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, 2000, THE AGGREGATE MARKET VALUE OF THE VOTING
STOCK HELD BY NON-AFFILIATES WAS $1,357,608.
AS OF MARCH 24, 2000, THERE WERE 348,599 SHARES OF COMMON
STOCK, $.20 PAR VALUE, OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
HOMASOTE COMPANY 1999 ANNUAL REPORT TO STOCKHOLDERS (PARTS II
AND IV).
PROXY STATEMENT DATED APRIL 12, 2000 TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS OF DECEMBER 31,
1999.(PART III).
INDEX TO FORM 10-K
PART I
ITEM 1. BUSINESS
(A) GENERAL BUSINESS DEVELOPMENT
(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 CONSOLIDATED 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. CONSOLIDATED 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, CONSOLIDATED 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 REGISTRANT'S PRODUCTS
ARE BUILDING MATERIAL WHOLESALERS AND CONTRACTORS
AND INDUSTRIAL MANUFACTURERS. PRODUCTS ARE
DISTRIBUTED THROUGH WHOLESALERS OF BUILDING
MATERIALS AND INDUSTRIAL MANUFACTURERS. THE
REGISTRANT IS CONTINUING TO BROADEN ITS COVERAGE IN
THE AUTOMOTIVE, GLASS AND STEEL MARKETS.
(II) PRODUCT IMPROVEMENTS AND NEW APPLICATIONS
APPLICATIONS FOR THE USE OF HOMASOTE BOARDS IN
FLOOR AND WALL SYSTEMS FOR SOUND CONTROL 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 AS PART OF EXHIBIT
13.
(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. SEE "LIQUIDITY AND CAPITAL RESOURCES"
UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS",
WHICH IS INCORPORATED HEREIN BY REFERENCE AS PART
OF EXHIBIT 13.
(VII)MATERIAL CUSTOMERS
ONE CUSTOMER ACCOUNTED FOR 11% OF THE COMPANY'S
SALES IN 1999 AND 11% OF ACCOUNTS RECEIVABLE AT
DECEMBER 31, 1999.
(VIII) BACKLOG
BACKLOG IS NOT MEANINGFUL SINCE MOST CUSTOMERS
ORDER FOR IMMEDIATE AND PROMPT DELIVERY. A FEW
CUSTOMERS SCHEDULE DELIVERIES SEVERAL WEEKS IN
ADVANCE.
(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
HOMASOTE IS A MEDIUM DENSITY FIBER BOARD. IT IS
USED AS AN UNDERLAYMENT, PROVIDING SOUND CONTROL IN
BUILDINGS DIRECTLY UNDER MANY TYPES OF FINISHED
FLOORING (I.E., CARPET, SOLID WOOD, CERAMIC).
HOMASOTE'S STRUCTURAL ABILITY ALLOWS THE BOARD TO
ALSO BE USED AS AN EXCELLENT TACKABLE SUBSTRATE FOR
BULLETIN BOARDS AND WALL PANELS. THE BOARD'S
CHARACTERISTICS ALLOW IT TO BE UTILIZED IN A
VARIETY OF PACKAGING APPLICATIONS. THE 440 SOUND
BARRIER TAKES THE PLACE OF GYPCRETE (POURED
CONCRETE) IN FLOOR SYSTEMS FOR SOUND AND FIRE
CONTROL. HOMEX EXPANSION JOINT AND FORMING BOARD
COMPETES DIRECTLY WITH ASPHALT IMPREGNATED
EXPANSION MATERIALS.
(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, 1999, 1998 AND 1997 NO
AMOUNTS WERE SPENT ON RESEARCH AND DEVELOPMENT.
DURING THE YEARS ENDED DECEMBER 31, 1999, 1998 AND
1997 THE REGISTRANT INCURRED QUALITY CONTROL COSTS
OF $84,097, $93,491, AND $90,304, RESPECTIVELY.
(XII)ENVIRONMENTAL PROTECTION
AS OF DECEMBER 31, 1999, 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, 1999, THE REGISTRANT EMPLOYED 219
EMPLOYEES, AS COMPARED TO 204 IN 1998.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
FOREIGN SALES, PRIMARILY IN CANADA, ACCOUNTED FOR
APPROXIMATELY 5%, IN THE YEAR ENDED DECEMBER 31, 1999 AND
6% IN EACH OF THE TWO YEARS ENDED DECEMBER 31, 1998 AND
1997, RESPECTIVELY, OF THE REGISTRANT'S TOTAL SALES. THE
REGISTRANT IS CONTINUING ITS EFFORTS TO EXPAND SALES
WORLDWIDE.
ITEM 2. PROPERTIES
THE REGISTRANT'S PLANT AND MAIN OFFICES ARE LOCATED OFF
LOWER FERRY ROAD, EWING TOWNSHIP, TRENTON, NEW JERSEY.
THE PROPERTY CONSISTS OF APPROXIMATELY 28 ACRES WITH
PRIVATE RAILROAD SIDINGS ENTERING THE SHIPPING AND
MANUFACTURING AREAS. BUILDINGS ARE OF CINDER BLOCK AND
BRICK CONSTRUCTION, WITH A FLOOR AREA OF APPROXIMATELY
600,000 SQUARE FEET, WHICH ARE PROPERLY ARRANGED FOR THE
MANUFACTURE AND FINISHING OF ALL THE REGISTRANT'S
PRODUCTS. THE ENTIRE AREA IS PROTECTED WITH AN ENCLOSURE
OF CYCLONE FENCING AND GUARD HOUSE. ALL MANUFACTURING
OPERATIONS AND THE OFFICE COMPLEX ARE PROTECTED BY FIRE
SPRINKLERS AND ARE MONITORED BY A SECURITY COMPANY FOR
FIRE PROTECTION. ALL PROPERTY IS HELD IN FEE SIMPLE.
THE MANUFACTURING OPERATION RUNS THREE SHIFTS, FIVE 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).
PRODUCTION SCHEDULING AND ACTIVITY IS DEPENDENT DIRECTLY
UPON THE ECONOMIC CONDITION OF THE HOUSING AND
MANUFACTURING INDUSTRIES.
ITEM 3. LEGAL PROCEEDINGS
AS OF DECEMBER 31, 1999, THERE WAS NO MATERIAL PENDING
LITIGATION AGAINST THE REGISTRANT. HOWEVER, SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS" RESPECTING CERTAIN
LITIGATION BROUGHT BY THE REGISTRANT AGAINST ITS
INSURANCE CARRIER RESPECTING LOSSES INCURRED AS A RESULT
OF FIRES INVOLVING THE REGISTRANTS NEW DRYER, WHICH
DISCUSSION IS INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
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 1999
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 1999 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 1999 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, 1999. 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, 1999.
CHANGES IN THE PRIME INTEREST RATE DURING FISCAL 2000
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 $0 BASED ON
THE DEBT OUTSTANDING AS OF DECEMBER 31, 1999. FURTHER
INFORMATION SPECIFIC TO THE COMPANY'S DEBT IS PRESENTED
IN NOTE 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
YEAR OF
ESTIMATED CARRYING MATURITY
DESCRIPTION FAIR VALUE AMOUNT 2000
DEMAND NOTE $ 0 $ 0 ---
INTEREST RATE --- --- 8.25%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF THE HOMASOTE COMPANY
1999 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 12, 2000, 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 27 85
SHANLEY E. FLICKER VICE CHAIRMAN
(1) OF THE BOARD 1/01/95 4 82
WARREN L. FLICKER PRESIDENT AND
(2) CHIEF OPERATING
OFFICER 1/01/95 4 56
JOSEPH A. BRONSARD EXECUTIVE VICE
(3) PRESIDENT 1/01/95 4 66
JAMES M. REISER VICE PRESIDENT 3/01/99 1 57
(4) AND CHIEF
FINANCIAL
OFFICER
IRENE T. GRAHAM ACTING 11/12/99 78
(5) SECRETARY
(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 1999.
(5) EMPLOYED BY THE COMPANY SINCE 1999, PREVIOUSLY SERVED AS
THE COMPANY'S CORPORATE SECRETARY FROM 1985 TO 1994.
(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 12, 2000, 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 12, 2000, 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 12, 2000, 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 PART OF EXHIBIT 13.
INDEPENDENT AUDITORS' REPORT INCORPORATED HEREIN BY
REFERENCE AS PART OF EXHIBIT 13.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED
EARNINGS - YEARS ENDED DECEMBER 31, 1999, 1998 AND
1997 INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1999 AND
1998 INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997 INCORPORATED
HEREIN BY REFERENCE AS PART OF EXHIBIT 13.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCORPORATED HEREIN BY REFERENCE AS PART OF
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 1999 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, 1999.
*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 30, 2000 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, CEO MARCH 30, 2000
& DIRECTOR
JOSEPH A. BRONSARD EXECUTIVE VICE
PRESIDENT & DIRECTOR MARCH 30, 2000
MICHAEL FLICKER DIRECTOR MARCH 30, 2000
SHANLEY E. FLICKER VICE CHAIRMAN, MARCH 30, 2000
& DIRECTOR
WARREN L. FLICKER PRESIDENT, COO MARCH 30, 2000
& DIRECTOR
PETER N. OUTERBRIDGE DIRECTOR MARCH 30, 2000
JAMES M. REISER VICE PRESIDENT, MARCH 30, 2000
CFO & DIRECTOR
CHARLES A. SABINO DIRECTOR MARCH 30, 2000
NORMAN SHARLIN DIRECTOR MARCH 30, 2000
LETTER TO SHAREHOLDERS
1999, our 90th year, will be remembered as a pivotal one for
Homasote Company. It is when architects began to realize the benefits
of using our 440 Sound Barrier (1/2" 440 Homasote) in UL series L500
floor systems, and specifying our floor decking products. The use of
both the 1-3/4" floor deck system, and the 1/2" 440 Sound Barrier for
L500 floor systems improved business in November and December due to
multiple housing projects in Charlotte, North Carolina, the suburbs
of Chicago, Illinois, and Phoenix, Arizona. We anticipate that sales
of Homasote for flooring systems will continue to attract architects
to these products and increase market penetration substantially.
We continue to test our products for both sound and fire control.
In the year 2000, more floor system sound tests are planned,
predominantly with hardwood and tile. Fire testing of a commercial
roof system has been scheduled for the first quarter of the year.
Positive test results of these products would enable their
introduction into new markets.
In 1999, orders were placed with three manufacturers for
equipment, which will process and pack our Homex expansion and forming
board products. The automatic feeder and saw were received in the
fourth quarter and placed in service in the first quarter of 2000.
The deliveries of the accumulator bar coder, bundler and unitizer are
anticipated early in the second quarter of 2000, with operations
targeted to commence by the end of May 2000. This cutting/packaging
line will allow us to position our Homex products in the marketplace
at competitive prices, which should thereby substantially improve
demand.
As of this writing, we have not reached a settlement with our
insurance company for the losses incurred in the November 1997 and
January 1998 fires in our then newly installed Coe dryer. The matter
is currently being considered by a Federal judge.
Net sales for 1999 were $24,653,401 versus 1998 sales of
$23,915,187, an increase of $738,214 or 3.1%. The Company incurred
a net loss for the year of ($386,820) after an income tax benefit of
$20,514, resulting in a net loss per share of ($1.11). Net working
capital was $2,564,212, a decrease of $338,003 from the previous year.
The Company's common stock was previously listed on the
Philadelphia Stock Exchange (the "Exchange"). In April of 1999, the
Exchange notified the Company that it had taken action pursuant to its
rules to delist the common stock because the Company did not meet
certain of the Exchange's continued listing requirements. The
Company's common stock continues to trade in the over-the-counter
market.
We wish to thank our loyal shareholders, directors, officers,
management, employees, customers, and suppliers for their continued
support.
Warren L. Flicker Irving Flicker Shanley E. Flicker
President Chairman of the Vice Chairman of
Board and Chief the Board
Executive Officer
<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
1999
---------
<S> <C>
Net Sales $ 24,653,401
Depreciation and amortization $ 1,533,583
Net loss $ (386,820)
Common shares outstanding
(weighted average basic and diluted) 348,599
Basic and diluted net loss per common share$ (1.11)
Dividends-cash $ 0.00
Dividends per share $ 0.00
Working capital $ 2,564,212
Working capital ratio 1.8:1
Capital expenditures $ 1,282,412
Total assets $ 19,560,532
Long-term debt, excluding current
portion $ 2,738,333
Stockholders' equity $ 6,885,778
Common shares outstanding 348,599
Per share book value of common stock $ 19.75
</TABLE>
<TABLE>
1998
---------
<S> <C>
Net Sales $ 23,915,187
Depreciation and amortization $ 1,365,692
Net loss $ (698,229)
Common shares outstanding
(weighted average basic and diluted) 348,630
Basic and diluted net loss per common share$ (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 348,599
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 $ (445,778)
Common shares outstanding
(weighted average basic and diluted) 364,479
Basic and diluted net loss per common share$ (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 earnings $ 708,489
Common shares outstanding
(weighted average basic and diluted) 376,528
Basic and diluted net earnings per common
share $ 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 earnings $ 786,100
Common shares outstanding
(weighted average basic and diluted) 383,756
Basic and diluted net earnings per common
share $ 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>
TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON
<CAPTION>
CASH DIVIDENDS
Quarterly cash dividends for the last two years were as follows:
Quarter 1999 1998
---- ----
<S> <C> <C>
First $ 0.00 $ 0.00
Second 0.00 0.00
Third 0.00 0.00
Fourth 0.00 0.00
---- ----
$ 0.00 $ 0.00
</TABLE>
<TABLE>
<CAPTION>
STOCK PRICES
Stock prices for the last two years were as follows:
1999 1998
Quarter High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First $ 14.25 $ 11.12 $ 16.25 $ 15.75
Second $ 12.50 $ 9.87 $ 16.25 $ 16.00
Third $ 11.37 $ 9.00 $ 16.13 $ 15.25
Fourth $ 9.25 $ 5.62 $ 15.25 $ 14.00
The number of Stockholders of record of the Company at December 31,
1999 and 1998 is 232 and 251, 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
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Net sales $ 24,653,401 $ 23,915,187 $24,979,819
Cost of sales 19,017,672 18,647,626 19,419,846
---------- ---------- ----------
Gross profit 5,635,729 5,267,561 5,559,973
Selling, general and
administrative expenses 5,975,088 6,597,579 6,350,194
--------- ---------- ----------
Operating loss (339,359) (1,330,018) (790,221)
Other income (expense):
Gain on sale of assets 5,850 6,218 10,942
Interest income 79,860 72,002 159,678
Interest expense (172,718) (284,277) (185,678)
Other income (note 10) 19,033 500,695 86,681
---------- ---------- ----------
(67,975) 294,638 71,623
---------- ---------- ----------
Loss before
income tax benefit (407,334) (1,035,380) (718,598)
Income tax benefit
(note 5) (20,514) (337,151) (272,820)
---------- ---------- ----------
Net loss (386,820) (698,229) (445,778)
Retained earnings at beginning
of year 13,716,042 14,414,271 14,950,349
Less cash dividends paid
(0.24 per share in 1997) --- --- (90,300)
---------- ---------- ----------
Retained earnings at
end of year $ 13,329,222 $ 13,716,042 $14,414,271
========== ========== ==========
Basic and diluted net loss
per common share $ (1.11)$ (2.00)$ (1.22)
========== ========== ==========
Common shares outstanding
(weighted average basic and
diluted) 348,599 348,630 364,479
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
1999 1998
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 291,729 $ 1,115,815
Accounts receivable (net
of allowance for doubtful
accounts of $51,392 and
$41,464 in 1999 and 1998,
respectively) 2,030,090 1,897,904
Inventories (note 2) 2,980,970 3,828,817
Refundable income taxes --- 218,377
Deferred income
taxes (note 5) 127,992 170,095
Prepaid expenses and
other current assets 284,480 228,745
------------ -----------
Total Current Assets 5,715,261 7,459,753
------------ -----------
Property, Plant and
Equipment, Net
(notes 3 and 4) 10,655,141 10,911,139
Restricted cash (notes 4 and 6) 820,623 1,163,601
Other (note 6) 2,369,507 2,087,123
------------ -----------
$ 19,560,532 $ 21,621,616
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1999 1998
------------ -----------
<S> <C> <C>
CURRENT LIABILITIES:
Short term debt (note 4) $ --- $ 2,000,000
Current installments of
long-term debt (note 4) 417,500 406,667
Accounts payable 2,014,423 1,403,721
Accrued expenses (note 7) 719,126 747,150
------------ -----------
Total Current Liabilities 3,151,049 4,557,538
Long-term debt, excluding
current installments (note 4) 2,738,333 3,155,833
Deferred income taxes (note 5) 127,992 52,435
Other liabilities (note 6) 6,657,380 6,583,212
------------ -----------
Total Liabilities 12,674,754 14,349,018
------------ -----------
COMMITMENTS AND CONTINGENCIES (note 10)
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 13,329,222 13,716,042
------------ -----------
14,400,057 14,786,877
Less cost of common shares in
treasury - 515,396 shares in
1999 and 1998 (note 8) 7,514,279 7,514,279
------------ -----------
Total Stockholders' Equity 6,885,778 7,272,598
------------ -----------
$ 19,560,532 $ 21,621,616
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (386,820) $ (698,229) $(445,778)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and amortization 1,533,583 1,365,692 888,944
Gain on disposal of fixed
assets (5,850) (4,065) (10,942)
Deferred income taxes 117,660 21,061 21,903
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable, net (132,186) 314,544 (339,108)
Decrease (increase) in
inventories 847,847 (1,177,828) 434,897
Increase in other assets (277,557) (280,086) (341,565)
Decrease (increase) in
refundable income taxes 218,377 214,327 (432,704)
(Increase) decrease in prepaid
expenses and other current
assets (55,735) 242,342 (229,834)
Increase (decrease) in accounts
payable 610,702 (22,469) 439,528
(Decrease) increase in accrued
expenses (28,024) 170,617 (335,624)
Increase in other liabilities 74,168 1,378,148 120,610
---------- ---------- --------
Net cash provided by (used in)
operating activities 2,516,165 1,524,054 (229,673)
---------- ---------- ---------
Cash flows from investing
activities:
Proceeds from sale of
equipment 5,850 6,100 21,803
Capital expenditures (1,282,412) (1,284,154) (4,291,324)
Decrease (increase) in
restricted cash 342,978 (626,353) 2,420,125
---------- ---------- ---------
Net cash used in investing
activities (933,584) (1,904,407) (1,849,396)
---------- ---------- ----------
Cash flows from financing
activities:
(Repayment of) proceeds from
short-term debt (2,000,000) 1,000,000 1,000,000
Repayment of long-term debt (406,667) (392,500) (185,000)
Cash dividends paid --- --- (90,300)
Proceeds from sale of
treasury stock --- 58,650 32,500
Purchase of treasury
stock --- (62,132) (466,042)
---------- ---------- --------
Net cash (used in) provided by
financing activities: (2,406,667) 604,018 291,158
---------- ----------- ---------
Net (decrease) increase in
cash and cash equivalents (824,086) 223,665 (1,787,911)
Cash and cash equivalents
at beginning of year 1,115,815 892,150 2,680,061
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 291,729 $ 1,115,815 $ 892,150
========== ========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 172,718 $ 284,277 $ 185,678
========== ========== ==========
Income taxes $ --- $ --- $ 479,640
========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
Homasote Company and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 and 1997
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
1999 were distributed as follows: Building material wholesalers and
contractors, approximately 76%; industrial manufacturers,
approximately 24%; in 1998: Building material wholesalers and
contractors, approximately 79%; industrial manufacturers,
approximately 21%; in 1997; Building material wholesalers and
contractors, approximately 77%, industrial manufacturers,
approximately 23%. 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 are 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: As of December 31, 1999 and 1998
the fair value of the Company's financial instruments approximates
cost.
REVENUE RECOGNITION: Revenue from product sales is recognized when
the related goods are shipped and all significant obligations of the
Company have been satisfied.
NET LOSS PER SHARE: Basic net loss per share has been computed by
dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is the
same as basic net loss per common share since the Company has a
simple capital structure with only common stock outstanding in 1999,
1998, and 1997.
BUSINESS AND CREDIT CONCENTRATIONS: Sales of the Company's products
are dependent upon the economic conditions of the housing and manu-
facturing 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. One customer accounted for 11% of the
Company's sales in 1999 and accounts receivable at December 31, 1999.
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 of its 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 carryforwards. 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, 1999 and 1998:
1998 1998
--------- ---------
<S> <C> <C>
Finished goods $ 2,098,051 $ 2,782,031
Work in process 25,360 80,617
Raw materials 857,559 966,169
--------- ---------
$ 2,980,970 $ 3,828,817
========= =========
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
1999 1998 Useful Lives
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 591,492 $ 577,152
Buildings and additions 8,724,489 8,676,972 10-50 years
Machinery and equipment 27,472,963 26,506,340 5-20 years
Office equipment 1,335,512 1,327,391 3-10 years
Automotive equipment 517,977 531,683 3-5 years
Construction in progress 675,439 452,977
---------- ----------
$ 39,317,872 $ 38,072,515
Less accumulated
depreciation 28,662,731 27,161,376
---------- ----------
$ 10,655,141 $ 10,911,139
========== ==========
</TABLE>
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 year ended December 31, 1999, was a decrease of
$251,958. The corresponding decrease in basic and diluted net loss
per common share for the year ended December 31, 1999 was $.72.
NOTE 4-DEBT
In November 1996, the Company entered into a loan agreement (the
"Agreement") and promissory note with the New Jersey Economic Devel-
opment 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 (1.9% to 5.5% in 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 $0 and $163,952 at December 31, 1999 and
1998, respectively, and are classified as a restricted non-current
asset 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
"Amended Agreement") to include amended terms and covenants
retroactive to December 31, 1998. The 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, 1999
and 1998. The Amended Agreement further provides for
collateralization of the Letter of Credit facility by substantially
all of the Company's assets. On April 4, 2000 the Company and the
bank agreed to amend certain financial covenants for the fiscal year
2000, with which management believes the Company will be in
compliance through December 31, 2000.
The balance of long-term debt outstanding (including current
installments) at December 31, 1999 and 1998 was $3,155,833 and
$3,562,500, respectively. The aggregate maturities of long-term debt
for each of the five years subsequent to December 31, 1999, are as
follows: 2000, $417,500; 2001, $432,500; 2002, $447,500; 2003,
$462,500; 2004, $477,500; thereafter $918,333.
At December 31, 1998 the Company had a $2,000,000 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 (8.50% at December 31,
1999) less 0.25%. As of December 31, 1999 and 1998, $0 and
$2,000,000, respectively, was outstanding under the line of credit.
In connection with the aforementioned 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
line of credit expires February 28, 2000. On February 25, 2000, the
bank extended the expiration of the line of credit to May 28, 2000.
The Company believes that the demand note line of credit will be
extended in the normal course of business into 2001. 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 1999 and 1998 were
approximately $173,000 and $284,000, respectively.
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 Bonds exceed
4.5% per annum.
NOTE 5-INCOME TAXES
Income tax benefit is computed based on the applicable
statutory rates and is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
Current:
<S> <C> <C> <C>
Federal $ (70,998) $ (358,212) $ (294,723)
State (67,176) --- ---
------- ------- -------
(138,174) (358,212) (294,723)
------- ------- -------
Deferred:
Federal 103,911 17,902 62,384
State 13,749 3,159 (40,481)
------- ------- -------
117,660 21,061 21,903
------- ------- -------
$ (20,514) $ (337,151) $ (272,820)
======= ======= =======
The actual income tax benefit differs from the amounts
computed by applying the U.S. Federal Income Tax rate of 34% to
loss before income taxes as a result of the following:
1999 1998 1997
------- ------- -------
Computed "expected" tax
benefit $(138,494) $(352,029) $(244,323)
State income taxes (net of
Federal income tax benefit) (35,262) 2,085 (26,717)
Change in valuation reserve 207,237 --- ---
Reversal of prior year
overaccrual of Federal tax (70,998) --- ---
Other 17,003 12,793 (1,780)
------- ------- -------
$ (20,514) $(337,151) $(272,820)
======= ======= =======
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1999 and 1998 are presented below:
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 20,557 $ 16,586
Inventories 184,525 199,960
Other liabilities, principally due to
supplemental pension and post-
retirement costs 2,338,623 2,233,426
Nondeductible accrued expense 28,201 62,582
Net operating loss carryforwards--
Federal and State 281,160 110,760
Alternative minimum tax credit 26,000 ---
--------- ---------
Total deferred tax assets 2,879,066 2,623,314
Less valuation allowance (1,299,447) (1,092,210)
--------- ---------
Net deferred tax assets 1,579,619 1,531,104
--------- ---------
Deferred tax liabilities:
Fixed assets, due to accelerated
depreciation 663,981 603,981
Other assets, due to pension costs 906,284 795,432
Accumulated DISC income 9,354 14,031
--------- ---------
Total deferred tax
liabilities 1,579,619 1,413,444
--------- ---------
Net deferred tax asset $ 0 $ 117,660
========= =========
The net change in the total valuation allowance for the years
ended December 31, 1999 and 1998 was an increase of $207,237 and
$59,270, respectively. In addition, at December 31, 1999, the
Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $400,000 and
$2,300,000,respectively, which are available to reduce future
taxes, if any. The net operating loss carryforwards will begin to
expire in year 2019 for federal and 2005 for state tax purposes.
</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 $22.00
per month per year of service, as defined (increased to $23.00 in
January 2000). 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, 1999 and 1998, 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. Partial benefits are provided to early retirees who have
not 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, 1999, 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>
1999
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
<S> <C> <C>
Benefit obligation at beginning
of year $8,757,675 $2,545,993
Service cost 143,982 85,625
Interest cost 574,426 174,119
Plan amendments 335,537 589,763
Actuarial gain (1,580,567) (868,272)
Benefits paid (494,577) (133,499)
--------- ---------
Benefit obligation at end of year $7,736,476 $2,393,729
========= =========
1998
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
<S> <C> <C>
Benefit obligation at beginning
of 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
========= =========
</TABLE>
<TABLE>
1999
Pension Other
Change in plan assets Benefits Benefits
------------------------- ----------- ------------
<S> <C> <C>
Fair value of plan assets at
beginning of year $9,635,327 $ ---
Actual return on plan assets 313,709 ---
Employer contributions 100,105 133,499
Administrative expenses (139,550) ---
Benefits paid (494,577) (133,499)
--------- ---------
Fair value of plan assets at end
of year $9,415,014 $ ---
========= =========
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 819,741 ---
Employer contributions 95,374 100,616
Administrative expenses (99,784) ---
Benefits paid (485,351) (100,616)
--------- ---------
Fair value of plan assets at end
of year $9,635,327 $ ---
========= =========
</TABLE>
<TABLE>
1999
Pension Other
Reconciliation of funded status Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Funded status $ 1,678,538 $(2,393,729)
Unrecognized transition obligation 212,658 ---
Unrecognized prior service cost 925,774 1,709,978
Unrecognized actuarial gain (3,795,705) (1,918,359)
--------- ----------
Net amount recognized at year-end $ (978,735) $(2,602,110)
========= ==========
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)
========= =========
</TABLE>
<TABLE>
1999
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) $ 2,265,713 $ ---
Accrued benefit liability (3,244,448) (2,602,110)
--------- ---------
Net amount recognized at year-end $ (978,735) $(2,602,110)
========= =========
Benefit obligation $ 1,891,870 $ 2,393,729
Projected benefit obligation 1,891,870 N/A
Accumulated benefit obligation 1,751,863 N/A
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
</TABLE>
<TABLE>
1999
Components of net period benefit Pension Other
cost Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Service cost $ 143,982 $ 85,625
Interest cost 574,426 174,119
Expected return on plan assets (801,086) ---
Amortization of transitional
obligation 109,100 ---
Amortization of prior service cost 85,418 165,121
Recognized actuarial gain (217,696) (99,542)
--------- ---------
Net periodic pension (benefit) cost $ (105,856) $ 325,323
========= =========
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 service 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
cost 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 service cost 16,608 ---
Recognized actuarial gain (133,217) (105,757)
--------- ---------
Net periodic pension benefit $ (13,651) $ (35,078)
========= =========
</TABLE>
<TABLE>
1999
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Discount rate 8.00% 8.00%
Expected return an plan assets 8.50% N/A
1998
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
<S> <C> <C>
Discount rate 6.75% 6.75%
Expected return an plan assets 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%
Expected return an plan assets 8.50% N/A
</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
2000. The rate is assumed to decrease gradually to 5.0% in 2006 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 1999:
<TABLE>
One-Percentage- One-Percentage-
Point Increase Point Decrease
------------- ------------
<S> <C> <C>
Effect on postretirement benefit
obligation $ 251,499 $ (212,636)
Effect on total of service and
interest cost components 32,015 (26,502)
</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 1999,$28,000 in 1998,
and $29,000 in 1997.
Included in other liabilities at December 31, 1999 and 1998 is
$810,822 and $999,649, respectively, of monies received by the Company
in December 1998 from its insurance company related to the dryer fires
(included in restricted cash in the accompanying consolidated balance
sheet at December 31, 1999 and December 31, 1998). The cash is
restricted for use under the terms of its loan agreement with the New
Jersey Economic Development Authority to pay costs incurred in
connection with and to repair the dryer damaged in the fires described
in note 10.
NOTE 7-ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses as of December 31, 1999 and 1998 consist of the
following:
1999 1998
------- -------
<S> <C> <C>
Commissions $ 185,114 $ 236,401
Payroll 144,274 114,241
Other 389,738 396,508
------- -------
$ 719,126 $ 747,150
======= =======
</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. A summary of activity for the years 1999, 1998 and 1997 is
as follows:
<TABLE>
Acquired Sold Retained in Treasury
---------------- ------------- ----------------
Shares Cost Shares Cost Shares Cost
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
1999 --- $ --- --- $ --- --- $ ---
1998 3,602 $ 62,132 3,400 $ 58,650 202 $ 3,482
1997 29,950 $ 466,042 2,500 $ 32,500 27,450 $ 433,542
</TABLE>
NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments at
December 31, 1999 and 1998 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 require minimum quantity purchases by the
Company which are generally below the Company's normal usage.
Purchases in 1999 and 1998 aggregated approximately $860,000 and
$1,000,000, 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, uninsured losses, if any, resulting from the ultimate
resolution of these matters will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
The Company is a party to an employment agreement with an officer
requiring annual compensation payments of $200,000, adjusted biennially
for changes in the Consumer Price Index (as defined). The agreement
expires May 6, 2009.
As previously disclosed, on November 1, 1997, and again on 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. The Company is presently in
litigation with the insurance company over coverage and the amount to
be paid. The matter is being considered by a Federal judge in the U.S.
District Court - District of New Jersey. During 1998, the Company
received advance payments of approximately $465,000 of business
interruption insurance proceeds, which are included in Other Income in
the accompanying consolidated statement of operations for 1998. There
were no insurance proceeds received in 1999.
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
KPMG LLP
March 8, 2000
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 and amount of insurance proceeds
for business interruption relating to the Company's fires in
its new 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.
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.
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 present 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 2000.
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. The
Company is presently in litigation with the insurance company over
coverage and the amount to be paid. The matter is being considered by
a Federal judge in the U.S. District CourtRESULTS OF OPERATIONS 1999-1998
The Company's sales are derived from building material wholesalers
and industrial manufacturers. Net sales in 1999 increased by $738,214
or 3.1% to $24,653,401 from $23,915,187. The increase is attributable
primarily to improved demand through customer recognition of the sound
absorbent and light weight qualities of the Company's millboard and
floor system products during the fourth quarter.
Gross profit as a percentage of sales increased from 22.0% in 1998
to 22.9% in 1999. The increase resulted in part from a raise in the
price of most millboard products early in the fourth quarter, and
increased sales over 1998. Programs to increase margins through
reduction of overtime costs and production inefficiencies were
partially offset by an increase in depreciation.
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 year ended December 31, 1999, was a decrease of $251,958.
The corresponding decrease in basic and diluted net loss per common
share for the year ended December 31, 1999 was $.72.
Selling, general and administrative expenses as a percentage of
sales were 24.2% in 1999 as compared to 27.6% in 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, workers' compensation costs, and professional fees.
Interest income increased 10.9% to $79,860 in 1999 from $72,002
in 1998. In 1999, interest income on the restricted cash received in
December 1998 was offset by a decrease in interest income resulting
from 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 by 39.2% to $172,718 in 1999
from $284,277 in 1998. The decrease is due primarily to the change in
investment of excess cash balances as discussed above.
Other income decreased by $481,662 to $19,033 in 1999 from
$500,695 in 1998, primarily as a result of the receipt in 1998 of
$464,640 of business interruption insurance proceeds.
In 1999, the Company recorded an income tax benefit of $20,514 as
compared to $337,151 in 1998. The amount in 1999 includes $138,175
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, offset by an increase in the valuation
allowance for deferred tax assets. The 1998 amount is primarily
related to losses which are being carried back to taxes previously
paid. No carryback is available to the tax loss sustained in 1999.
RESULTS OF OPERATIONS 1998-1997
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, metal separators into 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 decreased 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.
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 $2.5 million in 1999, $1.5 million
in 1998, and $(0.2) million in 1997. At December 31, 1999, the
Company had working capital of $2,564,212 as compared to
$2,902,215 at December 31, 1998, a decrease of $338,003.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $1.3 million in 1999, $1.3 million
in 1998, and $4.3 million in 1997. The Company has estimated
capital expenditures for 2000 in the amount of $1.3 million, in
part 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.
Additional funds will be expended to overhaul one of the Company's
production lines and on other replacement projects. Such amounts
may be revised based on the timing and extent of receipt of
payments or settlements from its insurance carrier on the fire loss
described previously.
Cash flows from financing activities decreased from $0.6
million provided in 1998 to $2.4 million used in 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, 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 is presently in litigation with the insurance
company over coverage and the amount to be paid. The matter is
being considered by a federal judge in the U.S. District Court -
District of New Jersey. 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, when finally
received, should provide the wherewithal to cover a substantial
portion of lost revenues.
The Company is party to a loan agreement (the "Agreement") and
promissory note with the New Jersey Economic Development Authority
(the "Authority"). Under the Agreement, the Authority loaned the
Company $4,140,000 out of the proceeds from the issuance of the
Authority's Economic Growth Bonds (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 (1.9% to 5.5% in 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 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
"Amended Agreement") to include amended terms and covenants
retroacative to December 31, 1998. The 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, 1999. The Amended Agreement further provides for the
collateralization of the Letter of Credit Facility by substantially
all of the Company's assets. On April 4, 2000 the Company and the
bank agreed to amend certain financial covenants for the fiscal
year 2000, with which management believes the Company will be in
compliance through December 31, 2000.
At December 31, 1998 the Company had a $2,000,000 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 (8.5% at
December 31, 1999), less 0.25%. As of December 31, 1999 and 1998,
$0 and $2,000,000, respectively, was outstanding under the line of
credit. In connection with the aforementioned 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 line of credit expires February 28, 2000. On
February 25, 2000, the bank extended the expiration of the line of
credit to May 28, 2000. The Company believes that the demand note
line of credit will be extended in the normal course of business
into 2001. 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%.
Management believes that cash flows from operations, coupled
with its bank credit facilities, are adequate for the Company to
meet its obligations throughout 2000.
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.
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 require minimum quantity
purchases by the Company which are generally below the Company's
normal usage. Purchases in 1999, 1998 and 1997 aggregated
approximately $860,000, $1,000,000 and $923,000, 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.
<TABLE>
<CAPTION>
SUMMARIZED (unaudited) QUARTERLY FINANCIAL DATA OF THE COMPANY FOR
THE YEARS 1999 AND 1998 ARE AS FOLLOWS:
(in thousands of dollars except per share data)
1999
-----------------------------------
<S> <C> <C> <C> <C>
First Second Third Fourth
----- ----- ----- -----
Net sales $ 6,497 $ 5,967 $ 6,130 $ 6,059
===== ===== ===== =====
Gross profit $ 1,576 $ 1,461 $ 1,198 $ 1,401
===== ===== ===== =====
Net earnings (loss) $ (84) $ (155) $ (165) $ 17
===== ===== ===== =====
Net earnings (loss)
per common share $ (0.24) $ (0.45) $(0.47) $ 0.05
===== ===== ===== =====
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)
===== ===== ===== =====
Basic and diluted net
earnings (loss)
per common share $ 0.13 $ (0.54) $(0.53) $(1.09)
===== ===== ===== =====
</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.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HOMASOTE COMPANY
Under date of March 8, 2000, we reported on the consolidated
balance sheets of Homasote Company and subsidiary as of December
31, 1999 and 1998, and the related consolidated statements of
operations and retained earnings, and cash flows for the years then
ended, as contained in the 1999 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 8, 2000
Short Hills, New Jersey
<TABLE>
Schedule II, Valuation and Qualifying Accounts
Years Ended DECEMBER 31, 1999, 1998 and 1997
<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,
1999 $42,000 $9,000 --- $51,000
Year ended
December 31,
1998 $59,000 $40,000 $(57,000) $42,000
Year ended
December 31,
1997 $60,000 - $(1,000) $59,000
(a) Principally bad debts written-off, less recoveries.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 292
<SECURITIES> 0
<RECEIVABLES> 2,030
<ALLOWANCES> 51
<INVENTORY> 2,981
<CURRENT-ASSETS> 5,715
<PP&E> 39,318
<DEPRECIATION> 28,663
<TOTAL-ASSETS> 19,560
<CURRENT-LIABILITIES> 3,151
<BONDS> 0
<COMMON> 350
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,560
<SALES> 24,653
<TOTAL-REVENUES> 24,759
<CGS> 19,018
<TOTAL-COSTS> 5,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173
<INCOME-PRETAX> (407)
<INCOME-TAX> (20)
<INCOME-CONTINUING> (387)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (387)
<EPS-BASIC> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
