Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15 of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. (X)Yes ( )No
At June 30, 1998, 348,599 shares of common stock of the
registrant were outstanding.
<TABLE>
Results of Operations
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
(UNAUDITED)
For the three months For the six months
ended ended
June 30, June 30,
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 5,645,907 6,176,748 12,169,771 12,907,669
Cost of sales 4,361,109 5,007,087 9,194,752 9,884,194
--------- --------- ---------- ----------
Gross profit 1,284,798 1,169,661 2,975,019 3,023,475
Selling, general
and administrative
expenses 1,547,097 1,686,335 3,237,876 3,353,650
--------- --------- ---------- ----------
Operating loss (262,299) (516,674) (262,857) (330,175)
Other income(expense):
Interest income 20,206 42,170 40,726 98,004
Interest expense (78,885) (40,951) (141,393) (78,449)
Other income 6,737 14,156 127,415 35,376
--------- --------- ---------- ----------
Loss before
income taxes (314,241) (501,299) (236,109) (275,244)
Income tax benefit (125,696) (200,519) (94,443) (110,097)
--------- --------- ---------- ---------
Net loss (188,545) (300,780) (141,666) (165,147)
Retained earnings
at beginning of
period 14,461,150 15,040,832 14,414,271 14,950,349
Less cash
dividends paid
($.24 per share
in 1997). - (45,150) - (90,300)
---------- ---------- ---------- ----------
Retained earnings
at end of period 14,272,605 14,694,902 14,272,605 14,694,902
========== ========== ========== ==========
Net loss per common
share - basic (0.54) (0.80) (0.41) (0.44)
Common shares
outstanding
(weighted average) 348,599 375,855 348,657 376,081
See accompanying notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,563,386 $ 892,150
Accounts receivable (net
of allowance for doubtful
accounts of $60,362 and
$58,854 in 1998 and 1997,
respectively) 1,914,019 2,212,448
Inventories 3,686,217 2,650,989
Refundable income tax 348,274 432,704
Deferred income taxes 119,175 119,175
Prepaid expenses and
other current assets 49,046 471,087
------------ -----------
Total current assets $ 7,680,117 $ 6,778,553
------------ -----------
PROPERTY, PLANT AND
EQUIPMENT, at cost 37,625,595 36,823,676
Less accumulated
depreciation 26,371,189 25,828,964
------------ -----------
Net property plant and
equipment 11,254,406 10,994,712
------------ -----------
OTHER ASSETS
Deferred income taxes 19,546 19,546
Restricted cash 159,384 537,248
Other assets 1,747,816 1,807,037
------------ -----------
$ 20,861,269 $ 20,137,096
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ 2,000,000 $ 1,000,000
Current installments of
long-term debt 401,250 392,500
Accounts payable 1,357,378 1,426,190
Accrued expenses 624,884 576,533
------------ -----------
Total current liabilities 4,383,512 3,395,223
LONG-TERM DEBT, excluding
current installments 3,358,750 3,562,500
OTHER LIABILITIES 5,289,846 5,205,064
------------ -----------
Total liabilities 13,032,108 12,162,787
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.20
per share;authorized
1,500,000 shares;
issued 863,995 shares in
1998 and 1997. 172,799 172,799
Additional paid-in capital 898,036 898,036
Retained earnings 14,272,605 14,414,271
------------ -----------
15,343,440 15,485,106
Less cost of common shares
in treasury - 515,396
shares in 1998, 515,194
shares in 1997. 7,514,279 7,510,797
------------ -----------
Total stockholders' equity 7,829,161 7,974,309
------------ -----------
$ 20,861,269 $ 20,137,096
============ ===========
See accompanying notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (141,666) $ (165,147)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 589,445 582,611
Gain on disposal of
fixed assets - (11,487)
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable, net 298,429 (278,732)
Increase in inventories (1,035,228) (266,056)
Decrease in other assets 12,001 -
Decrease (increase) in
refundable income taxes 84,430 (247,154)
Decrease in restricted cash 377,864 2,119,130
Decrease (increase) in prepaid
expenses and other current assets 422,041 (91,390)
(Decrease) increase in
accounts payable (68,812) 1,425,188
Increase in accrued expenses 48,351 108,284
Decrease in accrued income taxes - (329,228)
Increase in other liabilities 84,782 93,442
---------- ----------
Net cash provided by
operating activities 671,637 2,939,461
---------- ----------
Cash flows from investing
activities:
Proceeds from sale of
equipment - 16,888
Capital expenditures (801,919) (2,944,842)
---------- ----------
Net cash used in investing
activities (801,919) (2,927,954)
---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 1,000,000 -
Repayment of long-term debt (195,000) (24,000)
Cash dividends paid - (90,300)
Proceeds from sale of
treasury stock 58,650 -
Purchase of treasury stock (62,132) (19,602)
---------- ---------
Net cash provided by (used in)
financing activities: 801,518 (133,902)
---------- ---------
Net increase (decrease) in
cash and cash equivalents 671,236 (122,395)
Cash and cash equivalents
at beginning of period 892,150 2,680,061
---------- ----------
Cash and cash equivalents
at end of period $ 1,563,386 $ 2,557,666
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the years for:
Interest $ 78,884 $ 78,449
---------- ----------
Income taxes $ - $ 353,015
---------- ----------
See accompanying notes to Financial Statements.
</TABLE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
JUNE 30, 1998
Note 1. The consolidated financial data as of June 30, 1998 and
December 31, 1997 and for the three and six-month periods
ended June 30, 1998 and 1997 includes, in the opinion of
management, all adjustments (none of which were non-
recurring) necessary for a fair presentation of such
periods. The consolidated financial data for the six
months ended June 30, 1998 is not necessarily indicative
of the results of operations that might be expected for
the entire year ending December 31, 1998.
Note 2. At June 30, 1998 the Company was not in compliance with
two financial covenants, related to its credit facility,
and on August 12, 1998, the Company received a waiver of
such noncompliance from the bank. Management believes
that the Company will be in compliance with the agreement
for the balance of 1998.
Note 3. INVENTORIES
The following are the major classes of inventories as of
June 30, 1998 and December 31, 1997:
1998 1997
Finished goods.......$2,811,434 $ 7,726,209
Work in process...... 73,786 8,001
Raw materials........ 800,997 916,779
3,686,217 2,650,989
Inventories include the cost of materials, direct labor
and manufacturing overhead.
FORM 10-Q
HOMASOTE COMPANY AND SUBSIDIARY
June 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains certain
forward-looking statements. These forward-looking statements do
not constitute facts and involve risks and uncertainties. Actual
results could differ materially from those referred to in the
forward-looking statements due to a number of factors, some of
which have been set forth in such discussion and analysis.
Management's analysis of material change by quarter as noted
RESULTS OF OPERATIONS
Net sales decreased by 5.7% for the six-month period ended
June 30, 1998 as compared to June 30, 1997, while net sales
decreased 8.6% for the three-month period ended June 30, 1998, as
compared to the same period ended June 30, 1997. Management
believes the decrease in net sales to be a result of weather
effects of El Nino across the North American continent, the General
Motors strike and the economic situation in the Far East. The
decrease in net income is a result of lower sales and other factors
discussed in the following paragraphs.
Cost of sales, as a percentage of sales, were 77.2% and 81.1%,
respectively, for the three month period ended June 30, 1998 and
1997, and 75.6% and 76.6%, respectively, for the six month period
ended June 30, 1998 and 1997. These percentage decreases in the
cost of sales as a percentage of sales are attributable to increase
in production due to the new dryer, as compared to last year,
offset by increases in labor costs.
Selling general and administrative expenses, as a percentage
of sales, were 27.4% and 26.6%, respectively, for the three and
six-month periods ended June 30, 1998, as compared to 27.3% and
26.0%, respectively, for the three and six-month periods ended June
30, 1997. Selling general and administrative expenses increased
primarily in the areas of salaries, due to the hiring of additional
personnel for the sales force and advertising.
Interest income decreased by 52.1% and 58.4%, respectively,
for the three and six month periods ended June 30, 1998, as
compared to the same periods ended June 30, 1997, due primarily to
a decreased average balance of funds available for investment.
Interest expense on debt increased by 92.6% and 80.2%,
respectively, for the three and six month periods ended June 30,
1998, as compared to the same periods ended June 30, 1997,
due to debt incurred in relation to the dryer project.
Other income increased by $92,039, for the six-month period
ended June 30, 1998, as compared to the six-month period ended
June 30, 1997, primarily as a result of the receipt of $100,000 of
business interruption insurance proceeds. Other income declined
$7,419 for the three month period ended June 30, 1998 as compared
to the corresponding period 1997.
The Company installed a new dryer that was originally
scheduled for partial completion in June 1997, but was placed into
modified production during the last week of September 1997 for an
initial shakedown period in order to surface potential operating
problems. However, on November 1, 1997, a fire occurred in the new
dryer, causing severe damage to the rolls, insulation and other
structural steel components, rendering it inoperable and resulting
in an interruption of the Company's anticipated productivity of its
major product line, which adversely affected revenues and
profitability. The dryer was placed in a temporary state of repair
and production resumed on January 12, 1998. On January 30, 1998,
there was another fire in the new dryer that was restricted to an
area at the end of the dryer. The damage was repaired in a short
period of time with a resumption of production on February 9, 1998.
The new dryer is producing at a level of 40% of its anticipated
production capability, which level is equivalent to the Company's
previous capacity in running five units.
Management believes that insurance will cover substantially
all of the Company's property and business losses relating to the
fires. However, the Company may incur costs as a result of the
fires which will not be covered by insurance. Management is unable
to estimate at this time the magnitude of such costs. The
insurance claims process is lengthy, and its outcome cannot be
predicted with certainty.
Based on its present assessment of the situation, management
believes that the fires have had an adverse effect on the Company's
financial position and operating results which can be expected to
continue throughout 1998. The Company believes that recovery under
its business interruption policy, of which $100,000 has already
been received, should provide the wherewithal to cover the
substantial portion of lost revenues.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $3,296,605 at June 30, 1998, as compared
to $3,383,330 at December 31, 1997, a decrease of $86,725. This
decrease was primarily a result of an increase in short-term
borrowing at June 30, 1998, which was only partially offset by the
increase in inventory.
Cash flows from operating activities and bank borrowings are
the primary sources of liquidity. Net cash provided by operating
activities amounted to $0.7 million in 1998 and $2.9 in 1997.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $0.8 million in 1998 and $2.9
million in 1997. The Company has estimated capital expenditures
for the remaining six (6) months of 1998 in the amount of $0.75
million. Such amounts may be revised based on the timing of
receipts of payments or settlements from its insurance carrier on
the fire loss described under "Results of Operations".
Cash flows from financing activities increased from $0.1
million in 1997 to $0.8 million in 1998, as a result of proceeds of
short-term debt.
In November 1996, the Company entered into a loan agreement
(the "Agreement") and promissory note with the New Jersey Economic
Development Authority (the "Authority"). Under the Agreement, the
Authority loaned the Company $4,140,000 out of the proceeds from
the issuance of the Authority's Economic Growth Bonds (Greater
Mercer County Composite Issue) 1996 Series E (the Bonds) to be used
in connection with specified capital expenditures described in the
Agreement. Interest is charged at the variable rate of interest due
on the Bonds (3.25% at June 30, 1998).
In connection with the Agreement, the Authority also entered
into a trust indenture with a bank to serve as trustee and tender
agent for the loan proceeds. Principal and interest are payable
monthly to the trustee in varying amounts through 2006. The funds
held by the bank amounted to $159,384 at June 30, 1998, and are
classified as a restricted non-current asset in the accompanying
consolidated balance sheets. The Company believes these funds will
be sufficient to cover its remaining capital expenditure
commitments in 1998.
The trust indenture is secured in part by the Agreement and by
a direct pay Letter of Credit facility issued by another bank in
the face amount of $4,209,000. The Letter of Credit facility
contains financial and other restrictive covenants including
minimum tangible net worth and other financial ratios. At June 30,
1998, the Company was not in compliance with two financial
covenants and, on August 12, 1998, the Company received a waiver of
such noncompliance from the bank. Although, there no assurances,
Management believes that the Company will be in compliance with the
agreement for the balance of 1998.
The Company has a $2.0 million unsecured demand note line of
credit agreement with a bank which has no specific expiration date
but is cancelable by the bank at any time. Interest is charged at
the bank's index rate (8.5% at June 30, 1998) less 0.25%. As of
June 30, 1998, $2.0 million was outstanding under the line of
credit. Management believes that cash flows from operations
coupled with its bank credit facilities are adequate for the
Company to meet its obligations.
Additionally, the Company has incurred approximately $500,000
of labor costs, which were capitalized, related to the dryer fire,
which were later reimbursed by its insurance company.
INFLATION AND THE ECONOMY
The Company will continue to maintain a policy of constantly
monitoring such factors as demand and costs, and adjusting prices
as those factors and the economic conditions warrant.
OTHER DEVELOPMENTS
During 1994, demand for wastepaper, the primary raw material
for the Company's products, surpassed the supply for the first
time. This situation was due primarily to demand by new industries
created to handle the volume of wastepaper generated by mandated
municipal recycling, and as a result, effective in September 1994,
the Company entered into purchase agreement contracts to purchase
readily available wastepaper from two suppliers. Under the terms
of the contracts, the Company is required to make purchases at a
minimum price per ton, as defined, or at the prevailing market
price, whichever is greater. The contracts do not require minimum
quantity purchases by the Company. Purchases in 1998 and 1997
aggregated approximately $515,000 and $923,000, respectively. The
contracts expire in 2009.
In September 1996, the Company signed an agreement with
Weyerhaeuser Corporation for the joint marketing and distribution
of the Company's products.
On February 21, 1997, the Board of Directors of the Company
authorized the retention of a financial advisor to assist in the
investigation of alternatives to enhance the value of the Company's
common stock to the shareholders. On May 23, 1997, the Board of
Directors terminated this effort due to developments with respect
to union negotiations.
On May 22, 1997, an election was conducted by the National
Labor Relations Board ("NLRB"), electing Teamsters Local Union No.
701 to be the exclusive bargaining representative for wages, hours
and conditions of employment for the hourly employees of the
Company. Negotiations have been ongoing with the bargaining unit
to reach a labor contract covering the employees in the bargaining
unit. Management does not believe that the unionization of the
hourly employees will materially affect the Company's financial
position or results of operations.
During the normal course of business, the Company is from time
to time involved in various claims and legal actions. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
YEAR 2000
The Company has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue.
The Company has developed an implementation plan to resolve this
issue. Management presently believes that with modifications to
existing software, and conversions to new software for certain
applications, the Year 2000 matter will not pose a significant
operational problem for the Company. Management expects its
implementation plans to be completed on a timely basis without
material expenditures for the Company.
Part 2
OTHER INFORMATION
June 30, 1998
ITEM 9
EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K - There are no reports on Form
8-K filed for the six months ended June 30, 1998.
OTHER INFORMATION
All other schedules are omitted, as the required
information is inapplicable or the information is
presented in the consolidated financial statements or
related notes.
Pursuant of the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereto
authorized.
HOMASOTE COMPANY
(Registrant)
8/13/98 Neil F Bacon, Treasurer
Date (Chief Financial Officer)
(Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,563
<SECURITIES> 0
<RECEIVABLES> 1,974
<ALLOWANCES> 60
<INVENTORY> 3,686
<CURRENT-ASSETS> 7,680
<PP&E> 37,626
<DEPRECIATION> 26,371
<TOTAL-ASSETS> 20,861
<CURRENT-LIABILITIES> 4,384
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,861
<SALES> 12,170
<TOTAL-REVENUES> 12,338
<CGS> 9,195
<TOTAL-COSTS> 3,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> (236)
<INCOME-TAX> (94)
<INCOME-CONTINUING> (142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (142)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
