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
AS OF MARCH 24, 1998, THE AGGREGATE MARKET VALUE OF THE VOTING
STOCK HELD BY NON-AFFILIATES WAS $2,910,855.
AS OF MARCH 24, 1998, THERE WERE 348,799 SHARES OF COMMON
STOCK, $.20 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
HOMASOTE COMPANY 1997 ANNUAL REPORT TO STOCKHOLDERS (PARTS II
AND IV).
PROXY STATEMENT DATED APRIL 2, 1998 (PART III).
INDEX TO FORM 10-K
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
(C) NARRATIVE DESCRIPTION OF BUSINESS
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS, AND EXPORT SALES
ITEM 2. PROPERTIES
ITEM 3 LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
SIGNATURES
PART I
ITEM 1. BUSINESS
(A) GENERAL BUSINESS DEVELOPMENT
HOMASOTE COMPANY IS IN THE BUSINESS OF MANUFACTURING
INSULATED WOOD FIBRE BOARD AND POLYISOCYANURATE FOAM
PRODUCTS.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
THE COMPANY OPERATES IN ONLY ONE INDUSTRY SEGMENT,
THE MANUFACTURE AND SALE OF RIGID POLYISOCYANURATE
AND STRUCTURAL INSULATING BUILDING MATERIALS AND
PACKAGING PRODUCTS FOR INDUSTRIAL CUSTOMERS.
(C) NARRATIVE DESCRIPTION OF BUSINESS
(I) PRINCIPAL PRODUCTS AND SERVICES
THE PRINCIPAL PRODUCT OF THE REGISTRANT IS
"HOMASOTE" INSULATING AND BUILDING BOARD
MANUFACTURED IN VARIOUS THICKNESSES, SIZES AND
FINISHES. THE BASIC RAW MATERIAL IS WOOD FIBRE
OBTAINED FROM RECONVERTING CLEAN, FLAT FOLDED
NEWSPAPERS. IT IS COMBINED WITH VARIOUS
CHEMICALS TO PRODUCE RIGID, SIDEWALL AND
ROOFING INSULATION IN VARIOUS SHEET SIZES AND
THICKNESSES. THIS PRODUCT HAS NO ASBESTOS AND
NO UREAFORMALDEHYDE ADDITIVES.
THE PRINCIPAL MARKETS FOR THE REGISTRANTS
PRODUCTS ARE BUILDING MATERIAL WHOLESALERS AND
CONTRACTORS AND INDUSTRIAL MANUFACTURERS.
PRODUCTS ARE DISTRIBUTED THROUGH WHOLESALERS OF
BUILDING MATERIALS AND INDUSTRIAL MANUFACTURERS.
THE REGISTRANT IS BROADENING ITS COVERAGE IN THE
AUTOMOTIVE, GLASS AND STEEL MARKETS.
(II) PRODUCT IMPROVEMENTS AND NEW APPLICATIONS
NEW CONCEPTS FOR MACHINING HOMASOTE AND
FORMULATING PRODUCTS ARE OPENING AVENUES IN THE
CUSTOMER BASE.
(III) RAW MATERIALS
THE COMPANY'S PRIMARY RAW MATERIAL, WASTEPAPER, IS
GENERALLY READILY AVAILABLE FROM TWO SUPPLIERS
WITH WHICH THE COMPANY HAS PURCHASE CONTRACTS THAT
EXPIRE IN 2009.
(IV) PATENTS
THERE ARE NO PATENTS, LICENSES, FRANCHISES OR
CONCESSIONS IMPORTANT TO THE CONDUCT OF THE BUSINESS
OF THE REGISTRANT OR ITS SUBSIDIARY.
(V) SEASONAL BUSINESS
NO MATERIAL PORTION OF THE BUSINESS OF THE
REGISTRANT IS SEASONAL.
(VI) WORKING CAPITAL REQUIREMENTS
THE REGISTRANT BELIEVES THAT ITS OPERATION DOES NOT
REQUIRE ANY UNUSUAL WORKING CAPITAL NEEDS.
AVAILABLE CREDIT FACILITIES AND CASH GENERATED FROM
OPERATIONS ARE SUFFICIENT TO MEET WORKING CAPITAL
REQUIREMENTS.
(VII) MATERIAL CUSTOMERS
DURING THE CALENDAR YEAR ENDED DECEMBER 31, 1996, NO
CUSTOMER OF THE REGISTRANT ACCOUNTED FOR SALES OF 5%
OR MORE.
(VIII) BACKLOG
BACKLOG IS NOT MEANINGFUL SINCE MOST CUSTOMERS ORDER
FOR IMMEDIATE AND PROMPT DELIVERY AND ONLY A FEW FOR
SEVERAL WEEKS' SCHEDULED DELIVERIES.
(IX) GOVERNMENT CONTRACTS
NO MATERIAL PORTION OF THE REGISTRANT'S BUSINESS IS
SUBJECT TO RENEGOTIATION OF PROFITS OR TO
TERMINATION OF CONTRACTS BY THE GOVERNMENT.
(X) COMPETITIVE CONDITIONS
IN EXPLAINING THE HOMASOTE COMPANY'S COMPETITIVE
POSITION, IT MUST BE UNDERSTOOD THAT HOMASOTE IS A
MEDIUM DENSITY BOARD - NOT A HARD NOR A SOFT BOARD.
IT CAN BE USED IN THE INTERIOR OR EXTERIOR OF A
HOME. IT IS AN ALL-PURPOSE BOARD AND IS SOLD IN
THAT MANNER. IT TAKES THE PLACE OF PLYWOOD IN MANY
CASES. THE COMPANY'S PRODUCT IS SOLD TO MANY
CUSTOMERS WHERE THEY CAN TAKE ADVANTAGE OF THE
UNIQUE QUALITIES OF THE PRODUCT.
(XI) RESEARCH AND DEVELOPMENT
THE REGISTRANT DEFINES RESEARCH AS THE
EXPERIMENTATION WITH RESPECT TO NEW PRODUCTS OR
DESIGNS. IT DEFINES QUALITY CONTROL AS THE ONGOING
SUPPORT FOR EXISTING PRODUCTS OR DESIGNS. DURING
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NO
AMOUNTS WERE SPENT ON RESEARCH AND DEVELOPMENT.
DURING THE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995 THE REGISTRANT INCURRED QUALITY CONTROL COSTS
OF $90,304, $80,309, AND $84,448 RESPECTIVELY.
(XII) ENVIRONMENTAL PROTECTION
AS OF DECEMBER 31, 1997, COMPLIANCE WITH FEDERAL,
STATE AND LOCAL PROVISIONS WHICH HAVE BEEN ENACTED
OR ADOPTED TO REGULATE THE PROTECTION OF THE
ENVIRONMENT WILL NOT HAVE A MATERIAL EFFECT UPON THE
CAPITAL EXPENDITURES, EARNINGS OR COMPETITIVE
POSITION OF THE REGISTRANT OR ITS SUBSIDIARY. THE
REGISTRANT DOES NOT EXPECT TO MAKE ANY MATERIAL
CAPITAL EXPENDITURES FOR ENVIRONMENTAL CONTROL
FACILITIES FOR ITS CURRENT FISCAL YEAR.
(XIII) NUMBER OF EMPLOYEES
AS OF DECEMBER 31, 1997, THE REGISTRANT EMPLOYED 220
EMPLOYEES, AS COMPARED TO 214 IN 1996.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
FOREIGN SALES, PRIMARILY IN CANADA, ACCOUNTED FOR
APPROXIMATELY 6%, FOR THE YEAR ENDED DECEMBER 31, 1997,
AND APPROXIMATELY 5%, IN EACH OF THE TWO YEARS ENDED
DECEMBER 31, 1996 AND 1995, RESPECTIVELY, OF THE
REGISTRANT'S TOTAL SALES. THE REGISTRANT IS CONTINUING
ITS EFFORTS TO EXPAND SALES WORLDWIDE.
ITEM 2. PROPERTIES
THE REGISTRANT'S PLANT AND MAIN OFFICES ARE LOCATED OFF
LOWER FERRY ROAD, EWING TOWNSHIP, TRENTON, NEW JERSEY.
THE PROPERTY CONSISTS OF APPROXIMATELY 27 ACRES WITH
PRIVATE RAILROAD SIDING (CONSOLIDATED RAIL CORPORATION)
ENTERING THE SHIPPING AREA. BUILDINGS ARE OF CINDER
BLOCK AND BRICK CONSTRUCTION, WITH A FLOOR AREA OF
APPROXIMATELY 531,000 SQUARE FEET, WHICH ARE PROPERLY
ARRANGED FOR THE MANUFACTURE AND FINISHING OF ALL THE
REGISTRANT'S PRODUCTS. THE WHOLE AREA IS PROTECTED WITH
A COMPLETE ENCLOSURE OF CYCLONE FENCING AND GUARD HOUSE.
THE ENTIRE MANUFACTURING OPERATION AND OFFICE COMPLEX
CONTAINS FIRE SPRINKLERS AND IS MONITORED BY A SECURITY
COMPANY FOR FIRE PROTECTION. ALL PROPERTY IS HELD IN FEE
SIMPLE. THE MANUFACTURING OPERATION RUNS THREE SHIFTS,
SEVEN DAYS A WEEK. OPERATIONAL CAPACITY IS APPROXIMATELY
60% WHILE THE NEW DRYER SYSTEM IS BEING INSTALLED AND IS
DEPENDENT DIRECTLY UPON THE ECONOMIC CONDITION OF THE
HOUSING AND MANUFACTURING INDUSTRIES.
ITEM 3. LEGAL PROCEEDINGS
AS OF DECEMBER 31, 1997, THERE WAS NO MATERIAL PENDING
LITIGATION AGAINST THE REGISTRANT.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
THIS INFORMATION IS INCLUDED IN THE HOMASOTE COMPANY 1997
ANNUAL REPORT TO STOCKHOLDERS. SEE THE TWO YEAR DIVIDEND
AND STOCK PRICE COMPARISON SECTION OF SUCH REPORT
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
ITEM 6. SELECTED FINANCIAL DATA
SEE CONSOLIDATED FIVE YEAR HIGHLIGHTS SECTION OF THE
HOMASOTE COMPANY 1997 ANNUAL REPORT TO STOCKHOLDERS
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS SECTION OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEE MANAGEMENT'S DISCUSSION AND ANALYSIS SECTION OF THE
HOMASOTE COMPANY 1997 ANNUAL REPORT TO STOCKHOLDERS
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF THE HOMASOTE COMPANY
1997 ANNUAL REPORT TO STOCKHOLDERS INCORPORATED
HEREIN BY REFERENCE AS EXHIBIT 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) DIRECTORS
A DEFINITIVE PROXY STATEMENT DATED APRIL 2, 1998, WAS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THESE ITEMS.
(B) EXECUTIVE OFFICERS
EXPERIENCE
STARTED IN YEARS
IN AT
NAME TITLE (6) POSITION POSITION AGE
- ------------------ --------- -------- -------- ---
IRVING FLICKER CHAIRMAN OF
(1) THE BOARD AND
CHIEF EXECUTIVE
OFFICER 2/16/72 26 82
SHANLEY E. FLICKER VICE CHAIRMAN
(1) OF THE BOARD 1/01/95 3 80
WARREN L FLICKER PRESIDENT AND
(2) CHIEF OPERATING
OFFICER 1/01/95 3 54
JOSEPH A BRONSARD EXECUTIVE VICE
(3) PRESIDENT 1/01/95 3 64
NEIL F BACON TREASURER 4/14/88 10 41
(4) CHIEF FINANCIAL
AND ACCOUNTING
OFFICER 3/14/88 10
ASSISTANT
SECRETARY 4/14/88 10
CINDY ADLER SECRETARY 4/21/95 3 41
(5)
(1) IRVING FLICKER AND SHANLEY FLICKER ARE BROTHERS.
(2) WARREN FLICKER IS THE SON OF IRVING FLICKER.
(3) EMPLOYED BY THE COMPANY SINCE 1968.
(4) EMPLOYED BY THE COMPANY SINCE 1979.
(5) EMPLOYED BY THE COMPANY SINCE 1988.
(6) THE OFFICERS MENTIONED ABOVE ARE RE-ELECTED EACH YEAR
BY THE BOARD OF DIRECTORS AT THEIR ANNUAL MEETING.
ITEM 11. EXECUTIVE COMPENSATION
A DEFINITIVE PROXY STATEMENT DATED APRIL 2, 1998, WAS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THIS ITEM.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A DEFINITIVE PROXY STATEMENT DATED APRIL 2, 1998, WAS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THIS ITEM.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A DEFINITIVE PROXY STATEMENT DATED APRIL 2, 1998, WAS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THIS ITEM.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) (1) FINANCIAL STATEMENTS INCORPORATED HEREIN BY
REFERENCE AS EXHIBIT 13.
INDEPENDENT AUDITORS' REPORT INCORPORATED HEREIN BY
REFERENCE AS EXHIBIT 13.
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND
1996 INCORPORATED HEREIN BY REFERENCE AS EXHIBIT
13.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED
EARNINGS - YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995 INCORPORATED HEREIN BY REFERENCE AS EXHIBIT
13.
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 INCORPORATED
HEREIN BY REFERENCE AS EXHIBIT 13.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
(2) FINANCIAL STATEMENT SCHEDULES
NONE REQUIRED
(3) EXHIBITS
3 ARTICLES OF INCORPORATION AND BYLAWS *
13 HOMASOTE COMPANY 1997 ANNUAL REPORT TO
STOCKHOLDERS
(B) REPORT ON FORM 8-K
NO REPORTS ON FORM 8-K WERE FILED IN THE THREE
MONTHS ENDED DECEMBER 31, 1997.
*PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED
THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED.
HOMASOTE COMPANY
DATED: MARCH 31, 1998 BY IRVING FLICKER
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE
ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES ON THE
DATE INDICATED.
IRVING FLICKER CHAIRMAN, DIRECTOR MARCH 31, 1998
& CEO
NEIL F. BACON TREASURER MARCH 31, 1998
SHANLEY E. FLICKER DIRECTOR MARCH 31, 1998
WARREN FLICKER DIRECTOR MARCH 31, 1998
PATIENCE O. BANISTER DIRECTOR MARCH 31, 1998
JOSEPH A. BRONSARD DIRECTOR MARCH 31, 1998
MICHAEL FLICKER DIRECTOR MARCH 31, 1998
PETER N. OUTERBRIDGE DIRECTOR MARCH 31, 1998
LETTER TO SHAREHOLDERS
The year of 1997 was disappointing for Homasote for a variety
of factors. We had anticipated substantial enhancements to our
production process during the year. However, due to (i) the
substantial modification of our production areas to make room for
a new state-of-the-art dryer that had been ordered, and (ii) the
restrictions of our productivity as a result of the dismantling of
two Making lines that produce Homasote products which occurred in
May of 1996, there were periods when we did not service our
customer accounts as we would have liked.
After this process was completed, the engineering phase that
was necessary in anticipation of the placement of the new dryer was
ongoing and modification of the location for this placement was
finished.
We engaged a contractor to assemble and install this new dryer
in concert with those Homasote employees that we could make
available to this effort.
The new dryer was put into modified production the last week
of September 1997, which enabled us to go through a shakedown
period in order to surface any potential problems. One of our main
concerns was to determine whether problems may exist on the start-up when heat
was introduced. Another major purpose was to find the
speed necessary to dry Homasote and to evaluate the forward travel
of product through the dryer at a speed that would be economically
successful.
We were not able to do this, for on November 1, 1997, a fire
occurred in the new dryer, making it completely inoperable and
resulting in an interruption of our anticipated productivity of our
major product line, which in turn affected our bottom line.
Homasote employees did their best to replace many of the burned and
distorted parts that were required and were finally able to put the
dryer in a temporary state of repair toward the end of the year.
On January 30, 1998, we again experience a fire in the new Coe
Dryer. This fire was restricted to an area at the end of the dryer
and was repaired in a short period of time. Once back into
production, the new dryer is expected to produce at 40% of its
anticipated production capability, but approximately equal to 100%
of our previous capacity running five units.
Management believes that insurance will cover substantially
all of Homasote Company's property and business interruption losses
relating to the fires. However, Homasote 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
could have an adverse effect on Homasote Company's financial
position and operating results which can be expected to continue
well into 1998. Management believes further that Homasote
Company's recovery under its business interruption policy, when
finally received, should provide the wherewithal to cover the
substantial portion of lost revenues.
The relationship with our customers during this period has
been good and it is our anticipation that it will remain so in the
future. We are appreciative for their support during this
challenging period.
Testing which is ongoing for our primary Homasote products,
polyiso sidewall foam sheathing and roofing insulation, is
necessarily continuous in order for us to maintain a competitive
position. Substantial effort is made by our Research and
Development Department to conform to the environmental mandates.
We are in touch with suppliers to develop a cost effective and
successful new sizing system.
Homasote has been accepted from an aesthetic point of view to
be put on walls with no subsequent finish. Wall requirements may
call for sophisticated laminates such as burlap, papers, textiles
and paint. Products such as carpet underlayment with both
unmachined and grid machined surface are important to our scheme of
things, as is Homex which is a highway expansion strip and is also
used as a unique forming material for concrete sidewalks,
driveways, swimming pools, etc.
Products processed in the Industrial Department are
continually gaining acceptance.
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.
The net loss for the year was $(445,778) after an income tax
benefit of $272,820, equal to $(1.22) net loss per share.
Dividends were paid at a rate of $0.24 per share.
Sales for 1997 were $24,979,819, a decrease from $26,969,869
in 1996.
Homasote Company purchased an additional 29,950 shares of
Homasote common stock for our Treasury. Net working capital was
$3,383,330, a decrease of $2,548,651 from last year.
At this time of the year, we wish to take the opportunity to
thank our Board of Directors, shareholders, employees, customers,
and suppliers for their continuing support.
________________________ ____________________
Irving Flicker Shanley E. Flicker
Chairman of the Board Vice Chairman
and Chief Executive Officer of the Board
<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
1997
----------<S>
<C>
Net Sales $ 24,979,819
Depreciation and amortization $ 888,944
(Loss) earnings before cumulative
effect of changes in accounting
principles $ (445,778)
Cumulative effect of changes in
accounting principles $ ---
Net (loss) earnings $ (445,778)
Weighted average number of common
shares outstanding 364,479
(Loss) earnings per share, before
cumulative effect of changes in
accounting principles -- basic $ (1.22)
Per share, cumulative effect of
changes in accounting principles $ ---
Net (loss) earnings per share -- basic $ (1.22)
Dividends-cash $ 90,300
Dividends per share $ 0.24
Working capital $ 3,383,330
Working capital ratio 2.0-1
Capital expenditures $ 4,291,324
Total assets $ 20,137,096
Long-term debt, excluding current
portion $ 3,562,500
Stockholders' equity $ 7,974,309
Common shares outstanding 348,801
Per share book value of common stock $ 22.86
</TABLE>
<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
1996
----------<S>
<C>
Net Sales $ 26,969,869
Depreciation and amortization $ 606,830
(Loss) earnings before cumulative
effect of changes in accounting
principles $ 708,489
Cumulative effect of changes in
accounting principles $ ---
Net (loss) earnings $ 708,489
Weighted average number of common
shares outstanding 376,528
(Loss) earnings per share, before
cumulative effect of changes in
accounting principles -- basic $ 1.88
Per share, cumulative effect of
changes in accounting principles $ ---
Net (loss) earnings per share -- basic $ 1.88
Dividends-cash $ 165,694
Dividends per share $ 0.44
Working capital $ 5,931,981
Working capital ratio 3.9:1
Capital expenditures $ 2,444,627
Total assets $ 20,067,202
Long-term debt, excluding current
portion $ 3,987,500
Stockholders' equity $ 8,943,929
Common shares outstanding 376,251
Per share book value common stock $ 23.77
</TABLE>
<TABLE>
1995
----------<S>
<C>
Net Sales $ 25,536,461
Depreciation and amortization $ 532,895
(Loss) earnings before cumulative
effect of changes in accounting
principles $ 786,100
Cumulative effect of changes in
accounting principles $ ---
Net (loss) earnings $ 786,100
Weighted average number of common
shares outstanding 383,756
(Loss) earnings per share, before
cumulative effect of changes in
accounting principles -- basic $ 2.05
Per share, cumulative effect of
changes in accounting principles $ ---
Net (loss) earnings per share -- basic $ 2.05
Dividends-cash $ 221,087
Dividends per share $ 0.58
Working capital $ 6,503,700
Working capital ratio 4.4:1
Capital expenditures $ 886,221
Total assets $ 15,302,966
Long-term debt, excluding current
portion $ ---
Stockholders' equity $ 8,424,834
Common shares outstanding 377,451
Per share book value common stock $ 22.32
</TABLE>
<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
1994
----------
<S> <C>
Net Sales $ 25,698,178
Depreciation and amortization $ 479,977
(Loss) earnings before cumulative
effect of changes in accounting
principles $ 1,227,226
Cumulative effect of changes in
accounting principles $ ---
Net (loss) earnings $ 1,227,226
Weighted average number of common
shares outstanding $ 400,403
(Loss) earnings per share, before
cumulative effect of changes in
accounting principles -- basic $ 3.06
Per share, cumulative effect of
changes in accounting principles $ ---
Net (loss) earnings per share --basic $ 3.06
Dividends-cash $ 199,457
Dividends per share $ 0.50
Working capital $ 7,102,868
Working capital ratio 4.7:1
Capital expenditures $ 189,993
Total assets $ 15,501,034
Long-term debt, excluding current
portion $ 775,000
Stockholders' equity $ 8,099,981
Common shares outstanding 390,956
Per share book value common stock $ 20.72
</TABLE>
<TABLE>
1993
----------
<S> <C>
Net Sales $ 23,850,504
Depreciation and amortization $ 474,863
(Loss) earnings before cumulative effect
of changes in accounting principles $ 475,702
Cumulative effect of changes in
accounting principles $ 2,299,730
Net (loss) earnings $ (1,824,028)
Weighted average number of common
shares outstanding 426,248
(Loss) earnings per share, before
cumulative effect of changes in
accounting principles -- basic $ 1.12
Per share, cumulative effect of changes
in accounting principles $ (5.40)
Net (loss) earnings per share -- basic $ (4.28)
Dividends-cash $ 211,610
Dividends per share $ 0.50
Working capital $ 6,254,861
Working capital ratio 6.6:1
Capital expenditures $ 250,049
Total assets $ 14,253,593
Long-term debt, excluding current
portion $ 932,158
Stockholders' equity $ 7,389,904
Common shares outstanding 411,874
Per share book value common stock $ 17.94
</TABLE>
<TABLE>
TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON
<CAPTION>
CASH DIVIDENDS
Quarterly cash dividends for the last two years were as follows:
Quarter 1997 1996
---- ----
<S> <C> <C>
First $ 0.12 $ 0.12
Second 0.12 0.12
Third 0.00 0.10
Fourth 0.00 0.10
---- ----
$ 0.24 $ 0.44
</TABLE>
<TABLE>
<CAPTION>
STOCK PRICES
Stock prices for the last two years were as follows:
1997 1996
Quarter High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First $ 16.50 $ 13.00 $ 20.25 $ 17.00
Second $ 18.25 $ 15.00 $ 17.88 $ 15.75
Third $ 18.25 $ 14.00 $ 17.50 $ 14.50
Fourth $ 18.25 $ 16.75 $ 15.50 $ 13.00
Number of Stockholders at December 31, 1997 and 1996 is 270 and
280, respectively.
</TABLE>
PROFILE
Homasote Company manufactures building and industrial products used
in various construction and manufacturing industries.
Homasote International Sales Co., Inc. is an export company.
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Net sales $ 24,979,819 $ 26,969,869 $25,536,461
Cost of sales 19,419,846 20,013,748 18,870,545
---------- ---------- ----------
Gross profit 5,559,973 6,956,121 6,665,916
Selling, general and
administrative expenses 6,350,194 5,850,714 5,465,568
--------- ---------- ----------
Operating (loss) income (790,221) 1,105,407 1,200,348
Other income (expense):
Gain on sale of assets 10,942 13 219 4,300
Interest income 159,678 94,730 115,969
Interest expense (185,678) (89,600) (85,472)
Other income 86,681 69,975 76,765
---------- ---------- ----------
71,623 88,324 111,562
---------- ---------- ----------
(Loss) earnings before
income taxes (718,598) 1,193,731 1,311,910
Income tax benefit
expense (note 5) (272,820) 485,242 525,810
---------- ---------- ----------
Net (loss) earnings (445,778) 708,489 786,100
Retained earnings at beginning
of year 14,950,349 14,407,554 13,842,541
less cash dividends paid
($.24 per share in 1997,
$.44 per share in 1996 and
$.58 per share in 1995) (90,300) (165,694) (221,087)
---------- ---------- ----------
Retained earnings at
end of year $ 14,414,271 $ 14,950,349 $14,407,554
========== ========== ==========
Net (loss) earnings per
common share -- basic $ (1.22) $ 1.88 $ 2.05
========== ========== ==========
Common shares outstanding
(weighted average) 364,479 376,528 383,756
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 892,150 $ 2,680,061
Accounts receivable (net
of allowance for doubtful
accounts of $58,854 and
$59,776 in 1997 and 1996,
respectively) 2,212,448 1,873,340
Inventories (note 2) 2,650,989 3,085,886
Refundable income taxes 432,704 ---
Deferred income
taxes (note 5) 119,175 102,760
Prepaid expenses and
other current assets 471,087 241,253
------------ -----------
Total current assets $ 6,778,553 $ 7,983,300
------------ -----------PROPERTY, PLANT AND
EQUIPMENT, NET
(notes 3 and 4) 10,994,712 7,539,476
OTHER ASSETS:
Deferred income
taxes (note 5) 19,546 57,864
Restricted cash (note 4) 537,248 2,957,373
Other (note 6) 1,807,037 1,529,189
------------ -----------
$ 20,137,096 $ 20,067,202
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1997 1996
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Short term debt (note 4) $ 1,000,000 $ ---
Current installments of
long-term debt (note 4) $ 392,500 $ 152,500
Accounts payable 1,426,190 986,662
Accrued income taxes --- 329,228
Accrued expenses (note 7) 576,533 582,929
------------ -----------
Total current liabilities $ 3,395,223 $ 2,051,319
LONG-TERM DEBT, excluding
current installments (note 4) 3,562,500 3,987,500
OTHER LIABILITIES (note 6) 5,205,064 5,084,454
------------ -----------
Total liabilities 12,162,787 11,123,273
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, par value $0.20
per share; Authorized
1,500,000 shares;
Issued 863,995 shares 172,799 172,799
Additional paid-in capital 898,036 898,036
Retained earnings 14,414,271 14,950,349
------------ -----------
15,485,106 16,021,184
Less cost of common shares in
treasury - 515,194 shares in
1997 and 487,744 shares in
1996 (note 8) 7,510,797 7,077,255
------------ -----------
Total stockholders' equity 7,974,309 8,943,929
------------ -----------
$ 20,137,096 $ 20,067,202
============ ===========
COMMITMENTS AND CONTINGENCIES (note 10)
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) earnings $ (445,778) $ 708,489 $ 786,100
Adjustments to reconcile
net (loss) earnings to net
cash (used in) provided by
operating activities:
Depreciation and amortization 888,944 606,830 532,895
Gain on disposal of fixed
assets (10,942) (13,219) (4,300)
Deferred income taxes 21,903 42,439 23,460
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable, net (339,108) (223,983) 8,909
Decrease (increase) in
inventories 434,897 671,546 (120,265)
Decrease (increase) in
prepaid income taxes --- 294,291 (294,291)
Increase in other assets (341,565) (223,697) (64,241)
Increase in refundable income
taxes (432,704) --- ---
Increase (decrease) in prepaid
expenses and other current
assets (229,834) 54,664 (58,781)
Increase in accounts payable 439,528 259,356 82,311
Decrease (increase) in accrued
expenses (6,396) 163,288 (135,705)
Decrease (increase) in accrued
income taxes (329,228) 329,288 (588,751)
Increase in other liabilities 120,610 128,269 272,815
---------- ---------- --------
Net cash (used in) provided
by operating activities (229,673) 2,797,501 440,156
---------- ---------- ---------
Cash flows from investing
activities:
Proceeds from sale of
equipment 21,803 13,219 4,300
Capital expenditures (4,291,324) (2,444,627) (886,221)
Decrease (increase) in
restricted cash 2,420,125 (2,957,373) ---
---------- ---------- ---------
Net cash used in investing
activities (1,849,396) (5,388,781) (881,921)
---------- ---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 1,000,000 1,000,000 ---
Repayment of short-term debt --- (1,775,000) (3,591)
Repayment of long-term debt (185,000) --- (150,000)
Cash dividends paid (90,300) (165,694) (221,087)
Proceeds from sale of
treasury stock 32,500 --- 3,925
Purchase of treasury
stock (466,042) (23,700) (244,085)
Proceeds from bond issue --- 4,140,000 ---
Debt acquisition costs --- (233,292) ---
---------- ---------- --------Net cash
provided by (used in)
financing activities: 291,158 2,942,314 (614,838)
---------- ---------- ---------Net decrease
(increase) in
cash and cash equivalents (1,787,911) 351,034 (1,056,603)
Cash and cash equivalents
at beginning of year 2,680,061 2,329,027 3,385,630
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 892,150 $ 2,680,061 $2,329,027
========== ========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the years for:
Interest $ 185,678 $ 90,323 $ 78,855
---------- ---------- ---------
Income taxes $ 479,640 $ 53,294 $1,385,330
---------- ---------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
Homasote Company and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Homasote Company is in the business
of manufacturing insulated wood fibre board and polyisocyanurate
foam products, and operates in only one industry segment: the
manufacture and sale of rigid polyisocyanurate and structural
insulating building materials and packaging products for industrial
customers. Sales in 1997 were distributed as follows: building
material wholesalers and contractors, approximately 77%; and
industrial manufacturers, approximately 23%; and in 1996: building
material wholesalers and contractors, approximately 75%, and
industrial manufacturers, approximately 25%.
The Company's primary basic raw material, wastepaper, is
generally readily available from two suppliers with which the
Company has purchase contracts that expire in 2009. (See note 10)
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary, Homasote International Sales Co., Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS: The Company considers all highly
liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
INVENTORY VALUATION COST: Inventories are valued at the lower
of weighted average actual cost, which approximates first-in,
first-out (FIFO), or market.
DEPRECIATION: Property, plant and equipment is stated at
cost. Depreciation of plant and equipment is computed using the
straight-line and various accelerated methods at rates adequate to
depreciate the cost of applicable assets over their expected useful
lives. Maintenance and repairs are charged to operations as
incurred and major improvements are capitalized. The cost of
assets retired or otherwise disposed of and the accumulated
depreciation thereon is removed from the accounts with any gain or
loss realized upon sale or disposal charged or credited to
operations.
DEBT ACQUISITION COSTS: Debt acquisition costs consist
principally of costs associated to secure long-term debt (see note
4). These costs are being amortized using the straight-line method
over the term of the related debt.
REVENUE RECOGNITION: Revenue from product sales is recognized
when the related goods are shipped and all significant obligations
of the Company have been satisfied.
EARNINGS PER SHARE: Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." SFAS No. 128 requires a dual
presentation of earning per share--basic and diluted. Basic
earnings per share has been computed by dividing net (loss)
earnings by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is not
presented since the Company has a simple capital structure with
only common stock outstanding in 1997, 1996, and 1995.
BUSINESS AND CREDIT CONCENTRATIONS: Sales of the Company's
products are dependent upon the economic condition of the housing
and manufacturing industries. Changes in these industries may
significantly affect management's estimates and the Company's
performance. The majority of the Company's customers are located
in the northeastern United States, with the remainder spread
throughout the United States and Canada. No single customer
accounted for more than five percent of the Company's sales.
The Company estimates an allowance for doubtful accounts based
upon the actual payment history of each individual customer.
Consequently, an adverse change in the financial condition or the
local economy of a particular customer could affect the Company's
estimate of its bad debts.
EMPLOYEE BENEFIT PLANS: The Company has a non-contributory
pension plan covering substantially all employees who meet age and
service requirements. Additionally, the Company provides certain
health care and life insurance benefits to retired employees. The
net periodic pension costs are recognized as employees render the
services necessary to earn pension and post-retirement benefits.
INCOME TAXES: Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS
121"). This statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS
121 also requires that assets to be disposed of be reported at the
lower of the carrying amount or the fair value less costs to sell.
Adoption of this statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVENTORIES
<TABLE>
<CAPTION>
The following are the major classes of inventories as of
December 31, 1997 and 1996:
1997 1996
--------- ---------
<S> <C> <C>
Finished goods $ 1,726,209 $ 1,940,344
Work in process 8,001 66,770
Raw materials 916,779 1,078,772
--------- ---------
$ 2,650,989 $ 3,085,886
========= =========
Inventories include the cost of materials, direct labor and
manufacturing overhead.
</TABLE>
<TABLE>
<CAPTION>
NOTE 3-PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December
31:
--------------------------------------
Estimated
1997 1996 Useful Lives
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 93,543 $ 93,543
Buildings and additions 9,045,195 9,003,571 10-50 years
Machinery and equipment 25,754,968 19,703,379 5-20 years
Office equipment 1,162,530 981,175 10 years
Automotive equipment 521,960 445,894 3-5 years
Construction in progress 245,480 2,397,604
---------- ----------
$ 36,823,676 $ 32,625,166
Less accumulated
depreciation 25,828,964 25,085,690
---------- ----------
$ 10,994,712 $ 7,539,476
========== ==========
NOTE 4-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 (3.7% at December 31, 1997).
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 $537,248 and $2,957,373 at
December 31, 1997 and 1996, respectively, 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 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 such that
management believes the Company will be in compliance with the
covenants throughout 1998.
In order to reduce its risks from interest rate fluctuations
under the Agreement, the Company entered into a five-year interest
rate cap agreement with a bank at a cost of $101,000 which is being
amortized to interest expense over the life of the agreement. The
agreement entitles the Company to receive, on a monthly basis, the
amounts, if any, by which the interest payments on the Bond exceed
4.5% per annum.
The balance of long-term debt outstanding at December 31, 1997
and 1996 was $3,955,000 and $4,140,000 respectively. The aggregate
maturities of long-term debt for each of the five years subsequent
to December 31, 1997, are as follows: 1998, $392,500; 1999,
$406,667; 2000, $417,500; 2001, $432,500; 2002, $447,500;
thereafter $1,858,333.
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 December 31, 1997) less 0.25%. As
of December 31, 1997, $1.0 million was outstanding under the line
of credit. On February 4, 1998, the Company increased the
borrowings outstanding under this facility to the full $2.0
million.
Total interest costs incurred during 1997 was approximately
$289,000, of which approximately $103,000 was capitalized.
NOTE 5-INCOME TAXES
Income tax expense is computed based on the applicable statutory
rates and is comprised of the following:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
Current:
<S> <C> <C> <C>
Federal $ (294,723) $ 341,473 $ 387,601
State 0 101,330 114,749
------- ------- -------
(294,723) 442,803 502,350
------- ------- -------
Deferred:
Federal 62,384 36,072 19,941
State (40,481) 6,367 3,519
------- ------- -------
21,903 42,439 23,460
------- ------- -------
Total income tax (benefit)
expense $(272,820) $ 485,242 $ 525,810
======= ======= =======
The actual income tax expense differs from the amounts computed by
applying the U.S. Federal Income Tax rate of 34% to (loss) earnings
before income taxes as a result of the following:
1997 1996 1995
------- ------- -------
Computed "expected" tax
(benefit) expense $(244,323) $ 405,869 $ 446,049
State income taxes (net of
Federal income tax benefit) (26,717) 71,080 78,057
Other (1,780) 8,293 1,704
------- ------- -------
$(272,820) $ 485,242 $ 525,810
======= ======= =======
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are presented below:
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 23,542 $ 23,910
Inventories, principally due to
reserves for obsolescence 161,672 177,672
Other liabilities, principally due to
supplemental pension and post-
retirement costs 2,082,025 2,033,782
Nondeductible accrued expense 29,784 25,103
Net operating loss carryforwards--
state 51,490 ---
--------- ---------
Total gross deferred tax assets 2,348,513 2,260,467
Less valuation allowance (1,032,940) (1,032,940)
--------- ---------
Net deferred tax assets 1,315,573 1,227,527
--------- ---------
Deferred tax liabilities:
Fixed assets, due to accelerated
depreciation 500,522 522,522
Other assets, due to pension costs 657,623 520,997
Accumulated DISC income 18,707 23,384
--------- ---------
Total gross deferred tax
liabilities 1,176,852 1,066,903
--------- ---------
Net deferred tax asset $ 138,721 $ 160,624
========= =========
There was no change in the total valuation allowance for the years
ended December 31, 1997 and 1996. In addition, at December 31,
1997, the Company has net operating loss carryforwards for state
income tax purposes of approximately $850,000, which are available
to reduce future state income taxes, if any, through the year 2004.
</TABLE>
NOTE 6-EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit retirement
plan (the Pension Plan) covering all eligible employees. Benefits
under the Pension Plan are calculated at a rate of $15.00 per month
per year of service, as defined (increased to $20.00 in January
1998). Additionally a supplemental noncontributory plan (the
Supplemental Plan) covering certain key employees of the Company
provides benefits based upon the employee's compensation, as
defined, during the highest five of the last ten consecutive years
preceding retirement.
Actuarial assumptions for both the Pension and Supplemental
Plans include 7.25% (7.25% in 1996 and 1995) for the assumed
discount rate used to determine the present value of future
benefits, (7.00% for expense) and 8.5% for expected long-term rate
of return on plan assets. The assumed rate of average future
increases in pension benefit compensation was 5.5% for disclosure
and 5% for expense (5% in 1996 and 1995).
Employer costs (benefit) for the Pension and Supplemental
Plans amounted to $(13,651), $145,707, and $289,870 in 1997, 1996
and 1995, respectively. Net periodic pension cost in 1997, 1996
and 1995 was composed of the following:
<TABLE>
<CAPTION>
1997
Pension Supplemental
Net periodic pension cost Plan Plan
------------------------- ----------- ------------
<S> <C> <C>
Service cost-benefits earned
during the period $ 95,678 $ 39,510
Interest cost on projected
benefit obligation 340,347 193,743
Actual return on plan assets (1,545,757) ---
Net amortization and deferral 768,167 94,661
--------- ---------
$ (341,565) $ 327,914
========= =========
1996
Pension Supplemental
Net periodic pension cost Plan Plan
------------------------- ----------- ------------
<S> <C> <C>
Service cost-benefits earned
during the period $ 93,276 $ 38,549
Interest cost on projected
benefit obligation 332,931 204,758
Actual return on plan assets (1,313,346) ---
Net amortization and deferral 663,442 126,097
--------- ---------
$ (223,697) $ 369,404
========= =========
1995
Pension Supplemental
Net periodic pension cost Plan Plan
------------------------- ----------- ------------
<S> <C> <C>
Service cost-benefits earned
during the period $ 79,782 $ 35,561
Interest cost on projected
benefit obligation 333,473 207,047
Actual return on plan assets (1,828,743) ---
Net amortization and deferral 1,347,071 115,679
--------- ---------
$ (68,417) $ 358,287
========= =========
</TABLE>
<TABLE>
<CAPTION>
The Company's funding policy for the Pension Plan is to
contribute amounts sufficient to meet minimum funding requirements
set forth in U.S. employee benefit and tax laws. The Company's
policy for funding the Supplemental Plan is to contribute benefits
in amounts as determined at the discretion of management. As of
December 31, 1997 and 1996, the Supplemental Plan was unfunded. A
schedule reconciling the projected benefit obligation of the
Company's two pension plans with recorded pension asset (liability)
is as follows:
1997
Reconciliation of funded status Pension Supplemental
as of December 31 Plan Plan
- ------------------------------- ----------- -------------
<S> <C> <C>
Actuarial present value of benefit
obligation
Vested benefit obligation $(5,036,931) $(2,169,973)
Accumulated benefit obligation (5,079,592) (2,451,209)
========= =========
Projected benefit obligation for
service rendered to date (5,079,592) (2,928,666)
Plan assets at fair market value 9,305,347 ---
--------- ---------
Assets in excess of (less than) pro-
jected benefit obligation 4,225,755 (2,928,666)
Unamortized net transition (asset)
obligation (116,255) 547,113
Unrecognized prior service cost 160,172 ---
Unrecognized net gain from past
experience different from that
assumed (2,625,615) (598,808)
--------- ---------
(Accrued)/prepaid pension cost $ 1,644,057 $(2,980,361)
========= =========
1996
Pension Supplemental
Reconciliation of funded status Plan Plan
------------------------------- ----------- ------------
<S> <C> <C>
Actuarial present value of benefit
obligation
Vested benefit obligation $(4,796,768) $(2,193,562)
Accumulated benefit obligation (4,845,123) (2,458,153)
========= ===========
Projected benefit obligation for
service rendered to date (4,845,123) (3,026,893)
Plan assets at fair market value 8,123,079 ---
--------- -----------
Assets in excess of (less than)
projected benefit obligation 3,277,956 (3,026,893)
Unamortized net transition (asset)
obligation (143,933) 683,891
Unrecognized prior service cost 147,264 ---
Unrecognized net gain from past
experience different from that
assumed (1,978,795) (401,008)
--------- ----------
(Accrued)/prepaid pension cost $ 1,302,492 $(2,744,010)
========= ==========
</TABLE>
The Company has a voluntary savings plan for which all
employees are eligible. The Plan provides for the Company to
contribute a minimum of $0.25 for every dollar contributed by
employees, up to 4% of their salaries. Company contributions
charged to operations under this plan amounted to approximately
$29,000 in each of the years 1997, 1996 and 1995.
The Company also provides certain health care and life
insurance benefits for retired employees. Only Company employees
retired on or before May 1, 1992, are eligible for the health care
benefit. Effective January 1998, the Company amended eligibility
to participate in the plan to include all retirees (past and
present) who have reached the age of 65. The Company's policy is
to fund the cost of health care and life insurance benefits for
retirees in amounts determined at the discretion of management. As
of December 31, 1997, and 1996 the plan was unfunded.
<TABLE>
<CAPTION>
The post-retirement benefit cost for 1997, 1996 and 1995 was
composed of the following:
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost $ 3,329 $ 3,681 $ 3,006
Interest cost 67,350 65,432 150,542
Net amortization
and deferral (105,757) (141,435) (31,228)
------- ------- -------
Net post-retirement cost $ (35,078) $ (72,322) $ 122,320
(credit) ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The actuarial present value of benefit obligations and the amount
recognized in the consolidated balance sheets, included in other
liabilities, as of December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
<S> <C> <C>
Retirees $ 890,478 $ 859,062
Fully eligible active plan
participants 48,990 43,581
Other active plan participants 31,994 33,796
--------- ---------
Accumulated post-retirement
benefit obligation 971,462 936,439
Unrecognized actuarial gain 1,253,241 1,404,005
--------- ---------
Accrued post-retirement benefit
obligation $ 2,224,703 $ 2,340,444
========= =========
</TABLE>
Effective June 1995, the Company changed its insurance carrier
providing health care benefits for retirees at a cost savings to
the Company. This change did not impact upon the benefits offered
to the retirees. The result of this change on the actuarial
present value of benefit obligations was to reduce the accumulated
post-retirement benefit obligation and increase the unrecognized
actuarial gain. The unrecognized actuarial gain will be based on
the remaining life expectancy of the retirees.
The assumed annual rate of future increases in the per capita
cost of health care benefits was 9% for both disclosure and expense
in 1997 (10% in 1996). The rate was assumed to decline gradually
to 5.5% for expense and for disclosure in 2002, and remain level
thereafter. Increasing the health care cost trend by 1% in each
year would increase the accumulated benefit obligation and the
interest cost of $51,000 and $3,400, respectively, for 1997, and
$49,000 and $3,300, respectively, for 1996. The weighted average
discount rate used in determining the accumulated benefit
obligation was 7.25% for disclosure and 7% for expense in 1997
(7.25% and 7.25%, respectively, in 1996).
NOTE 7-ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses as of December 31, 1997 and 1996 consist of
the following:
1997 1996
------- -------
<S> <C> <C>
Commissions $ 257,784 $ 213,626
Payroll 115,940 116,165
Other 202,809 253,138
------- -------
$ 576,533 $ 582,929
======= =======
</TABLE>
NOTE 8-TREASURY STOCK
The Company has a policy of offering directors, officers, and
employees the option to purchase reacquired shares of Homasote
Company common stock on the date acquired and at the purchase price
paid by the Company.
<TABLE>
<CAPTION>
A summary of activity for the years 1997, 1996 and 1995 is as
follows:
Acquired Sold Retained in Treasury
---------------- ------------- ----------------
Shares Cost Shares Cost Shares Cost
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
1997 29,950 $ 466,042 2,500 $ 32,500 27,450 $ 433,542
1996 1,200 $ 23,700 --- $ --- 1,200 $ 23,700
1995 13,755 $ 244,085 250 $ 3,925 13,505 $ 240,160
</TABLE>
NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107,
"Disclosures about the Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction
between willing parties. The carrying amounts of the Company's
financial instruments at December 31, 1997 and 1996 approximate
fair value because of the short maturity of those instruments and
with respect to the Bonds (see note 4) due to the variable interest
rates which approximate current market rates.
NOTE 10-COMMITMENTS AND CONTINGENCIES
The Company's primary basic raw material, wastepaper, is
generally readily available from two suppliers with which the
Company has purchase contracts that expire in 2009. 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 1997 and 1996
aggregated approximately $923,000 and $929,000, respectively.
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.
On November 1, 1997, a fire broke out on the Company's new gas
fired board dryer. The fire caused severe damage to the dryer, as
well as disruptions to production. The Company has filed an
insurance claim.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
HOMASOTE COMPANY
We have audited the accompanying consolidated balance sheets of
Homasote Company and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations and retained
earnings and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Homasote Company and subsidiary as of December 31, 1997
and 1996, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
February 20, 1998 except as to the third paragraph
of note 4, which is as of March 19, 1998
Princeton, N.J.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 1997-1996
The Company's sales are derived from building material
wholesalers and industrial manufacturers. 1997 sales decreased by
$1,990,000, or 7.4%, to $24,980,000, from $26,970,000 in 1996.
While demand remained strong through the third quarter of 1997,
production and floor inventories could not keep pace with orders
for Homasote products. This was due to the 40% reduction in
production capacity brought about by the removal of two production
units to make room for installation of new, more efficient
production equipment.
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.
Once back into production, the new dryer is expected to produce 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.
Cost of goods sold, as a percentage of sales, increased from
74.2% in 1996, to 77.7% in 1997. This increase 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 25.4% in 1997 as compared to 21.7% in 1996. SG&A
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 increased by 68.6% to $159,678 in 1997 from
$94,730 in 1996, due primarily to the balance being carried for the
full year of 1997 in the restricted cash account for new dryer-
related purchases.
Interest expense on debt increased by 107.2% to $185,678 in
1997, from $89,600, in 1996, due to debt incurred with relation to
the dryer project.
As a result of the loss in 1997, the Company recorded an
income tax benefit of $272,820 which primarily relates to a federal
income tax refund due the Company from carrying such loss back to
years in which the Company paid income taxes.
RESULTS OF OPERATION 1996-1995
The Company's sales are derived from building material
wholesalers and industrial manufacturers. 1996 sales increased by
$1,443,000, or 5.6%, to $27.0 million, from $25.5 million in 1995.
This was due primarily to a change in marketing strategy, which
included a September 1996 agreement with Weyerhaeuser Corporation
for the joint marketing and distribution in the Unites States, of
the Company's building products, contributing to an increase in
sales volume in the third and fourth quarters of 1996. The
approximate sales mix of products in 1996 remains unchanged from
1995, with sales of Millboard wholesalers at 75% and Industrial
manufacturers at 25%. Cost of goods sold, as a percentage of
sales, increased from 73.9% in 1995, to 74.2% in 1996, a change of
$1,143,000. Net earnings as a percentage of sales decreased from
3.1% in 1995 to 2.6% in 1996, a change of $78,000. While the
fourth quarter 1996 cost of goods sold percentage reflected
improvements in production volumes and manufacturing efficiencies,
it was not sufficient to offset the higher costs incurred during
the first nine months of the year resulting in the full year 1996
cost of sales percentage being higher than 1995.
Selling, general and administrative expenses as a percentage
of sales were comparable from 1996 to 1995 at 21.6% and 21.4%
respectively.
Interest income decreased by 18.3% to $94,730 in 1996, from
$115,969 in 1995, due to lower average balance of funds available
for investment.
Interest expense on debt increased by 4.8% to $89,600 in 1996,
from $85,500 in 1995, due to increasing interest rates on an
increasing average balance of debt outstanding. The effective
income tax expense rate increased to 40.6% in 1996 as compared to
40.1% in 1995 primarily as a result of a higher effective rate for
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities and bank borrowings are
the primary sources of liquidity. Net cash (used in) provided by
operating activities amounted to $(0.2) million in 1997, $2.8
million in 1996, and $0.4 million in 1995.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $4.3 million in 1997, $2.4 million
in 1996, and $0.9 million in 1995. The Company has estimated
capital expenditures for 1998 in the amount of $3,230,500. 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 1997-1996".
Cash flows from financing activities declined from $2.9
million in 1996 to $0.3 million in 1997, primarily as a result of
proceeds of $4.1 million in 1996 from a bond issue (none in 1997)
and a reduction of $1.8 million of repayments of short-term debt.
In November 1995, the Company entered into a contract with a
manufacturer for the purchase of a new gas fired board dryer. The
entire expansion project included the dryer, renovations to plant
and ancillary equipment, rerouting conveyors and rebuilding and
replacing molds. As discussed under "Results of Operation 1997-1996",
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 a substantial portion of lost
revenues.
At December 31, 1997, the Company had a $2.0 million unsecured
demand note line of credit with a bank of which $1.0 million was
outstanding. On February 4, 1998, the Company increased the
borrowings outstanding to the full $2.0 million. Management
believes that cash flows from operations coupled with its bank
credit facilities are adequate for the Company to meet its
obligations.
The Company has a Letter of Credit facility which contains
financial and other covenants. 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 and the bank amended certain covenants prospectively such that
management believes the Company will be in compliance with the
covenants throughout 1998.
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.
INFLATION AND ECONOMY
The Company will continue to maintain a policy of constantly
monitoring such factors as product demand and costs, and will
adjust prices as these 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 1997 and 1996
aggregated approximately $923,000 and $929,000, 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.
<TABLE>
<CAPTION>
SUMMARIZED (unaudited) QUARTERLY FINANCIAL DATA OF THE COMPANY FOR
THE YEARS 1997 AND 1996 ARE AS FOLLOWS:
(in thousands of dollars except per share data)
1997
-----------------------------------
<S> <C> <C> <C> <C>
First Second Third Fourth
----- ----- ----- -----
Net Sales $ 6,731 $ 6,177 $ 6,003 $ 6,069
===== ===== ===== =====
Gross Profit $ 1,854 $ 1,170 $ 1,043 $ 1,493
===== ===== ===== =====
Net Earnings (loss) $ 129 $ (301) $ (221) $ (53)
===== ===== ===== =====
Net earnings (loss)
per common share $ 0.34 $ (0.80) $(0.62) $(0.14)
===== ===== ===== =====
1996
-----------------------------------
<S> <C> <C> <C> <C>
First Second Third Fourth
----- ----- ----- -----
Net Sales $ 6,143 $ 6,431 $ 7,446 $ 6,950
===== ===== ===== =====
Gross Profit $ 1,485 $ 1,346 $ 1,544 $ 2,581
===== ===== ===== =====
Net Earnings (loss) $ 17 $ (15) $ 55 $ 651
===== ===== ===== =====
Net earnings (loss)
per common share $ 0.05 $ (0.04) $ 0.15 $ 1.73
===== ===== ===== =====
</TABLE>
The fourth quarter 1997 was adversely affected by a fire in the
Company's new dryer, which was offset by an adjustment to reduce
depreciation expenses recorded prior to the 4th quarter amounting
to approximately $270,000. The fourth quarter, 1996 reflects an
improved gross profit margin compared to prior 1996 quarters, due
primarily to higher production volume, improved manufacturing
efficiencies, sales product mix and a reduction of pension costs
and property taxes. Also, net earnings benefited in the fourth
quarter of 1996 as a result of the reversal of unused customer
volume rebates of approximately $100,000 before income taxes.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,680
<SECURITIES> 0
<RECEIVABLES> 1,933
<ALLOWANCES> 60
<INVENTORY> 3,086
<CURRENT-ASSETS> 7,983
<PP&E> 32,625
<DEPRECIATION> 25,086
<TOTAL-ASSETS> 20,067
<CURRENT-LIABILITIES> 2,051
<BONDS> 0
<COMMON> 376
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,067
<SALES> 26,970
<TOTAL-REVENUES> 27,148
<CGS> 20,014
<TOTAL-COSTS> 5,851
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> 1,193
<INCOME-TAX> 485
<INCOME-CONTINUING> 708
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 708
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
</TABLE>
