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 September 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 nine months
ended ended
September 30 September 30,
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 6,179,688 6,003,206 18,349,459 18,910,875
Cost of sales 4,808,355 4,960,544 14,003,107 14,844,738
--------- --------- ---------- ----------
Gross profit 1,371,333 1,042,662 4,346,352 4,066,137
Selling, general
and administrative
expenses 1,627,934 1,422,003 4,865,810 4,775,653
--------- --------- ---------- ----------
Operating loss (256,601) (379,341) (519,458) (709,516)
Other income(expense):
Interest income 16,812 63,679 57,537 184,087
Interest expense (74,064) (55,213) (215,456) (133,662)
Other income 13,352 2,781 140,767 15,752
--------- --------- ---------- ----------
Loss before
income taxes (300,501) (368,094) (536,610) (643,339)
Income tax benefit (120,200) (147,238) (214,644) (257,336)
--------- --------- ---------- ---------
Net loss (180,301) (220,856) (321,966) (386,003)
Retained earnings
at beginning of
period 14,272,606 14,694,902 14,414,271 14,950,349
Less cash
dividends paid
($.24 per share
in 1997). - - - (90,300)
---------- ---------- ---------- ----------
Retained earnings
at end of period 14,092,305 14,474,046 14,092,305 14,474,046
========== ========== ========== ==========
Net loss per common
share - basic (0.52) (0.62) (0.92) (1.05)
Common shares
outstanding
(weighted average) 348,599 358,507 348,640 369,154
See accompanying notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,124,636 $ 892,150
Accounts receivable (net
of allowance for doubtful
accounts of $60,301 and
$58,854 in 1998 and 1997,
respectively) 2,248,421 2,212,448
Inventories 3,639,110 2,650,989
Refundable income tax 468,597 432,704
Deferred income taxes 119,175 119,175
Prepaid expenses and
other current assets 54,361 471,087
------------ -----------
Total current assets $ 7,654,300 $ 6,778,553
------------ -----------
PROPERTY, PLANT AND
EQUIPMENT, at cost 37,852,382 36,823,676
Less accumulated
depreciation 26,609,118 25,828,964
------------ -----------
Net property plant and
equipment 11,243,264 10,994,712
------------ -----------
OTHER ASSETS
Deferred income taxes 19,546 19,546
Debt acquisition costs (net) 92,150 162,980
Restricted cash 162,207 537,248
Other assets 1,632,057 1,644,057
------------ -----------
$ 20,803,524 $ 20,137,096
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 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 3,630,000 392,500
Accounts payable 1,510,797 1,426,190
Accrued expenses 684,437 576,533
------------ -----------
Total current liabilities 7,825,234 3,395,223
LONG-TERM DEBT, excluding
current installments 0 3,562,500
OTHER LIABILITIES 5,329,429 5,205,064
------------ -----------
Total liabilities 13,154,663 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 14,092,305 14,414,271
------------ -----------
15,163,140 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 7,648,861 7,974,309
------------ -----------
$ 20,803,524 $ 20,137,096
============ ===========
See accompanying notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (321,966) $ (386,003)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 813,430 803,519
Gain on disposal of fixed assets (4,061) (11,487)
Changes in assets and liabilities:
Increase in accounts
receivable, net (35,973) (368,606)
(Increase) decrease in inventories (988,121) 303,156
Increase in refundable
income taxes (35,893) (395,168)
Decrease in other assets 82,830 62,927
Decrease in restricted cash 375,041 2,355,402
Decrease (increase) in prepaid
expenses and other current assets 416,726 (11,776)
Increase in accounts payable 84,607 99,001
Increase (decrease) in accrued
expenses 107,904 (5,545)
Decrease in accrued income taxes - (329,228)
Increase in other liabilities 124,365 142,010
---------- ----------
Net cash provided by
operating activities 618,889 2,258,202
---------- ----------
Cash flows from investing
activities:
Proceeds from sale of
equipment 6,100 16,888
Capital expenditures (1,064,021) (3,644,974)
---------- ----------
Net cash used in investing
activities (1,057,921) (3,628,086)
---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 1,000,000 1,000,000
Repayment of debt (325,000) (96,000)
Cash dividends paid - (90,300)
Proceeds from sale of
treasury stock 58,650 -
Purchase of treasury stock (62,132) (378,842)
---------- ---------
Net cash provided by
financing activities: 671,518 434,858
---------- ---------
Net increase (decrease) in
cash and cash equivalents 232,486 (935,026)
Cash and cash equivalents
at beginning of period 892,150 2,680,061
---------- ----------
Cash and cash equivalents
at end of period $ 1,124,636 $ 1,745,035
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the years for:
Interest $ 201,149 $ 133,662
---------- ----------
Income taxes $ 2,169 $ 353,790
---------- ----------
See accompanying notes to Financial Statements.
</TABLE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
SEPTEMBER 30, 1998
Note 1. The consolidated financial data as of September 30,
1998 for the three and nine-month periods ended September
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 nine months ended
September 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 September 30, 1998, the Company was not in compliance
with certain financial covenants under its credit
facility, related to the bond issue for the Coe dryer. On
November 16, 1998, the Company received a waiver of such
noncompliance from the bank. The Company does not expect
to be able to be in compliance with the existing financial
covenants at or for the year ending December 31, 1998 and,
as a result has reclassified its long-term debt at
September 30, 1998 of approximately $3,226,250 to current
liabilities. Negotiations with the Company's bank are
currently underway, to modify the financial covenants in
certain respects to levels that are believed by management
to be realistic and attainable. Management expects that
these negotiations will be finalized in the fourth quarter
of 1998. Although there can be no assurances that
modifications satisfactory to the Company and the bank can
be negotiated, management does believe that the Company
will be able to renegotiate such financial covenants so as
to permit the Company to be in compliance with the
modified covenants through the end of 1999.
Note 3. INVENTORIES
The following are the major classes of inventories as of
September 30, 1998 and December 31, 1997:
1998 1997
Finished goods.......$2,615,014 $ 1,726,209
Work in process...... 119,879 8,001
Raw materials........ 904,217 916,779
$3,639,110 $ 2,650,989
Inventories include the cost of materials, direct labor
and manufacturing overhead.
FORM 10-Q
HOMASOTE COMPANY AND SUBSIDIARY
September 30, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis and statements made
elsewhere in this Form 10-Q may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such
Statements are subject to risks and uncertainties that could cause
actual results or objectives to differ materially from those
projected. Such risks and uncertainties include, but are not
limited to, risks arising from adverse changes in the building and
manufacturing industries that are the Company's principal
customers, personnel and labor matters, production risks and credit
and collection risks. Additionally, the Company's operating
results would be adversely affected if unexpected increases in the
costs of labor, materials, supplies, equipment used and financing
could not be reflected in the prices of its products.
Management's analysis of material change by quarter as noted
RESULTS OF OPERATIONS
Net sales decreased by 3.0% for the nine-month period ended
September 30, 1998 as compared to September 30, 1997, while net
sales increased 2.9% for the three-month period ended September 30,
1998, as compared to the same period ended September 30, 1997.
Management believes the decrease in net sales for the nine-month
period 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 increase in net sales for
the three-month period is the result of an increase in sales of
flat stock. 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 77.8% and 82.6%,
respectively, for the three month period ended September 30, 1998
and 1997, and 76.3% and 78.5%, respectively, for the nine month
period ended September 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 26.3% and 26.5%, respectively, for the three and
nine-month periods ended September 30, 1998, as compared to 23.7%
and 25.3%, respectively, for the three and nine-month periods ended
September 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 73.6% and 68.7%, respectively,
for the three and nine month periods ended September 30, 1998, as
compared to the same periods ended September 30, 1997, due
primarily to a decreased average balance of funds available for
investment.
Interest expense on debt increased by 34.1% and 61.2%,
respectively, for the three and nine month periods ended September
30, 1998, as compared to the same periods ended September 30, 1997,
due to debt incurred in relation to the dryer project.
Other income increased by $125,015, for the nine-month period
ended September 30, 1998, as compared to the nine-month period
ended September 30, 1997, primarily as a result of the receipt of
$100,000 of business interruption insurance proceeds. Other income
increased $10,571 for the three month period ended September 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 temporarily 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. While Management 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, there can be no assurance
that any insurance recovery will be adequate to recover such
amounts.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was a $(170,934) deficit at September 30,
1998, as compared to $3,383,330 at December 31, 1997, a decrease of
$3,554,264. This decrease was primarily a result of an increase in
short-term borrowing and the reclassification of dryer related
long-term debt to current at September 30, 1998, which were only
partially offset by the increase in inventory.
Cash flows from operating activities and bank borrowing are
the primary sources of liquidity. Net cash provided by operating
activities amounted to $0.6 million in 1998 and $2.3 million in
1997.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $1.1 million in 1998 and $3.6
million in 1997. The Company has estimated capital expenditures
for the remaining three (3) months of 1998 in the amount of $0.1
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 $0.4
million in 1997 to $0.7 million in 1998, as a result of a decrease
in the amount of Treasury Stock purchases, no dividends paid in
1998, partially offset by an increase in repayment of long 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 (3.75% at September 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 $162,207 at September 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
September 30, 1998, the Company was not in compliance with certain
financial covenants under its credit facility, related to the bond
issue for the Coe dryer. On November 16, 1998, the Company
received a waiver of such noncompliance from the bank. The Company
does not expect to be able to be in compliance with the existing
financial covenants at or for the year ending December 31, 1998
and, as a result has reclassified its long-term debt at September
30, 1998 of approximately $3,226,250 to current liabilities.
Negotiations with the Company's bank are underway, to modify the
financial covenants, in certain respects, to levels that are
believed by management to be realistic and attainable. Management
expects that these negotiations will be finalized in the fourth
quarter of 1998. Although there can be no assurances that
modifications satisfactory to the Company and the bank can be
negotiated, management does believe that the Company will be able
to renegotiate such financial covenants so as to permit the Company
to be in compliance with the modified covenants through the end of
1999. Should such modification be achieved, the Company's
long-term debt would be reclassified back to long-term liabilities
at
December 31, 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 (8.25% at September 30, 1998) less 0.25%. As
of September 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 through 1999.
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
The Company has 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 $747,000 and $923,000, respectively. The
contracts expire in 2009.
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 Year 2000 ("Y2K") issue is the result of computer programs
being written using two digits, rather than four, to define the
applicable year. Mistaking "00" for the year 1900 could result in
miscalculations and errors and cause significant business
interruptions for the Company, as well as for the government and
most other companies. The Company has assessed its state of
readiness for Y2K, remediated those systems that are non-compliant
and is currently investigating whether material third parties will
be Y2K compliant.
The Company has assessed its PC's, servers, network, midrange
hardware, operating and application systems for Y2K readiness,
giving the highest priority to those information technology
applications (IT) systems that are considered critical to its
business operations. At present, management believes its IT
systems have been remediated, and expect no disruption in the
Company's ability to supply product to its customers.
Preliminary investigations of the embedded chip systems, which
include those systems containing embedded chip technology commonly
found in buildings and manufacturing equipment, indicate that Y2K
will not affect these systems.
The Company is utilizing both internal and external resources
to address the Y2K issue. Internal resources reflect the
reallocation of IT personnel to the Y2K project from other IT
projects. In the opinion of management, the deferral of such other
projects will not have a significant adverse effect on continuing
operations. The total estimated direct cost to remediate the Y2K
issue, is not expected to be material to the Company's results of
operations or financial condition. All Y2K costs are expensed as
incurred.
The Company is in the process of developing contingency plans
for those areas which might be affected by Y2k. Although the full
consequences are unknown, the failure of either the Company's
critical systems or those of its material third parties to be Y2K
compliant could result in the interruption of its business, which
could have a material adverse effect on the results of operations
or financial condition of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards 131
"Disclosures About Segments of an Enterprise and Related
Information", was issued to establish standards for public business
enterprises reporting information regarding operating segments in
annual and interim financial statements issued to shareholders. It
also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement
is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. The Company
operates in one business segment in which it manufactures and
markets insulated wood fiberboard and polyisocyanurate foam
products, and accordingly, does not believe that segment reporting
will impact disclosures in the financial statements. The Company
anticipates compliance with the Statement in 1998.
Part 2
OTHER INFORMATION
September 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 nine months ended September 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)
12/08/98 Neil F Bacon, Treasurer
Date (Chief Financial Officer)
(Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,125
<SECURITIES> 0
<RECEIVABLES> 2,309
<ALLOWANCES> 60
<INVENTORY> 3,639
<CURRENT-ASSETS> 7,654
<PP&E> 37,852
<DEPRECIATION> 26,609
<TOTAL-ASSETS> 20,803
<CURRENT-LIABILITIES> 4,599
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,803
<SALES> 18,349
<TOTAL-REVENUES> 18,547
<CGS> 14,003
<TOTAL-COSTS> 4,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> (537)
<INCOME-TAX> (215)
<INCOME-CONTINUING> (322)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (322)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
