Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by section 13 or 15 of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. (X)Yes ( )No
At March 31, 1999, 348,599 shares of common stock of the
registrant were outstanding.
<TABLE>
Results of Operations
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
For the three months
ended
March 31,
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 6,496,422 $ 6,523,864
Cost of sales 4,920,355 4,833,643
--------- ---------
Gross profit 1,576,067 1,690,221
Selling, general and
administrative expenses 1,617,345 1,690,779
--------- ---------
Operating (loss) (41,278) (558)
Other income(expense):
Interest income 21,348 20,520
Interest expense (66,300) (62,508)
Other income 1,741 120,678
--------- ---------
(43,211) 78,690
--------- ---------
(Loss) earnings before
income tax expense (84,489) 78,132
Income tax expense --- 31,253
--------- ---------
Net (loss) earnings (84,489) 46,879
Retained earnings at beginning
of period 13,716,042 14,414,271
---------- ----------
Retained earnings at
end of period $13,631,553 $14,461,150
========== ==========
Basic and diluted net (loss)
earnings per common share $ (0.24) $ 0.13
========== ==========
Weighted average basic and
diluted common shares
outstanding 348,599 348,701
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,559,093 $ 1,115,815
Accounts receivable (net
of allowance for doubtful
accounts of $49,853 and
$41,464 in 1999 and 1998,
respectively) 2,134,614 1,897,904
Inventories 3,626,993 3,828,817
Refundable income tax 174,062 218,377
Deferred income
taxes 170,095 170,095
Prepaid expenses and
other current assets 413,479 228,745
----------- -----------
Total current assets 8,078,336 7,459,753
----------- -----------
PROPERTY, PLANT AND
EQUIPMENT, at cost 38,343,576 38,072,515
Less accumulated
depreciation 27,594,169 27,161,376
----------- -----------
Net property, plant and
equipment 10,749,407 10,911,139
OTHER ASSETS:
Restricted cash 1,165,193 1,163,601
Other assets 2,063,513 2,087,123
----------- -----------
$ 22,056,449 $ 21,621,616
=========== ===========
(continued)
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Short term debt $ 2,000,000 $ 2,000,000
Current installments of
long-term debt 409,167 406,667
Accounts payable 2,189,943 1,403,721
Accrued expenses 529,705 747,150
----------- -----------
Total current liabilities 5,128,815 4,557,538
LONG-TERM DEBT, excluding
current installments 3,052,083 3,155,833
Deferred income taxes 52,435 52,435
OTHER LIABILITIES 6,635,007 6,583,212
----------- -----------
Total liabilities 14,868,340 14,349,018
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.20
per share; authorized
1,500,000 shares;
issued 863,995 shares in
1999 and 1998 172,799 172,799
Additional paid-in capital 898,036 898,036
Retained earnings 13,631,553 13,716,042
----------- -----------
14,702,388 14,786,877
Less cost of common shares in
treasury - 515,396 shares in
1999, and 515,396 shares in
1998 7,514,279 7,514,279
----------- -----------
Total stockholders' equity 7,188,109 7,272,598
----------- -----------
$ 22,056,449 $ 21,621,616
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating
activities:
Net (loss) earnings $ (84,489) $ 46,879
Adjustments to reconcile net
(loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 432,793 271,112
Amortization of debt acquisition
costs 23,610 23,611
Changes in assets and liabilities:
Increase in accounts
receivable,(net) (236,710) (596,751)
Decrease (increase) in inventories 201,824 (429,963)
Decrease in refundable income taxes 44,315 210,126
(Increase) decrease in prepaid
expenses and other current assets (184,734) 388,666
Decrease in other assets --- 12,000
Increase in accounts payable 786,222 75,857
(Decrease) increase in accrued
expenses (217,445) 96,291
Increase in other liabilities 51,795 46,067
--------- ----------
Net cash provided by
operating activities 817,181 143,895
---------- ----------
Cash flows from investing
activities:
Capital expenditures (271,061) (427,994)
(Increase) decrease in restricted
cash (1,592) 50,813
---------- ----------
Net cash used in investing
activities (272,653) (377,181)
---------- ----------
(continued)
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt - 1,000,000
Repayment of long-term debt (101,250) (130,000)
Proceeds from sale of treasury
stock - 58,650
Purchase of treasury stock - (62,132)
---------- ---------
Net cash (used in) provided
by financing activities: (101,250) 866,518
---------- ---------
Net increase in cash and
cash equivalents 443,278 633,232
Cash and cash equivalents
at beginning of period 1,115,815 892,150
---------- ----------
Cash and cash equivalents
at end of period $ 1,559,093 $ 1,525,382
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 66,300 $ 62,508
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED MARCH 31, 1999
Note 1. The consolidated financial information as of March 31,
1999 and December 31, 1998, and for the three month
periods ended March 31, 1999 and 1998 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 information for
the three months ended March 31, 1999 is not necessarily
indicative of the results of operations that might be
expected for the entire year ending December 31, 1999.
Note 2. INVENTORIES
The following are the major classes of inventories as of
March 31, 1999 and December 31, 1998:
1999 1998
Finished goods.......$2,667,576 $ 2,782,031
Work in process...... 62,184 80,617
Raw materials........ 897,233 966,169
$3,626,993 $ 3,828,817
Inventories include the cost of materials, direct labor
and manufacturing overhead.
FORM 10-Q
HOMASOTE COMPANY AND SUBSIDIARY
March 31, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis and statements made
elsewhere in this Form 10-Q may include forward-looking statements
about the future that are necessarily subject to various risks and
uncertainties. These statements are based on the beliefs and
assumptions of management and on information currently available to
management. These forward-looking statements are identified by
words such as "estimates", "expects", "anticipates", "plans",
"believes", and other similar expressions.
Factors that could cause future results to differ materially
from those expressed in or implied by the forward-looking
statements or historical results include the impact or outcome of:
- events or conditions which affect the building and
manufacturing industries in general and the Company in
particular, such as general economic conditions,
employment levels, inflation, weather, strikes and other
factors;
- competitive factors such as changes in choices regarding
structural building materials by architects and builders
and packing products by industrial firms;
- the undue delay in receipt of insurance proceeds for
business interruption relating to the Company's fires in
its new dryer;
- internal and external Year 2000 software and hardware
issues; and
- unanticipated disruption in production caused by delays
in repairs or replacement of the fire-damaged dryer and
the resulting pressure of heightened usage of other older
equipment.
Although the ultimate impact of the above and other factors
are uncertain, these and other factors may cause future earnings to
differ materially from results or outcomes we currently seek or
expect. These factors are discussed in greater detail below.
RESULTS OF OPERATIONS
The Company's sales are derived from building material
wholesalers and industrial manufacturers. Sales during the three
months ended March 31, 1999 decreased by $27,442 or 0.4%, to
$6,496,422, from $6,523,864 in the three months ended March 31,
1998. There were no significant changes in the components of net
sales.
Gross profit as a percentage of sales, was 24.3% for the
three-month period ended March 31, 1999, as compared to 25.9% for
the three-month period ended March 31, 1998. This decrease is
attributable primarily to an increase in the cost of depreciation
in 1999 offset by a reduction in costs incurred in relation to the
fire in a new dryer.
Selling, general and administrative expenses as a percentage
of sales were 24.9% in 1999 as compared to 25.9% in 1998. The
decrease in selling, general and administrative expenses is
attributable primarily to lower sales commissions incurred.
Interest income increased to $21,348 for the three-month
period ended March 31, 1999, as compared to $20,520 for the three
month period ended March 31, 1998.
Interest expense on debt increased to $66,300 for the three-month period
ended March 31, 1999, as compared to $62,508 for the
three-month period ended March 31, 1998. Subsequent to December
31, 1998 there were no significant changes in the Company's debt.
Other income decreased from $120,678, for the period ended
March 31, 1998, to $1,741 for the three month period ended March
31, 1999, primarily as a result of the receipt of $100,000 of
business interruption insurance proceeds in the prior year period.
The Company did not record an income tax benefit in the three
months ended March 31, 1999 due to the uncertainty regarding the
realization of the deferred tax asset generated by the 1999 loss.
As a result of the foregoing, net income decreased from
$46,879 for the three-month period ended March 31, 1998, to a loss
of $(84,489) for the three month period ended March 31, 1999.
The Company installed a new dryer that was originally scheduled for
partial completion in June 1997, but was placed into modified
production during the last week of September 1997 for an initial
shakedown period in order to surface potential operating problems.
However, on November 1, 1997, a fire occurred in the new dryer,
causing severe damage to the rolls, insulation and other structural
steel components, rendering it inoperable and resulting in an
interruption of the Company's anticipated productivity of its major
product line, which adversely affected revenues and profitability.
The dryer was placed in a temporary state of repair and production
resumed on January 12, 1998. On January 30, 1998, there was
another fire in the new dryer that was restricted to an area at the
end of the dryer. The damage was repaired in a short period of
time with a resumption of production on February 9, 1998. The new
dryer is producing at a level of 40% of its anticipated production
capability, which level is equivalent to the Company's previous
capacity that the new dryer replaced.
Management believes that insurance will cover substantially
all of the Company's property and business losses relating to the
fires. However, this cannot be assured and 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 1999. The Company believes that recovery under
its business interruption policy, when finally received, should
provide the wherewithal to cover the substantial portion of lost
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities and bank borrowings are
the primary sources of liquidity. Net cash provided by operating
activities amounted to $0.8 million in the three months ended March
31, 1999 and $0.1 million in the three months ended March 31, 1998.
Working capital was $2,949,521 at March 31, 1999, as compared
to $2,902,215 at December 31, 1998, a increase of $47,306.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $0.3 million in 1999 and $0.4
million in 1998. The Company has estimated capital expenditures
for the remaining nine (9) months of 1999 in the amount of $0.6
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 decreased from $0.9
million provided in 1998 to $(0.1) million used in 1999, primarily
as a result of the increase in short term debt of $1.0 million
during the period ended March 31, 1998.
As discussed above, in November 1997 and January 1998, fires
occurred in the Company's new dryer. Management believes that
insurance will cover substantially all of the Company's property
and business losses relating to the fires. However, this cannot be
assured and 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 1999. 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.
The Company is party to 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 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 (2.90%
at March 31, 1999).
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 $165,544 at March 31, 1999, 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 1999.
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. At December
31, 1998, the Company was not in compliance with certain financial
covenants and on February 26, 1999, the Company and the bank
amended the agreement (the "New Amended Agreement") to include
amended terms and covenants. The New Amended Agreement provides
that the covenants are effective December 31, 1998. The New
Amended Agreement contains financial and other covenants including
tangible net worth, cash flow coverage, current ratio and
liabilities to tangible net worth (all as defined) with which the
Company is in compliance at March 31, 1999 and management believes
the Company will be in compliance through December 31, 1999. The
New Amended Agreement further provides for collateralization of the
Letter of Credit facility by substantially all of the Company's
assets.
At December 31, 1998, the Company had a $2.0 million unsecured
demand note line of credit agreement with a bank which had no
specific expiration date but is cancelable by the bank at any time.
Interest is charged at the bank's index rate (7.75% at March 31,
1999) less 0.25%. As of March 31, 1999, $2.0 million was
outstanding under the line of credit. On February 26, 1999, in
connection with the aforementioned New Amended Agreement, the
demand note line of credit was amended under an Amended and
Restated Line of Credit Note (the "New Note") dated February 26,
1999, under which the $2.0 million outstanding at March 31, 1999 is
due February 28, 2000. The New Note provides for prepayments and
advances as required to satisfy working capital needs. The New
Note is collateralized by substantially all of the Company's
assets.
Management believes that all cash flows from operations,
coupled with its bank credit facilities, are adequate for the
Company to meet its obligations through 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement on Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the
accounting for derivative instruments by requiring that an entity
recognize derivatives as assets or liabilities in the statement of
financial position and measure them at fair value. This Statement
is effective for all quarters of all fiscal years beginning after
June 15, 1999. This Statement should have no impact on the
Company's consolidated financial statements.
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 expects no disruption in the
Company's ability to supply product to its customers.
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.
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 conditions warrant.
OTHER DEVELOPMENTS
The Company is a party to 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 the three months ended March 31, 1999 and the three months ended
March 31, 1998, aggregated approximately $197,000 and $231,000,
respectively. The contracts expire in 2009.
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 commenced with the bargaining union to reach
a labor contract covering the employees in the bargaining unit. On
December 10, 1998, a majority of employees voted to decertify
Teamsters Local 701 as their union (78 to 46).
The Company's Common Stock is presently listed on the
Philadelphia Stock Exchange (the "Exchange"). The Exchange has
notified the Company that it will take action pursuant to its rules
to delist the Common Stock because the Company does not meet
certain of the Exchange's continued listing requirements. The
Company anticipates that the Common Stock will continue to trade in
the over-the-counter market should such delisting occur.
Part 2
OTHER INFORMATION
March 31, 1999
ITEM 9
EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K - There are no reports on Form
8-K filed for the three months ended March 31, 1999.
OTHER INFORMATION
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 thereunto
duly authorized.
HOMASOTE COMPANY
(Registrant)
5/14/99 James M. Reiser, Vice President
Date and Chief Financial Officer
(Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,559
<SECURITIES> 0
<RECEIVABLES> 2,184
<ALLOWANCES> 50
<INVENTORY> 3,627
<CURRENT-ASSETS> 8,078
<PP&E> 38,344
<DEPRECIATION> 27,594
<TOTAL-ASSETS> 22,056
<CURRENT-LIABILITIES> 5,129
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,056
<SALES> 6,496
<TOTAL-REVENUES> 6,520
<CGS> 4,920
<TOTAL-COSTS> 1,617
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (84)
<INCOME-TAX> 0
<INCOME-CONTINUING> (84)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84)
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
