

 

63

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS**

**FORTHE YEAR ENDED DECEMBER 31, 2000**

 
|                                                  |   | **Henry Company****(Parent Corporation)  and  Guarantor Subsidiary** |       | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination  Entries** |   | **Consolidated  Total** |   |
|-------------------------------------------------------|--------|----------------------------------------------------------------------|------------|--------------------------------|--------|----------------------------------------|--------|-------------------------|--------|
| Net cash used in operating  activities                |   | $                                                                    | (9,459,343 | )                              | $      | (654,718                               | )      | $                       | — |   | $ | (10,114,061 | ) |
| Cash flows from investing  activities:                |   |                                                                 |       |                           |   |                                   |   |                    |   |
| Capital expenditures                                  |   | (2,365,940                                                           | )          | (686,510                       | )      | —                                 |   | (3,052,450              | )      |
| Proceeds from the disposal of  property and equipment |   | 40,217                                                               |       | —                         |   | —                                 |   | 40,217                  |   |
| Proceeds from sale of  investment                     |   | 204,423                                                              |       | —                         |   | —                                 |   | 204,423                 |   |
| Investment in affiliate                               |   | 7,080                                                                |       | —                         |   | —                                 |   | 7,080                   |   |
| Net cash used in investing  activities                |   | (2,114,220                                                           | )          | (686,510                       | )      | —                                 |   | (2,800,730              | )      |
| Cash flows from financing activities:                 |   |                                                                 |       |                           |   |                                   |   |                    |   |
| Net borrowings under  line-of-credit agreements       |   | 9,680,790                                                            |       | 1,143,467                      |   | —                                 |   | 10,824,257              |   |
| Repayments under notes payable  agreements            |   | (70,641                                                              | )          | (54,353                        | )      | —                                 |   | (124,994                | )      |
| Increase in book overdrafts                           |   | 3,071,548                                                            |       | 330,605                        |   | —                                 |   | 3,402,153               |   |
| Cash surrender value of life  insurance               |   | (746,996                                                             | )          | —                         |   | —                                 |   | (746,996                | )      |
| Net cash provided by financing  activities            |   | 11,934,701                                                           |       | 1,419,719                      |   | —                                 |   | 13,354,420              |   |
| Effect of changes in exchange  rate on cash           |   | —                                                               |       | (78,558                        | )      | —                                 |   | (78,558                 | )      |
| Net increase (decrease) in  cash and cash equivalents |   | 361,138                                                              |       | (67                            | )      | —                                 |   | 361,071                 |   |
| Cash and cash equivalents,  beginning of year         |   | 683,138                                                              |       | 1,906                          |   | —                                 |   | 685,044                 |   |
| Cash and cash equivalents, end  of year               |   | $                                                                    | 1,044,276  |                           | $      | 1,839                                  |   | —                  |   | $ | 1,046,115 |   |
|                                                       |        |                                                                      |            |                                |        |                                        |        |                         |        |  |  |  |  |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

64

----

 

**SCHEDULEII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

 

(In thousands)

 
|                             |   | **Balance at  Beginning  of Year** |    | **Provision** |   | **Deductions  From  Reserves** |   | **Balance at End of  Year** |     |
|----------------------------------|--------|------------------------------------|---------|---------------|--------|--------------------------------|--------|-----------------------------|----------|
| 2002                             |   |                               |    |          |   |                           |   |                        |     |
| Allowance for doubtful  accounts |   | $                                  | 2,760.6 |          | $      | 704.5                          |   | $                           | (1,134.9 | ) | $ | 2,330.2 |   |
| Inventory reserve                |   | $                                  | 250.0   |          | $      | 158.0                          |   | $                           | (158.0   | ) | $ | 250.0 |   |
| 2001                             |   |                               |    |          |   |                           |   |                        |     |
| Allowance for doubtful  accounts |   | $                                  | 2,044.2 |          | $      | 2,050.6                        |   | $                           | (1,334.2 | ) | $ | 2,760.6 |   |
| Inventory reserve                |   | $                                  | —  |          | $      | 1,217.7                        |   | $                           | (967.7   | ) | $ | 250.0 |   |
| 2000                             |   |                               |    |          |   |                           |   |                        |     |
| Allowance for doubtful  accounts |   | $                                  | 1,027.8 |          | $      | 1,555.9                        |   | $                           | (539.5   | ) | $ | 2,044.2 |   |
| Inventory reserve                |   | $                                  | —  |          | $      | 51.6                           |   | $                           | (51.6    | ) | $ | — |   |

 

65

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**SIGNATURES**

 

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

 
|   |   | **HENRY COMPANY**                                    |
|--------|--------|------------------------------------------------------|
|   |   |                                                 |
|   |   | *(Registrant)*                                       |
|   |   |                                                 |
|   |   | *Warner W. Henry*                                    |
|   | *By*   | *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 theregistrant and in the capacities and on the dates indicated.

 
| **Name**             |   | **Title**                                       |   | **Date**       |
|----------------------|--------|-------------------------------------------------|--------|----------------|
| William H. Baribault |   | President, Chief Operating Officer and Director |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Jeffrey A. Wahba     |   | Chief Financial Officer, Secretary and Director |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Gary T. Spence       |   | Corporate Controller                            |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Joseph T. Mooney Jr. |   | Director                                        |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Paul H. Beemer       |   | Director                                        |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Frederick H. Muhs    |   | Director                                        |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Carol F. Henry       |   | Director                                        |   | March 31, 2003 |
|                 |   |                                            |   |           |
| Terrill M. Gloege    |   | Director                                        |   | March 31, 2003 |

 

66

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**STATEMENT PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY CHIEF EXECUTIVE OFFICERREGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS**

 

I, Warner Henry, certify that:

 

1.             I have reviewedthis annual report on Form 10-K of Henry Company;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)     designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)     presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols  and procedures based on ourevaluation as of the Evaluation Date.

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)     allsignificant deficiencies in the design or operation of internal controls whichcould adversely  affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

(b)     anyfraud, whether or not material, that involves management or other employees whohave a  significant role in theregistrant’s internal controls.

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect in internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| /s/  Warner Henry    |   |
|---------------------------|--------|
|                      |
| Warner Henry              |
| *Chief Executive Officer* |
| March 31,  2003           |

 

67

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**STATEMENT PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY CHIEF FINANCIAL OFFICERREGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS**

 

I, Jeffrey Wahba, certify that:

 

1.             I have reviewedthis annual report on Form 10-K of Henry Company;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)     designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)     presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols  and procedures based on ourevaluation as of the Evaluation Date.

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)     allsignificant deficiencies in the design or operation of internal controls whichcould adversely  affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

(b)     anyfraud, whether or not material, that involves management or other employees whohave a  significant role in theregistrant’s internal controls.

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect in internal controls subsequentto the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| /s/  Jeffrey A. Wahba |   |
|----------------------------|--------|
|                       |
| Jeffrey A.  Wahba          |
| *Chief Financial Officer*  |
| March 31,  2003            |

 

68

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**HENRYCOMPANY**

**INDEXTO EXHIBITS**

 
| **Exhibit Number** |   | **Description**                                                                                                                                                                                         |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                    |
| 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 Credit Facility dated August 2001.                                                                                                                                                         |
| 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                                                                              |
| 10.3*              |   | Ground  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  agreement between Henry Company and William H. Baribault, dated August 10,  2001                                                                                                            |
| 10.13†        |   | Amended and  Restated Employment agreement between Henry Company and James F. Doose, dated  August 31, 1988                                                                                             |
| 10.14†        |   | Employment  agreement between Henry Company and James Van Pelt, dated March 26, 1999                                                                                                                    |
| 10.15†        |   | Noncompetition  agreement between Henry Company and James Van Pelt, dated March 26, 1999                                                                                                                |
| 10.16              |   | Revised  Incentive Compensation agreement between Henry Company and Jeffrey A. Wahba,  dated December 9, 2002                                                                                           |
| 21.1†         |   | Subsidiaries  of the Registrant                                                                                                                                                                         |

 

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| *      |   | Incorporated  by reference from Registrant’s Statement of Form S–4, filed  September 11, 1998 (Registration No. 333–59485). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| **     |   | Incorporated  by reference from Registrant’s Form 10-K for the fiscal year ended  December 31, 2000.                                  |
| † |   | Incorporated  by reference from Registrant’s Form 10-K for the fiscal year ended  December 31, 2001.                                  |

 

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