Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15 of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. (X)Yes ( )No
At September 30, 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 For the nine months
ended ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 6,130,368 6,179,688 18,594,610 18,349,459
Cost of sales 4,932,055 4,808,355 14,359,587 14,003,107
--------- --------- ---------- ----------
Gross profit 1,198,313 1,371,333 4,235,023 4,346,352
Selling, general
and administrative
expenses 1,493,164 1,627,934 4,702,196 4,865,810
--------- --------- ---------- ----------
Operating loss (294,851) (256,601) (467,173) (519,458)
Other income (expense):
Gain on sale of
equipment 4,321 584 5,781
Interest income 18,258 16,812 52,934 57,537
Interest expense (35,786) (74,064) (143,875) (215,456)
Other income 8,855 9,031 14,511 134,986
--------- --------- ---------- ----------
Loss before income
taxes (303,524) (300,501) (543,019) (536,610)
Income tax benefit (138,175) (120,200) (138,175) (214,644)
--------- --------- ---------- ---------
Net loss (165,349) (180,301) (404,844) (321,966)
Retained earnings
at beginning of
period 13,476,547 14,272,606 13,716,042 14,414,271
---------- ---------- ---------- ----------
Retained earnings
at end of period 13,311,198 14,092,305 13,311,198 14,092,305
========== ========== ========== ==========
Basic and diluted net
loss per common
share (0.47) (0.52) (1.16) (0.92)
========== ========== ========== ==========
Common shares
outstanding
(weighted average) 348,599 348,599 348,599 348,640
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 101,717 $ 1,115,815
Accounts receivable (net
of allowance for doubtful
accounts of $41,392 and
$41,464 in 1999 and 1998,
respectively) 2,163,187 1,897,904
Inventories 3,001,515 3,828,817
Refundable income taxes
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Short term debt $ 117,666 $ 2,000,000
Current installments of
long-term debt 414,167 406,667
Accounts payable 1,827,959 1,403,721
Accrued expenses 725,296 747,150
----------- -----------
Total current liabilities 3,085,088 4,557,538
LONG-TERM DEBT, excluding
current installments 2,844,583 3,155,833
Deferred income taxes 52,435 52,435
OTHER LIABILITIES 6,593,871 6,583,212
----------- -----------
Total liabilities 12,575,977 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 13,311,198 13,716,042
----------- -----------
14,382,033 14,786,877
Less cost of common shares in
treasury - 515,396 shares in
1999 and 1998 7,514,279 7,514,279
----------- -----------
Total stockholders' equity 6,867,754 7,272,598
----------- -----------
COMMITMENTS AND CONTINGENCIES
----------- -----------
$ 19,443,731 $ 21,621,616
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating
activities:
Net loss $ (404,844) $ (321,966)
Adjustments to reconcile net
loss to net cash
provided by operating activities:
Depreciation 1,190,825 742,601
Amortization of debt acquisition
costs 70,829 70,829
Gain on disposal of fixed assets
(265,283) (35,973)
Decrease (increase) in inventories 827,302 (988,121)
Decrease (increase) in refundable
income taxes 218,377 (35,893)
(Increase) decrease in prepaid
expenses and other current assets (71,236) 416,726
(Increase) decrease in other assets (425) 82,830
Increase in accounts payable 424,238 84,607
(Decrease)increase in accrued
expenses (21,854) 107,904
Increase in other liabilities 10,659 124,365
---------- ----------
Net cash provided by
operating activities 1,978,588 243,848
---------- ----------
Cash flows from investing
activities:
Proceeds from sale of equipment 584 6,100
Capital expenditures (949,982) (1,064,021)
Decrease in restricted cash 142,796 375,041
---------- ----------
Net cash used in investing
activities (806,602) (682,880)
---------- ----------
(continued)
Cash flows from financing
activities:
(Repayment) proceeds from issuance
of short-term debt (1,882,334) 1,000,000
Repayment of long-term debt (303,750) (325,000)
Proceeds from sale of treasury
stock - 58,650
Purchase of treasury stock - (62,132)
---------- ---------
Net cash (used in) provided
by financing activities: (2,186,084) 671,518
---------- ---------
Net (decrease) increase in cash
and cash equivalents (1,014,098) 232,486
Cash and cash equivalents
at beginning of period 1,115,815 892,150
---------- ----------
Cash and cash equivalents
at end of period $ 101,717 $ 1,124,636
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 143,875 $ 201,149
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Note 1. The consolidated financial information as of September
30,1999, and for the three and nine-month periods ended
September 30, 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 and nine-month periods ended September 30, 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
September 30, 1999 and December 31, 1998:
1999 1998
Finished goods.......$2,127,734 $ 2,782,031
Work in process...... 80,381 80,617
Raw materials........ 793,400 966,169
$3,001,515 $ 3,828,817
Inventories include the cost of materials, direct labor
and manufacturing overhead.
Note 3. EARNINGS PER SHARE
Basic and diluted net loss per common share have been
computed by dividing net loss by the weighted average number
of shares outstanding of approximately 348,599 for the three
months ended September 30, 1999 and 1998, and approximately
348,599 and 348,640 for the nine months ended September 30,
1999 and 1998, respectively.
Note 4. PROPERTY, PLANT AND EQUIPMENT
In the third quarter of 1999 the Company reevaluated the
estimated useful life of certain manufacturing equipment
and, based upon the durability of the asset and other
similar assets, increased the estimated useful life from ten
to twenty years. The impact on net loss for the three and
nine-month periods ended September 30, 1999 was a decrease
of $125,979. The corresponding decrease in basic and
diluted net loss per common share was $0.36 for the three
and nine-month periods ended September 30, 1999.
FORM 10-Q
HOMASOTE COMPANY AND SUBSIDIARY
September 30, 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 and amount of insurance proceeds
for business interruption relating to the Company's fires in
its newest dryer;
- further delay in receipt of funds to repair or replace
the fire-damaged dryer;
- 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; and
- internal and external Year 2000 software and hardware
issues.
Although the ultimate impact of the above and other factors are
uncertain, these and other factors may cause future operating results
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 September 30, 1999 decreased by $49,320 or 0.8% to
$6,130,368 from $6,179,688 in the three months ended September 30,
1998. Sales for the nine-month period ended September 30, 1999
increased by $245,151 or 1.3% to $18,594,610 from $ 18,349,459 in the
nine months ended September 30, 1998. There were no significant
changes in the components of net sales.
Gross profit as a percentage of sales, was 19.6% and 22.2%,
respectively, for the three-month periods ended September 30, 1999 and
1998 and 22.8% and 23.7%, respectively, for the nine-month periods
ended September 30, 1999 and 1998. This decrease is attributable
primarily to an increase in overtime and other incremental costs
incurred due to production inefficiencies, and an increase in
depreciation expense.
In the third quarter of 1999 the Company reevaluated the
estimated useful life of certain manufacturing equipment and, based
upon the durability of the asset and other similar assets, increased
the estimated useful life from ten to twenty years. The impact on net
loss for the three and nine-month periods ended September 30, 1999 was
a decrease of $125,979.
Selling, general and administrative expenses as a percentage of
sales were 24.4% and 26.3%, respectively, for the three-month periods
ended September 30, 1999 and 1998 and 25.3% and 26.5%, respectively,
for the nine-month periods ended September 30, 1999 and 1998. The
decrease in the relative percentage of selling, general and
administrative expenses is attributable primarily to lower sales
commissions resulting from a modification in the Company's commission
structure and to a lesser extent, successful expense reduction
programs in areas such as advertising and workers compensation costs.
Interest income increased to $18,258 for the three-month period
ended September 30, 1999, as compared to $16,812 for the three-month
period ended September 30, 1998. Interest income decreased to $52,934
for the nine-month period ended September 30, 1999 as compared to
$57,537 for the nine-month period ended September 30, 1998. The
decrease in interest income is attributable primarily to a change in
the method of investment of excess cash balances. Prior to April 1,
1999 such balances were invested daily in a money market fund.
Effective April 1, 1999 these balances are applied daily against the
Company's outstanding demand line of credit, resulting in reduced
interest income and interest expense.
Interest expense on debt decreased to $35,786 and $143,875,
respectively, for the three and nine-month periods ended September 30,
1999, as compared to $74,064 and $215,456, respectively, for the three
and nine-month periods ended September 30, 1998. The decrease is due
primarily to the change in investment of excess cash balances as
discussed above.
Other income decreased from $9,031 and $134,986, respectively,
for the three and nine-month periods ended September 30, 1998, to
$8,855 and $14,511 for the three and nine-month periods ended
September 30, 1999, primarily as a result of the receipt of $100,000
of business interruption insurance proceeds in the first quarter of
1998, thereby affecting the nine-month periods.
The Company recorded an income tax benefit of $138,175 in the
three and nine-month periods ended September 30, 1999, resulting from
receipt of a federal tax refund in excess of the recorded receivable,
and the reduction of certain other tax related accruals no longer
required. The income tax benefit in the three and nine-month periods
ended September 30, 1998 was $120,200 and $214,644, respectively.
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 with
equipment 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.
The Company has instituted an action (the "Action") against the
insurer in the United States District Court for the District of New
Jersey to recover under the policies. Discovery is being taken, and
the insurer has filed a motion for summary judgement to dismiss the
Action. The Court will be holding a hearing on the summary judgement
motion before the Action proceeds to trial. The Company is unable to
assess the extent to which it will be successful in the Action.
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. The Company believes that
recovery under its business interruption policy, if ultimately
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 $2.0 million and $0.2 million in the nine month
periods ended September 30, 1999 and 1998, respectively.
Working capital was $2,651,407 at September 30, 1999, as compared
to $2,902,215 at December 31, 1998, a decrease of $250,808.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally generated
funds and debt, were $0.9 million in 1999 and $1.1 million in 1998.
The Company has estimated capital expenditures for the remaining three
(3) months of 1999 in the amount of $0.5 million primarily for a new
automated saw production line to cut, bar code, and package Homex
expansion and forming materials. The line will also be used to cut
other strip products that are currently marketed. 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 $0.7 million
provided in 1998 to $2.2 million used in 1999, primarily as a result
of the decrease in short term debt of $1.9 million during the period
ended September 30, 1999. The decrease is attributable primarily to a
change in the method of investment of excess cash balances.
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.
The Company has instituted an action (the "Action") against the
insurer in the United States District Court for the District of New
Jersey to recover under the policies. Discovery is being taken, and
the insurer has filed a motion for summary judgement to dismiss the
Action. The Court will be holding a hearing on the summary judgement
motion before the Action proceeds to trial. The Company is unable to
assess the extent to which it will be successful in the Action.
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. The Company believes that
recovery under its business interruption policy, if ultimately
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 (3.65% at
September 30, 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 $168,858 and $163,952, respectively, at September 30, 1999
and December 31, 1998, and are classified as restricted non-current
assets in the accompanying consolidated balance sheets.
The trust indenture is secured in part by the Agreement and by a
direct pay Letter of Credit facility 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 September 30, 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 (8.25% at September 30, 1999) less
0.25%. As of September 30, 1999, $0.1 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 $0.1 million outstanding at
September 30, 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. In June 1999 the FASB issued SFAS No.
137. This statement defers the effective date of SFAS No. 133, which
is now effective for all quarters of all fiscal years beginning after
June 15, 2000. The Company is currently evaluating the effects of
SFAS No. 133.
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 has finalized a contingency plan for areas that 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 nine months ended
September 30, 1999 and September 30, 1998, aggregated approximately
$605,000 and $747,000, respectively. The contracts expire in 2009.
The Company's Common Stock was previously listed on the
Philadelphia Stock Exchange (the "Exchange"). The Exchange has
notified the Company that it has taken 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's Common
Stock continues to trade in the over-the-counter market.
Part 2
OTHER INFORMATION
September 30, 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 nine months ended September 30, 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)
James M. Reiser, Vice President
Date and Chief Financial Officer
(Signature)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 102
<SECURITIES> 0
<RECEIVABLES> 2,163
<ALLOWANCES> 41
<INVENTORY> 3,002
<CURRENT-ASSETS> 5,736
<PP&E> 39,022
<DEPRECIATION> 28,352
<TOTAL-ASSETS> 19,444
<CURRENT-LIABILITIES> 3,085
<BONDS> 0
<COMMON> 349
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,444
<SALES> 18,595
<TOTAL-REVENUES> 18,663
<CGS> 14,360
<TOTAL-COSTS> 4,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144
<INCOME-PRETAX> (543)
<INCOME-TAX> (138)
<INCOME-CONTINUING> (405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (405)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
