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, 1999, THE AGGREGATE MARKET VALUE OF THE VOTING
STOCK HELD BY NON-AFFILIATES WAS $1,962,596.
AS OF MARCH 24, 1999, THERE WERE 348,599 SHARES OF COMMON
STOCK, $.20 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
HOMASOTE COMPANY 1998 ANNUAL REPORT TO STOCKHOLDERS (PARTS II
AND IV).
PROXY STATEMENT DATED APRIL 7, 1999 TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS OF DECEMBER 31,
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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. SEE ITEM 7 "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WHICH IS INCORPORATED HEREIN BY
REFERENCE.
(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, 1998, NO
CUSTOMER OF THE REGISTRANT ACCOUNTED FOR SALES OF
9.5% 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 AND COMPETES WITH PLYWOOD AS A CONSTRUCTION
COMPONENT. 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, 1998, 1997 AND 1996 NO
AMOUNTS WERE SPENT ON RESEARCH AND DEVELOPMENT.
DURING THE YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996 THE REGISTRANT INCURRED QUALITY CONTROL COSTS
OF $93,491, $90,304, AND $80,309 RESPECTIVELY.
(XII) ENVIRONMENTAL PROTECTION
AS OF DECEMBER 31, 1998, 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, 1998, THE REGISTRANT EMPLOYED 204
EMPLOYEES, AS COMPARED TO 220 IN 1997.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
FOREIGN SALES, PRIMARILY IN CANADA, ACCOUNTED FOR
APPROXIMATELY 6%, IN EACH OF THE TWO YEARS ENDED DECEMBER
31, 1998 AND 1997, RESPECTIVELY, AND APPROXIMATELY 5% FOR
THE YEAR ENDED DECEMBER 31, 1996, 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 CONTINUES TO OPERATE AT A
REDUCED LEVEL (SEE MANAGEMENT'S DISCUSSION AND ANALYSIS)
AND IS DEPENDENT DIRECTLY UPON THE ECONOMIC CONDITION OF
THE HOUSING AND MANUFACTURING INDUSTRIES.
ITEM 3. LEGAL PROCEEDINGS
AS OF DECEMBER 31, 1998, 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 1998
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 1998 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 1998 ANNUAL REPORT TO STOCKHOLDERS
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETING
RISK
IN THE NORMAL COURSE OF BUSINESS, THE COMPANY IS EXPOSED
TO FLUCTUATIONS IN INTEREST RATES AND EQUITY MARKET RISKS
AS THE COMPANY SEEKS DEBT AND EQUITY CAPITAL TO SUSTAIN
ITS OPERATIONS.
THE INFORMATION BELOW SUMMARIZES THE COMPANY'S MARKET
RISK ASSOCIATED WITH ITS DEBT OBLIGATIONS AS OF DECEMBER
31, 1998. FAIR VALUE INCLUDED HEREIN HAS BEEN ESTIMATED
TAKING INTO CONSIDERATION THE NATURE AND TERM OF THE DEBT
INSTRUMENT AND THE PREVAILING ECONOMIC AND MARKET
CONDITIONS AT THE BALANCE SHEET DATE. THE TABLE BELOW
PRESENTS PRINCIPAL CASH FLOWS BY YEAR OF MATURITY BASED
ON THE TERMS OF THE DEBT. THE VARIABLE INTEREST RATE
DISCLOSED REPRESENTS THE RATE AT DECEMBER 31, 1998.
CHANGES IN THE PRIME INTEREST RATE DURING FISCAL 1999
WILL HAVE A POSITIVE OR NEGATIVE EFFECT ON THE COMPANY'S
INTEREST EXPENSE. EACH 1% OF FLUCTUATIONS IN THE PRIME
INTEREST RATE WILL INCREASE OR DECREASE ANNUAL INTEREST
RATE EXPENSE FOR THE COMPANY BY APPROXIMATELY $20,000
BASED ON THE DEBT OUTSTANDING AS OF DECEMBER 31, 1998.
FURTHER INFORMATION SPECIFIC TO THE COMPANY'S DEBT IS
PRESENTED IN NOTE 4 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
YEAR OF MATURITY
ESTIMATED CARRYING
DESCRIPTION FAIR VALUE AMOUNT 1999 2000
DEMAND NOTE $2,000,000 $2,000,000 --- $2,000,000
INTEREST RATE --- --- 7.50% ---
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF THE HOMASOTE COMPANY
1998 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 7, 1999, WHICH
WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THESE ITEMS, IS
INCORPORATED HEREIN BY REFERENCE.
(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 83
SHANLEY E. FLICKER VICE CHAIRMAN
(1) OF THE BOARD 1/01/95 3 81
WARREN L. FLICKER PRESIDENT AND
(2) CHIEF OPERATING
OFFICER 1/01/95 3 55
JOSEPH A. BRONSARD EXECUTIVE VICE
(3) PRESIDENT 1/01/95 3 65
JAMES M. REISER VICE PRESIDENT 3/01/99 - 56
AND CHIEF
FINANCIAL
OFFICER
NEIL F. BACON TREASURER 4/14/88 10 42
(4) ASSISTANT
SECRETARY 4/14/88 10
CINDY FRIZZELL SECRETARY 4/21/95 3 42
(5)
(1) IRVING FLICKER AND SHANLEY E. FLICKER ARE BROTHERS.
(2) WARREN L. 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 7, 1999, WHICH
WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THESE ITEMS, IS
INCORPORATED HEREIN BY REFERENCE.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A DEFINITIVE PROXY STATEMENT DATED APRIL 7, 1999, WHICH
WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THESE ITEMS, IS
INCORPORATED HEREIN BY REFERENCE.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A DEFINITIVE PROXY STATEMENT DATED APRIL 7, 1999, WHICH
WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
INCLUDING THE INFORMATION REQUIRED BY THESE ITEMS, IS
INCORPORATED HEREIN BY REFERENCE.
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 STATEMENTS OF OPERATIONS AND RETAINED
EARNINGS - YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996 INCORPORATED HEREIN BY REFERENCE AS EXHIBIT
13.
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1998 AND
1997 INCORPORATED HEREIN BY REFERENCE AS EXHIBIT
13.
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996 INCORPORATED
HEREIN BY REFERENCE AS EXHIBIT 13.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
(2) FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
NO OTHER SCHEDULES ARE REQUIRED.
(3) EXHIBITS
3 ARTICLES OF INCORPORATION AND BYLAWS *
13 HOMASOTE COMPANY 1998 ANNUAL REPORT TO
STOCKHOLDERS
27 FINANCIAL DATA SCHEDULE
(B) REPORT ON FORM 8-K
NO REPORTS ON FORM 8-K WERE FILED IN THE THREE
MONTHS ENDED DECEMBER 31, 1998.
*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, 1999 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, 1999
& CEO
NEIL F. BACON TREASURER MARCH 31, 1999
SHANLEY E. FLICKER DIRECTOR MARCH 31, 1999
WARREN L. FLICKER DIRECTOR MARCH 31, 1999
JAMES M. REISER DIRECTOR MARCH 31, 1999
PATIENCE O. BANISTER DIRECTOR MARCH 31, 1999
JOSEPH A. BRONSARD DIRECTOR MARCH 31, 1999
MICHAEL FLICKER DIRECTOR MARCH 31, 1999
PETER N. OUTERBRIDGE DIRECTOR MARCH 31, 1999
LETTER TO SHAREHOLDERS
As described in last year's letter, in November 1997 we
experienced a major fire in our new Coe Dryer. The fire adversely
affected our bottom line in 1997. Although all Homasote employees
strived to deliver material on a timely basis to our customers in
1998, our efforts were hampered because our manufacturing
facilities were not producing at 100% capacity. Many major
accounts making up our customer base which includes retailers,
distributors and OEM manufacturers accepted late shipment of
Homasote products. Because of the diligence and service of our
sales representatives we have been able to maintain our customer
base.
Our production employees initiated a movement to nullify and
decertify the International Brotherhood of Teamsters, Local 701,
AFL-CIO, which had been voted in on May 22, 1997. They petitioned
the National Labor Relations Board (NLRB) to have an election for
decertification. On December 10, 1998, at an election held under
the direction and control of the NLRB, the production employees
voted 78 to 46 in favor of decertification, resulting in removal of
the union.
As we stated in our 1997 Annual Report, in late January of
1998, we again experienced a fire in the new Coe dryer. The fire
was confined to an area at the end of the dryer resulting in a
brief disruption to production. However, the effects of both fires
caused our general maintenance costs to be substantially higher
than those experienced under normal production conditions.
Although Homasote is still operating on an "only necessary"
maintenance repair schedule, the work load placed on our two oldest
production lines, numbers 3 and 4, will make it necessary to
overhaul both units. This work is currently in progress on the
number 4 making unit. Number 3 making unit will most likely be
scheduled in the late fall or early winter 2000.
We are still working with our insurance company to reach an
equitable conclusion by which the dryer can be either brought back
to its original state as it was before the first fire, or replaced.
The business loss associated with both fires has yet to be fully
determined and, although we believe it is significant, our
insurance company has yet to agree on an amount.
Net sales for 1998 were $23,915,000 versus 1997 sales of
$24,980,000, a decrease of $1,065,000 or 4.3%. Due to the decrease
in sales and resulting events associated with the fire, results of
operations were a net loss for the year of ($698,229) after an
income tax benefit of $337,151, equal to ($2.00) net loss per
share. Net working capital was $2,902,215 a decrease of $481,115
from the previous year.
Throughout the year our Sales Department has been testing our
1/2" 440 product in various floor/ceiling assemblies. The results
of these sound and fire tests have been most favorable, resulting
in the registration of the trademark "440 Sound Barrier".
Architects and builders alike have started to specify and use
this product wherever a sound and/or fire rated product is needed.
The fire tests were conducted by Underwriters Laboratory and now
our "440 Sound Barrier" carries the UL label as a component of 48
various (L500 series) floor/ceiling assemblies. The acceptance of
this product continues to grow and the sales for 1999 should
reflect this growth.
Our Pak-Line products continue to get recognition in the OEM
marketplace. The separator business, both in steel and glass,
continues to gain acceptance with new customers on an ongoing
basis.
In 1998, Homasote Company purchased an additional 3,602 shares
of Homasote common stock.
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.
We wish to thank our loyal shareholders, directors, officers,
management, employees, customers and suppliers for their continued
support through these trying times.
<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
1998
---------
<S> <C>
Net Sales $ 23,915,187
Depreciation and amortization $ 1,365,692
Net (loss) earnings $ (698,229)
Weighted average number of common
shares outstanding 348,630
Net (loss) earnings per share -- basic $ (2.00)
Dividends-cash $ 0.00
Dividends per share $ 0.00
Working capital $ 2,902,215
Working capital ratio 1.6:1
Capital expenditures $ 1,284,154
Total assets $ 21,621,616
Long-term debt, excluding current
portion $ 3,155,833
Stockholders' equity $ 7,272,598
Common shares outstanding 348,509
Per share book value of common stock $ 20.86
</TABLE>
<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
1997
---------
<S> <C>
Net Sales $ 24,979,819
Depreciation and amortization $ 888,944
Net (loss) earnings $ (445,778)
Weighted average number of common
shares outstanding 364,479
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
Net (loss) earnings $ 708,489
Weighted average number of common
shares outstanding 376,528
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
Net (loss) earnings $ 786,100
Weighted average number of common
shares outstanding 383,756
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
Net (loss) earnings $ 1,227,226
Weighted average number of common
shares outstanding $ 400,403
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>
TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON
<CAPTION>
CASH DIVIDENDS
Quarterly cash dividends for the last two years were as follows:
Quarter 1998 1997
---- ----
<S> <C> <C>
First $ 0.00 $ 0.12
Second 0.00 0.12
Third 0.00 0.00
Fourth 0.00 0.00
---- ----
$ 0.00 $ 0.24
</TABLE>
<TABLE>
<CAPTION>
STOCK PRICES
Stock prices for the last two years were as follows:
1998 1997
Quarter High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First $ 16.25 $ 15.75 $ 16.50 $ 13.00
Second $ 16.25 $ 16.00 $ 18.25 $ 15.00
Third $ 16.13 $ 15.25 $ 18.25 $ 14.00
Fourth $ 15.25 $ 14.00 $ 18.25 $ 16.75
Number of Stockholders at December 31, 1998 and 1997 is 251 and
270, 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
1998 1997 1996
--------- ----------
- ---------
<S> <C> <C> <C>
Net sales $ 23,915,187 $ 24,979,819 $26,969,869
Cost of sales 18,647,626 19,419,846 20,013,748
---------- ---------- ----------
Gross profit 5,267,561 5,559,973 6,956,121
Selling, general and
administrative expenses 6,597,579 6,350,194 5,850,714
--------- ---------- ----------
Operating (loss) income (1,330,018) (790,221) 1,105,407
Other income (expense):
Gain on sale of assets 6,218 10,942 13,219
Interest income 72,002 159,678 94,730
Interest expense (284,277) (185,678) (89,600)
Other income 500,695 86,681 69,975
---------- ---------- ----------
294,638 71,623 88,324
---------- ---------- ----------
(Loss) earnings before
income taxes (1,035,380) (718,598) 1,193,731
Income tax benefit
expense (note 5) (337,151) (272,820) 485,242
---------- ---------- ----------
Net (loss) earnings (698,229) (445,778) 708,489
Retained earnings at beginning
of year 14,414,271 14,950,349 14,407,554
less cash dividends paid
($.00 per share in 1998,
$.24 per share in 1997 and
$.44 per share in 1996) --- (90,300) (165,694)
---------- ---------- ----------
Retained earnings at
end of year $ 13,716,042 $ 14,414,271 $14,950,349
========== ========== ==========
Net (loss) earnings per
common share -- basic $ (2.00) $ (1.22)$ 1.88
========== ========== ==========
Common shares outstanding
(weighted average) 348,630 364,479 376,528
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1998 1997
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,115,815 $ 892,150
Accounts receivable (net
of allowance for doubtful
accounts of $41,464 and
$58,854 in 1998 and 1997,
respectively) 1,897,904 2,212,448
Inventories (note 2) 3,828,817 2,650,989
Refundable income taxes 218,377 432,704
Deferred income
taxes (note 5) 170,095 119,175
Prepaid expenses and
other current assets 228,745 471,087
------------ -----------
Total current assets $ 7,459,753 $ 6,778,553
------------ -----------
PROPERTY, PLANT AND
EQUIPMENT, NET
(notes 3 and 4) 10,911,139 10,994,712
OTHER ASSETS:
Deferred income
taxes (note 5) --- 19,546
Restricted cash (note 4) 1,163,601 537,248
Other (note 6) 2,087,123 1,807,037
------------ -----------
$ 21,621,616 $ 20,137,096
============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1998 1997
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES
Short term debt (note 4) $ 2,000,000 $ 1,000,000
Current installments of
long-term debt (note 4) $ 406,667 $ 392,500
Accounts payable 1,403,721 1,426,190
Accrued income taxes --- ---
Accrued expenses (note 7) 747,150 576,533
------------ -----------
Total current liabilities $ 4,557,538 $ 3,395,223
LONG-TERM DEBT, excluding
current installments (note 4) 3,155,833 3,562,500
Deferred income taxes (note 5) 52,435 ---
OTHER LIABILITIES (note 6) 6,583,212 5,205,064
------------ -----------
Total liabilities 14,349,018 12,162,787
------------ -----------
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 13,716,042 14,414,271
------------ -----------
14,786,877 15,485,106
Less cost of common shares in
treasury - 515,396 shares in
1998 and 515,194 shares in
1997 (note 8) 7,514,279 7,510,797
------------ -----------
Total stockholders' equity 7,272,598 7,974,309
------------ -----------
$ 21,621,616 $ 20,137,096
============ ===========
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
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) earnings $ (698,229) $ (445,778) $ 708,489
Adjustments to reconcile
net (loss) earnings to net
cash (used in) provided by
operating activities:
Depreciation and amortization 1,365,692 888,944 606,830
Gain on disposal of fixed
assets (4,065) (10,942) (13,219)
Deferred income taxes 21,061 21,903 42,439
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable, net 314,544 (339,108) (223,983)
Decrease (increase) in
inventories (1,177,828) 434,897 671,546
Decrease (increase) in
prepaid income taxes --- --- 294,291
Increase in other assets (280,086) (341,565) (223,697)
Increase in refundable income
taxes 214,327 (432,704) ---
Increase (decrease) in prepaid
expenses and other current
assets 242,342 (229,834) 54,664
(Decrease) increase in accounts
payable (22,469) 439,528 259,356
Decrease (increase) in accrued
expenses (170,617) (335,624) 492,516
Increase in other liabilities 1,378,148 120,610 128,269
---------- ---------- --------
Net cash (used in) provided
by operating activities 1,524,054 (229,673) 2,797,501
---------- ---------- ---------
Cash flows from investing
activities:
Proceeds from sale of
equipment 6,100 21,803 13,219
Capital expenditures (1,284,154) (4,291,324) (2,444,627)
(Decrease) increase in
restricted cash (626,353) 2,420,125 (2,957,373)
---------- ---------- ---------
Net cash used in investing
activities (1,904,407) (1,849,396) (5,388,781)
---------- ---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 1,000,000 1,000,000 1,000,000
Repayment of short-term debt --- --- (1,775,000)
Repayment of long-term debt (392,500) (185,000) ---
Cash dividends paid --- (90,300) (165,694)
Proceeds from sale of
treasury stock 58,650 32,500 ---
Purchase of treasury
stock (62,132) (466,042) (23 700)
Proceeds from bond issue --- --- 4,140,000
Debt acquisition costs --- --- (233,292)
---------- ---------- --------
Net cash provided by (used in)
financing activities: 604,018 291,158 2,942,314
---------- ----------- ---------
Net increase (decrease) in
cash and cash equivalents 223,665 (1,787,911) 351,034
Cash and cash equivalents
at beginning of year 892,150 2,680,061 2,329,027
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 1,115,815 $ 892,150 $2,680,061
========== ========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the years for:
Interest $ 284,277 $ 185,678 $ 90,323
========== ========== ==========
Income taxes $ --- $ 479,640 $ 53,294
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
Homasote Company and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: Homasote Company is in the business
of manufacturing insulated wood fiberboard and polyisocyanurate foam
products, and operates in only one industry segment: the manufacture
and sale of rigid polyisocyanurate and structural insulating
building materials and packing products for industrial customers.
Sales in 1998 were distributed as follows: Building material
wholesalers and contractors, approximately 79%; industrial
manufacturers, approximately 21%; in 1997: Building material
wholesalers and contractors, approximately 77%; and industrial
manufacturers, approximately 23%; in 1996: Building material
wholesalers and contractors, approximately 75%, 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: 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 No. 128,
"Earnings Per Share ("SFAS 128")." SFAS No. 128 required a dual
presentation of earnings 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 1998, 1997, and 1996.
BUSINESS AND CREDIT CONCENTRATIONS: Sales of the Company's
products are dependent upon the economic conditions 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: Long-lived assets and intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net
cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less the
cost to sell.
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, 1998 and 1997:
1998 1997
--------- ---------
<S> <C> <C>
Finished goods $ 2,782,031 $ 1,726,209
Work in process 80,617 8,001
Raw materials 966,169 916,779
--------- ---------
$ 3,828,817 $ 2,650,989
========= =========
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
1998 1997 Useful Lives
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 108,343 $ 93,543
Buildings and additions 9,145,781 9,045,195 10-50 years
Machinery and equipment 26,506,340 25,754,968 5-20 years
Office equipment 1,327,391 1,162,530 10 years
Automotive equipment 531,683 521,960 3-5 years
Construction in progress 452,977 245,480
---------- ----------
$ 38,072,515 $ 36,823,676
Less accumulated
depreciation 27,161,376 25,828,964
---------- ----------
$ 10,911,139 $ 10,994,712
========== ==========
</TABLE>
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 (3.85% at December 31, 1998).
In connection with the Agreement, the Authority also entered
into a trust indenture with a bank to serve as trustee and tender
agent for the loan proceeds. Principal and interest are payable
monthly to the trustee in varying amounts through 2006. The funds
held by the bank amounted to $163,952 and $537,248 at December 31,
1998 and 1997, 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 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, 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 believed the
Company would be in compliance with the covenants throughout 1998.
At December 31, 1998, the Company was not in compliance with certain
amended financial covenants and on February 26, 1999, the Company
and the bank further 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 December 31, 1998, and
management believes the Company will be in compliance. The New
Amended Agreement further provides for collateralization of the
Letter of Credit facility by substantially all of the Company's
assets.
The balance of long-term debt outstanding (including current
installments) at December 31, 1998 and 1997 was $3,562,500 and
$3,955,000, respectively. The aggregate maturities of long-term
debt for each of the five years subsequent to December 31, 1998, are
as follows: 1999, $406,667; 2000, $417,500; 2001, $432,500; 2002,
$447,500, 2003, $462,500; thereafter $1,395,833.
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 December 31,
1998) less 0.25%. As of December 31, 1998 and 1997, $2.0 million
and $1.0 million, respectively, 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
December 31, 1998 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. Interest is payable monthly at the prime lending
rate (as defined) less 0.25%.
Total interest costs incurred during 1998 and 1997 were
approximately $284,000 and $289,000, respectively, of which
approximately $103,000 was capitalized in 1997.
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.
NOTE 5-INCOME TAXES
Income tax (benefit) expense is computed based on the applicable
statutory rates and is comprised of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
Current:
<S> <C> <C> <C>
Federal $ (358,212) $ (294,723) $ 341,473
State --- --- 101,330
------- ------- -------
(358,212) (294,723) 442,803
------- ------- -------
Deferred:
Federal 17,902 62,384 36,072
State 3,159 (40,481) 6,367
------- ------- -------
21,061 21,903 42,439
------- ------- -------
Total income tax (benefit)
expense $(337,151) $(272,820) $ 485,242
======= ======= =======
The actual income tax (benefit) 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:
1998 1997 1996
------- ------- -------
Computed "expected" tax
(benefit) expense $(352,029) $(244,323) $ 405,869
State income taxes (net of
Federal income tax benefit) 2,085 (26,717) 71,080
Other 12,793 (1,780) 8,293
------- ------- -------
$(337,151) $(272,820) $ 485,242
======= ======= =======
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997 are presented below:
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 16,586 $ 23,542
Inventories, principally due to
reserves for obsolescence 199,960 161,672
Other liabilities, principally due to
supplemental pension and post-
retirement costs 2,233,426 2,082,025
Nondeductible accrued expense 62,582 29,784
Net operating loss carryforwards--
state 110,760 51,490
--------- ---------
Total gross deferred tax assets 2,623,314 2,348,513
Less valuation allowance (1,092,210) (1,032,940)
--------- ---------
Net deferred tax assets 1,531,104 1,315,573
--------- ---------
Deferred tax liabilities:
Fixed assets, due to accelerated
depreciation 603,981 500,522
Other assets, due to pension costs 795,432 657,623
Accumulated DISC income 14,031 18,707
--------- ---------
Total gross deferred tax
liabilities 1,413,444 1,176,852
--------- ---------
Net deferred tax asset $ 117,660 $ 138,721
========= =========
The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was an increase of $59,270 and $0,
respectively. In addition, at December 31, 1998, the Company has
net operating loss carryforwards for state income tax purposes of
approximately $1,800,000, which are available to reduce future state
income taxes, if any, through the year 2005.
</TABLE>
NOTE 6-OTHER LIABILITIES
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 $20.00 per month
per year of service, as defined (increased to $22.00 in January
1999). 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.
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, 1998 and 1997, the Supplemental Plan was unfunded.
The Company also provides certain health care and life
insurance benefits for retired employees 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, 1998 and 1997, the
plan was unfunded.
The following table sets forth the Company's defined benefit
pension plans' benefit obligations, fair value of assets, funded
status and other information:
<TABLE>
<CAPTION>
1998
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
<S> <C> <C>
Benefit obligation at beginning
of the year $8,008,258 $ 971,462
Service cost 165,404 69,104
Interest cost 562,400 160,561
Plan amendments 576,175 1,409,643
Actuarial (gain) loss (69,211) 35,839
Benefits paid (485,351) (100,616)
--------- ---------
Benefit obligation at end of year $8,757,675 $2,545,993
========= =========
1997
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
<S> <C> <C>
Benefit obligation at beginning
of the year $7,872,016 $ 936,439
Service cost 135,188 3,329
Interest cost 534,090 67,350
Plan amendments 29,516 ---
Actuarial (gain) loss (107,500) 44,986
Benefits paid (455,052) (80,642)
--------- ---------
Benefit obligation at end of year $8,008,258 $ 971,462
========= =========
</TABLE>
<TABLE>
1998
Pension Other
Change in plan assets Benefits Benefits
------------------------- ----------- ------------
<S> <C> <C>
Fair value of plan assets at
beginning of year $9,305,347 $ ---
Actual return on plan assets 719,957 ---
Employer contributions 95,374 100,616
Benefits paid (485,351) (100,616)
--------- ---------
Fair value of plan assets at end
of year $9,635,327 $ ---
========= =========
1997
Pension Other
Change in plan assets Benefits Benefits
------------------------- ----------- ------------
<S> <C> <C>
Fair value of plan assets at
beginning of year $8,123,079 $ ---
Actual return on plan assets 1,545,757 ---
Employer contributions 91,563 80,642
Benefits paid (455,052) (80,642)
--------- ---------
Fair value of plan assets at end
of year $9,305,347 $ ---
========= =========
</TABLE>
<TABLE>
1998
Pension Other
Reconciliation of funded status Benefits Benefits
- ------------------------------- ----------- -------------
<S> <C> <C>
Funded status $ 877,652 $(2,545,993)
Unrecognized transition obligation 321,758 ---
Unrecognized prior service cost 675,655 1,285,336
Unrecognized actuarial gain (3,059,761) (1,149,629)
--------- ---------
Net amount recognized at year-end $(1,184,696) $(2,410,286)
========= =========
1997
Pension Other
Reconciliation of funded status Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Funded status $ 1,297,089 $ (971,462)
Unrecognized transition obligation 430,858 ---
Unrecognized prior service cost 160,172 ---
Unrecognized actuarial gain (3,224,423) (1,253,241)
--------- ----------
Net amount recognized at year-end $(1,336,304) $(2,224,703)
========= ==========
</TABLE>
<TABLE>
1998
Amounts recognized in the
consolidated balance sheet Pension Other
consist of Benefits Benefits
- ------------------------------- ----------- -------------
<S> <C> <C>
Prepaid benefit cost(included in
other long-term assets) $ 1,988,581 $ ---
Accrued benefit liability (3,173,277) (2,410,286)
--------- ---------
Net amount recognized at year-end $(1,184,696) $(2,410,286)
========= =========
Benefit obligation 2,712,543 2,545,993
Projected benefit obligation 2,712,543 N/A
Accumulated benefit obligation 2,261,446 N/A
1997
Amounts recognized in the
consolidated balance sheet Pension Other
consist of Benefits Benefits
- ------------------------------- ----------- -------------
<S> <C> <C>
Prepaid benefit cost(included in
other long-term assets) $ 1,644,057 $ ---
Accrued benefit liability (2,980,361) (2,224,703)
--------- ---------
Net amount recognized at year-end $(1,336,304) $(2,224,703)
========= =========
Benefit obligation 2,928,666 971,462
Projected benefit obligation 2,928,666 N/A
Accumulated benefit obligation 2,451,209 N/A
</TABLE>
<TABLE>
1998
Components of net period benefit Pension Other
cost Benefits Benefits
- ------------------------------- ----------- -------------
<S> <C> <C>
Service cost $ 165,404 $ 69,104
Interest cost 562,400 160,561
Expected return on plan assets (774,336) ---
Amortization of transitional
obligation 109,100 ---
Amortization of prior cost 60,692 124,307
Recognized actuarial gain (179,494) (67,794)
--------- ---------
Net periodic pension (benefit) cost $ (56,234) $( 286,178)
========= =========
1997
Components of net period benefit Pension Other
costs Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Service cost $ 135,188 $ 3,329
Interest cost 534,090 67,350
Expected return on plan assets (675,420) ---
Amortization of transitional
obligation 109,100 ---
Amortization of prior cost 16,608 ---
Recognized actuarial gain (133,217) (105,757)
--------- ---------
Net periodic pension (benefit) cost $ (13,651) $ (35,078)
========= =========
</TABLE>
1996
Components of net period benefit Pension Other
costs Benefits Benefits
- ------------------------------- ----------- ------------
[S] [C] [C]
Service cost $ 131,825 $ 3,681
Interest cost 537,689 65,432
Expected return on plan assets (592,699) ---
Amortization of transitional
obligation 109,100 ---
Amortization of prior cost 14,309 ---
Recognized actuarial gain (54,517) (141,435)
--------- ---------
Net periodic pension (benefit) cost $ 145,707 $ (72,322)
========= =========
[/TABLE]
<TABLE>
1998
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Discount rate 6.75% $ 6.75%
Rate of compensation increase 8.50% N/A
1997
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Discount rate $ 7.00% $ 7.00%
Rate of compensation increase 8.50% N/A
1996
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Discount rate $ 7.25% $ 7.25%
Rate of compensation increase 8.50% 0.00%
</TABLE>
Assumed health care cost trend
For measurement purposes, an 8% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
1998. The rate is assumed to decrease gradually to 5.5% for 2001
and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plan. A
one-percentage-point change in assumed health care cost trend rates
would have the
following effects at year-end 1998:
<TABLE>
One-Percentage- One-Percentage-
Point Increase Point Decrease
------------- ------------
<S> <C> <C>
Effect on postretirement benefit
obligation $ 367,531 $ (297,301)
Effect on total of service and
interest cost components 40,736 (32,009)
</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
$28,000 in 1998 and $29,000 in 1997 and 1996, respectively.
Included in other liabilities at December 31, 1998 is $999,649
received (included in restricted cash in the accompanying
consolidated balance sheet at December 31, 1998) by the Company in
December 1998 from its insurance company, which is restricted for
use under the terms of its loan agreement with the New Jersey
Economic Development Authority to repair the dryer damaged in the
fire described in note 10.
NOTE 7-ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses as of December 31, 1998 and 1997 consist of
the following:
1998 1997
------- -------
<S> <C> <C>
Commissions $ 236,401 $ 257,784
Payroll 114,241 115,940
Other 396,508 202,809
------- -------
$ 747,150 $ 576,533
======= =======
</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 1998, 1997 and 1996 is as
follows:
Acquired Sold Retained in Treasury
---------------- ------------- ----------------
Shares Cost Shares Cost Shares Cost
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
1998 3,602 $ 62,132 3,400 $ 58,650 202 $ 3,482
1997 29,950 $ 466,302 2,500 $ 32,500 27,450 $ 433,542
1996 1,200 $ 23,700 --- $ --- 1,200 $ 23,700
</TABLE>
NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments at
December 31, 1998 and 1997 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 1998 and 1997
aggregated approximately $1,000,000 and $923,000, 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.
As previously disclosed, on November 1, 1997 and January 30,
1998, fires broke out in the Company's new gas fired board dryer.
These fires caused severe damage to the dryer, as well as
disruptions to production. The Company has filed several insurance
claims related to the fires, including a significant claim under its
business interruption policy. The claims process is lengthy and its
outcome cannot be predicted with certainty. During 1998, the
Company received an advance payment of approximately $465,000 of
business interruption insurance proceeds, which are included in
Other Income in the accompanying consolidated statement of
operations for 1998.
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, 1998 and 1997,
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, 1998. 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, 1998
and 1997, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
March 5, 1999
Short Hills, New Jersey
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
This combined annual report, including our Letter to
Stockholders and this Management's Discussion and Analysis, contains
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.
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 produced at a level of 40% of its
anticipated production capacity, which level is equivalent to the
Company's previous capacity in running five units.
Based on its assessment of the situation, management believes
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.
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.
RESULTS OF OPERATIONS 1998-1997
The Company's sales are derived from building material
wholesalers and industrial manufacturers. Sales during 1998
decreased by $1,064,632, or 4.3%, to $23,915,187, from $24,979,819
in 1997. Management believes the decrease in net sales of millboard
products to be a result of weather effects of El Nino across the
North American continent during the first six months of 1998 which
directly affected our foam sheathing and roofing sales.
Construction was curtailed and this resulted in lost construction
time. These construction jobs eventually pushed others back,
creating a backlog into the first quarter of 1999. Industrial
packaging was affected by two major factors during 1998. First, the
General Motors strike during the second quarter directly affected
our sales to the glass and metal separator industries. Second, the
economic problems in the Far East affected all exports, i.e. glass
into Thailand and Korea, automotive packs into Japan and Korea, and
the shoe heel business into the Philippines and Korea. The
millboard division also suffered from lack of shipments to our
principal building material distributors in Korea, Japan and
Australia.
Gross profit as a percentage of sales decreased from 22.3% in
1997, to 22.0% in 1998. This decrease 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 27.6% in 1998 as compared to 25.4% in 1997. These
expenses increased primarily 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 54.9% to $72,002 in 1998 from
$159,678 in 1997, due to a decreased balance of funds available for
investment.
Interest expense on debt increased by 53.1% to $284,277 in
1998, from $185,678 in 1997, due to debt incurred with relation to
the dryer project.
Other income increased by $414,014, to $500,695 in 1998, from
$86,681 in 1997, due primarily to the receipt of $464,640 of
business interruption insurance proceeds.
During 1998, the Company recorded an income tax benefit of
$337,151 as compared to $272,280 in 1997, primarily related to
increased losses which are being carried back to recover taxes
previously paid. However, should the Company incur a tax loss in
1999, no further carryback is available.
RESULTS OF OPERATIONS 1997-1996
Net sales in 1997 decreased by $1,990,050 or 7.4%, to
$24,979,819, from $26,969,869 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.
Gross profit as a percentage of sales, decreased from 25.8% in
1996, to 22.3% in 1997. This decrease 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 for the dryer
project.
As a result of the loss in 1997, the Company recorded an income
tax benefit of $272,820 which primarily related to a federal income
tax refund due the Company from carrying such loss back to years in
which the Company paid income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities and bank borrowings are
the primary sources of liquidity. Net cash provided by (used in)
operating activities amounted to $1.5 million in 1998, $(0.2)
million in 1997, and $2.8 million in 1996. At December 31, 1998,
the Company had working capital of $2,902,215 as compared to
$3,383,330 at December 31, 1997, a decrease of $481,115.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally generated
funds and debt, were $1.3 million in 1998, $4.3 million in 1997, and
$2.4 million in 1996. The Company has estimated capital
expenditures for 1999 in the amount of $0.9 million. Such amounts
may be revised based on the timing of receipts of payments or
settlements from its insurance carried on the fire loss described
previously.
Cash flows from financing activities increased from $0.3
million in 1997 to $0.6 million in 1998, primarily as a result of
reduction in the purchases of treasury stock, the absence of cash
dividend in 1998, offset by an increase in repayment of long-term
debt.
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, 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 has a Letter of Credit facility which contains
financial and other restrictive covenants, and had a balance of
$3,562,500 outstanding at December 31, 1998. At December 31, 1997,
the Company was not in compliance with a financial covenant and, on
March 19, 1998, the bank amended certain covenants prospectively
such that management believed the Company would be in compliance
with the covenants throughout 1998. At December 31, 1998, the
Company was not in compliance with certain amended financial
covenants and on February 26, 1999, the Company and the bank further
amended the agreement (the "New Amended Agreement") to include
amended terms and covenants which were made 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 management believes the Company will be in compliance with
throughout 1999.
The New Amended Agreement further provides for the
collaterization 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 was cancelable by the bank at any
time.
Interest is charged at the bank's index rate (7.75% at December 31,
1998), less 0.25%. As of December 31, 1998 and 1997, $2.0 million
and $1.0 million, respectively, 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
and restated to provide for an amended and restated note (the
"Restated Note") with a due date of February 28, 2000. The Restated
Note provides for prepayments and advances as required to satisfy
working capital needs. The Restated Note is collateralized by
substantially all of the Company's assets. Interest is payable
monthly at the prime lending rate (as defined) less 0.25%.
Management believes that cash flows from operations, coupled
with its bank credit facilities, are adequate for the Company to
meet its obligations throughout 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
released Statement on Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income", and SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information". Both
statements became effective for the Company during the year ended
December 31, 1998. These statements require disclosure of certain
components of changes in equity, and certain information about
operating segments and geographic areas of operation, respectively.
The Company adopted SFAS No. 130 in the first quarter of 1998 and
has applied the requirements of SFAS No. 131 to its 1998
consolidated financial statements. The adoption of SFAS No. 130
resulted in no additional disclosures in the Company's consolidated
financial statements. The Company has reviewed the provisions of
SFAS No. 131 and has concluded that the Company operates in one
business segment.
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.
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.
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
During 1994, demand for wastepaper, the primary raw material
for the Company's products, surpassed the supply for the first
time.
This situation was due primarily to demand by new industries created
to handle the volume of wastepaper generated by mandated municipal
recycling, and as a result, effective in September 1994, the
Company entered into purchase agreement contracts to purchase
readily available wastepaper from two suppliers. Under the terms of
the contracts, the Company is required to make purchases at a
minimum price per ton, as defined, or at the prevailing market
price, whichever is greater. The contracts do not require minimum
quantity purchases by the Company. Purchases in 1998, 1997 and 1996
aggregated approximately $1,000,000, $923,000 and $929,000,
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.
<TABLE>
<CAPTION>
SUMMARIZED (unaudited) QUARTERLY FINANCIAL DATA OF THE COMPANY FOR
THE YEARS 1998 AND 1997 ARE AS FOLLOWS:
(in thousands of dollars except per share data)
1998
-----------------------------------
<S> <C> <C> <C> <C>
First Second Third Fourth
----- ----- ----- -----
Net Sales $ 6,524 $ 5,646 $ 6,180 $ 5,565
===== ===== ===== =====
Gross Profit $ 1,690 $ 1,285 $ 1,371 $ 922
===== ===== ===== =====
Net Earnings (loss) $ 47 $ (189) $ (180) $ (376)
===== ===== ===== =====
Net earnings (loss)
per common share-
basic $ 0.13 $ (0.54) $(0.53) $(1.09)
===== ===== ===== =====
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)
===== ===== ===== =====
</TABLE>
The fourth quarter of 1998 was adversely affected by depreciation
expense in the amount of $244,000 representing depreciation recorded
in the fourth quarter of 1998 pertaining to earlier 1998 quarters,
and higher maintenance costs on older equipment. The fourth quarter
of 1997 was adversely affected by a fire in the Company's new dryer,
which was offset by an adjustment to reduce depreciation expense
recorded prior to the fourth quarter amounting to approximately
$270,000.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HOMASOTE COMPANY
Under date of March 5, 1999, we reported on the consolidated
balance sheets of Homasote Company and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of operations
and retained earnings, and cash flows for the years then ended, as
contained in the 1998 annual report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, such financial statement schedule when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG LLP
March 5, 1999
Short Hills, New Jersey
<TABLE>
Schedule II, Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
Homasote Company and Subsidiary
Col A Col B Col C Col D Col E
<S> <C> <C> <C> <C>
Balance
at Additions Other
Beginning Charged Additions Balance
of to or End of
Description Period Expenses (Subtractions)(a) Period
Allowance for
Doubtful
Accounts
Year ended
December 31,
1998 59,000 40,000 (57,000) 42,000
Year ended
December 31,
1997 60,000 - (1,000) 59,000
Year ended
December 31,
1996 46,000 41,000 (27,000) 60,000
(a) Principally bad debt written-off, less recoveries.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,116
<SECURITIES> 0
<RECEIVABLES> 1,939
<ALLOWANCES> 41
<INVENTORY> 3,829
<CURRENT-ASSETS> 7,460
<PP&E> 38,072
<DEPRECIATION> 27,161
<TOTAL-ASSETS> 21,622
<CURRENT-LIABILITIES> 4,558
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,622
<SALES> 23,915
<TOTAL-REVENUES> 24,494
<CGS> 18,648
<TOTAL-COSTS> 6,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284
<INCOME-PRETAX> <1,035>
<INCOME-TAX> <337>
<INCOME-CONTINUING> <698>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> <698>
<EPS-PRIMARY> <2.00>
<EPS-DILUTED> <2.00>
</TABLE>
