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 March 31, 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
ended
March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 6,523,864 $ 6,730,921
Cost of sales 4,833,643 4,877,107
--------- ---------
Gross profit 1,690,221 1,853,814
Selling, general and
administrative expenses 1,690,779 1,667,315
--------- ---------
Operating (loss) income (558) 186,499
Other income(expense):
Gain on sale of assets - 11,817
Interest income 20,520 55,833
Interest expense (62,508) (37,497)
Other Income 120,678 9,403
--------- ---------
78,690 39,556
--------- ---------
Earnings before income
tax expense 78,132 226,055
Income tax expense 31,253 97,203
--------- ---------
Net earnings 46,879 128,852
Retained earnings at
beginning of period 14,414,271 14,950,349
Less: cash dividends
paid of $.12 per share
in 1997 - (45,150)
---------- ----------
Retained earnings at
end of period $14,461,150 $15,034,051
========== ==========
Net earnings per common
share-basic $ 0.13 $ 0.34
========== ==========
Common shares outstanding
(weighted average) 348,701 376,251
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,525,382 $ 892,150
Accounts receivable (net
of allowance for doubtful
accounts of $58,372 and
$58,854 in 1998 and 1997,
respectively) 2,809,199 2,212,448
Inventories:
Raw materials 952,807 916,779
Work in process 90,861 8,001
Finished goods 2,037,284 1,726,209
Refundable income tax 222,578 432,704
Deferred income taxes 119,175 119,175
Prepaid expenses and
other current assets 82,421 471,087
----------- -----------
Total current assets 7,839,707 6,778,553
----------- -----------
PROPERTY, PLANT AND
EQUIPMENT, at cost 37,251,670 36,823,676
Less accumulated
depreciation 26,100,076 25,828,964
----------- -----------
Net property, plant and
equipment 11,151,594 10,994,712
----------- -----------
OTHER ASSETS
Deferred income taxes 19,546 19,546
Restricted cash 486,435 537,248
Other assets 1,771,426 1,807,037
----------- -----------
$ 21,268,708 $ 20,137,096
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, 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 397,500 392,500
Accounts payable 1,502,047 1,426,190
Accrued expenses 672,824 576,533
----------- -----------
Total current liabilities 4,572,371 3,395,223
LONG-TERM DEBT, excluding
current installments 3,427,500 3,562,500
OTHER LIABILITIES 5,251,131 5,205,064
----------- -----------
Total liabilities 13,251,002 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 14,461,150 14,414,271
----------- -----------
15,531,985 15,485,106
Less cost of common shares in
treasury - 515,396 shares in
1998, and 515,194 shares in
1997 7,514,279 7,510,797
----------- -----------
Total stockholders' equity 8,017,706 7,974,309
----------- -----------
$ 21,268,708 $ 20,137,096
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating
activities:
Net earnings $ 46,879 $ 128,852
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 271,112 268,929
Gain on disposal of fixed assets - (10,888)
Changes in assets and Liabilities:
Increase in accounts
receivable,(net) (596,751) (774,572)
Increase in inventories (429,963) (246,591)
Decrease in other assets 12,000 25,785
Decrease in refundable income taxes 210,126 -
Decrease in restricted cash 50,813 504,999
Decrease in prepaid expenses
and other current assets 388,666 195,837
Increase(Decrease) in accounts
payable 75,857 (288,775)
Increase in accrued expenses 96,291 43,313
Decrease in accrued income taxes - (134,083)
Increase in other liabilities 46,067 49,971
--------- ----------
Net cash provided by (used in)
operating activities 171,097 (237,223)
---------- ----------
Cash flows from investing
activities:
Proceeds from sale of
equipment - 10,888
Additions to plant and
equipment (427,994) (818,795)
---------- ----------
Net cash used in investing
activities (427,994) (807,907)
---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 1,000,000 -
Repayment of short-term debt (130,000) -
Cash dividends paid - (45,150)
Proceeds from sale of treasury
stock 58,650 -
Purchase of treasury stock (62,132) -
Debt acquisition costs 23,611 -
---------- ---------
Net cash provided by (used
in) by financing activities: 890,129 (45,150)
---------- ---------
Net increase(decrease) in cash
and cash equivalents 633,232 (1,090,280)
Cash and cash equivalents
at beginning of year 892,150 2,680,061
---------- ----------
Cash and cash equivalents
at end of year $ 1,525,382 $ 1,589,781
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the years for:
Interest $ 62,508 $ 37,497
---------- ----------
Income taxes $ - $ 240,515
---------- ----------
</TABLE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
MARCH 31, 1998
Note 1. The consolidated financial data as of March 31, 1998 and
1997 and for the three month periods ended March 31, 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 three months ended March 31, 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 March 31, 1998, the Company was not in compliance with
a financial covenant, related to its credit facility, and
on May 13, 1998, the Company received a waiver of such
noncompliance from the bank. Management believes the
company will be in compliance for the balance of 1998.
FORM 10-Q
HOMASOTE COMPANY AND SUBSIDIARY
March 31, 1998
NOTE # 1
Management's discussion and analysis of results of operations.
RESULTS OF OPERATIONS
Net sales for the three-month period ended March 31, 1998 of
$6,523,864, decreased by $207,057, or 3.1%, when compared to net
sales of $6,730,921 for the three-month period ended March 31,
1997. Net income decreased to $46,879 for the three-month period
ended March 31, 1998, from $128,852 for the three month period
ended March 31, 1997. Management believes the decrease in net
sales to be a result of weather effects of El Nino across the North
American continent, and the decrease in net income to be a result
of lower sales and the other factors discussed in the following
paragraphs.
The cost of sales as a percentage of sales, was 74.1% for the
three-month period ended March 31, 1998, as compared to 72.5% for
the three-month period ended March 31, 1997. This increase in the
cost of sales as a percentage of sales is attributable to increased
overhead due to production inefficiencies, repairs to the new
dryer, higher maintenance costs on the older equipment, and
overtime incurred in an effort to meet demand for the Company's
product.
Selling, general and administrative expenses as a percentage
of sales were 25.9% in 1998 as compared to 24.8% in 1997. Selling
general and administrative expenses increased in the areas of
salaries, due to the hiring of additional personnel for the sales
force, advertising, and claims for unsatisfactory material.
Interest income decreased to $20,520 for the three-month
period ended March 31, 1998, as compared to $65,236 for the three
month period ended March 31, 1997, due primarily to a decreased
average balance of funds available for investment.
Interest expense on debt increased to $62,508 for the three-month period
ended March 31, 1998, as compared to $37,497 for the
three-month period ended March 31, 1997 due to debt incurred with
relation to the dryer project.
Other income increased by $111,275, for the period ended March
31, 1998, as compared to the three month period ended March 31,
1997, primarily as a result of the receipt of $100,000 of business
interruption insurance proceeds.
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 well into 1998. The Company believes that recovery under
its business interruption policy, when finally received, should
provide the wherewithal to cover the substantial portion of lost
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $3,267,336 at March 31, 1998, as compared
to $3,383,330 at March 31, 1997, a decrease of $115,994. This
decrease was primarily a result of an increase in short-term
borrowing at March 31,1998, which was only partially offset by the
increase in receivables and inventory.
Cash flows from operating activities and bank borrowings are
the primary sources of liquidity. Net cash provided by operating
activities amounted to $0.2 million in 1998 and $(0.2) million used
in 1997.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $0.4 million in 1998 and $0.8
million in 1997. The Company has estimated capital expenditures
for the remaining nine (9) months of 1998 in the amount of $0.5
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 $0.0
million in 1997 to $1.0 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 (3.4% at March 31, 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
are held by the bank amounted to $486,435 at March 31, 1998, and is
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 December
31, 1997, the Company was not in compliance with a financial
covenant and, on March 19, 1998, the Company received a waiver of
such noncompliance from the bank. Additionally, on March 19, 1998,
the bank amended certain covenants prospectively. At March 31,
1998, the Company was not in compliance with a financial covenant
and, on May 13, 1998, the Company received a waiver of such
noncompliance from the bank. Management believes the company will
be in compliance 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 March 31, 1998) less 0.25%. As of
March 31, 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 condition 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 $231,000 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 commenced 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 is conducting a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue.
The Company is developing 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.
Part 2
OTHER INFORMATION
March 31, 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 three months ended March 31, 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)
5/14/98 Neil F Bacon, Treasurer
Date (Chief Financial Officer)
(Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,525
<SECURITIES> 0
<RECEIVABLES> 2,868
<ALLOWANCES> 58
<INVENTORY> 3,081
<CURRENT-ASSETS> 7,840
<PP&E> 372528
<DEPRECIATION> 26,100
<TOTAL-ASSETS> 21,269
<CURRENT-LIABILITIES> 4,572
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,269
<SALES> 6,524
<TOTAL-REVENUES> 6,665
<CGS> 4,834
<TOTAL-COSTS> 1,691
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 78
<INCOME-TAX> 31
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
