**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**

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| **(Mark One)** |                                                                                      |
|----------------|-------------------------------------------------------------------------------------------|
| **ý**     | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

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**For the fiscal year ended December 31, 2001**

 

**OR**

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| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

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**For the transition period from               .**

 

**Commission file number 333-59485**

 

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**HENRY COMPANY**

(Exact Name of Registrant asSpecified 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 toSection 12(g) of the Act:

 

**10% Series B Senior Notes Due 2008**

(Title of Class)

 

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Indicate by check mark whether the registrant: (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 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 anyamendment to this Form 10-K.

 

As of  December 31, 2001, therewere outstanding 221,500 shares of the Registrant’s common stock (“CommonStock”) and 6,000 shares of the Registrant’s class A common stock (“Class ACommon Stock”). As of  December 31, 2001,no shares of the Common Stock or the Class A Common Stock were held bynon-affiliates of the Registrant.

 

 

 

**HENRY COMPANY**

**ANNUAL REPORT ON FORM 10-K**

**FOR FISCAL YEAR ENDED DECEMBER 31, 2001**

 

**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                                             |
|         | PART IV                                                                                     |
| 14.          | Exhibits,  Financial Statements, Schedules and Reports on Form 8-K                          |
|         |                                                                                        |

 

**FORWARD LOOKING STATEMENTS**

Any statements set forth herein that are not historical facts are herebyidentified as "forward-looking statements" for the purpose of thesafe harbor provided by the Private Securities Litigation Reform Act of1995.  These "forward-lookingstatements" are found at various places throughout this document andinclude without limitation those relating to the Henry Company's ("Henry"or the "Company") future business prospects, revenues, workingcapital, liquidity, capital needs and income. In addition, forward-looking statements generally can be identified bythe 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 many factors that could cause actual results to differ materiallyfrom those contained in the forward-looking statements.  These factors include: (i) the ability togenerate sufficient cash flow to service the Company's debt service and workingcapital needs; (ii) the ability to achieve future cost savings and revenuegrowth; (iii) fluctuations in raw material costs; (iv) the absence of inclementweather, (v) adverse changes in the Company's relationship with its mostsignificant customers, including Home Depot, (vi) the impact of productliability and asbestos litigation; (vii) competitive factors; and (viii)changes in general economic conditions, particularly those relating to theevents of September 11.  Additionalinformation concerning factors that could cause actual results to differmaterially from those in the forward-looking statement will be contained fromtime to time in documents filed by the Henry Company with the SEC, including,but not limited to the company's reports on Forms 10-Q and 10-K.  Some of these factors are described underthe section entitled "Business/Risk Factors."

 

The Company, through its senior management or persons acting on itsbehalf, may from time to time make oral or written "forward lookingstatements" about the matters described herein or other matters concerningthe Company, and such statements are subject to the qualifications set forthherein.  The Company disclaims anyintent or obligation to update publicly or revise "forward lookingstatements."

 

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**PART I**

 

ITEM 1.  BUSINESS

 

*General*

 

The Company is a construction materials 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.

 

Beginning in 1988, the Company’s management focused on expanding the Henrybrand from its Southern California base initially through the acquisition ofregional roof coatings manufacturers and distributors in contiguous regions ofthe 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 the professionaltrade in the Midwest and Rocky Mountain region of the U.S.

 

*Divisions*

 

The Company’s two major divisions are the HenryBuilding Products Division and the Resin Technology Division.

 

*Henry BuildingProducts Division*

 

The Henry Building Products Division, whichrepresents the majority of the Company’s 2001 net sales, develops, manufacturesand markets coatings, sealants and membranes for construction, industrial,building materials and other specialty applications. The Company alsomanufactures wax–based emulsions for the gypsum industry.

 

*Products*

 

Roofing products represent the majority of theBuilding Products Division’s total revenues. Henry’s roofing products aredesigned to address the problems of water invasion, wind erosion andultraviolet damage. Henry offers a full line of liquid roof coatings andadhesives including both solvent and water-based products. In addition to roofcoatings and mastics, Henry manufactures high-quality styrene-butadiene-styrene(SBS) modified bitumen roofing membrane products designed to be used in roofingsystems that can meet the challenge of the elements encountered throughoutNorth America.

 

The Company offers a full line of reflectivecoatings designed to improve roof aesthetics and aid in the conservation of energythrough their reflective qualities. Henry’s reflective coatings product lineincludes both white acrylic and solvent-based coatings and high-qualityaluminum products and the accessories needed to protect roofs for years.

 

Henry’s industrial emulsions are used as coating,sizing, strengthening and moisture-proofing additives by manufacturers of fiberproducts such as gypsum wallboard, insulation board, gaskets, paper board, andglass fibers. The Company’s primary emulsion product, wax-based industrial emulsions,are specifically used by manufacturers of gypsum wallboards. Sales ofindustrial emulsions have increased in recent years partially due to increasedenvironmental restrictions on volatile organic compound emissions, which hascreated a demand for emulsion–based products over solvent-based products.The Company’s wax-based emulsions are manufactured with proprietary andpatented processes that management believes contributes to higher marginsrelative to those of competitors.

 

Driveway maintenance and paving productsmanufactured by Henry are used for the asphalt highway market and thepreventative maintenance of asphalt parking lots and driveways. Henry Companyproduces polymerized asphalt, an asphalt binder that is a key ingredient ofpaving asphalts.

 

The Company’s air barrier systems are designed toreduce air flows through exterior walls of buildings. The movement of air intoa building (infiltration) and out of a building (exfiltration) is caused bypressure differences produced by wind, chimney effect and pressurization. Ifair flows through a building and exfiltrates, it can deposit moisture on thecold masonry cladding, causing brick or stone to undergo major changes due tomoisture absorption. This dampness can cause dimensional changes and acceleratethe deterioration process. Moisture–laden air from a humidified buildingcan also develop into ice under freezing conditions, causing displacement ofthe exterior masonry cladding, corrosion, and lower energy efficiency. Theadvantage of the Company’s prefabricated modified bitumen sheet is that itprovides a flexible air barrier membrane capable of bridging construction gapsand absorbing deflection. 

 

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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, there isno national standard and the air barrier market remains in its infancy.

 

The Company’s specialty products includeprotective coatings for a variety of industrial and commercial applications,such as specialty asphalt coatings to protect wood, metal, mortar or thermalinsulation. The Company manufactures undercoatings for mobile homes, as well asboth solvent and water-based rust-proofing products for the automobileindustry.

 

The Company’s sealant line has three distinctproduct categories: sealants for construction applications, hatch coversealants for ocean freighters, and preformed adhesive waterstops for expansionjoint applications on construction projects. Products include preformed plasticgaskets for precast concrete structures, which provides watertight sealing forjoints such as those on underground concrete drainage and manhole structures.These products are also used for sealing hatch covers on ships to prevent waterdamage to cargoes that can occur in heavy seas. There is also a preformed plasticadhesive 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 manufacturingprocess, the Company uses seven related product groups. The product groups are:cold applied liquid coatings, cements and adhesives; asphalt, coal tar and waxemulsions; acrylic-based roof and insulation coatings; hot melt rubberizedasphalt roofing and waterproofing products; SBS modified bitumen membranes, airbarrier and waterproofing membranes; specialty adhesives; and specialtypreformed asphaltic tapes.

 

The key materials used in the production ofroofing and pavement products are asphalt, mineral spirits, various fibers,resins, and polyester and glass matting. For the production of industrialemulsions, the primary material is refined wax. These raw materials aregenerally available on a regional basis and supply disruptions are very rare.The Company maintains multiple sourcing arrangements for all of its key rawmaterials helping to mitigate price increases. In addition to raw materials, packaging supplies represent a meaningfulportion of production cost.

 

The Company, like many of its competitors, usesfibers such as chrysotile asbestos in its production process. Managementbelieves that its use of chrysotile asbestos is in accordance with regulationsof the Occupational Safety and Health Administration (“OSHA”). OSHA requiresthat chrysotile asbestos fibers not be exposed to an open-air environment. Inthe Company’s production process, the cellulose or chrysotile asbestos fiber ispumped through a negative pressure fluffer that separates the fibers foroptimal dispersion in the product mixture. The fibers are then mixed into andfully encapsulated by the asphalt. Once encapsulated the fibers are “locked”into the asphalt cutback and cannot be physically separated from the product.OSHA and other regulatory bodies have determined that encapsulation renders thechrysotile asbestos harmless. The Environmental Protection Agency (“EPA”) doesnot regulate or enforce any special procedures for the application ofchrysotile asbestos–containing roof coatings or sealants.

 

Management believes that chrysotileasbestos-fibered roofing cements have better application quality and durabilityas compared to those containing chrysotile asbestos substitutes. The primaryindustries that currently continue to use chrysotile asbestos are thosemanufacturing chrysotile asbestos-cement pipe and shingles, automobile brakepads, gaskets and roof coatings and sealants. Although chrysotileasbestos-cement pipe and shingles are no longer manufactured in the United States,these products are still currently sold in various parts of the country.Domestic manufacturers of brake pads, gaskets and roof coatings use roughly22,000 tons of chrysotile asbestos annually because of its strength, durabilityand heat resistance. Although some roofing products manufacturers have switchedto an exclusively non–asbestos line, some of the leading firms in theindustry continue to use asbestos in at least some of their products.

 

*Sales, Marketing and Distribution*

 

Due to the many products manufactured by the HenryBuilding Products Division, the Company markets its products by focusing onfour primary sales channels. These channels are: Retail; Industrial, Commercialand Institutional (“ICI”); Specialty Products; and International.

 

The Retail channel consists of national homecenter chains, retail building material suppliers, hardware distributors, paintand sundry distributors, farm and hardware cooperatives, and massmerchandisers. To reach customers, the Company employs a trained salesorganization and has an in-house Creative Services Department that producescustomized brochures and promotional materials and coordinates national andregional advertising programs.

 

The ICI channel consists of national and regionalroofing distributors that sell to contractors throughout North America.  Henry maintains a technical selling staffengaged in both sales and training to help ensure that the Company’s productsare applied properly.

 

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The Specialty Products channel consists of thegypsum wallboard industry, which buys wax emulsions, and major roofingcompanies, which are the primary market for asphalt emulsions for use as asizing agent in insulation board.  TheCompany markets a broad array of products using a technical sales force trainedto help customers in the use of the various products.

 

The International channel consists ofinternational retailers and distributors. Henry products are marketed to the international sales channel with specialfocus on the Company’s basic product line of roof coatings and cements andindustrial emulsions.

 

                In January 2002, the Company entered into athree-year agreement with Home Depot that significantly expands the Company'srelationship with Home Depot.  Theagreement contains performance targets, which, if not achieved, could trigger apayment from the Company to Home Depot in the second year of theagreement.  In the first quarter of2002, the Company's relationship with Lowes, its second largest customer, wasterminated.  The Company believes thatthe incremental revenue resulting from the Home Depot agreement will exceed therevenue lost as a result of the loss of Lowes as a customer.

 

*Roofing Systems*

 

Henry Company has developed a roofing systemssegment for one-stop commercial roofing or re–roofing or roofingmaintenance with warranty protection. The Company’s personnel work directlywith architects, building owners and contractors to develop customspecifications utilizing Henry products for the design, construction andmaintenance of commercial roofs. An important component of the Company’s roofsystems program’s success is that building owners are assured that HenryCompany will stand behind the roof from beginning 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.

 

*ResinTechnology Division*

 

The Resin Technology Company (“RTC”), founded asan independent company in 1982 and now a division of the Company, producespolyurethane foam products for roofing and other industrial applications. RTCalso sells coating products manufactured for it by third parties forapplication on foam. The acquisition of RTC in 1988 has enabled the Company tooffer a broader range of roofing products to meet the needs of the commercialand residential roofing markets.

 

*Products*

 

RTC’s primary product categories are polyurethanefoam and coatings. Polyurethane foam has two liquid components, resin andhardener, which are mixed together in a spray unit during application. Achemical reaction causes the liquid to expand many times in thickness creatinga rigid layer of closed-cell foam. In roofing applications, this foam is strongenough to be walked on minutes after the application. The result is a seamlessbarrier against water penetration that is durable and easy to maintain. Inroofing applications, an elastomeric coating must be applied as protectionagainst the sun’s ultraviolet radiation. RTC sells acrylic, urethane, siliconeand polyurea coatings.

 

RTC’s products offer users several advantages,including a seamless barrier that minimizes the likelihood of leaks andprovides superior insulation characteristics that can reduce energy costs. Itis relatively light in weight and is therefore particularly adaptable to largearenas or other structures that may benefit from a lighter weight roof.Furthermore, it can be applied directly over an existing roof, potentiallyavoiding the costly “tear-offs” that may be required with other roofingsystems.

 

RTC’s products are also used in a number oforiginal equipment manufacturer applications. The insulation and weightcharacteristics of polyurethane foam make it an integral part of the thermalpanel, spa and packaging industries, among others.

 

*Manufacturing*

 

RTC manufactures all of its polyurethane foamproducts in its Ontario, California manufacturing facility. Its polyurethaneresin system is made up of two components: a hardening agent that is purchasedby the Company and resin that is manufactured in the Ontario facility. Rawmaterials are automatically pumped from one or more of the 11 raw materialstorage tanks within the facility, blended and then poured into 55-gallondrums, tote capsules or bulk tanker trucks. The production process is highlyautomated. The bulk of RTC’s coatings products for polyurethane foam applicationsare produced by a third-party manufacturer also located in Ontario. The Companybelieves that it derives its success in the polyurethane foam market from itssuperior understanding of technology and the Company has secured a number oforiginal equipment manufacturer accounts because of its ability to produceproducts for a customer’s very specific technical requirements.

 

*Sales, Marketing and Distribution*

 

The Resin Technology Company sells primarily toroofing contractors and original equipment manufacturers in the western UnitedStates. RTC’s roofing products are sold directly to pre–qualifiedcontractors experienced in applying and spraying polyurethane 

 

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foam onto roofs. Sales to original equipment manufacturers include thoseto spa equipment manufacturers, and management believes the Company is theleading supplier to this market. RTC also supplies manufacturers in many otherindustries including those producing freezer panels, thermal food transportationequipment, boat floatation and packaging products. RTC’s remaining sales aremade to several distributors, particularly in the Northwest and upper Midwest.

 

RTC supports its sales efforts with a sales stafforganized according to market segment and regional location. Henry Companybelieves that RTC’s marketing advantages are based on a commitment to technicaldevelopment and customer support and also believes that RTC has captured anumber of original equipment manufacturer accounts from its competitors byefficiently responding to the customer’s technical requirements. In both theroofing and original equipment manufacturer segments Henry Company providesjust-in-time delivery capability which is essential in time and labor –sensitive roofing applications.

 

**Employees**

 

As of December 31, 2001, Henry Company employedapproximately 560 persons, the majority of whom were involved in production anddistribution, with the balance engaged in administration, sales and clericalwork. Of these employees, approximately 425 were employed in the United Statesand 135 in Canada. Approximately 35 employees located in Huntington Park,California, 25 employees in Kimberton, Pennsylvania, 10 employees in Rock Hill,South Carolina, 28 employees in Lachine (formerly Ville St. Pierre), Quebec and2 employees in Mirabel, Quebec are unionized and covered by collectivebargaining agreements. These collective bargaining agreements expire on June30, 2003, March 31, 2003, February 1, 2004, June 30, 2002 and June 30, 2002, 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.

 

 

**Risk Factors**

 

***SubstantialLeverage***

 

The Company has consolidated indebtedness that issubstantial in relation to the book value of its shareholders’ equity. As ofDecember 31, 2001, Henry Company had approximately $91.3 million of debt (thesum of long-term debt, including current maturities of long-term debt, notespayable and capitalized lease obligations) and a shareholders’ deficit ofapproximately $12.4 million.

 

The Company’s significant level of borrowings hasseveral important consequences for the Company including but not limited to thefollowing: (i) a substantial portion of the Company’s cash flow from operationsmust be dedicated to debt service and is not available for other purposes; (ii)the Company’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 tosatisfy its debt obligations will depend on its future operating performance,which will be affected by financial, business, competitive, general economicand other factors, many of which are beyond the Company’s control. Based uponcurrent levels of operations and anticipated cost savings and future growth,the Company believes that its expected cash flows from operations, togetherwith available borrowings under its credit facility will be adequate to meetits anticipated requirements for working capital, scheduled principal andinterest payments, lease payments and capital expenditures for the next twelvemonths. See “Management’s Discussion and Analysis of Financial Condition,Results of Operations, and Liquidity and Capital Resources”.

 

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

 

During FY 2001, the Company instituted a number ofinitiatives to improve operating results including, but not limited to (i) achange in executive level management, appointing Mr. Baribault as President andChief Operating Officer (ii) the implementation of a restructuring plan inwhich the Company closed a manufacturing plant, reorganized or eliminatedcertain administrative functions, and restructured its selling organization.Although financial results improved from FY 2000 to FY 2001 there can be noassurance that any of these actions will result in further improvement in theCompany’s future financial and operating results. Any statements concerningpotential cost savings and revenue growth contained in this annual report areforward-looking statements that are based on estimates and assumptions made bythe Company’s management.

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***Fluctuationof Raw Material Cost***

 

The Company utilizes a number of raw materials inits manufacturing processes, some of which have historically fluctuated inprice at particular times. These price fluctuations have been based on suchfactors as the capacity of the raw material supply chain, demand in the market,weather, general economic factors and the availability of alternative rawmaterials. Raw materials utilized by the Company that have historicallyexperienced some price fluctuation include asphalt, aluminum paste, rubber andcertain diisocynates, among others. For example, asphalt, which is a byproductof crude oil refining, has fluctuated in price with changes in worldwide crudeoil prices and capacity and with changes in the supply and demand in the oil,gasoline and fossil fuel markets. Significant increases in asphalt prices or inthe prices of other raw materials, if not offset by product price increases,could have a material adverse impact on the profits of the Company as it did in2000.  There can be no assurance thatthe Company will be able to pass any future cost increases through to itscustomers in the form of price increases.

 

***Impactof Weather***

 

Because many of the Company’s products aredesigned to patch or fix damaged roofs, the Company’s revenues are affected byweather conditions. Sales of roofing products have historically tended toincrease in areas that have experienced severe weather. The results of severeweather or the anticipation of severe weather may motivate property owners toundertake required roof maintenance or to replace an old or worn roof. Theabsence of inclement weather in some or all of the Company’s markets could havean adverse impact on the Company’s business, financial condition, results ofoperations or cash flows.

 

***Dependence on Key Customer***

*** ***

The company is substantially dependent on Home Depot, the Company'slargest customer.  Home Depotrepresented approximately 8.3% of gross sales in fiscal year 1999, 11.4% ofgross sales in fiscal year 2000 and13.3% of gross sales in fiscal year 2001 and also accounted for approximately11.5% and 23.3% of accounts receivable at December 31, 2000 and 2001,respectively. In January 2002, the Company entered into a three-year agreementwith Home Depot that significantly expands the Company's relationship with HomeDepot.  The agreement containsperformance targets, which, if not achieved, could trigger a payment from theCompany to Home Depot in the second year of the agreement.  In the first quarter of 2002, the Company'srelationship with Lowes, its second largest customer, was terminated.  The Company believes that the incrementalrevenue resulting from the Home Depot agreement will exceed the revenue lost asa result of the loss of Lowes as a customer. Any deterioration of the Company's relationship with Home Depot, or anyfailure of Home Depot to purchase and pay for product shipped by the Company toHome Depot could have a material adverse affect on the Company.

 

***ProductLiability and Asbestos Litigation***

 

The Company’s business entails an inherent risk ofproduct liability claims, including a particular risk with respect tochrysotile asbestos-containing products that the Company manufactures. Althoughsome roofing products manufacturers have switched to an exclusivelynon-asbestos line, some of the leading firms in the industry continue to usechrysotile asbestos in at least some of their products. The Company believesthat its use of chrysotile asbestos fibers, which are encapsulated by asphaltin the manufacturing process, is in accordance with applicable laws. However,the Company has been named as a defendant in suits alleging certainasbestos-related injuries. Although the Company has not paid any amounts injudgment or settlement of any asbestos–related 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 such claimswill 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 believe 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 insurancefor non-asbestos claims in the amount of $21,000,000. 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.

 

A product liability or asbestos-related claim thatresults in a judgment or settlement in excess of the Company’s insurance coverage,or a material judgment or settlement for an asbestos-related claim for injuriesalleged to have arisen after 1985, could have a material adverse effect on theCompany.   With respect to the asbestosrelated cases filed against the Company, the Company knows of none that iseither not covered by liability insurance or is claiming exposure afterDecember 1, 1985, although in a few cases, the date of exposure is unknown.

 

 

***Relianceon Key Personnel***

 

The Company’s future success will depend to asignificant extent on its executive officers and other key managementpersonnel. Although the Company has employment agreements with three of itsexecutive officers, there can be no assurance that the Company will be able toretain its executive officers and key personnel or attract additional qualifiedmanagement in the future.

 

***Competition***

 

The roofing products and roofing systemsindustries are highly competitive in most product categories and geographicregions. Competition is largely based on quality, service, price anddistribution capabilities. The Company competes for retail and wholesalebusiness with both large national manufacturers and smaller regional producers.In certain circumstances, due primarily to factors such as freight rates andcustomer preference for local brands, manufacturers with better access tocertain geographic markets may have a competitive advantage in such markets. Inaddition, many of the Company’s competitors within the roofing productsindustry have greater financial, marketing, distribution, management and otherresources than the Company, and as the industry consolidates, the Company’scompetitors may further enhance these resources. 

 

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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 intensified competition.   Additionally, it appears that the Companyis facing increased competition in the wax emulsion segment of itsbusiness.  Given these factors, therecan be no assurance that the Company will be able to continue to competesuccessfully against existing or new competitors, and the failure to do sowould have a material adverse effect on the Company’s business, financialcondition, results of operations or cash flows.

 

***EnvironmentalMatters***

 

The past and present business operations of theCompany and the past and present ownership and operation of real property bythe Company are subject to extensive and changing federal, state, local andforeign environmental laws and regulations pertaining to the discharge ofmaterials into the environment, the handling, storage, treatment and disposalof wastes (including solid and hazardous wastes), the remediation of releasesof toxic or hazardous materials or otherwise relating to health, safety andprotection of the environment (“Environmental Laws”). As such, the nature ofthe Company’s operations as well as previous operations by others at real propertyowned, leased or used by the Company, expose the Company to the risk of claimsunder Environmental Laws, and there can be no assurance that material costs orliabilities will not be incurred in connection with such claims. Based on itsexperience to date, the Company does not expect such claims or the costs ofcompliance with the scope or enforcement of Environmental Laws to have amaterial impact on its earnings or competitive position. The Company believesthat it is in substantial compliance with applicable Environmental Laws. Noassurance can be given, however, that the discovery of presently unknownenvironmental conditions, changes in the scope or enforcement of EnvironmentalLaws or their interpretation, or other unanticipated events will not give riseto expenditures or liabilities that may have a material adverse effect on theCompany’s business, financial condition or results of operations. The Company,through its acquisition of Monsey Bakor, has been named as a potentiallyresponsible party in litigation concerning contamination at a former waste–oilrecycling facility used by it in Douglassville, Pennsylvania. The Company, alsothrough its acquisition of Monsey Bakor, is also a party to a consent decreeissued by the federal Environmental Protection Agency relating to remediationof contamination at its Kimberton, Pennsylvania facility. It is sharingremediation costs with a former owner of the facility that is also a party tothe consent decree. Based on currently available information, the Companybelieves that neither this litigation nor this remediation will have a materialadverse effect on the Company’s business, financial condition, results ofoperations or cash flows.

 

***GovernmentalRegulation and Permits***

 

The Company is subject to regulation under variousfederal, state and local laws, including laws regulating its manufacturingoperations and laws relating to employee health and safety. Permits arerequired for operation of the Company’s business, and such permits are subjectto renewal, modification and, in certain circumstances, revocation bygovernmental authorities. The loss of certain of such permits could have amaterial adverse effect on the Company’s business, financial condition orresults of operations. The Company expects to incur ongoing capital andoperating costs and administrative expenses to maintain compliance with itspermits and with applicable laws and regulations. The Company cannot predictthe legislation or regulations that may be enacted in the future or how existingor future laws or regulations will be administered or interpreted. Compliancewith new laws or regulations, as well as more vigorous enforcement policies ofthe regulatory agencies or stricter interpretation of existing laws, mayrequire additional expenditures by the Company, some or all of which may bematerial.

 

 

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ITEM 2.  PROPERTIES

The Company’s operations are conducted at the owned orleased facilities described below:

 
| **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                |   | 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            |   |
| Joilet, Illinois                   |   | 72,000                       |   | 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 administrationfacility in Mississauga, Ontario. In addition, the Company owns a smallfacility in Troy, New York that it leases to a third party. The Companybelieves that its facilities are in good operating condition and are adequateto meet anticipated future requirements.

 

ITEM 3.  LEGAL PROCEEDINGS

 

In the ordinary course of business, the Company isperiodically named as a defendant in a variety of product liability lawsuitsincluding “slip and fall” claims relating to pavement sealants and claims foralleged product failure. The Company does not believe these cases will have amaterial adverse effect on the Company’s business, financial condition, resultsof operations or cash flows.

 

As of December 31, 2001, the Company was a partyto approximately 40 active state court cases alleging certain asbestos-relatedinjuries. There were eleven new cases filed in 2001, five filed 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. Although theCompany has not paid any amounts in judgment or settlement of anyasbestos-related claim to date, there can be no assurance that any such claimwill not in the future result in a material adverse judgment against, orsettlement by, the Company.  TheCompany’s insurance carriers currently fund the legal costs of these suits andthe Company believes that such insurance coverage is adequate. However, HenryCompany is not covered by insurance for asbestos-related claims for injuriesthat are alleged to have arisen after December 1, 1985.   With respect to the cases filed, theCompany knows of none that is either not covered by liability insurance or isclaiming exposure after December 1, 1985, although in a few cases, the date ofexposure is unknown.

 

The Company does not believe that the outcome ofthese suits and legal proceedings will have a material adverse effect on theCompany’s financial condition, results of operations, or cash flows.

 

**EnvironmentalMatters**

 

The Company is subject to extensive and changingenvironmental laws and regulations with which it believes it is in substantialcompliance. However, there can be no assurance that the discovery of presentlyunknown environmental conditions or changes in the scope, interpretation orenforcement of environmental laws and regulations will not have a materialadverse effect on the Company’s business, financial condition, results ofoperations, or cash flows.

 

The Company’s Kimberton facility was formerlyoccupied by a pharmaceutical manufacturer whose operations resulted ingroundwater contamination identified on the site and surrounding area. The contaminantof concern 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 1999, 2000and 2001 were approximately $73,000, $73,000 and $60,000, respectively, and arenot expected to be significantly different during 2002 and 2003. 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 $60,000 in 2001reduced the liability to $3.2 million at December 31, 2001.

 

9

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The Company is currently upgrading, replacing or closingunderground storage tanks that it owns or operates to meet certain corrosionprotection and overfill/spill containment standards. The Company estimates thatthe capital expenditures required to comply with various regulatory programs in2002 will not have a material adverse effect on the Company’s earnings, cashflows or competitive position. Such estimates, however, are based on factorsand assumptions that are subject to change, including potential modificationsof regulatory requirements, detection of unanticipated environmental conditionsor other currently unexpected circumstances.

 

ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of the Company’s shareholders duringthe fourth quarter of the fiscal year covered by this report.

 

**PART II**

 

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDERMATTERS

 

There is no established public trading market for the Company’s commonequity.

 

As of December 31, 2001, there were seven (7)beneficial holders of the Company’s Common Stock and one beneficial holder ofthe Company’s Class A Common Stock.

 

At the present time, the Company intends to retainall earnings for use in the operation and development of its business and doesnot expect to declare or pay any cash dividends in the foreseeable future. TheCompany’s current credit facility also prohibits the payment of any dividends.Any determination in the future to pay dividends will depend on the Company’searnings, financial condition, capital requirements, level of indebtedness andother factors deemed relevant by the Company’s Board of Directors, includingany contractual or statutory restrictions on the Company’s ability to paydividends.

 

10

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ITEM 6.  SELECTED FINANCIAL DATA

 

The following selected consolidated financial data should be read inconjunction with Henry Company’s consolidated financial statements and relatednotes thereto and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this document. Theconsolidated statement of operations data for each of the years in thethree-year period ended December 31, 2001, and the consolidated balance sheetdata at December 31, 2000 and 2001, are derived from the consolidated financialstatements of Henry Company which have been audited by PricewaterhouseCoopersLLP, independent accountants, and are included elsewhere in this document. Theconsolidated statement of operations data for the years ended December 31, 1997and 1998 and the consolidated balance sheet data at December 31, 1997, 1998,and 1999 are derived from audited financial statements of Henry Company notincluded in this Annual Report on Form 10-K. Historical results are not necessarily indicative of the results to beexpected in the future.

 
|                                                                            |   | **Year Ended  December 31** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                            |   | **1997**                    |   | **1998(5)** |   | **1999** |   | **2000** |   | **2001** |   |
|                                                                            |   | **(In  thousands)**         |   |
| **Consolidated Statement of Operations Data(1):**                               |   |                        |   |   |   |   |   |   |   |   |   |
| Net sales                                                                       |   | $                           | 67,424 |   | $ | 150,156 |   | $ | 178,705 |   | $ | 193,461 |   | $ | 193,806 |   |
| Cost of sales                                                                   |   | 46,413                      |   | 105,143 |   | 124,906 |   | 143,266 |   | 138,473 |   |
| Gross profit                                                                    |   | 21,011                      |   | 45,013 |   | 53,799 |   | 50,195 |   | 55,333 |   |
| Operating expenses:                                                             |   |                        |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                             |   | 17,509                      |   | 35,480 |   | 47,864 |   | 48,543 |   | 49,342 |   |
| Restructuring charges                                                           |   | —                      |   | — |   | — |   | 735 |   | 569 |   |
| Amortization of intangibles                                                     |   | 137                         |   | 1,629 |   | 2,928 |   | 2,550 |   | 2,525 |   |
| Operating income (loss)                                                         |   | 3,365                       |   | 7,904 |   | 3,007 |   | (1,633 | ) | 2,897 |   |
| Interest expense                                                                |   | 1,465                       |   | 6,567 |   | 9,194 |   | 9,889 |   | 10,060 |   |
| Interest and other income, net                                                  |   | (321                        | )      | (243 | ) | (224 | ) | (260 | ) | (191 | ) |
| Income (loss) before extraordinary item                                         |   | 2,221                       |   | 1,580 |   | (5,963 | ) | (11,262 | ) | (6,972 | ) |
| Extraordinary gain related to early extinguishments of  debt                    |   | —                      |   | — |   | (601 | ) | — |   | — |   |
| Income (loss) before provision (benefit) for taxes                              |   | 2,221                       |   | 1,580 |   | (5,362 | ) | (11,262 | ) | (6,972 | ) |
| Provision (benefit) for income taxes (2)                                        |   | 33                          |   | 509 |   | 304 |   | (4,596 | ) | (1,634 | ) |
| Net income (loss)                                                               |   | $                           | 2,188  |   | $ | 1,071 |   | $ | (5,666 | ) | $ | (6,666 | ) | $ | (5,338 | ) |
|                                                                            |   |                        |   |   |   |   |   |   |   |   |   |
| Pro forma provision for income taxes (3)                                        |   | 882                         |   | — |   | — |   | — |   | — |   |
| Pro forma net income (3)                                                        |   | 1,339                       |   | — |   | — |   | — |   | — |   |
| **Other Financial Data:**                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                            |   | $                           | 801    |   | $ | 2,997 |   | $ | 4,184 |   | $ | 3,052 |   | $ | 1,358 |   |
| Depreciation and amortization (including amortization  of intangibles)          |   | 1,469                       |   | 4,894 |   | 7,171 |   | 7,591 |   | 7,315 |   |
| EBITDA (4)                                                                      |   | 5,155                       |   | 13,041 |   | 10,402 |   | 6,218 |   | 10,403 |   |
| Cash flows provided by (used in):                                               |   |                        |   |   |   |   |   |   |   |   |   |
| Operating activities                                                            |   | 4,781                       |   | 9,981 |   | (3,387 | ) | (10,114 | ) | 6,507 |   |
| Investing activities                                                            |   | (949                        | )      | (48,010 | ) | (6,783 | ) | (2,801 | ) | (1,326 | ) |
| Financing activities                                                            |   | (4,013                      | )      | 50,445 |   | (1,374 | ) | 13,354 |   | (5,710 | ) |
|                                                                            |   |                        |   |   |   |   |   |   |   |   |   |
|                                                                            |   | **1997**                    |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
|                                                                            |   |                        |   |   |   |   |   |   |   |   |   |
| **Combined Balance Sheet Data (1):**                                            |   |                        |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                       |   | $                           | 119    |   | $ | 12,023 |   | $ | 685 |   | $ | 1,046 |   | $ | 426 |   |
| Working capital                                                                 |   | 7,204                       |   | 32,380 |   | 23,862 |   | 20,797 |   | 20,518 |   |
| Total assets                                                                    |   | 30,418                      |   | 125,514 |   | 119,325 |   | 125,288 |   | 110,899 |   |
| Long-term debt, including current maturities and  borrowings on lines of credit |   | 13,748                      |   | 87,631 |   | 84,671 |   | 95,370 |   | 91,297 |   |
| Total shareholders’ equity (deficit)                                       |   | 5,122                       |   | 5,830 |   | 804 |   | (6,365 | ) | (12,440 | ) |
|                                                                                 |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

___________

(1)                                  For periods prior toApril 22, 1998, the Company’s financial statements were prepared on a combinedbasis with Warner Development Company of Texas (“Warner Development”) as bothentities were under common control with identical shareholder

 

11

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ownership interests. On April 21,1998, Warner Development was merged into Henry Company and the outstandingshares of Warner Development capital stock were cancelled.

 

(2)                                  Prior to April 1998,Henry Company was operated as a subchapter “S” Corporation under the Code. As aresult, Henry Company did not incur federal and state income taxes (except withrespect to certain states) and, accordingly, the provision for income taxesonly includes the applicable state income tax. Federal and state income taxes(except with respect to certain states) on the income of Henry Company havebeen incurred and paid directly by the shareholders of Henry Company. It hadbeen the policy of Henry Company to make periodic distributions to theshareholders in respect of such tax liabilities. During the year ended December31,1998, Henry Company paid distributions of $1.2 million for the shareholders’1997 tax liabilities. On April 22, 1998, the Company converted to a “C”corporation under the Code and will subsequently pay all future tax obligationsof the Company to the appropriate taxing authorities.

 

(3)                                  As described in Note(2) above, Henry Company was operated as a Subchapter “S” Corporation for 1997.The pro forma provision for income taxes and pro forma net income reflect theresults as if Henry Company were operated as a “C” Corporation for thehistorical periods presented.

 

(4)                                  EBITDA, as definedin the indenture relating to the Company’s outstanding 10% Senior Notes,represents net earnings before taking into consideration taxes on earnings,interest expense, depreciation and amortization, and non-recurring, non-cashcharges, less any cash expended that funds a non-recurring, non-cash charge.While EBITDA should not be construed as a substitute for operating earnings,net earnings, or cash flows from operating activities in analyzing operatingperformance, financial position or cash flows, EBITDA has been included becauseit is commonly used by certain investors and analysts to analyze and comparecompanies on the basis of operating performance, leverage and liquidity. Thisdata is relevant to an understanding of the economics of the Company’s businessas it indicates cash flow available from operations (and/or trends in cash flowavailable from operations) to service debt and satisfy certain fixedobligations. A reconciliation of net income (loss) to EBITDA for the respectiveyears and related interim periods is as follows:

 
|                                          |   | **Years  Ended December 31,** |       |
|-----------------------------------------------|--------|-------------------------------|------------|
|                                          |   | **1997**                      |       | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
|                                          |   | **(In  thousands)**           | ** ** |
| Net income (loss)                             |   | $                             | 2,188      |   | $ | 1,071 |   | $ | (5,666 | ) | $ | (6,666 | ) | $ | (5,338 | ) |
| Provision (benefit) for income taxes          |   | 33                            |       | 509 |   | 304 |   | (4,596 | ) | (1,634 | ) |
| Interest expense                              |   | 1,465                         |       | 6,567 |   | 9,194 |   | 9,889 |   | 10,060 |   |
| Depreciation and amortization                 |   | 1,469                         |       | 4,894 |   | 7,171 |   | 7,591 |   | 7,315 |   |
| Extraordinary gain on debt extinguishment (6) |   | —                        |       | — |   | (601 | ) | — |   | — |   |
| EBITDA                                        |   | $                             | 5,155      |   | $ | 13,041 |   | $ | 10,402 |   | $ | 6,218 |   | $ | 10,403 |   |

 

(5)                                  On April 22, 1998,the Company acquired Monsey Bakor and its subsidiaries. The acquisition wasaccounted for using the purchase method of accounting and as such, the resultsof operations of Monsey Bakor since the acquisition date have been included inthe consolidated financial statements of the Company.

 

(6)                                  In 1999, the Companyrepurchased $3.6 million of the Senior Notes which were issued in conjunctionwith the acquisition of Monsey Bakor. The resulting gain is shown net of taxes.

 

(7)                                  The Company recordeda $735,127 and a $568,808 restructuring charge in 2000 and 2001, respectively,related to plant closings and the reorganization or elimination of certainadministrative and selling functions. The charges represent severance and otherpersonnel payments related to the streamlining of operations associated withthe implementation of cost reduction initiatives noted above.

 

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

 

The following discussion and analysis of the Company’s consolidatedresults of operations and consolidated financial position should be read inconjunction with the Selected Financial Data and the Company’s ConsolidatedFinancial Statements, including notes thereto, appearing elsewhere in thisAnnual Report.

 

**GENERAL**

 

The Company is a construction materials companyfocusing primarily on products for roofing, sealing and paving applications.The Company develops, manufactures and markets several separate but relatedproduct lines including roof and driveway coatings and paving products,industrial emulsions, air barriers, polyurethane foam for roofing andcommercial uses, sealants for construction and marine uses and specialtyproducts. The Company has eighteen manufacturing and distribution facilitiesthroughout North America. The Company’s business is seasonal and is dependenton weather trends that vary by geographic region.

 

During fiscal year 2001, the Company instituted anumber of initiatives to improve operating results including, but not limitedto: (i) a change in executive level management, appointing Mr. Baribault asPresident and Chief Operating Officer; (ii) the implementation of arestructuring plan in which the Company closed a manufacturing plant,reorganized or eliminated certain administrative functions, and restructuredits selling organization; (iii) a reduction in administrative and operatingexpenses, including those associated with telecommunications, automobiles,travel and entertainment and freight; (iv) improvement in inventory control andproduction planning programs including a reduction in both the number of formulas used to manufacture theCompany’s products and finished good SKUs;  (v) introduction of improved analytics in the areas of product pricing,customer profitability, and freight costs; (vi) restructuring of a performance-based bonus program; (vii) increasedfocus on improving product quality and reducing returns and allowances; (viii)reduction in raw materials costs, in addition to those attributable to changesin commodity prices; and related other action steps designed to enhanceprofitability.  Although it is expectedthat future benefits may result from management’s ongoing efforts to reducecosts and increase revenues, no assurance can be given that such operatingperformance will be achieved.

 

**CRITICALACCOUNTING 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 assumptionsaffect the reported amounts of assets and liabilities, the disclosure of contingentliabilities and the reported amounts of revenues and expenses.  Actual results could differ from thoseamounts.

 

Critical accounting policies are those that are important to theportrayal of the Company’s financial condition and results, and which requiremanagement to make difficult, subjective and/or complex judgments.  Critical accounting policies coveraccounting matters that are inherently uncertain because the future resolutionof such matters is unknown.  The Companybelieves that critical accounting policies include accounting for salesrebates, accounting for allowances for doubtful accounts, accounting forinventory, and accounting for intangible and other long lived assets.

 

Sales rebates and discounts are common practice in the industries inwhich the Company operates.  Volume,promotional, price, cash and other discounts and customer incentives areaccounted for as a reduction to gross sales. Rebates and discounts are estimated and recorded when sales of productsare made.  These provisions for rebatesand discounts are adjusted, if necessary, when additional information becomesavailable.

 

Management is required to make judgments, based on historical experienceand future expectations, as to the collectibility of accounts receivable.  The allowances for doubtful accounts andsales returns represent allowances for customer trade accounts receivable thatare estimated to be partially or entirely uncollectible.  These allowances are used to reduce grosstrade accounts receivable to their net realizable value.  The Company records these allowances basedon estimates related to the following factors: i) customer specific allowances; ii) amounts based upon an aging scheduleand iii) an estimated amount, based on the Company’s historical experience, forcollectibilility issues not yet identified.

 

Inventories are stated at the lower of cost or market value and arecategorized as raw materials or finished goods.  Inventory is reviewed for damaged, obsolete, excess andslow-moving inventory and reserves are provided as necessary.  The Company has the ability to reworkslow-moving inventory into more saleable product.

 

The Company evaluates the recoverability of identifiable intangibleassets and other long-lived assets in accordance with SFAS No. 121, whichgenerally requires the assessment of these assets for recoverability whenevents or circumstances indicate a potential impairment by estimating theundiscounted cash flows to be generated from the use and ultimate dispositionof these assets.

 

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**BUSINESS SEGMENTS**

 

The Company manages its business through tworeportable segments or primary business units with separate management teams,infrastructures, marketing strategies and customers. The Company’s reportablesegments are: the Henry Building Products Division, which develops,manufactures and markets roof and driveway coatings and paving products,industrial emulsions, air barriers, and specialty products; and the ResinTechnology Division, which develops, manufactures and sells polyurethane foamfor roofing and commercial construction. The Company evaluates the performanceof its operating segments based on sales, gross profit and operating income.Intersegment sales and transfers are not significant.

 

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

 
|                          |   | **Henry Building  Products  Division** |        | **Resin  Technology  Division** |   | **Total**   |   |
|-------------------------------|--------|----------------------------------------|-------------|---------------------------------|--------|-------------|--------|
| **2001**                      |   |                                   |        |                            |   |        |   |
| Net sales                     |   | $                                      | 171,672,776 |                            | $      | 22,132,860  |   | $ | 193,805,636 |   |
| Gross profit                  |   | 50,826,212                             |        | 4,506,093                       |   | 55,332,305  |   |
| 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                     |   | $                                      | 171,427,721 |                            | $      | 22,033,865  |   | $ | 193,461,586 |   |
| Gross profit                  |   | 46,278,492                             |        | 3,916,938                       |   | 50,195,430  |   |
| 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   |   |
| **1999**                      |   |                                   |        |                            |   |        |   |
| Net sales                     |   | $                                      | 160,209,476 |                            | $      | 18,495,180  |   | $ | 178,704,656 |   |
| Gross profit                  |   | 50,512,550                             |        | 3,285,908                       |   | 53,798,458  |   |
| Operating income              |   | 2,938,915                              |        | 68,251                          |   | 3,007,166   |   |
| Depreciation and amortization |   | 6,976,246                              |        | 195,021                         |   | 7,171,267   |   |
| Total assets                  |   | 106,700,898                            |        | 12,624,539                      |   | 119,325,437 |   |
| Capital expenditures          |   | 4,024,680                              |        | 159,741                         |   | 4,184,421   |   |

 

The Company is domiciled in the United States withforeign operations based in Canada which were acquired during 1998. Prior tothe 1998 acquisition of Monsey Bakor, the Company had no foreign operations.Summarized geographic data related to the Company’s operations for 1999, 2000and 2001 are as follows:

 
|          |   | **Net Sales** |        | **Long-Lived  Assets** |   |
|---------------|--------|---------------|-------------|------------------------|--------|
| **2001**      |   |          |        |                   |   |
| United States |   | $             | 160,876,477 |                   | $      | 59,583,273 |   |
| Canada        |   | 32,929,159    |        | 7,515,720              |   |
| Total         |   | $             | 193,805,636 |                   | $      | 67,098,993 |   |
| **2000**      |   |          |        |                   |   |
| United States |   | $             | 160,639,850 |                   | $      | 62,725,434 |   |
| Canada        |   | 32,821,736    |        | 8,478,534              |   |
| Total         |   | $             | 193,461,586 |                   | $      | 71,203,968 |   |
| **1999**      |   |          |        |                   |   |
| United States |   | $             | 148,874,641 |                   | $      | 67,079,856 |   |
| Canada        |   | 29,830,015    |        | 8,921,012              |   |
| Total         |   | $             | 178,704,656 |                   | $      | 76,000,868 |   |

 

 

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**RESULTS OFOPERATIONS**

 

**ConsolidatedStatements of Operations Data:**

** **
|                                      |   | **Year Ended  December 31** |   |
|-------------------------------------------|--------|-----------------------------|--------|
|                                      |   | **1999**                    |   | **% of Sales** |   | **2000** |   | **% of Sales** |   | **2001** |   | **% of Sales** |   |
|                                      |   | **(in  millions)**          |   |
| Net sales                                 |   | $                           | 178.7  |   | 100.0 | % | $ | 193.5 |   | 100.0 | % | $ | 193.8 |   | 100.0 | % |
| Cost of sales                             |   | 124.9                       |   | 69.9 | % | 143.3 |   | 74.1 | % | 138.5 |   | 71.5 | % |
| Gross profit                              |   | 53.8                        |   | 30.1 | % | 50.2 |   | 25.9 | % | 55.3 |   | 28.5 | % |
| Operating expenses:                       |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative       |   | 47.9                        |   | 26.8 | % | 48.5 |   | 25.1 | % | 49.3 |   | 25.4 | % |
| Restructuring charges                     |   | 0.0                         |   | 0.0 | % | 0.7 |   | 0.3 | % | 0.6 |   | .3 | % |
| Amortization of intangibles               |   | 2.9                         |   | 1.6 | % | 2.6 |   | 1.3 | % | 2.5 |   | 1.3 | % |
| Operating income                          |   | 3.0                         |   | 1.7 | % | (1.6 | ) | (0.8 | )% | 2.9 |   | 1.5 | % |
| Interest expense                          |   | 9.2                         |   | 5.1 | % | 9.9 |   | 5.1 | % | 10.1 |   | 5.2 | % |
| Interest and other income, net            |   | (0.2                        | )      | (0.1 | )% | (0.2 | ) | (0.1 | )% | (0.2 | ) | (0.1 | )% |
| Loss before extraordinary item            |   | (6.0                        | )      | (3.4 | )% | (11.3 | ) | (5.8 | )% | (7.0 | ) | (3.6 | ) |
| Extraordinary gain debt extinguishments   |   | 0.6                         |   | 0.3 | % | 0.0 |   | 0.0 | % | 0.0 |   | 0.0 | % |
| Loss before provision (benefit) for taxes |   | (5.4                        | )      | (3.0 | )% | (11.3 | ) | (5.8 | )% | (7.0 | ) | (3.6 | )% |
| Provision (benefit) for income taxes      |   | 0.3                         |   | 0.2 | % | (4.6 | ) | (2.3 | )% | (1.6 | ) | (0.8 | )% |
| Net loss                                  |   | $                           | (5.7   | ) | (3.2 | )% | $ | (6.7 | ) | (3.5 | )% | $ | (5.3 | ) | (2.8 | )% |
|                                           |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*Net Sales.*  The Company’s net sales increased to $193.8million for the year ended December 31, 2001, an increase of $0.3 million, or0.2%, from $193.5 million for the year ended December 31, 2000. The increasewas primarily due to product sales price increases enacted during the latter partof 2000 and 2001 partially offset by a decrease in unit sales volume in 2001.

 

*Gross Profit.*  The Company’s gross profit increased to$55.3 million for the year ended December 31, 2001, an increase of $5.1million, or 10.2%, from $50.2 million for the year ended December 31, 2000.Gross profit increased as a percentage of net sales to 28.5% for the year endedDecember 31, 2001 from 25.9% 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 and Administrative.* Selling, general and administrative expenses as a percentage of netsales increased to 25.4% for the year ended December 31, 2001 from 25.1% forthe year ended December 31, 2000. The Company’s selling, general andadministrative expense increased to $49.3 million for the year ended December31, 2001, an increase of $0.8 million, or 1.7%, from $48.5 million for the yearended December 31, 2000.  Included inselling, general and administrative expenses were expenses of $0.5 million forthe transition to a new employee medical plan in mid-2001, and severance andrelated expenses of  $0.8 million nototherwise included in restructuring charges.

 

*RestructuringCharges.*  Restructuringcharges amounted to $0.6 million for the year ended December 31, 2001.  These charges primarily relate to a plantclosing, restructuring of the selling organization, the reorganization ofcertain operational and marketing functions and the related severance costs.

 

*Amortization ofIntangibles.*  Amortization ofintangibles decreased to $2.5 million for the year ended December 31, 2001, adecrease of $0.1 million, or 3.9%, from $2.6 million for the year endedDecember 31, 2000.  Amortization expenseis primarily due to the amortization of intangibles resulting from theacquisition of Monsey Bakor in 1998.

 

*OperatingIncome (Loss).*  Operating incomeamounted 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 the year endedDecember 31, 2000. The increase of $4.5 million was primarily attributable tothe increased gross profit, discussed above.

 

15

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*InterestExpense.*  Interest expenseincreased to $10.1 million for 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 was primarily attributable to additional working capitalborrowings, partially offset by declining interest rates due to the new creditfacility and a generally lower interest rate environment in 2001.

 

*Provision(Benefit) for Income Taxes.* The benefit for income taxes decreased to a benefit of $1.6 million forthe year ended December 31, 2001, a decrease of $3.0 million, from a benefit of$4.6 million for the year ended December 31, 2000. The decrease was primarilydue to the 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 gross marginas noted above.

 

 

**Year EndedDecember 31, 2000 Compared to Year Ended December 31, 1999**

 

*Net Sales.*  The Company’s net sales increased to $193.5million for the year ended December 31, 2000, an increase of $14.8 million, or8.3%, from $178.7 million for the year ended December 31, 1999. The increasewas primarily due to product sales price increases enacted in the second andthird quarters of 2000, growth in sales with several existing major accountsand increased sales in the southwest during the first quarter of 2000 as aresult of heavy rainfalls.

 

*Gross Profit.*  The Company’s gross profit decreased to$50.2 million for the year ended December 31, 2000, a decrease of $3.6 million,or 6.7%, from $53.8 million for the year ended December 31, 1999. Gross profitdecreased as a percentage of net sales to 25.9% for the year ended December 31,2000 from 30.1% for the year ended December 31, 1999. The decrease wasprimarily attributable to increased raw material costs primarily related topetroleum based products and the inability of the Company to pass such coststhrough to its customers during the first six months of 2000.

 

*Selling,General and Administrative.* Selling general and administrative expenses as a percentage of net salesdecreased to 25.1% for the year ended December 31, 2000 from 26.8% for the yearended December 31, 1999. The Company’s selling, general and administrativeexpense increased to $48.5 million for the year ended December 31, 2000, anincrease of $0.6 million, or 1.3%, from $47.9 million for the year endedDecember 31, 1999. The increase was primarily due to the more than commensurateincrease in net sales and the Company’s continued support of its national brandstrategy.

 

*RestructuringCharges.*  Restructuringcharges amounted to $0.7 million for the year ended December 31, 2000. Thesecharges primarily relate to a plant closing, the reorganization of certainoperational and marketing functions and the related severance costs forapproximately 24 employees.

 

*Amortization ofIntangibles.*  Amortization ofintangibles decreased to $2.6 million for the year ended December 31, 2000, adecrease of $0.3 million, or 10.3%, from $2.9 million for the year endedDecember 31, 1999. The decrease was primarily due to the expiration of anoncompete agreement.

 

*OperatingIncome (Loss).*  Operating lossamounted to $1.6 million for the year ended December 31, 2000, a decrease of$4.6 million, or 153.3%, from operating income of $3.0 million for the yearended December 31, 1999. The decrease of $4.6 million was primarilyattributable to decreased gross profit as a result of higher raw material costsand restructuring charges.

 

*InterestExpense.*  Interest expenseincreased to $9.9 million for the year ended December 31, 2000, an increase of$0.7 million, or 7.6%, from $9.2 million for the year ended December 31, 1999.The increase was primarily attributable to additional working capitalborrowings to support the growth of the business.

 

*ExtraordinaryGain Related to Early Extinguishment of Debt.* The Company did not retire any of its outstanding Senior Notes duringthe year ended December 31, 2000. The Company retired a portion of theoutstanding Senior Notes which resulted in a $0.6 million gain, net of incometaxes for the year ended December 31, 1999.

 

*Provision(Benefit) for Income Taxes.* The provision for income taxes decreased to a benefit of $4.6 millionfor the year ended December 31, 2000, a decrease of $4.9 million, from aprovision of $0.3 million for the year ended December 31, 1999. The decreasewas primarily due to the decrease in loss before income taxes.

 

*Net Loss.*  Net loss was $6.7 million for the year endedDecember 31, 2000, an increase of $1.0 million, or 17.5% from a $5.7 millionnet loss for the year ended December 31, 1999. The net loss was primarily dueto increased raw material costs, increased interest expense, restructuringcharges and other factors discussed above.

 

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**Liquidity andCapital Resources**

 

The Company’scurrent requirements for capital are primarily for working capital, capitalexpenditures and debt service. The Company’s primary sources of capital tofinance such needs are cash flow from operations and borrowings under bankcredit facilities. In August 2001, the Company entered into a replacementcredit facility agreement and received funding from two new lendinginstitutions. The replacement credit facility provides for a $25 millionrevolving credit facility and a $10 million term loan. Upon closing, $3.5million of the term loan was drawn down. This senior credit facility expires inAugust 2006 and is collateralized by substantially all of the Company’s UnitedStates assets. Borrowings on the revolver bear interest at the Prime rate withan option to borrow based on the LIBOR rate. The loan balance outstanding and the remaining availability of creditunder the revolver were $6.0 million and $4.4 million respectively, at December31, 2001.

 

The Company alsomaintains a $5.2 million credit line with a Canadian bank to finance Canadianoperations. The balance outstanding under this revolving line was $0.1 millionat December 31, 2001. The Company believes that cash from operations andfundings on its bank lines of credit will be sufficient to meet its workingcapital, capital expenditure, and debt service requirements for the next twelvemonths. There can be no assurance, however, that such resources will besufficient to meet the Company’s anticipated working capital, capitalexpenditure, debt service or other financing requirements or that the Companywill not require additional financing within this time frame.  The Company’s contractual obligations duringthe 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                     |   | $                                      | 6,652,014 |   | $ | 1,053,405 |   | $ | 1,063,263 |   | $ | 82,528,471 |   | $ | 91,297,153 |   |
|                               |   |                                   |      |   |   |   |   |   |   |   |   |
| Capital Lease Obligations          |   | —                                 |      | — |   | — |   | — |   | — |   |
|                               |   |                                   |      |   |   |   |   |   |   |   |   |
| Operating Leases (a)               |   | 1,419,311                              |      | 1,820,936 |   | 894,761 |   | 2,469,722 |   | 6,604,730 |   |
|                               |   |                                   |      |   |   |   |   |   |   |   |   |
| Unconditional Purchase Obligations |   | —                                 |      | — |   | — |   | — |   | — |   |
|                               |   |                                   |      |   |   |   |   |   |   |   |   |
| Other Long-Term Obligations (b)    |   | —                                 |      | 500,000 |   | 1,000,000 |   | 1,500,000 |   | 3,000,000 |   |
|                               |   |                                   |      |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligations |   | $                                      | 8,071,325 |   | $ | 3,374,341 |   | $ | 2,958,024 |   | $ | 86,498,193 |   | $ | 100,901,883 |   |

 

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(a)                  Consists of property, equipment,and auto leases.

(b)                 Assumes Mr. Mooney will exercisehis put option on redeemable convertible preferred stock.

 

 

The Company’sprimary sources of capital are cash flows from operations and borrowings underbank credit facilities, each of which could be negatively impacted by areduction in demand for the Company’s products.  Demand for the Company's products is affected by many factors,including weather, competition, and the competitive position of the Company'scustomers.  A reduction in demand forthe Company's products in some or all of the Company’s markets could have anadverse impact on the Company’s liquidity.

 

 

**Cash Flows forthe Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000**

 

The Company’s net cash provided by operations was$6.5 million compared to $10.1 million used in operations for the years endedDecember 31, 2001 and 2000, respectively. The increase in cash provided byoperations from December 31, 2000 to December 31, 2001 of $16.6 million wasprimarily attributable to the lower net loss incurred in 2001, declines intrade and notes receivable, declines in inventories, and a smaller increase indeferred tax assets from fiscal year 2000 to 2001.  Net cash used in investing activities during the year endedDecember 31, 2001 and the year ended December 31, 2000 was  $1.3 million and $2.8 million, respectively.The decrease in cash used in investing activities of $1.5 million from the yearended December 31, 2000 to the year ended December 31, 2001 was primarily dueto decreased capital expenditures of $1.7 million. 

 

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Cash flows used in financing activities during the year ended December31, 2001 were $5.7 million compared to $13.4 million provided by financingactivities for the year ended December 31, 2000. The decrease in cash flowsfrom financing activities of $19.1 million from the year ended December 31,2000 to December 31, 2001 was primarily due to a reduction in borrowings underthe line of credit agreement and a reduction in book overdrafts from 2000 to2001.

 

 

**RecentAccounting Pronouncements**

 

In July 2001, the FASB issuedStatement of Financial Accounting Standards (“SFAS”) Nos. 141 and 142 (SFAS No.141 and SFAS No. 142), “Business Combinations” and “Goodwill and OtherIntangible Assets”. SFAS No. 141 replaces APB 16 and eliminates pooling–of–interestsaccounting prospectively. It also provides guidance on purchase accountingrelated to the recognition of intangible assets and accounting for negativegoodwill. SFAS No. 142 changes the accounting for goodwill from an amortizationmethod to an impairment–only approach. Under SFAS No. 142, goodwill willbe tested annually and whenever events or circumstances occur indicating thatgoodwill might be impaired. SFAS No. 141 and SFAS No. 142 are effective for allbusiness combinations completed after June 30, 2001. Upon adoption of SFAS No.142, amortization of goodwill recorded for business combinations consummatedprior to July 1, 2001 will cease, and intangible assets acquired prior to July1, 2001 that do not meet the criteria for recognition under SFAS No. 141 willbe reclassified to goodwill. Companies are required to adopt SFAS No. 142 forfiscal years beginning after December 15, 2001, but early adoption ispermitted. The Company will adopt SFAS No. 142 on January 1, 2002, at thebeginning of fiscal year 2002. In connection with the adoption of SFAS No. 142,the Company will be required to perform a transitional goodwill impairmentassessment. The Company has not yet determined the impact these standards willhave on its financial position, results of operations, or cash flows.

 

In August 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This Statement requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value canbe made.  The associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset.  All provisions ofthis Statement will be effective at the beginning of fiscal year 2003.  The Company is in the process of determiningthe impact of this standard on the Company’s financial statements.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This Statement supersedes SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed of” and amendsAPB Opinion No. 30, “Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions.”  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. 144 retains the fundamental provisions of SFAS No. 121for (a) recognition and measurement of the impairment of long-lived assets tobe held and used and (b) measurement of long-lived assets to be disposed of bysale.  This Statement also retains APBOpinion No. 30’s requirement that companies report discontinued operationsseparately from continuing operations. All provisions of this Statement will be effective in the first quarterof fiscal year 2002.  The adoption ofthis standard is not expected to have a significant impact on the Company’sfinancial position, results of operations, or cash flows.

 

In November 2001,the Financial Accounting Standards Board (“FASB”) Emerging Task Force (“EITF”)reached a consensus on EITF Issue 01-09, Accounting for Consideration Given bya Vendor to a customer or a Reseller of the Vendor’s Products, which is acodification of EITF 00-14, 00-22 and 00-25.  This issue presumes that consideration from a vendor to a customeror reseller of the vendor’s products to be a reduction of the selling prices ofthe vendor’s products and, therefore, should be characterized as a reduction ofrevenue when recognized in the vendor’s income statement and could lead tonegative revenue under certain circumstances. Revenue reduction is required unless consideration relates to a separateidentifiable benefit and the benefit’s fair value can be established.  This issue should be applied no later thanin annual or interim financial statements for periods beginning after December15, 2001, which is the Company’s first quarter ended March 31, 2002.  Upon adoption the Company is required to reclassifyall prior period amounts to conform to the current period presentation.  The Company is currently evaluating theeffects of these changes on the Company's consolidated financial statements.

 

 

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ITEM7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

Marketrisk generally represents the risk that losses may occur in the value offinancial instruments as a result of movements in interest rates, foreigncurrency exchange rates and commodity prices. As part of its overall riskmanagement strategies, the Company monitors and manages these risks byreviewing key trends and indicators on a continuous basis.

 

*Interest Rate Risk—*From time to time, the Companytemporarily invests its excess cash in interest bearing temporary investmentsof high quality issuers or with major financial institutions. Due to the short–termmaturity of the investments are outstanding and their general liquidity, theseinstruments are classified as cash equivalents in the consolidated balancesheet and do not represent a material interest rate risk to the Company. TheCompany’s primary market risk exposure for changes in interest rates relates tothe Company’s debt obligations. The Company manages its exposure to changinginterest rates principally through the use of a combination of fixed andfloating rate debt. The majority of the Company’s long–term debt iscomprised of $81.3 million of Series B Senior Notes which represent fixed rateborrowings. The fair value of the Senior Notes at December 31, 2001 was approximately$30.9 million. The Company believes that near term changes in interest rateswould not have a significant impact on the Company’s financial position as theCompany has a limited amount of interest rate risk sensitive financialinstruments at December 31, 2001.

 

*Foreign Exchange Rate Risk—*The Company conducts businessprincipally in North America and in U.S. and Canadian currencies. The Company’sU.S. operations denominate all sales transactions in U.S. dollars. TheCompany’s Canadian subsidiaries are paid in Canadian dollars for sales made inCanada. Excess Canadian funds generally have been invested in the Canadianoperation rather than being remitted to the U.S. parent. At December 31, 2001,the Company had no foreign currency exchange contracts or hedging instruments.

 

*Commodity Price Risk—*The Company uses certain rawmaterials in its manufacturing process that fluctuate with certain commodityprices. These raw materials include asphalt, aluminum paste, rubber and certaindissoynates. The Company continuously monitors key trends in the commodityprices impacting raw materials. At December 31, 2001, the Company had nocommodity risk hedges or derivative instruments.

 

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Theconsolidated financial statements of Henry Company are included in a separatesection of this Annual Report on Form 10–K.

 

ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

NONE

 

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**PART III**

 

ITEM10.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT

 

Thefollowing table sets forth certain information regarding each of the Company’sdirectors and executive officers as of December 31, 2001:

 
| **Name**                       |   | **Age** |   | **Position**                                       |   |
|--------------------------------|--------|---------|--------|----------------------------------------------------|--------|
| Warner W. Henry(1)(2)          |   | 63      |   | Chairman  of the Board and Chief Executive Officer |   |
| Joseph T. Mooney, Jr.(1)       |   | 67      |   | Vice  Chairman of the Board                        |   |
| Paul H. Beemer(1)(2)           |   | 79      |   | Vice  Chairman of the Board                        |   |
| William H. Baribault (1)(2)(3) |   | 59      |   | President,  Chief Operating Officer and Director   |   |
| Jeffrey A. Wahba(1)(2)         |   | 45      |   | Chief  Financial Officer, Secretary and Director   |   |
| James Doose                    |   | 53      |   | President—Resin  Technology Company           |   |
| Larry A. Karasiuk              |   | 57      |   | President—Bakor  Division                     |   |
| Norman F. Nickerson (4)        |   | 61      |   | President—Henry  Building Products Division   |   |
| Frederick H. Muhs(1)           |   | 63      |   | Director                                           |   |
| Carol F. Henry                 |   | 62      |   | Director                                           |   |
| Donald H. Ford                 |   | 94      |   | Director                                           |   |
| Terrill M. Gloege(1)(2)        |   | 66      |   | Director                                           |   |

 

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(1)                                  Member of theExecutive Committee

 

(2)                                  Member of the AuditCommittee

 

(3)                                  In January 2001,William H. Baribault was appointed the acting President and Chief OperatingOfficer, and in August 2001 Mr. Baribault was appointed President and ChiefOperating Officer.

 

(4)                                  In February 2001,Norman F. Nickerson was appointed the President of the Henry Building ProductsDivision upon the prior President’s departure from the Company.

 

*Warner W. Henry* has been Chairman of the Board,Chief Executive Officer and a director of Henry Company or its parent since1974, and has served in various sales and sales management positions with HenryCompany from 1963 to 1974. Mr. Henry also serves on the board or is an Overseerof the following organizations: The Employers Group, Hoover Institution, LosAngeles Music Center Opera and the Los Angeles Chamber Orchestra. Mr. Henryreceived his A.B. in Economics from Stanford University and his M.B.A. fromStanford University, Graduate School of Business.

 

*William H. Baribault* has been President,Chief Operating Officer, and a director of Henry Company since August 2001.  Prior to joining Henry, he was a partner ofEagle Associates, an investment banking and consulting firm.  From 1975 to 1999, Mr. Baribault heldvarious positions including Chairman and CEO of Elect///Air, The FornaciariCompany, and Fluid Power Locator, and Vice President of Applied IndustrialTechnologies, all distributors and manufacturers of pneumatic and hydraulicautomation components.  Mr. Baribaultalso serves as Chairman of Professional Business Bank and Descanso Gardens andserves as a director on the boards of Architectural Woodworking Company, MChemical Company, Active Sales Inc, and Chief Executives Organization.  Mr. Baribault received his A.B. degree fromStanford University.

 

*Joseph T. Mooney, Jr.* has served as a Vice Chairman ofthe Board of the Company since the closing of the Monsey Bakor acquisition. Mr.Mooney began his career with Monsey Bakor in 1960 and previously served asChairman of the Board and President of Monsey Bakor from 1972 to April 1998,where his responsibilities included major strategic decisions regarding productand equipment purchases as well as oversight of all of Monsey Bakor’s financialoperations. Mr. Mooney received a B.S. from Villanova University.

 

*Paul H. Beemer* has served as Vice Chairman ofHenry Company since 1983, and as a director of Henry Company or its parentsince 1964. Mr. Beemer began with Henry Company in 1947, holding varioustechnical and sales management positions, and has also served as GeneralManager and President. Mr. Beemer was responsible for the formulation anddevelopment of a number of Henry Company’s key products and continues to servein a part–time technical consulting role. Mr. Beemer received a B.S. fromLoyola University in Los Angeles.

 

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*Jeffrey A. Wahba* has been Chief FinancialOfficer, Secretary and a director of Henry Company since 1986. From 1984 to1985, Mr. Wahba served as Chief Financial Officer of Vault Corporation. From1980 to 1984, Mr. Wahba was with Max Factor and Co. and served as Controller ofthe International Division. Mr. Wahba received a B.S. in Industrial Engineeringand an M.S. in Industrial Engineering and Engineering Management from StanfordUniversity, as well as an M.B.A. from the University of Southern California.

 

*James Doose* has been the President of ResinTechnology Company since 1994. Mr. Doose and a partner founded Resin TechnologyCompany in 1982. Mr. Doose served as Executive Vice President of ResinTechnology Company from 1982 to 1994. From 1973 to 1982, Mr. Doose was withReichold Chemical Company in various sales and technical positions. Mr. Doosereceived a B.S. in Chemistry from California Polytechnic University at Pomona.

 

*Larry A. Karasiuk* has served as President—BakorCanada since the closing of the Monsey Bakor acquisition. Mr. Karasiuk servedas the President of Bakor Holdings, Inc. and as the President of Monsey Bakor’sCanadian operations beginning in 1991. From 1982 to 1991, Mr. Karasiuk was theVice President of Marketing and Sales with the predecessor company of BakorHoldings, Inc., Bakelite Thermosets Building Materials Division. Prior to thattime, Mr. Karasiuk served in various management positions with Hunter Douglas,a subsidiary of Alcan. Mr. Karasiuk attended Simon Fraser University and YorkUniversity.

 

*Norman F. Nickerson* has served as Executive VicePresident of the Henry Building Products Division since the closing of theMonsey Bakor acquisition until February 2001 when he was named President of theHenry Building Products Division. Mr. Nickerson served as Vice President ofSales of Monsey Bakor from 1985 to 1998. From 1979 to 1985, Mr. Nickerson wasGeneral Manager of Monsey Bakor’s Southeastern division. From 1972 to 1979, Mr.Nickerson was General Manager of Cosmicoat, Inc. Mr. Nickerson received hisB.A. in History from Allegheny College.

 

*Frederick H. Muhs* has been a director of HenryCompany since 1996. Since 1991, Mr. Muhs has been a private investor andbusiness consultant. From 1963 to 1990, Mr. Muhs held various positions in theinvestment and investment banking operations of the Prudential InsuranceCompany of America, including as Managing Director for its Prudential BacheSecurities, Inc. subsidiary. Mr. Muhs received an A.B. in Economics fromStanford University and his M.B.A. from Stanford University, Graduate School ofBusiness.

 

*Carol F. Henry* has been a director of HenryCompany since 1970. She is currently involved with several civic and charitableorganizations. Mrs. Henry received an A.B. and M.A. in Education from StanfordUniversity.

 

*Donald H. Ford* has been a director of HenryCompany since 1958. From 1933 through 2001, Mr. Ford practiced law with the lawfirm of Overton, Lyman and Prince in Los Angeles, California. Mr. Ford receiveda B.S. in Commerce from Oregon State University and a J.D. from the Universityof Michigan.   Mr. Ford passed away inMarch, 2002.

 

*Terrill M. Gloege* has been a director of HenryCompany since 1993. He retired as the Chief Financial Officer of the CarsonCompanies in 2001. Mr. Gloege is currently a director of Dominguez ServicesCorporation, a water services utility company. Mr. Gloege received a B.S. fromthe United States Coast Guard Academy and an M.B.A. from Stanford University.

 

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

 

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

 

**Board Committees**

 

The Executive Committee is comprised of Warner W.Henry, Paul H. Beemer, Joseph T. Mooney, Jr., William H. Baribault, Terrill M.Gloege, and Frederick H. Muhs. Jeffrey A. Wahba serves as Secretary of theExecutive Committee without a vote. The Executive Committee has the fullauthority of the Board of Directors, except with respect to the approval of anyaction for which shareholder approval is required by law or for certain otherfundamental corporate actions, which require the act of the full Board. TheAudit Committee is comprised of Warner W. Henry, Paul H. Beemer,  Terrill M. Gloege, Jeffrey A. Wahba, WilliamH. Baribault, and Frederick H. Muhs. The Audit Committee oversees theactivities of Henry Company’s independent accountants. The CompensationCommittee is comprised of Warner W. Henry, Terrill M. Gloege and Frederick H.Muhs.

 

 

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**Executive andDirector Compensation**

 

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

 

The Compensation Committee and William H.Baribault monitor the Company’s compensation policies and review executive andemployee annual compensation increases. Mr. Baribault’s compensation wasdetermined by the Compensation Committee without the participation of Mr.Baribault and increases in Mr. Henry’s annual compensation are determined bythe Executive Committee without the participation of Mr. Henry. No executiveofficer of the Company serves as a member of the Board of Directors of anyother entity that has one or more members serving as a member of the Company’sBoard of Directors.

 

Paul H. Beemer is compensated for consultingadvisory services pursuant to a consulting agreement with the Company. Mr.Beemer provides the Company with a certain number of hours of consultingadvisory services each quarter for compensation of $100,000 per year. Mr.Beemer may also provide additional services that are compensated at the rate of$105 per hour. The consulting agreement also 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, 2002. In fiscal year 2001,Mr. Beemer received $100,000 in compensation under his consulting agreement.

 

In connection with services provided by The MuhsCompany, Inc., Frederick H. Muhs provides certain business and financialconsulting services to Henry Company. Henry Company pays The Muhs Company, Inc.a retainer of $6,250 per month for these services. In fiscal year 2001, TheMuhs Company, Inc. received $75,000 for business and financial consultingservices. See “Certain Transactions.”

 

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ITEM11.  EXECUTIVE COMPENSATION

 

Thefollowing table sets forth certain information concerning compensation receivedfor services rendered to Henry Company in all capacities during the fiscal yearended December 31, 2001 by Henry Company’s Chief Executive Officer and each ofHenry Company’s four other most highly compensated executive officers whoseannual salary and bonus for the year ended December 31, 2001 exceeded $100,000(collectively, the “Named Executive 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  Chairman of the Board and Chief  Executive Officer |   | 2001                    |    | $             | 285,000 |      | $      | 250                         |   | — |   | — |   | —  |   |
|                                                                | 2000   |                    | 285,000 |          | —  |      | — |                        | — |   | — |   |
|                                                                | 1999   |                    | 386,000 |          | —  |      | $      | 14,500                      |   | — |   | — |   |
|                                                                |   |                    |    |          |    |      |   |                        |   |   |   |   |   |
| James Doose  President—Resin Technology  Company               |   | 2001                    |    | 257,692       |    | 82,436    |   | —                      |   |  — |   | — |   |
|                                                                | 2000   |                    | 251,084 |          | 22,700  |      | — |                        | — |   | — |   |
|                                                                | 1999   |                    | 243,620 |          | 22,700  |      | 4,828  |                        | — |   | — |   |
|                                                                |   |                    |    |          |    |      |   |                        |   |   |   |   |   |
| James Van Pelt  Vice President Grundy Division                      |   | 2001                    |    | 200,000       |    | 140,000   |   | —                      |   | — |   | — |   |
|                                                                | 2000   |                    | 195,921 |          | 140,000 |      | — |                        | — |   | — |   |
|                                                                | 1999   |                    | 186,390 |          | —  |      | — |                        | — |   | — |   |
|                                                                |   |                    |    |          |    |      |   |                        |   |   |   |   |   |
| William H. Baribault  President and Chief Operating  Officer        |   | 2001                    |    | 112,500       |    | 150,000   |   | —                      |   | — |   | — |   |
|                                                                | 2000   |                    | —  |          | —  |      | — |                        | — |   | — |   |
|                                                                | 1999   |                    | —  |          | —  |      | — |                        | — |   | — |   |
|                                                                |   |                    |    |          |    |      |   |                        |   |   |   |   |   |
| Larry A. Karasiuk  President—Bakor Canada                      |   | 2001                    |    | 176,544       |    | 54,868    |   | —                      |   | — |   | — |   |
|                                                                | 2000   |                    | 179,794 |          | 26,893  |      | — |                        | — |   | — |   |
|                                                                | 1999   |                    | 173,220 |          | 20,181  |      | — |                        | — |   | — |   |
|                                                                |   |                    |    |          |    |      |   |                        |   |   |   |   |   |
| Joseph T. Mooney  Vice Chairman of the Board                        |   | 2001                    |    | 180,000  |    | 250       |   | —                      |   | — |   | — |   |
|                                                                | 2000   |                    | 236,672 |          | —  |      | — |                        | — |   | — |   |
|                                                                | 1999   |                    | 350,000 |          | —  |      | — |                        | — |   | — |   |
|                                                                     |        |                         |         |               |         |           |        |                             |        |  |  |  |  |  |  |  |

 

----

(1)           “Other Annual Compensation” represents contributions tothe accounts of the Named Executive Officers under Henry Company’s NonqualifiedExecutive Deferral Plan and Profit Sharing/401(k) Plan. See “Executive DeferralPlan” and “Profit Sharing/401(k) Plan.”

** **

 

23

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**Warrant GrantsOutstanding**

 

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, 2000 and 2001:

 

**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** |    | **Gant Date Present Value(3)r** |   |
| Warner W. Henry |   | 400,000                                              | (1)    | 100                                                         |   | $                     | 12.94  |                | 9/30/12 |                            | $      | 44,000 |   |
|                 |        |                                                      |        |                                                             |        |                       |        |                     |         |                                 |        |  |  |

 

----

(1)           On October 1, 1997 Henry Company granted the Warner W.Henry Living Trust warrants to purchase an aggregate of 400,000 shares of HenryCompany capital stock, consisting of 12,000 shares of Class A Common Stock and388,000 shares of Common Stock (the “Henry Warrants”). The Henry Warrantsexpire on September 30, 2012 and may be exercised in whole or in part atvariable and increasing exercise prices over the term of the Henry Warrants.The current and maximum exercise prices of the Henry Warrants for both Class ACommon Stock and Common Stock are $12.94 and $38.82 per share, respectively.Warner W. Henry is the trustee of the Warner W. Henry Living Trust and may beassumed to have beneficial ownership of the Henry Warrants and sharespurchasable upon exercise of the Henry Warrants. The Henry Warrants were issuedas further consideration for certain loans made to Henry Company by Mr. Henry.

 

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

 

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

 

**ExecutiveDeferral Plan**

 

Henry Company has adopted an Executive DeferralPlan (the “Plan”) to allow certain management personnel and highly compensatedemployees to defer a portion of their annual salary and bonus to be paid at afuture date chosen by them or upon their retirement, death, disability ortermination of employment. Participants in the Plan are selected by anadministrative committee (the “Plan Committee”) appointed by the Board ofDirectors which establishes eligibility qualifications and manages andadministers the Plan. To participate in the Plan for any year, a participantmust make an irrevocable election to defer at least $2,000 to a maximum of 100%of his or her base salary and bonus for such year prior to the beginning of theyear for which the salary and bonus relate. For each Plan year Henry Companymay contribute to each participant’s account at the Plan Committee’sdiscretion. Deferred amounts are credited with interest at the September”Moody’s Seasoned Corporate Bond” rate that is published prior to the end ofthe Plan year preceding the Plan year for which the rate is used. Participantsare at all times fully vested in their deferred compensation accounts except inthe event of a termination of their employment, in which case participants arevested to only a percentage of any Company contributions that have been made,calculated according to the executive’s number of years of employment. At thetime of deferral, participants may elect to receive future short–termpayouts with respect to each year’s deferral, payable in a lump sum not priorto 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.

 

**ProfitSharing/401(k) Plan**

 

Henry Company’s Profit Sharing/401(k) Plan, asamended and restated as of January 1, 1995 (the “401(k) Plan”) is a qualifiedprofit sharing plan with a 401(k) feature covering salaried and hourlyemployees of Henry Company and its affiliates, other than union employees, whohave completed one year of service and attained the age of 21. Participants inthe 401(k) Plan may contribute up to 15% of their annual compensation to the401(k) Plan through salary deferral up to a maximum of $10,500. In addition,Henry Company may make annual discretionary matching contributions not toexceed 10% of a participant’s annual compensation. Currently, participantcontributions

 

24

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are matched at the rate of $0.50 for each dollar up to 4% of theparticipant’s compensation. Participating employees are 100% vested inparticipant contributions and become vested to a certain percentage of anyHenry Company discretionary matching contributions according to the employee’syears of service with Henry Company or its affiliates.

 

**EmploymentAgreements and Compensation Arrangements**

 

Henry Company hasentered into employment agreements with Mr. Baribault, Mr. Doose and Mr. VanPelt.

 

Mr. Baribault’semployment agreement provides for an annual base salary of $300,000, subject toannual review by the Company’s Board of Directors.  Mr. Baribault also receives annual bonuses based on the Company’soperating performance relative to the target performance set forth in theCompany’s annual operating plan.  If Mr.Baribault is terminated without cause, he is entitled to earned basecompensation plus any earned performance bonus during the year oftermination.  He is also entitled toseverance pay that is a multiple of annual base salary, determined by years ofservice.  Mr. Baribault’s employmentagreement terminates December 31, 2005.

 

Mr. Doose’s employment agreement provides for a base salary, subject toannual cost–of–living and discretionary increases. For 2001, Mr.Doose’s base salary was $257,692. Mr. Doose also receives annual bonuses basedon the net operating profits of, and on the return on capital employed at,RTC.  If Mr. Doose is terminated withoutcause, he is entitled to base compensation plus the bonus calculated on netoperating profits for the remaining term of the agreement.  Mr. Doose’s employment agreement terminatesJanuary 1, 2004.

 

Mr. Van Pelt's employment agreement providesfor an annual base salary of$200,000.  Mr. Van Pelt also receivesannual bonuses of $140,000 through the term of this agreement.  Mr. Van Pelt's employment agreementterminated March 26, 2002.  The Companyalso has a noncompetition agreement with Mr. Van Pelt, which restricts Mr. VanPelt from competing with Henry Company until March 26, 2005.

 

**Indemnificationof Directors and Officers**

 

The Company’s Articles of Incorporation authorizethe indemnification of Company officers and directors to the fullest extentpermissible under California law. Subject to the Articles of Incorporation andCalifornia law, the Bylaws provide that Henry Company shall indemnify each ofits directors and officers against expenses, judgments, fines, settlements andother amounts actually and reasonably incurred in connection with anyproceeding arising by reason of the fact that any person is or was a Companydirector or officer. The Company maintains directors and officers liabilityinsurance coverage.

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS 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 31,2001. 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.

 

25

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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 9/17/932911 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 9/17/932911 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 |   |

 

----

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

 

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

 

(3)                                  Assumes theconversion of Mr. Mooney’s redeemable convertible preferred stock into 22,500shares of Common Stock and the exercise of Mr. Mooney’s right to purchase up to45,000 shares of Common Stock in amounts sufficient to maintain his currentpercentage of economic interest in the Company following the exercise of any ofthe Henry Warrants (and the purchase of shares of Common Stock by Mr. Muhspursuant to his similar right).

 

(4)                                  Assumes exercise ofthe Henry Warrants to purchase 12,000 shares of Class A Common Stock whichexpire on September 30, 2012. The warrants may be exercised in whole or in partat variable exercise prices which increase over the term of the warrants. The currentand maximum exercise prices for such Class A Common Stock is $12.94 and $38.82per share, respectively. See “Executive Compensation.”

 

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

 

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

 

26

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

TheCompany leases its Huntington Park headquarters from a family trust and livingtrust for which Warner W. Henry is the trustee pursuant to three separate realproperty leases. These leases expire in 2006 and 2016. The total rent paid in2000 and 2001 for the Huntington Park leases was approximately $424,900 eachyear. The Company leases additional property at its Huntington Parkheadquarters from Alamo Development Company. Frederick H. Muhs, a director ofthe Company, is a shareholder of Alamo Development Company along with certainother members of his family. The Company currently pays rent of $6,120 permonth pursuant to this lease which is subject to annual adjustments to reflectchanges in the Bank of America prime rate. The lease expired February 28, 2002and is currently being continued on a month-to-month basis. 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.

 

Henry Company performs certain administrativeservices for an affiliate, Henry II Company a California corporation, pursuantto an administrative services agreement that provides for payments from HenryII Company to Henry Company for such services. These payments totaled $0.7million in 1999, 2000 and 2001.  HenryII Company’s shareholders are Warner W. Henry, Carol Henry, and certain trustsfor the benefit of their children.

 

At December 31, 1997, Henry Company received anote from Henry II Company for $1.9 million representing the purchase price forits interest in certain real property. Such real property related solely to thebusiness of Henry II, Inc. and had a net book value of $1.9 million. The notebears interest at the prime rate, and is repayable in a lump sum at any time upto December 31, 2003. The balance of such note was $1.9 million at December 31,2000 and 2001.

 

In addition, at December 31, 2001, Henry IICompany owed $1.5 million to Henry Company, representing past advances made onbehalf of Henry II, Inc. The note evidencing this debt does not bear interestand is payable upon demand.

 

Henry Company receives business and financialconsulting services from The Muhs Company, Inc., of which Frederick H. Muhs, adirector of the Company, is the President and controlling shareholder. HenryCompany paid $96,000 for these services in 1999 and $75,000 in 2000 and 2001.See “Executive Compensation.”

 

The Company is a party to employment andconsulting agreements with certain directors and officers of the Company. See“Executive Compensation-Employment Agreements and Compensation Arrangements.”

 

27

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**PART****IV**

 

ITEM14.                EXHIBITS, FINANCIAL STATEMENTS,SCHEDULES AND REPORTS ON FORM 8–K

(A) DOCUMENTS FILED AS PART OF THIS REPORT

** **

**1. FinancialStatements**

 

The Consolidated Financial Statements of HenryCompany are contained herein.

 

**2. FinancialStatement Schedules**

 

The financial statement schedules of Henry Companyhave been omitted because they are not applicable, not required, or theinformation is included in the consolidated financial statement or notes thereto.

 

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

 

**Reports on Form8-K**

 

The Company did not file any reports on Form 8–Kduring the quarter ended December 31, 2001.

 

**Exhibits**

 

See Exhibit Index

 

HENRY COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
|                                                  |
|-------------------------------------------------------|
| 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           |
|                                                  |

 

**REPORT OF INDEPENDENT ACCOUNTANTS**

 

Tothe Board of Directors,

BondHolders and Shareholders

ofHenry Company

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of operations,shareholders’ equity (deficit) and of cash flows present fairly, in allmaterial respects, the financial position of Henry Company and subsidiaries (the“Company”) at December 31, 2001 and 2000, and the results of their operationsand their cash flows for each of the three years in the period ended December31, 2001, in conformity with accounting principles generally accepted in theUnited States of America. These financial statements are the responsibility ofthe Company’s management; our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with auditing standards generally accepted in theUnited States of America which require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

 

PricewaterhouseCoopersLLP

 

LosAngeles, California

March15, 2002

 

28

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HENRY COMPANY CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 2001

 
|                                                                                                                                    |   | **2000**    |        | **2001**    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| ASSETS:                                                                                                                                 |   |        |        |        |   |
| Current assets:                                                                                                                         |   |        |        |        |   |
| Cash and cash equivalents                                                                                                               |   | $           | 1,046,115   |        | $      | 425,695 |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of  $2,044,158 and   $2,760,591 for 2000 and 2001, respectively |   | 25,253,299  |        | 23,643,661  |   |
| Inventories, net                                                                                                                        |   | 18,013,098  |        | 13,260,850  |   |
| Receivables from affiliate                                                                                                              |   | 2,123,910   |        | 1,476,147   |   |
| Notes receivable                                                                                                                        |   | 763,947     |        | 42,849      |   |
| Prepaid expenses and other current assets                                                                                               |   | 1,492,074   |        | 1,393,403   |   |
| Income tax receivable                                                                                                                   |   | 133,935     |        | 2,416,536   |   |
| Deferred income taxes                                                                                                                   |   | 5,257,223   |        | 1,141,127   |   |
| Total current assets                                                                                                                    |   | 54,083,601  |        | 43,800,268  |   |
| Property and equipment, net                                                                                                             |   | 34,180,641  |        | 30,276,860  |   |
| Cash surrender value of life insurance, net                                                                                             |   | 5,087,384   |        | 3,597,967   |   |
| Intangibles, net                                                                                                                        |   | 26,820,922  |        | 24,158,525  |   |
| Notes receivable                                                                                                                        |   | 271,600     |        | 113,315     |   |
| Note receivable from affiliate                                                                                                          |   | 1,863,072   |        | 1,863,072   |   |
| Deferred income taxes                                                                                                                   |   | 2,754,746   |        | 5,995,008   |   |
| Other assets                                                                                                                            |   | 225,603     |        | 1,094,246   |   |
| Total assets                                                                                                                            |   | $           | 125,287,569 |        | $      | 110,899,261 |   |
| LIABILITIES, REDEEMABLE  CONVERTIBLE PREFERRED STOCK AND SHAREHOLDER'S DEFICIT:                                                         |   |        |        |        |   |
| Current liabilities:                                                                                                                    |   |        |        |        |   |
| Accounts payable                                                                                                                        |   | $           | 6,143,253   |        | $      | 4,842,204 |   |
| Accrued expenses                                                                                                                        |   | 8,990,604   |        | 10,059,005  |   |
| Book overdrafts                                                                                                                         |   | 4,516,278   |        | 1,389,858   |   |
| Income taxes payable                                                                                                                    |   | —      |        | 339,228     |   |
| Deferred income taxes                                                                                                                   |   | 130,342     |        | —      |   |
| Notes payable, current portion                                                                                                          |   | 51,596      |        | 523,495     |   |
| Borrowings under lines of credit                                                                                                        |   | 13,454,094  |        | 6,128,519   |   |
| Total current liabilities                                                                                                               |   | 33,286,167  |        | 23,282,309  |   |
| Notes payable                                                                                                                           |   | 464,618     |        | 3,395,139   |   |
| Environmental reserve                                                                                                                   |   | 3,301,546   |        | 3,241,144   |   |
| Deferred income taxes                                                                                                                   |   | 8,063,613   |        | 6,669,024   |   |
| Deferred warranty revenue                                                                                                               |   | 2,278,821   |        | 2,516,229   |   |
| Deferred compensation                                                                                                                   |   | 937,908     |        | 903,114     |   |
| Series B Senior notes                                                                                                                   |   | 81,400,000  |        | 81,250,000  |   |
| Total liabilities                                                                                                                       |   | 129,732,673 |        | 121,256,959 |   |
|                                                                                                                                    |   |        |        |        |   |
| Commitments and contingencies (Note 7)                                                                                                  |   |        |        |        |   |
|                                                                                                                                    |   |        |        |        |   |
| Redeemable convertible preferred stock                                                                                                  |   | 1,919,433   |        | 2,082,773   |   |
|                                                                                                                                    |   |        |        |        |   |
| Shareholders’ deficit:                                                                                                             |   |        |        |        |   |
|                                                                                                                                    |   |        |        |        |   |
| Common stock                                                                                                                            |   | 4,691,080   |        | 4,691,080   |   |
| Additional paid-in capital                                                                                                              |   | 2,364,308   |        | 2,200,968   |   |
| Cumulative translation adjustment                                                                                                       |   | (497,228    | )           | (1,071,590  | )      |
| Accumulated deficit                                                                                                                     |   | (12,922,697 | )           | (18,260,929 | )      |
| Total shareholders’ deficit                                                                                                        |   | (6,364,537  | )           | (12,440,471 | )      |
| Total liabilities, redeemable convertible preferred  stock and shareholders’ deficit                                               |   | $           | 125,287,569 |        | $      | 110,899,261 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

29

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HENRY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED:

 
|                                                                                    |   | **December 31** |        |
|-----------------------------------------------------------------------------------------|--------|-----------------|-------------|
|                                                                                    |   | **1999**        |        | **2000** |   | **2001** |   |
| Net sales                                                                               |   | $               | 178,704,656 |   | $ | 193,461,586 |   | $ | 193,805,636 |   |
| Cost of sales                                                                           |   | 124,906,198     |        | 143,266,156 |   | 138,473,331 |   |
| Gross profit                                                                            |   | 53,798,458      |        | 50,195,430 |   | 55,332,305 |   |
| Operating expenses:                                                                     |   |            |        |   |   |   |   |
| Selling, general and administrative                                                     |   | 47,863,496      |        | 48,543,184 |   | 49,342,091 |   |
| Restructuring charges                                                                   |   | —          |        | 735,127 |   | 568,808 |   |
| Amortization of intangibles                                                             |   | 2,927,796       |        | 2,549,805 |   | 2,524,859 |   |
| Operating income (loss)                                                                 |   | 3,007,166       |        | (1,632,686 | ) | 2,896,547 |   |
| Other expense (income):                                                                 |   |            |        |   |   |   |   |
| Interest expense                                                                        |   | 9,194,496       |        | 9,889,325 |   | 10,059,608 |   |
| Interest and other income                                                               |   | (224,103        | )           | (260,524 | ) | (191,023 | ) |
| Loss before extraordinary item                                                          |   | (5,963,227      | )           | (11,261,487 | ) | (6,972,038 | ) |
| Extraordinary gain related to early extinguishment of  debt, net of taxes of   $400,800 |   | (601,200        | )           | — |   | — |   |
| Loss before provision (benefit) for income taxes                                        |   | (5,362,027      | )           | (11,261,487 | ) | (6,972,038 | ) |
| Provision (benefit) for income taxes                                                    |   | 303,969         |        | (4,595,913 | ) | (1,633,806 | ) |
| Net loss                                                                                |   | $               | (5,665,996  | ) | $ | (6,665,574 | ) | $ | (5,338,232 | ) |
|                                                                                         |        |                 |             |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

30

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HENRY COMPANY CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY (DEFICIT)FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

 
|                                                  |   | **Common Stock**  |   |       |      |                             |   |                                    |   |                     |       |
|-------------------------------------------------------|--------|-------------------|--------|------------|-----------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|------------|
|                                                  |   | **Issued Shares** |   | **Amount** |      | **Additional  Paid-In  Capital** |   | **Cumulative  Translation  Adjustment** |   | **Accumulated  Deficit** |       | **Total** |   |
| Balances, December 31, 1998                           |   | 227,500           |   | $          | 4,691,080 |                             | $      | 2,622,867                               |   | $                        | (892,724   | ) | $ | (591,127 | ) | $ | 5,830,096 |   |
| Accretion on redeemable   convertible preferred stock |   | —            |   | —     |      | (103,720                         | )      | —                                  |   | —                   |       | (103,720 | ) |
| Comprehensive loss:                                   |   |              |   |       |      |                             |   |                                    |   |                     |       |   |   |
| Net loss                                              |   | —            |   | —     |      | —                           |   | —                                  |   | (5,665,996               | )          | (5,665,996 | ) |
| Other comprehensive   income (loss):                  |   |              |   |       |      |                             |   |                                    |   |                     |       |   |   |
| Change in cumulative   translation adjustment         |   | —            |   | —     |      | —                           |   | 743,641                                 |   | —                   |       | 743,641 |   |
| Total comprehensive loss                              |   | —            |   | —     |      | —                           |   | —                                  |   | —                   |       | (4,922,355 | ) |
| 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 | ) |

 

The accompanying notes are an integralpart of these consolidated financial statements.

 

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HENRY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED:

 
|                                                                                         |   | **December 31,** |       |
|----------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                         |   | **1999**         |       | **2000** |   | **2001** |   |
| Cash flows from operating activities:                                                        |   |             |       |   |   |   |   |
| Net loss                                                                                     |   | $                | (5,665,996 | ) | $ | (6,665,574 | ) | $ | (5,338,232 | ) |
| Adjustments to reconcile net loss to net cash provided  by (used in)   operating activities: |   |             |       |   |   |   |   |
| Depreciation and amortization                                                                |   | 4,243,471        |       | 5,041,093 |   | 4,789,789 |   |
| Provision for doubtful accounts                                                              |   | 261,192          |       | 1,016,333 |   | 716,433 |   |
| Deferred income taxes                                                                        |   | (364,388         | )          | (5,166,097 | ) | (649,096 | ) |
| Noncompetition and goodwill amortization                                                     |   | 2,927,796        |       | 2,549,805 |   | 2,524,859 |   |
| Loss (gain) on disposal of property and equipment                                            |   | 3,421            |       | 240,205 |   | (7,391 | ) |
| Gain on sale of investment                                                                   |   | —           |       | (86,542 | ) | –– |   |
| Gain on purchase of bonds                                                                    |   | (601,200         | )          | — |   | — |   |
| Changes in operating assets and liabilities, net of  assets acquired:                        |   |             |       |   |   |   |   |
| Accounts receivable                                                                          |   | (1,274,820       | )          | (4,919,876 | ) | 893,205 |   |
| Inventories                                                                                  |   | (432,147         | )          | (2,406,346 | ) | 4,752,248 |   |
| Receivables from affiliates                                                                  |   | 709,465          |       | 20,302 |   | 647,763 |   |
| Notes receivable                                                                             |   | 42,841           |       | (41,875 | ) | 879,383 |   |
| Other assets                                                                                 |   | 492,222          |       | 482,112 |   | (769,972 | ) |
| Income tax receivable                                                                        |   | 379,789          |       | 243,183 |   | (2,282,601 | ) |
| Accounts payable and accrued expenses                                                        |   | (4,536,762       | )          | (3,209 | ) | 148,176 |   |
| Deferred warranty revenue                                                                    |   | 372,293          |       | (284,410 | ) | 237,408 |   |
| Deferred compensation                                                                        |   | 55,508           |       | (133,165 | ) | (34,794 | ) |
| Net cash provided by (used in) operating activities                                          |   | (3,387,315       | )          | (10,114,061 | ) | 6,507,178 |   |
| Cash flows from investing activities:                                                        |   |             |       |   |   |   |   |
| Capital expenditures                                                                         |   | (4,184,421       | )          | (3,052,450 | ) | (1,358,006 | ) |
| Proceeds from the disposal of property and equipment                                         |   | 76,807           |       | 40,217 |   | 32,301 |   |
| Proceeds from sale of investment                                                             |   | —           |       | 204,423 |   | –– |   |
| Acquisition of business, net of cash acquired                                                |   | (2,645,401       | )          | — |   | — |   |
| Investment in affiliate                                                                      |   | (30,127          | )          | 7,080 |   | –– |   |
| Net cash used in investing activities                                                        |   | (6,783,142       | )          | (2,800,730 | ) | (1,325,705 | ) |
| Cash flows from financing activities:                                                        |   |             |       |   |   |   |   |
| Net borrowings (repayments) under line-of-credit  agreements                                 |   | 972,337          |       | 10,824,257 |   | (7,325,575 | ) |
| Repayments under note payable agreements                                                     |   | (331,931         | )          | (124,994 | ) | (97,580 | ) |
| Borrowings under notes payable agreements                                                    |   | —           |       | — |   | 3,500,000 |   |
| Increase (decrease) in book overdrafts                                                       |   | 1,114,126        |       | 3,402,153 |   | (3,126,421 | ) |
| Cash surrender value of life insurance                                                       |   | (564,676         | )          | (746,996 | ) | 1,489,417 |   |
| Purchase of Series B Senior Notes                                                            |   | (2,564,000       | )          | — |   | (150,000 | ) |
| Net cash provided by (used in) financing activities                                          |   | (1,374,144       | )          | 13,354,420 |   | (5,710,159 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                                |   | 206,969          |       | (78,558 | ) | (91,734 | ) |
| Net increase (decrease) in cash and cash equivalents                                         |   | (11,337,632      | )          | 361,071 |   | (620,420 | ) |
| Cash and cash equivalents, beginning of year                                                 |   | 12,022,676       |       | 685,044 |   | 1,046,115 |   |
| Cash and cash equivalents, end of year                                                       |   | $                | 685,044    |   | $ | 1,046,115 |   | $ | 425,695 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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HENRYCOMPANY NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

**1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis ofPresentation**

 

The Henry Company (the “Company”) develops,manufactures and markets materials for the construction industry focusing primarilyon roofing, sealing and paving applications. The Company’s products include:roof/driveway coatings and paving products, industrial emulsions, air barriers,specialty products, polyurethane foam for residential and commercial uses, andsealants for the construction and marine industries.

 

The consolidated financial statements of theCompany include the accounts of the Company and its subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated.

 

**RevenueRecognition**

 

Revenues are recognized when product is shippedand title transfers. The Company has established programs, which, underspecified conditions, allow customers to return products. The Companyestablishes liabilities for estimated returns and allowances at the time ofshipment. In addition, accruals for customer discounts and allowances arerecorded when revenues are recognized.

 

The Company also offers its customers an optionalseparately purchased warranty program for its commercial roofing systems.Revenue from the warranty program is recognized over the warranty periods thatrange from 5 to 20 years. Warranty repair expenses under the program arecharged to expense as incurred.

 

**Cash and CashEquivalents**

 

The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.

 

Under the Company’s cash management system, checksissued but not presented to banks frequently result in overdraft balances foraccounting purposes and are included in “book overdrafts” in the accompanyingbalance sheet. At December 31, 2000, and 2001, these overdraft balancesamounted to $4,516,278 and $1,389,858, respectively.

 

**Inventories**

 

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

 

**Property andEquipment**

 

Property and equipment are stated at cost.Leasehold improvements are amortized on a straight-line basis over theremaining lease term, or the asset’s estimated useful life, whichever isshorter. All other depreciable assets are depreciated using thedouble-declining-balance method or the straight-line method, over the assets’estimated useful lives.

 

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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 arecapitalized. Repair and maintenance costs are expensed as incurred. Upon saleor retirement of property and equipment, the cost and accumulated depreciationare removed from the appropriate accounts and any corresponding gain or loss isincluded in income in the year the asset is disposed.

 

**Intangibles**

 

Intangible assets are comprised of the excesspurchase price over the estimated fair value of net tangible assets acquired.Intangible assets are being amortized on a straight line basis over periodsranging from 6 to 15 years. At December 31, 2000 and 2001, intangible assetsare comprised of the following components:

 
|                            |   | **December 31,** |       |
|---------------------------------|--------|------------------|------------|
|                            |   | **2000**         |       | **2001** | ** ** |
| Goodwill                        |   | $                | 26,992,321 |   | $ | 26,854,783 |   |
| Noncompetition  agreement       |   | 4,727,199        |       | 4,727,199 |   |
| Financing  fees                 |   | 2,442,000        |       | 2,442,000 |   |
|                            |   | 34,161,520       |       | 34,023, 982 |   |
| Less,  accumulated amortization |   | (7,340,598       | )          | (9,865,457 | ) |
|                            |   | $                | 26,820,922 |   | $ | 24,158,525 |   |

 

**Long-LivedAssets**

 

The Company periodically evaluates the carryingvalue of goodwill, intangibles and other long-lived assets, including therelated depreciation or amortization periods. In evaluating goodwill, theCompany determines whether there has been an impairment and the amount thereof,if any, by comparing the undiscounted future operating income of the acquiredbusiness with the carrying value of the goodwill. In evaluating otherintangible assets and other long-lived assets, the Company determines whetherthere has been an impairment by comparing the anticipated undiscounted futureoperating income to be generated by the asset with their carrying values. Ifthe undiscounted operating income is less than the carrying value, the amountof the impairment, if any, will be determined by comparing the carrying valueof each asset with its fair value. Fair value is generally based on adiscounted cash flows analysis. The Company does not believe that anyimpairments of its goodwill, intangibles, or other long-lived assets haveoccurred.

 

**Income Taxes**

 

The Company recognizes deferred taxes inaccordance with the liability method of accounting for income taxes. Under thismethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.The provision for income taxes represents income taxes payable for the periodand the change during the period in deferred tax assets and liabilities.

 

 

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**EnvironmentalReserve**

 

The Company accrues for losses associated withenvironmental remediation obligations when such losses are probable andreasonably estimable. Accruals for estimated losses from environmentalremediation obligations generally are recognized no later than completion ofthe remedial feasibility study. Such accruals are adjusted as furtherinformation develops or as circumstances change. Any costs for futureexpenditures for environmental remediation obligations are not discounted.

 

**Selling, Generaland Administrative Expenses**

 

Selling, general and administrative expensesinclude all costs associated with marketing and distributing the Company’sproducts. Distribution costs were $8,918,056, $9,604,960, and $9,011,277 forthe years ended December 31, 1999, 2000 and 2001, 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 $1,582,468,  $1,545,855, and$1,388,156 for the years ended December 31, 1999, 2000 and 2001 respectively.

 

**Advertising andPromotion Costs**

 

All costs associated with advertising andpromoting products are expensed in the year incurred and are included in selling,general and administrative expenses. Advertising and promotion expenses were$4,375,061, $4,724,666, and $4,039,590 for the years ended December 31, 1999,2000 and 2001, respectively.

 

**Foreign CurrencyTranslation**

 

The assets and liabilities of the Company’swholly-owned Canadian subsidiaries are translated from Canadian dollars to U.S.dollars using exchange rates in effect at the balance sheet date. Revenues andexpenses are translated using average exchange rates prevailing during theperiod. The effect of the unrealized exchange rate fluctuations on translatingforeign currency assets and liabilities into U.S. dollars are accumulated as aseparate component of shareholders’ equity. Gains and losses resulting fromforeign currency transactions are included in operations.  For the years ended December 31, 1999, 2000and 2001, the aggregate foreign exchange gains included in operations were$128,446, $31,050, and $233,383, respectively.

 

**FinancialInstruments and Risk Management**

 

Financial instruments, which potentially exposethe Company to concentration of credit risk, consist primarily of cash and cashequivalents and trade receivables. The Company currently maintainssubstantially all of its day-to-day operating cash balances with majorfinancial institutions. At times, cash balances may be in excess of FederalDepository Insurance Corporation (“FDIC”) insurance limits. Cash equivalentsprincipally consist of money market funds on deposit with major financialinstitutions.

 

**Dependenceon Key Customer**

 

                The Company is substantially dependent on Home Depot,the Company's largest customer.  HomeDepot represented approximately 8.3% of gross sales in fiscal year 1999, 11.4%of gross sales in fiscal year 2000 and 13.3% of gross sales in fiscal year 2001and also accounted for approximately 11.5% and 23.3% of accounts receivable atDecember 31, 2000 and 2001 respectively. In January 2002, the company entered into a three-year agreement withHome Depot that significantly expands the Company's relationship with HomeDepot.  The agreement containsperformance targets, which, if not achieved, could trigger a payment from theCompany to Home Depot in the second year of the agreement.  In the first quarter of 2002, the Company'srelationship with Lowes, its second largest customer, was terminated.  The Company believes that the incrementalrevenue resulting from the Home Depot agreement will exceed the revenue lost asa result of the loss of Lowes as a customer. Any deterioration of the Company's relationship with Home Depot or anyfailure of Home Depot to purchase and pay for product shipped by the Company toHome Depot could have a material adverse effect on the Company.

 

**The Value ofFinancial Instruments**

 

SFAS No. 107, “Disclosure About Fair Value ofFinancial Instruments”, requires disclosure of fair value information aboutmost financial instruments both on and off the balance sheet, if it ispracticable to estimate. SFAS No. 107 excludes certain financial instrumentssuch as certain insurance contracts and all non-financial instruments from itsdisclosure requirements. A financial instrument is defined as a contractualobligation that ultimately ends with the delivery of cash or an ownershipinterest in an entity. Disclosures regarding the fair value of financialinstruments are derived using external market sources, estimates using presentvalue or other valuation techniques. Cash, accounts receivable, accountspayable, accrued liabilities and short-term debt are reflected in the financialstatements at fair value because of the short-term maturity of theseinstruments. The Company’s long-term debt is primarily comprised of SeniorNotes with a carrying value of $81.3 million at December 31, 2001. The fairvalue of the Senior Notes was $30.9 million at December 31, 2001.

 

 

35

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The Company has issued a standby letter of creditrelating to its business insurance and is contingently liable for approximately$1,068,180. The standby letter of credit is in force for the term of theinsurance policy, and reflects the current fair value.

 

**Use of Estimatesand Assumptions**

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, and disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

**Reclassifications**

 

Certain previously reported amounts have beenreclassified to conform with the current year’s presentation.

 

**ComprehensiveIncome (Loss)**

 

During 1998, the Company adopted the provisions ofSFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 establishesguidelines for the reporting and display of comprehensive income and itscomponents in the financial statements.

 

Comprehensive income (loss) as defined, includesall changes in shareholders’ equity during a period from non-owner sources. Theonly component of comprehensive loss not included in the Company’s operatingresults relates to the change in the cumulative translation adjustment relatedto the foreign currency effects of the Canadian operations acquired during 1998as part of the Monsey Bakor acquisition as discussed in Note 2.

 

**RecentAccounting Pronouncements**

 

In July 2001, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) Nos. 141 and 142 (SFAS No. 141 and SFASNo. 142), “Business Combinations” and “Goodwill and Other Intangible Assets”.SFAS No. 141 replaces APB 16 and eliminates pooling-of-interests accountingprospectively. It also provides guidance on purchase accounting related to therecognition of intangible assets and accounting for negative goodwill. SFAS No.142 changes the accounting for goodwill from an amortization method to animpairment-only approach. Under SFAS No. 142, goodwill will be tested annuallyand whenever events or circumstances occur indicating that goodwill might beimpaired. SFAS No. 141 and SFAS No. 142 are effective for all businesscombinations completed after June 30, 2001. Upon adoption of SFAS No. 142,amortization of goodwill recorded for business combinations consummated priorto July 1, 2001 will cease, and intangible assets acquired prior to July 1,2001 that do not meet the criteria for recognition under SFAS No. 141 will bereclassified to goodwill. Companies are required to adopt SFAS No. 142 forfiscal years beginning after December 15, 2001, but early adoption ispermitted. The Company will adopt SFAS No. 142 on January 1, 2002, at thebeginning of fiscal year 2002. In connection with the adoption of SFAS No. 142,the Company will be required to perform a transitional goodwill impairmentassessment. The Company has not yet determined the impact these standards willhave on its financial position, results of operations, or cash flows.

 

In August 2001, the FASB issuedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This Statement requires that thefair value of a liability for an asset retirement obligation be recognized inthe period in which it is incurred if a reasonable estimate of fair value canbe made.  The associated assetretirement costs are capitalized as part of the carrying amount of thelong-lived asset.  All provisions ofthis Statement will be effective at the beginning of fiscal 2003.  The Company is in the process of determiningthe impact of this standard on the Company’s financial statements wheneffective.

 

In October 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This Statement supersedes SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to be Disposed of” and amendsAPB Opinion No. 30, “Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions.”  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. 144 retains the fundamental provisions of SFAS No. 121for (a) recognition and measurement of the impairment of long-lived assets tobe held and used and (b) measurement of long-lived assets to be disposed of bysale.  This Statement also retains APBOpinion No. 30’s requirement that companies report discontinued operationsseparately from continuing operations. All provisions of this Statement will be effective in the first quarterof fiscal year 2002.  The adoption ofthis standard is not expected to have a significant impact on the Company’sfinancial position, results of operations, or cash flows.

 

In November 2001,the Financial Accounting Standards Board (“FASB”) Emerging Task Force (“EITF”)reached a consensus on

 

 

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EITF Issue 01-09,Accounting for Consideration Given by a Vendor to a customer or a Reseller ofthe Vendor’s Products, which is a codification of EITF 00-14, 00-22 and00-25.  This issue presumes thatconsideration from a vendor to a customer or reseller of the vendor’s productsto be a reduction of the selling prices of the vendor’s products and,therefore, should be characterized as a reduction of revenue when recognized inthe vendor’s income statement and could lead to negative revenue under certaincircumstances.  Revenue reduction isrequired unless consideration relates to a separate identifiable benefit andthe benefit’s fair value can be established. This issue should be applied no later than in annual or interimfinancial statements for periods beginning after December 15, 2001, which isthe Company’s first quarter ended March 31, 2002.  Upon adoption the Company is required to reclassify all priorperiod amounts to conform to the current period presentation.  The Company has not yet evaluated theeffects of these changes on its consolidated financial statements.

 

**2. BUSINESSACQUISITION AND NOTE OFFERING:**

 

On April 22, 1998, the Company completed theacquisition of Monsey Bakor and its subsidiaries, which are engaged in thedistribution and manufacture of roof coatings, adhesives and membranes, andwaterproofing and air barrier systems, for residential and commercialapplications. The cash purchase price was $42,750,000 with an additional$3,227,000 paid at closing to certain selling shareholders of Monsey Bakor fornoncompetition agreements. A selling shareholder also purchased 22,500 sharesof redeemable convertible preferred stock of the Company for $600,000 in cashas more fully discussed in Note 12. The acquisition was accounted for using thepurchase method of accounting.

 

Concurrent with the Monsey Bakor acquisition, theCompany conducted a senior note offering (the “Offering”) in the aggregateprincipal amount of $85,000,000 as more fully discussed in Note 5.

 

On March 26, 1999, the Company completed theacquisition of Grundy Industries which is engaged in the manufacture of roofcoating products. The purchase price was $2.0 million with an additional $0.6million paid to a shareholder for a noncompetition agreement.

 

37

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**3. INVENTORIES:**

 

Inventories consist of the following:

 
|           |   | **December 31,** |       |
|----------------|--------|------------------|------------|
|           |   | **2000**         |       | **2001** |   |
| Raw materials  |   | $                | 8,296,980  |   | $ | 6,811,265 |   |
| Finished goods |   | 9,716,118        |       | 6,449,585 |   |
|           |   | $                | 18,013,098 |   | $ | 13,260,850 |   |

 

 

**4. PROPERTY ANDEQUIPMENT, NET:**

 

Property and equipment consist of the following:

 
|                                            |   | **December 31,** |       |
|-------------------------------------------------|--------|------------------|------------|
|                                            |   | **2000**         |       | **2001** | ** ** |
| Buildings                                       |   | $                | 14,856,607 |   | $ | 14,707,437 |   |
| Machinery and equipment                         |   | 27,579,944       |       | 27,935,954 |   |
| Office furniture and equipment                  |   | 6,953,666        |       | 8,204,948 |   |
| Automotive equipment                            |   | 1,349,267        |       | 1,207,485 |   |
| Leasehold improvements                          |   | 2,928,565        |       | 2,938,283 |   |
| Other assets                                    |   | 454,834          |       | 486,535 |   |
|                                            |   |             |       |   |   |
|                                            |   | 54,122,883       |       | 55,480,642 |   |
| Less, accumulated depreciation and amortization |   | (24,582,232      | )          | (29,025,424 | ) |
|                                            |   |             |       |   |   |
|                                            |   | 29,540,651       |       | 26,455,218 |   |
| Land                                            |   | 3,262,550        |       | 3,219,585 |   |
| Construction-in-progress                        |   | 1,377,440        |       | 602,057 |   |
|                                            |   | $                | 34,180,641 |   | $ | 30,276,860 |   |

 

 

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**5. LONG–TERM DEBT AND CREDITFACILITIES:**

 

On April 22, 1998, the Company privately issuedand sold $85,000,000 of senior notes (the “Senior Notes”) due in 2008. Intereston the Senior Notes is payable semi–annually at 10% per annum. In October1998, the Company completed an exchange offer for all of the Senior Notes withidentical terms in all material respects to the original private issue. Theproceeds from the offering were used to (i) retire existing Company bank debt,(ii) retire existing Company subordinated shareholder debt, (iii) acquireMonsey Bakor, (iv) retire a substantial portion of Monsey Bakor’s then-existingbank debt with (v) the remainder providing additional working capital.

 

Long-term debt and credit facilities consist ofthe following:

 
|                                                                                                                                                                                     |   | **December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|------------|
|                                                                                                                                                                                     |   | **2000**         |       | **2001** | ** ** |
| 10.0% Series B Senior Notes due April 2008                                                                                                                                               |   | $                | 81,400,000 |   | $ | 81,250,000 |   |
| Line of credit borrowing, at the bank’s prime interest  rate (9.50% at December 31, 2000 and 4.75% at December 31, 2001)                                                            |   | 9,817,987        |       | 6,003,444 |   |
| Canadian bank line of credit borrowings, interest rate  charged at prime plus 0.5% (8.0% at December 31, 2000 and 4.5% at December  31, 2001)                                            |   | 3,636,107        |       | 125,075 |   |
| Term note payable to third party, with interest at 8.5%  at December 31, 2000 and 2001, principal and interest payable monthly in  installments of $4,848, due in fiscal year 2007       |   | 440,222          |       | 418,634 |   |
| Term note payable to third party, with interest at 6.5%  at December 31, 2000 and 2001, principal and interest payable monthly in  installments of $2,839, paid down in fiscal year 2001 |   | 75,992           |       | — |   |
| Term note payable to bank, with interest at 5.5% at  December 31, 2001, principal payable monthly in installments of $50,000  beginning March 2002                                       |   | —           |       | 3,500,000 |   |
|                                                                                                                                                                                     |   | 95,370,308       |       | 91,297,153 |   |
| Less, current maturities                                                                                                                                                                 |   | (13,505,690      | )          | (6,652,014 | ) |
|                                                                                                                                                                                     |   | $                | 81,864,618 |   | $ | 84,645,139 |   |

 

The Company’s Senior Notes are guaranteed by allof the Company’s United States subsidiaries, Kimberton Enterprises, Inc. andGrundy Industries, Inc. (the “Subsidiary Guarantors”). The guaranteeobligations of the Subsidiary Guarantors are full, unconditional and joint andseveral. See Note 15 for the Guarantor Condensed Consolidating FinancialStatements. The notes payable agreement limits the Company’s ability to makedividend payments and incur additional debt.

 

In 1999, the Company repurchased and retired $3.6million of the Senior Notes which resulted in a gain of $0.6 million, net ofincome taxes. In 2001, the Company repurchased and retired $150,000 of theSenior Notes at face value which resulted in no gain or loss.

 

In August 2001, the Company entered into areplacement credit facility agreement with two new financial institutions andreceived funding. The replacement credit facility provides for a $25 millionrevolving credit facility and a $10 million term loan. Upon closing, $3.5million of the term loan was funded. The replacement facility expires in August2006 and is collateralized by substantially all of the Company’s United Statesassets. Borrowings on the line of credit will bear interest at the prime ratewith an option to borrow based on the LIBOR rate. Balances outstanding underthis line were $6.0 million at December 31, 2001.  The Company also maintains a credit line with a Canadian bank.Balances outstanding under this line were $0.1 million at December 31, 2001.

 

39

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

 
| 2002       |   | $          | 6,652,014  |   |
|------------|--------|------------|------------|--------|
| 2003       |   | 525,572    |       |
| 2004       |   | 527,833    |       |
| 2005       |   | 530,293    |       |
| 2006       |   | 532,970    |       |
| Thereafter |   | 82,528,471 |       |
| Total      |   | $          | 91,297,153 |   |

 

**6. INCOME TAXES:**

 

The significant components of the provision(benefit) for income taxes for the years ended December 31, 1999, 2000 and 2001are as follows:

 
|      |   | **1999** |    | **2000**   |   | **2001**   |   |
|-----------|--------|----------|---------|------------|--------|------------|--------|
| Current:  |   |     |    |       |   |       |   |
| Federal   |   | —   |    | —     |   | —     |   |
| State     |   | —   |    | —     |   | —     |   |
| Foreign   |   | $        | 681,896 |       | $      | 650,918    |   | $ | (770,293 | ) |
|      |   |     |    |       |   |       |   |
|      |   | 681,896  |    | 650,918    |   | (770,293   | )      |
| Deferred: |   |     |    |       |   |       |   |
| Federal   |   | (207,557 | )       | (4,754,626 | )      | (485,238   | )      |
| State     |   | (170,370 | )       | (271,295   | )      | (378,275   | )      |
| Foreign   |   | —   |    | (220,910   | )      | —     |   |
|      |   | 377,927  |    | (5,246,831 | )      | (863,513   | )      |
|      |   | $        | 303,969 |       | $      | (4,595,913 | )      | $ | (1,633,806 | ) |
|           |        |          |         |            |        |            |        |  |  |  |  |  |  |

 

TheCompany’s effective tax rate differs from the federal statutory tax rate forthe years ended December 31, 1999, 2000 and 2001 as follows:

 
|                                                          |   | **1999** |   | **2000** |   | **2001** |   |
|---------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Provision for income taxes at the federal statutory tax  rate |   | (34      | )%     | (34      | )%     | (34      | )%     |
| State taxes net of federal tax benefit                        |   | (6       | )      | (3       | )      | (3       | )      |
| Foreign income taxes in excess of U.S. statutory rate         |   | 20       |   | 1        |   | 3        |   |
| Prior year net operating loss adjustment                      |   | —   |   | (8       | )      | 8        |   |
| Nondeductible intangibles                                     |   | 26       |   | 5        |   | 8        |   |
| Nondeductible life insurance                                  |   | —   |   | 1        |   | (1       | )      |
| Nondeductible business expenses                               |   | 5        |   | —   |   | 1        |   |
| Other, net                                                    |   | (2       | )      | (3       | )      | (5       | )      |
|                                                          |   | 9        | %      | (41      | )%     | (23      | )%     |

 

Income (loss) before income taxes of the Company’sCanadian operations was ($281,974), ($1,499,096) and $1,704,589 for the yearsended December 31, 1999, 2000 and 2001, respectively.

 

 

40

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The significant components of the Company’s deferred tax assets andliabilities as of December 31, 2000 and 2001 are as follows:

 
|                                             |   | **2000**   |      | **2001**   |   |
|--------------------------------------------------|--------|------------|-----------|------------|--------|
| Deferred tax assets:                             |   |       |      |       |   |
| Environmental reserve                            |   | $          | 1,429,569 |       | $      | 1,388,506 |   |
| Allowances and reserves deductible in the future |   | 923,819    |      | 1,091,955  |   |
| Inventory capitalization                         |   | 123,098    |      | 87,978     |   |
| Deferred revenue                                 |   | 919,062    |      | 999,217    |   |
| Net operating loss                               |   | 4,210,307  |      | 3,040,340  |   |
| Other accruals                                   |   | 406,114    |      | 528,139    |   |
|                                             |   |       |      |       |   |
| Deferred tax assets                              |   | 8,011,969  |      | 7,136,135  |   |
|                                             |   |       |      |       |   |
| Deferred tax liabilities:                        |   |       |      |       |   |
| Depreciation                                     |   | (2,825,169 | )         | (1,565,609 | )      |
| Deferred gain on discharge of liability          |   | (1,668,291 | )         | (1,582,985 | )      |
| Asset step-up due to valuation increase          |   | (3,570,153 | )         | (3,520,430 | )      |
| Inventory reserve                                |   | (130,342   | )         | —     |   |
|                                             |   |       |      |       |   |
| Deferred tax liabilities                         |   | (8,193,955 | )         | (6,669,024 | )      |
|                                             |   |       |      |       |   |
| Net deferred tax assets (liability)              |   | $          | (181,986  | )          | $      | 467,111 |   |

 

 

**7. COMMITMENTSAND CONTINGENCIES:**

 

The Company conducts certain operations out ofleased facilities, including the corporate office and divisional warehouses.The lease terms range from 1 to 6 years and begin to expire in 2002. Certain ofthe Company’s operating lease agreements provide for escalation of payments,which are based on fluctuations of certain published cost-of-living indices.The Company also leases certain land, buildings and equipment from relatedparties, with terms expiring in 2002. The various leases also contain certainrenewal options.

 

Total rent expense was, $1,487,854, $1,721,660 and$1,722,051 for the years ended December 31, 1999, 2000 and 2001, respectively.Included in rent expense is rent paid to related parties of $767,923, $771,433and $789,543 for the years ended December 31, 1999, 2000 and 2001, respectivelyThe minimum rental commitments for land, buildings and equipment under allnoncancelable operating leases, with lease terms in excess of one year, are asfollows:

 
| 2002       |   | $         | 1,419,311 |   |
|------------|--------|-----------|-----------|--------|
| 2003       |   | 1,163,098 |      |
| 2004       |   | 657,838   |      |
| 2005       |   | 475,098   |      |
| 2006       |   | 419,663   |      |
| Thereafter |   | 2,469,722 |      |
|       |   | $         | 6,604,730 |   |
|       |   |      |      |

 

Included in the annual minimum rental commitmentsare operating lease payments due to related parties of $729,414 in 2002,$717,174 in 2003, $433,173 in 2004, $424,898 in 2005, $404,020 in 2006 and$2,469,722 thereafter.

 

The Company is involved in various lawsuits, claimsand inquiries, most of which are routine to the nature of its business. In theopinion of management, the resolution of these matters will not materiallyaffect the financial position, results of operations or cash flows of theCompany.

 

41

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

 
|                                                               |   | **1999** |      | **2000** |    | **2001**  |    |
|--------------------------------------------------------------------|--------|----------|-----------|----------|---------|-----------|---------|
| Cash paid during the year for:                                     |   |     |      |     |    |      |    |
| Interest                                                           |   | $        | 8,807,940 |     | $       | 9,617,073 |    | $ | 9,768,530 |   |
| Income taxes                                                       |   | $        | 924,442   |     | $       | 889,820   |    | $ | 785,574 |   |
| Non-cash transactions:                                             |   |     |      |     |    |      |    |
| Note receivable from sale of assets                                |   | —   |      | $        | 123,000 |      | —  |   |
| Note receivable forgiven                                           |   | —   |      | —   |    | $         | 501,000 | (1) |
| Note receivable exchanged for interest  in Executive Deferred Plan |   | —   |      | —   |    | $         | 253,544 | (1) |

----

(1) See Footnote No. 10

** **

**9.PROFIT-SHARING AND PENSION PLAN:**

 

The Company sponsors a deferred qualified profit–sharingplan with a 401(k) feature covering salaried and hourly employees of HenryCompany and its affiliates, other than union employees, who have completed one yearof service. Contributions made to the profit–sharing plan by the Companyare based on the Company’s performance and are at the discretion of the Boardof Directors.  The Company has not madeany contributions to the profit-sharing plan during the years 1999 through2001.  Participants in the 401(k) Planmay contribute up to 15% of their annual compensation to the 401(k) Planthrough salary deferral up to a maximum of $10,500 of a participant’s annualcompensation. In 1999, the 401(k) plan was amended to include a discretionaryCompany matching contribution to eligible participants. For 2001, 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, 1999, 2000 and 2001 were $212,828, $211,698, and $165,314, respectively.

 

Hourly employees at the Huntington Park, Kimbertonand Rock Hill facilities are covered by multi-employer union plans to which theCompany makes periodic contributions as determined by collective bargainingagreements. The Company is also subject to additional charges as determined bythe plans’ trustees during the term of the agreement to maintain the currentlevel of health and welfare benefits. The information with respect to theplans’ net assets and actuarial present value of accumulated plan benefits arenot determinable due to the nature of the plans. The costs incurred during theyears ended December 31, 1999, 2000 and 2001 were $301,817, $313,905, and $396,912respectively.

 

**10. RELATEDPARTIES:**

 

The Company is obligated under certain leases atDecember 31, 2001 and has incurred rent expense in 1999, 2000 and 2001 withrelated parties, as more fully described in Note 7.

 

Receivables from affiliate represent amounts duefrom Henry II Company, an affiliated group of companies under common control,and relates to operating advances made to Henry II Company.

 

The note receivable from affiliate relates toproceeds due the Company on the sale of property to Henry II Company at itsthen net book value at December 31, 1997. The note receivable is repayable byDecember 31, 2002; bears interest at the prime interest rate and iscollateralized by an interest in the property.

 

The Company charges Henry II Company certaindirect administrative costs for services provided by the Company’s finance,human resources, and management information systems departments. In 1998, theCompany entered into a new administrative services agreement with Henry IICompany. for reimbursement of administrative services provided by theCompany.  The administrative costcharged totaled $775,000 for each of the years ended December 31, 1999, 2000and 2001, respectively.

 

As of December 31, 2000, notes receivable in theaccompanying balance sheet included outstanding principal and accrued interestdue from Richard Gordinier, the Company’s President until January 2001, in theamount of $743,770.  The notes accruedinterest at Bank of America’s Prime Rate (9.5% at December 31, 2000).  Mr. Gordinier separated from the Company inJanuary 2001.  At the time of thenegotiated settlement agreement, the outstanding note receivable balance owedby Mr. Gordiner to the Company was $784,207. In accordance with the settlement agreement, $501,000 of the receivablebalance was forgiven, and $253,544 was exchanged for Mr. Gordinier’s interestin the Henry Company Executive Deferred Plan. The remaining amount due the Company was remitted to the Company by Mr.Gordinier in cash. Henry II Company has assumed $327,000 of this expense.

 

42

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**11. CAPITALSTOCK:**

 

On April 21, 1998, Warner Development Company ofTexas (“Warner Development”) was merged into the Company. The outstandingshares of Warner Development were canceled in the merger. For periods prior tothis date, the financial results of the Company and Warner Development werepresented on a combined basis as both entities were under common control withidentical management and shareholder ownership and interest.

 

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

 

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

 

As of December 31, 2000 and 2001, common stock iscomposed of the following:

 
|                                                                                                                                             |   | **2000**  |      | **2001**  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| 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 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 “Warrants”). The Warrantsexpire on September 30, 2012 and may be exercised in whole or in part atvariable and increasing exercise prices over the term of the warrants. Thecurrent and maximum exercise prices for both Class A common stock and commonstock are $12.94 and $38.82 per share, respectively.

 

The warrants have an initial exercise price thatexceeds the fair value of the capital stock at the date of grant. The grantdate present value of each warrant is estimated at $114 or an aggregate of$44,000 using the Black-Scholes pricing model, using the following assumptions:risk-free interest rate at 6.0%; expected warrant life of 15 years; volatilityof 20.0%; forfeiture rate zero (0); no expected dividends; and no adjustmentsfor nontransferability. As of December 31, 2001, no warrants have beenexercised.

 

**12. REDEEMABLECONVERTIBLE PREFERRED STOCK:**

 

In connection with the Monsey Bakor acquisition,the Company sold 22,500 shares of redeemable convertible preferred stock in theCompany to Joseph T. Mooney, Jr. for $600,000. The Company is obligated, uponthe exercise of Mr. Mooney’s put option, to redeem the stock for cash in annualamounts of $500,000 beginning in 2004 and aggregating $3,000,000, or for$3,000,000 upon the death of Mr. Mooney. The shares are convertible into sharesof Common Stock. The fair value recorded for the issuance of the preferredstock represents the estimated present value of the redemption payments.

 

The carrying amount of the Preferred Stock isbeing increased by periodic accretions so that the amount reflected in thebalance sheet will equal the mandatory redemption amount at the redemptiondate.

 

**13.RESTRUCTURING CHARGES**

 

The Company recorded $735,127 and $568,808 forrestructuring charges for years ended December 31, 2000 and 2001,respectively.  The charges pertain toplant closings and the reorganization or elimination of certain administrativeand selling functions.  The chargesrepresent severance and other personnel payments as well as other costs relatedto the plant closures and streamlining of operations associated with theimplementation of cost reduction initiatives noted above.  As of December 31, 2001, the restructuringwas complete, and therefore no accruals were necessary.

 

43

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**14. SEGMENT ANDGEOGRAPHIC INFORMATION:**

 

During 1999, the Company adopted SFAS No. 131,“Disclosures About Segments of an Enterprise and Related Information”, whichrequires the Company to report information about its operating segments using amanagement approach.

 

The Company manages its business through tworeportable segments, or primary business units with separate management teams,infrastructures, marketing strategies and customers. The Company’s primarybusiness units are: the Henry Building Products Division, which develops,manufactures and markets roof and driveway coatings and paving products,industrial emulsions, air barriers, and specialty products; and the ResinTechnology Division, which develops, manufactures and sells polyurethane foamfor roofing and commercial uses.

 

The accounting policies of the reportable segmentsare the same as those described in Note 1 of the Notes to ConsolidatedFinancial Statements. The Company evaluates the performance of its operatingsegments based on net sales, gross profit and operating income. Intersegmentsales and transfers are not significant.

 

Summarized financial information concerning theCompany’s reportable segments is shown below.

 
|                          |   | **Henry Building   Products   Division** |        | **Resin   Technology   Division** |   | **Total**   |   |
|-------------------------------|--------|------------------------------------------|-------------|-----------------------------------|--------|-------------|--------|
| 2001                          |   |                                     |        |                              |   |        |   |
| Net sales                     |   | $                                        | 171,672,776 |                              | $      | 22,132,860  |   | $ | 193,805,636 |   |
| Gross profit                  |   | 50,826,212                               |        | 4,506,093                         |   | 55,332,305  |   |
| 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                     |   | $                                        | 171,427,721 |                              | $      | 22,033,865  |   | $ | 193,461,586 |   |
| Gross profit                  |   | 46,278,492                               |        | 3,916,938                         |   | 50,195,430  |   |
| 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   |   |
|                          |   |                                     |        |                              |   |        |   |
| 1999                          |   |                                     |        |                              |   |        |   |
| Net sales                     |   | $                                        | 160,209,476 |                              | $      | 18,495,180  |   | $ | 178,704,656 |   |
| Gross profit                  |   | 50,512,550                               |        | 3,285,908                         |   | 53,798,458  |   |
| Operating income              |   | 2,938,915                                |        | 68,251                            |   | 3,007,166   |   |
| Depreciation and amortization |   | 6,976,246                                |        | 195,021                           |   | 7,171,267   |   |
| Total assets                  |   | 106,700,898                              |        | 12,624,539                        |   | 119,325,437 |   |
| Capital expenditures          |   | 4,024,680                                |        | 159,741                           |   | 4,184,421   |   |

 

 

44

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The Company is domiciled in the United States with foreign operations based in Canada.  Summarized geographic data related to the Company’soperations for 1999, 2000 and 2001 are as follows:

 
|          |   | **Net Sales** |        | **Long-Lived  Assets** | ** ** |
|---------------|--------|---------------|-------------|------------------------|------------|
| 2001          |   |          |        |                   |       |
| United States |   | $             | 160,876,477 |                   | $          | 59,583,273 |   |
| Canada        |   | 32,929,159    |        | 7,515,720              |       |
| Total         |   | $             | 193,805,636 |                   | $          | 67,098,993 |   |
| 2000          |   |          |        |                   |       |
| United States |   | $             | 160,639,850 |                   | $          | 62,725,434 |   |
| Canada        |   | 32,821,736    |        | 8,478,534              |       |
| Total         |   | $             | 193,461,586 |                   | $          | 71,203,968 |   |
| 1999          |   |          |        |                   |       |
| United States |   | $             | 148,874,641 |                   | $          | 67,079,856 |   |
| Canada        |   | 29,830,015    |        | 8,921,012              |       |
| Total         |   | $             | 178,704,656 |                   | $          | 76,000,868 |   |

 

 

**15. GUARANTOR CONDENSEDCONSOLIDATING FINANCIAL STATEMENTS:**

 

The Company’s United States subsidiaries,Kimberton Enterprises, Inc. and Grundy Industries, Inc. (the “GuarantorSubsidiaries”) are unconditional guarantors, on a full, joint and severalbasis, of the Company’s debt represented by the Senior Notes. The Company’sCanadian subsidiaries are not guarantors of the Senior Notes.

 

Condensed consolidating financial statements ofthe Guarantors are combined with the Henry Company and are presented below.Separate financial statements of the Guarantor Subsidiaries are not presentedand the Guarantor Subsidiaries are not filing separate reports under theExchange Act because the Subsidiary Guarantors have fully and unconditionallyguaranteed the Senior Notes on a joint and several basis under the guaranteesand management has determined that separate financial statements and otherdisclosures concerning the Guarantor Subsidiaries are not material toinvestors.

 

45

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**CONDENSED CONSOLIDATINGBALANCE SHEET**

**AS OFDECEMBER 31, 2001**

 
|                                                                                             |   | **Henry Company  (Parent Corporation) and  Guarantor Subsidiaries** |        | **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 |   |
|                                                                                                  |        |                                                                     |             |                                |        |                                       |            |                        |             |  |  |  |  |  |  |  |

 

 

46

----

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31, 2001**

 
|                                          |   | **Henry Company****(Parent Corporation)  and Guarantor Subsidiaries** |        | **Nonguarantor Subsidiaries** |   | **Consolidated Elimination Entries** |   | **Consolidated Total** |       |
|-----------------------------------------------|--------|-----------------------------------------------------------------------|-------------|-------------------------------|--------|--------------------------------------|--------|------------------------|------------|
| Net sales                                     |   | $                                                                     | 169,258,327 |                          | $      | 32,929,159                           |   | $                      | (8,381,850 | ) | $ | 193,805,636 |   |
| Cost of sales                                 |   | 121,629,864                                                           |        | 25,225,317                    |   | (8,381,850                           | )      | 138,473,331            |       |
| Gross profit                                  |   | 47,628,463                                                            |        | 7,703,842                     |   | —                               |   | 55,332,305             |       |
| Operating expenses:                           |   |                                                                  |        |                          |   |                                 |   |                   |       |
| Selling, general and administrative           |   | 43,667,841                                                            |        | 5,674,250                     |   | —                               |   | 49,342,091             |       |
| 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 | ) |
|                                               |        |                                                                       |             |                               |        |                                      |        |                        |            |  |  |  |  |

 

 

47

----

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED DECEMBER 31, 2001**

** **
|                                                             |   | **Henry Company  (Parent Corporation)and  Guarantor Subsidiaries** |      | **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 |   |

 

 

48

----

 

**CONDENSED CONSOLIDATING BALANCE SHEET**

**AS OF DECEMBER 31, 2000**

** **
|                                                                                               |   | **Henry Company  (Parent Corporation) and   Guarantor Subsidiaries** |              | **Nonguarantor Subsidiaries** |   | **Consolidated Elimination Entries** |       | **Consolidated Total** |              |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|-------------------|-------------------------------|--------|--------------------------------------|------------|------------------------|-------------------|
| **ASSETS:**                                                                                        |   |                                                                 |              |                          |   |                                 |       |                   |              |
| Current assets:                                                                                    |   |                                                                 |              |                          |   |                                 |       |                   |              |
| Cash and cash equivalents                                                                          |   | $                                                                    | 1,044,276         |                          | $      | 1,839                                |       | —                 |              | $ | 1,046,115 |   |
| Accounts receivable, net                                                                           |   | 22,201,195                                                           |              | 3,052,104                     |   | —                               |       | 25,253,299             |              |
| Inventories, net                                                                                   |   | 14,257,986                                                           |              | 3,755,112                     |   | —                               |       | 18,013,098             |              |
| Receivables from affiliate                                                                         |   | 7,000,818                                                            |              | 2,486,652                     |   | $                                    | (7,363,560 | )                      | 2,123,910         |   |
| Notes receivable                                                                                   |   | 763,947                                                              |              | —                        |   | —                               |       | 763,947                |              |
| Prepaid expenses and other current assets                                                          |   | 1,364,281                                                            |              | 127,793                       |   | —                               |       | 1,492,074              |              |
| Income tax receivable                                                                              |   | —                                                               |              | 133,935                       |   | —                               |       | 133,935                |              |
| Deferred income taxes                                                                              |   | 5,218,525                                                            |              | 38,698                        |   | —                               |       | 5,257,223              |              |
| Total current assets                                                                               |   | 51,851,028                                                           |              | 9,596,133                     |   | (7,363,560                           | )          | 54,083,601             |              |
| Property and equipment, net                                                                        |   | 28,169,355                                                           |              | 6,011,286                     |   | —                               |       | 34,180,641             |              |
| Investment in subsidiaries                                                                         |   | 8,564,729                                                            |              | —                        |   | (8,564,729                           | )          | —                 |              |
| Cash surrender value of life insurance, net                                                        |   | 5,087,384                                                            |              | —                        |   | —                               |       | 5,087,384              |              |
| Intangibles, net                                                                                   |   | 24,353,674                                                           |              | 2,467,248                     |   | —                               |       | 26,820,922             |              |
| Notes receivable                                                                                   |   | 271,600                                                              |              | —                        |   | —                               |       | 271,600                |              |
| Note receivable from affiliate                                                                     |   | 1,863,072                                                            |              | —                        |   | —                               |       | 1,863,072              |              |
| Deferred income taxes                                                                              |   | 2,754,746                                                            |              | —                        |   | —                               |       | 2,754,746              |              |
| Other assets                                                                                       |   | 225,603                                                              |              | —                        |   | —                               |       | 225,603                |              |
| Total assets                                                                                       |   | $                                                                    |  123,141,191 |                          | $      |  18,074,667                     |       | $                      |  (15,928,289 | ) | $ |  125,287,569 |   |
| **LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK  AND SHAREHOLDERS’ EQUITY(DEFICIT):**   |   |                                                                 |              |                          |   |                                 |       |                   |              |
| Current liabilities:                                                                               |   |                                                                 |              |                          |   |                                 |       |                   |              |
| Accounts payable                                                                                   |   | $                                                                    | 4,886,168         |                          | $      | 1,257,085                            |       | —                 |              | $ | 6,143,253 |   |
| Accrued expenses                                                                                   |   | 8,033,860                                                            |              | 956,744                       |   | —                               |       | 8,990,604              |              |
| Book overdrafts                                                                                    |   | 4,167,547                                                            |              | 348,731                       |   | —                               |       | 4,516,278              |              |
| Intercompany payables                                                                              |   | 2,486,652                                                            |              | 4,876,908                     |   | $                                    | (7,363,560 | )                      | —            |   |
| Deferred income taxes                                                                              |   | 130,342                                                              |              | —                        |   | —                               |       | 130,342                |              |
| Notes payable, current portion                                                                     |   | 51,596                                                               |              | —                        |   | —                               |       | 51,596                 |              |
| Borrowings under line of credit                                                                    |   | 9,817,987                                                            |              | 3,636,107                     |   | —                               |       | 13,454,094             |              |
| Total current liabilities                                                                          |   | 29,574,152                                                           |              | 11,075,575                    |   | (7,363,560                           | )          | 33,286,167             |              |
| Notes payable                                                                                      |   | 464,618                                                              |              | —                        |   | —                               |       | 464,618                |              |
| Environmental reserve                                                                              |   | 3,301,546                                                            |              | —                        |   | —                               |       | 3,301,546              |              |
| Deferred income taxes                                                                              |   | 6,395,322                                                            |              | 1,668,291                     |   | —                               |       | 8,063,613              |              |
| Deferred warranty revenue                                                                          |   | 2,122,546                                                            |              | 156,275                       |   | —                               |       | 2,278,821              |              |
| Deferred compensation                                                                              |   | 937,908                                                              |              | —                        |   | —                               |       | 937,908                |              |
| Senior notes                                                                                       |   | 81,400,000                                                           |              | —                        |   | —                               |       | 81,400,000             |              |
| Total liabilities                                                                                  |   | 124,196,092                                                          |              | 12,900,141                    |   | (7,363,560                           | )          | 129,732,673            |              |
| Redeemable convertible preferred stock                                                             |   | 1,919,433                                                            |              | —                        |   | —                               |       | 1,919,433              |              |
| Shareholders’ equity:                                                                         |   |                                                                 |              |                          |   |                                 |       |                   |              |
| Common stock                                                                                       |   | 4,691,080                                                            |              | 7,194,402                     |   | (7,194,402                           | )          | 4,691,080              |              |
| Additional paid-in capital                                                                         |   | 2,364,308                                                            |              | —                        |   | —                               |       | 2,364,308              |              |
| Cumulative translation adjustment                                                                  |   | —                                                               |              | (1,085,228                    | )      | 588,000                              |       | (497,228               | )                 |
| Accumulated deficit                                                                                |   | (10,029,722                                                          | )                 | (934,648                      | )      | (1,958,327                           | )          | (12,922,697            | )                 |
| Total shareholders’ equity (deficit)                                                          |   | (2,974,334                                                           | )                 | 5,174,526                     |   | (8,564,729                           | )          | (6,364,537             | )                 |
| Total liabilities, redeemable convertible preferred  stock and shareholders’ equity (deficit) |   | $                                                                    | 123,141,191       |                          | $      | 18,074,667                           |       | $                      | (15,928,289       | ) | $ | 125,287,569 |   |
|                                                                                                    |        |                                                                      |                   |                               |        |                                      |            |                        |                   |  |  |  |  |  |  |

 

 

49

----

 

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**FOR THE YEAR ENDED DECEMBER 31, 2000**

 

 
|                                 |   | **Henry Company****(Parent Corporation)and  Guarantor Subsidiaries** |        | **Nonguarantor Subsidiaries** |   | **Consolidated Elimination Entries** |   | **Consolidated Total** |       |
|--------------------------------------|--------|----------------------------------------------------------------------|-------------|-------------------------------|--------|--------------------------------------|--------|------------------------|------------|
| Net sales                            |   | $                                                                    | 169,855,810 |                          | $      | 32,821,736                           |   | $                      | (9,215,960 | ) | $ | 193,461,586 |   |
| Cost of sales                        |   | 126,184,981                                                          |        | 26,297,135                    |   | (9,215,960                           | )      | 143,266,156            |       |
| Gross profit                         |   | 43,670,829                                                           |        | 6,524,601                     |   | —                               |   | 50,195,430             |       |
| Operating expenses:                  |   |                                                                 |        |                          |   |                                 |   |                   |       |
| Selling, general and administrative  |   | 40,956,530                                                           |        | 7,586,654                     |   | —                               |   | 48,543,184             |       |
| 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 | ) |
|                                      |        |                                                                      |             |                               |        |                                      |        |                        |            |  |  |  |  |

 

 

50

----

 

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED DECEMBER 31, 2000**

 

 
|                                                 |   | **Henry Company****(Parent Corporation) and  Guarantor Subsidiaries** |       | **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 anintegral part of these consolidated financial statements.

 

 

51

----

 

**CONDENSEDCONSOLIDATED STATEMENT OF OPERATIONS**

**FOR THEYEAR ENDED DECEMBER 31, 1999**

 
|                                                                                  |   | **Henry  (Parent Corporation)   and Guarantor   Subsidiaries** |        | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination Entries** |   | **Consolidated  Total** |       |
|---------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|-------------|--------------------------------|--------|---------------------------------------|--------|-------------------------|------------|
| Net Sales                                                                             |   | $                                                              | 156,086,424 |                           | $      | 29,830,015                            |   | $                       | (7,211,783 | ) | $ | 178,704,656 |   |
| Cost of Sales                                                                         |   | 109,910,900                                                    |        | 22,332,889                     |   | (7,337,591                            | )      | 124,906,198             |       |
|                                                                                  |   |                                                           |        |                           |   |                                  |   |                    |       |
| Gross Profit                                                                          |   | 46,175,524                                                     |        | 7,497,126                      |   | 125,808                               |   | 53,798,458              |       |
| Operating  Expenses                                                                   |   |                                                           |        |                           |   |                                  |   |                    |       |
| Selling, general  and administrative                                                  |   | 40,258,214                                                     |        | 7,479,474                      |   | 125,808                               |   | 47,863,496              |       |
| Amortization of  intangibles                                                          |   | 2,806,516                                                      |        | 121,280                        |   | —                                |   | 2,927,796               |       |
|                                                                                  |   |                                                           |        |                           |   |                                  |   |                    |       |
| Operating income  (loss)                                                              |   | 3,110,794                                                      |        | (103,628                       | )      | —                                |   | 3,007,166               |       |
| Other expense  (income)                                                               |   |                                                           |        |                           |   |                                  |   |                    |       |
| Interest expense                                                                      |   | 9,016,150                                                      |        | 178,346                        |   | —                                |   | 9,194,496               |       |
| Interest and  other income, net                                                       |   | (224,103                                                       | )           | —                         |   | —                                |   | (224,103                | )          |
|                                                                                  |   |                                                           |        |                           |   |                                  |   |                    |       |
| Loss before  extraordinary item                                                       |   | (5,681,253                                                     | )           | (281,974                       | )      | —                                |   | (5,963,227              | )          |
| Extraordinary  gain related to early extinguishment of debt, net of taxes of $400,800 |   | (601,200                                                       | )           | —                         |   | —                                |   | (601,200                | )          |
|                                                                                  |   |                                                           |        |                           |   |                                  |   |                    |       |
| Loss before  benefit for income taxes                                                 |   | (5,080,053                                                     | )           | (281,974                       | )      | —                                |   | (5,362,027              | )          |
| Provision  (benefit) for income taxes                                                 |   | (377,927                                                       | )           | 681,896                        |   | —                                |   | 303,969                 |       |
|                                                                                  |   |                                                           |        |                           |   |                                  |   |                    |       |
| Net loss                                                                              |   | $                                                              | (4,702,126  | )                              | $      | (963,870                              | )      | $                       | —     |   | $ | (5,665,996 | ) |
|                                                                                       |        |                                                                |             |                                |        |                                       |        |                         |            |  |  |  |  |  |  |  |  |

 

 

52

----

 

**CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS**

**FOR THEYEAR ENDED DECEMBER 31, 1999**

 
|                                                  |   | **Henry  (Parent Corporation) and Guarantor Subsidiaries** |       | **Nonguarantor  Subsidiaries** |   | **Consolidated  Elimination Entries** |   | **Consolidated  Total** |   |
|-------------------------------------------------------|--------|------------------------------------------------------------|------------|--------------------------------|--------|---------------------------------------|--------|-------------------------|--------|
| Net cash used in  operating activities                |   | $                                                          | (2,429,306 | )                              | $      | (958,009                              | )      |                    |   | $ | (3,387,315 | ) |
| Cash flows from  investing activities:                |   |                                                       |       |                           |   |                                  |   |                    |   |
| Capital  expenditures                                 |   | (3,543,295                                                 | )          | (641,126                       | )      | —                                |   | (4,184,421              | )      |
| Proceeds from  the disposal of property and equipment |   | 75,125                                                     |       | 1,682                          |   | —                                |   | 76,807                  |   |
| Acquisition of  business, net of cash acquired        |   | (2,645,401                                                 | )          | —                         |   | —                                |   | (2,645,401              | )      |
| Investment in  affiliate                              |   | (30,127                                                    | )          | —                         |   | —                                |   | (30,127                 | )      |
|                                                  |   |                                                       |       |                           |   |                                  |   |                    |   |
| Net cash used in  investing activities                |   | (6,143,698                                                 | )          | (639,444                       | )      | —                                |   | (6,783,142              | )      |
|                                                  |   |                                                       |       |                           |   |                                  |   |                    |   |
| Cash flow from  financing activities:                 |   |                                                       |       |                           |   |                                  |   |                    |   |
| Net borrowings  under line-of-credit agreements       |   | 137,197                                                    |       | 835,140                        |   | —                                |   | 972,337                 |   |
| Repayments under  notes payable agreements            |   | (151,959                                                   | )          | (179,972                       | )      | —                                |   | (331,931                | )      |
| Increase in book  overdraft                           |   | 1,096,000                                                  |       | 18,126                         |   | —                                |   | 1,114,126               |   |
| Cash surrender  value of life insurance               |   | (564,676                                                   | )          | —                         |   | —                                |   | (564,676                | )      |
| Purchase of  Series B Senior Notes                    |   | (2,564,000                                                 | )          | —                         |   | —                                |   | (2,564,000              | )      |
|                                                  |   |                                                       |       |                           |   |                                  |   |                    |   |
| Net cash (used  in) provided by financing activities  |   | (2,047,438                                                 | )          | 673,294                        |   | —                                |   | (1,374,144              | )      |
| Effect of  changes in exchange rate on cash           |   | —                                                     |       | 206,969                        |   | —                                |   | 206,969                 |   |
|                                                  |   |                                                       |       |                           |   |                                  |   |                    |   |
| Net decrease in  cash and cash equivalents            |   | (10,620,442                                                | )          | (717,190                       | )      | —                                |   | (11,337,632             | )      |
| Cash and cash  equilvalents, beginning of year        |   | 11,303,580                                                 |       | 719,096                        |   | —                                |   | 12,022,676              |   |
|                                                  |   |                                                       |       |                           |   |                                  |   |                    |   |
| Cash and cash  equilvalents, end of year              |   | $                                                          | 683,138    |                           | $      | 1,906                                 |   | —                  |   | $ | 685,044 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

53

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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               |   | April 1, 2002 |   |
|                 |   |                                             |   |          |   |
| Jeffrey A. Wahba     |   | Chief  Financial Officer, Secretary and Director |   | April 1, 2002 |   |
|                 |   |                                             |   |          |   |
| Gary T. Spence       |   | Corporate  Controller                            |   | April 1, 2002 |   |
|                 |   |                                             |   |          |   |
| Joseph T. Mooney Jr. |   | Vice  Chairman of the Board                      |   | April 1, 2002 |   |
|                 |   |                                             |   |          |   |
| Frederick H. Muhs    |   | Director                                         |   | April 1, 2002 |   |

 

 

54

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**HENRY COMPANY**

**INDEX TO 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                                                                                                               |
| 21.1               |   | Subsidiaries of the Registrant                                                                                                                                                                         |
|               |   |                                                                                                                                                                                                   |

___________

*              Incorporated by reference from Registrant’s Statementof Form S–4, filed September 11, 1998 (Registration No. 333–59485).

**           Incorporated byreference from Registrant’s Form 10-K for the fiscal year endedDecember 31, 2000.

 

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