UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
______________________
COMMISSION FILE NUMBER 0-?
HOMASOTE COMPANY
(Exact name of registrant as specified in its charter)
NEW JERSEY 21-0388986
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
LOWER FERRY ROAD, WEST TRENTON, NJ 08628
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (609) 883-3300
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, 2000, 348,799 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,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 6,561,836 6,130,368 19,751,918 18,594,610
Cost of sales 5,030,621 4,932,055 14,749,473 14,359,587
--------- --------- ---------- ----------
Gross profit 1,531,215 1,198,313 5,002,445 4,235,023
Selling, general
and administrative
expenses 1,776,301 1,493,164 4,963,358 4,702,196
--------- --------- ---------- ----------
Operating (loss)
income (245,086) (294,851) 39,087 (467,173)
Other income (expense):
Gain on sale of
assets --- --- 27,350 584
Interest income 18,426 18,258 48,539 52,934
Interest expense (34,610) (35,786) (99,586) (143,875)
Other income 13,109 8,855 38,693 14,511
--------- --------- ---------- ----------
(3,075) (8,673) 14,996 (75,846)
--------- --------- ---------- ---------
(Loss) earnings before
income tax benefit (248,161) (303,524) 54,083 (543,019)
Income tax benefit (138,175) (138,175)
--------- --------- ---------- ---------
Net (loss) earnings (248,161) (165,349) 54,083 (404,844)
Retained earnings
at beginning of
period 13,631,466 13,476,547 13,329,222 13,716,042
Less cash dividends
paid ($.05 per share
in 2000 and $0 in
1999) (17,440) --- (17,440) ---
Retained earnings
at end of period 13,365,865 13,311,198 13,365,865 13,311,198
========== ========== ========== ==========
Basic and diluted net
(loss) earnings per
common share (0.71) (0.47) 0.16 (1.16)
========== ========== ========== ==========
Weighted average basic
and diluted common
shares outstanding 348,799 348,599 348,799 348,599
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 179,318 $ 291,729
Accounts receivable (net
of allowance for doubtful
accounts of $51,392 in
2000 and 1999) 2,037,851 2,030,090
Inventories 2,700,842 2,980,970
Deferred income
taxes 127,992 127,992
Prepaid expenses and
other current assets 328,502 284,480
----------- -----------
Total current assets 5,374,505 5,715,261
----------- -----------
Property, plant and
equipment, at cost 40,383,427 39,317,872
Less accumulated
depreciation 29,471,467 28,662,731
----------- -----------
Net property, plant and
equipment 10,911,960 10,655,141
Restricted cash 787,420 820,623
Other assets 2,347,075 2,369,507
----------- -----------
$ 19,420,960 $ 19,560,532
=========== ===========
(continued)
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2000 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Current installments of
long-term debt $ 428,750 $ 417,500
Accounts payable 1,932,262 2,014,423
Accrued expenses 979,725 719,126
----------- -----------
Total current liabilities 3,340,737 3,151,049
Long-term debt, excluding
current installments 2,415,833 2,738,333
Deferred income taxes 127,992 127,992
Other liabilities 6,610,527 6,657,380
----------- -----------
Total liabilities 12,495,089 12,674,754
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.20
per share; Authorized
1,500,000 shares;
Issued 863,995 shares in
2000 and 1999 172,799 172,799
Additional paid-in capital 898,036 898,036
Retained earnings 13,365,865 13,329,222
----------- -----------
14,436,700 14,400,057
Less cost of common shares in
treasury - 515,196 shares in
2000 and 515,396 shares in
1999 7,510,829 7,514,279
----------- -----------
Total stockholders' equity 6,925,871 6,885,778
----------- -----------
$ 19,420,960 $ 19,560,532
=========== ===========
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)
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating
activities:
Net earnings (loss) $ 54,083 $ (404,844)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 922,884 1,261,654
Gain on disposal of fixed assets (27,350) ---
Changes in assets and liabilities:
Increase in accounts receivable (7,761) (265,283)
Decrease in inventories 280,128 827,302
Decrease in refundable income taxes --- 218,377
Increase in prepaid expenses and
other current assets (44,022) (71,236)
Increase in other assets --- (425)
(Decrease) increase in accounts
payable (82,161) 424,238
Increase (decrease) in accrued
expenses 260,599 (21,854)
(Decrease) increase in other
liabilities (46,853) 10,659
---------- ----------
Net cash provided by
operating activities 1,309,547 1,978,588
---------- ----------
Cash flows from investing
activities:
Proceeds from sale of equipment 27,350 584
Capital expenditures (1,157,271) (949,982)
Decrease in restricted
cash 33,203 142,796
---------- ----------
Net cash used in investing
activities (1,096,718) (806,602)
---------- ----------
(continued)
Cash flows from financing
activities:
Repayment of short-term debt --- (1,882,334)
Repayment of long-term debt (311,250) (303,750)
Cash dividends paid (17,440) ---
Proceeds from sale of treasury
stock 3,450 ---
---------- ---------
Net cash used in
financing activities: (325,240) (2,186,084)
---------- ---------
Net decrease in cash and cash
equivalents (112,411) (1,014,098)
Cash and cash equivalents
at beginning of period 291,729 1,115,815
---------- ----------
Cash and cash equivalents
at end of period $ 179,318 $ 101,717
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 34,610 $ 143,875
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD ENDED SEPTEMBER 30, 2000
Note 1. The consolidated financial information as of September 30,
2000 and for the three and nine-month periods ended
September 30, 2000 and 1999 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, 2000 is not
necessarily indicative of the results of operations that
might be expected for the entire year ending December 31,
2000.
Note 2. INVENTORIES
The following are the major classes of inventories as of
September 30, 2000 and December 31, 1999:
2000 1999
Finished goods.......$1,621,816 $ 2,098,051
Work in process...... 110,645 25,360
Raw materials........ 968,381 857,559
$2,700,842 $ 2,980,970
Inventories include the cost of materials, direct labor
and manufacturing overhead.
Note 3. NET EARNINGS (LOSS) PER COMMON SHARE
Basic net earnings (loss) per common share has been
computed by dividing net earnings (loss) by the weighted
average number of common shares outstanding during the
respective periods. Diluted net earnings (loss) per share
is the same as basic net earnings (loss) per common share
since the Company has a simple capital structure with only
common stock outstanding in 2000 and 1999.
Note 4. DEBT
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 (5.45% at
September 30, 2000).
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. The Agreement,
as currently amended, contains financial and other covenants
including minimum tangible net worth, cash flow coverage,
current ratio and maximum liabilities to tangible net worth
(all as defined) with which the Company was in compliance at
September 30, 2000 and December 31, 1999. The Amended
Agreement further provides for collateralization of the
Letter of Credit facility by substantially all of the
Company's assets.
The Company has a $1.0 million unsecured demand note line of
credit agreement with a bank which expires July 31, 2001.
Interest is charged at the bank's index rate (9.5% at
September 30, 2000) less 0.25%. As of September 30, 2000
and December 31, 1999, $0 was outstanding under the line of
credit. The note provides for prepayments and advances as
required to satisfy working capital needs. The 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%.
Note 5. SUBSEQUENT EVENT
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.
<PAGE>
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 has produced at a level of 40% of its
anticipated production capability, which level is equivalent
to the Company's previous capacity with equipment the new
dryer replaced.
The Company was engaged in litigation with its insurance
company over coverage and the amount to be paid with respect
to the loss. On November 14, 2000, the Company and the
insurance company reached a settlement, pursuant to which
the insurance company will pay an additional $2,250,000 to
the Company for all claims arising under the policy. Upon
receipt, the additional proceeds will be reflected as other
income. The Company is currently considering alternative
uses of these funds. The insurance company had previously
advanced $1,964,000 to the Company in 1998. As a result,
the total amount received and to be received under its
insurance coverage is $4,214,000.
FORM 10-Q
HOMASOTE COMPANY AND SUBSIDIARY
September 30, 2000
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 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.
RESULTS OF OPERATIONS
The Company's sales are derived from building material
wholesalers and industrial manufacturers. Sales during the three
months ended September 30, 2000 increased by $431,468 or 7.0% to
$6,561,836 from, $6,130,368 in the three months ended September 30,
1999. Sales for the nine month period ended September 30, 2000
increased by $1,157,308 or 6.2% to $19,751,918 from $18,594,610 in the
nine months ended September 30, 1999. The increase is attributable
primarily to improved demand for the Company's millboard and
industrial packaging products. However, shipments in the year earlier
nine-month period were adversely affected by reduced millboard
production due to the overhaul of a millboard production line.
Gross profit as a percentage of sales, was 23.3% and 19.5%,
respectively, for the three-month periods ended September 30, 2000 and
1999 and 25.3% and 22.8%, respectively, for the nine-month periods
ended September 30, 2000 and 1999. This increase in the year 2000
periods is attributable primarily to improved coverage of fixed costs
due to an increase in sales and a decrease in depreciation expense and
non-essential overtime costs in 2000. The increase in gross profit
percentage caused by these items was partially offset by increases in
wage rates, health insurance costs and other incremental costs, and a
10 day maintenance shutdown in the current three month period.
Selling, general and administrative expenses as a percentage of
sales were 27.0% and 24.4%, respectively, for the three-month periods
ended September 30, 2000 and 1999 and 25.1% and 25.3%, respectively,
for the nine-month periods ended September 30, 2000 and 1999. The
relative percentage of selling, general and administrative expenses in
the third quarter increased primarily in the areas of quality control,
worker's compensation costs, advertising and customer rebate programs,
partially offset by lower than projected retirement program expenses
and decreases in depreciation and amortization costs.
Interest income increased to $18,426 for the three-month period
ended September 30, 2000, as compared to $18,258 for the three-month
period ended September 30, 1999. Interest income decreased to $48,539
for the nine-month period ended September 30, 2000 as compared to
$52,934 for the nine-month period ended September 30, 1999. The
decrease in interest income for the nine-month period is attributable
primarily to a change in the nature of investing 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 $34,610 and $99,586,
respectively, for the three and nine-month periods ended September 30,
2000, as compared to $35,786 and $143,875, respectively, for the three
and nine-month periods ended September 30, 1999. The decrease for the
nine-month period is due primarily to the change in investment of
excess cash balances as discussed above.
Other income increased from $8,855 and $14,511, respectively,
for the three and nine-month periods ended September 30, 1999, to
$13,109 and $38,693, respectively, for the three and nine-month
periods ended September 30, 2000, due primarily to increases in the
net price of corrugated paper sold as scrap.
There was no income tax expense during the three and nine-month
periods ended September 30, 2000 due to the availability of federal
and state operating loss carryforwards. Management believes that
these operating loss carryforwards will be sufficient to offset taxes
on current estimated taxable income in 2000. 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.
As a result of the foregoing, the net loss of $165,349 for the
three-month period ended September 30, 1999, increased to $248,161 for
the three-month period ended September 30, 2000. Net income for the
nine-month period ended September 30, 2000 improved to $54,083 from a
net loss of $404,844 in the nine-month period ended September 30,
1999.
The Company installed a new dryer that was originally scheduled
for partial completion in June 1997, but was placed into modified
production during the last week of September 1997 for an initial
shakedown period in order to surface potential operating problems.
However, on November 1, 1997, a fire occurred in the new dryer,
causing severe damage to the rolls, insulation and other structural
steel components, rendering it inoperable and resulting in an
interruption of the Company's anticipated productivity of its major
product line, which adversely affected revenues and profitability.
The dryer was placed in a temporary state of repair and
production resumed on January 12, 1998. On January 30, 1998, there
was another fire in the new dryer that was restricted to an area at
the end of the dryer. The damage was repaired in a short period of
time with a resumption of production on February 9, 1998. Once back
into production, the new dryer has produced at a level of 40% of its
anticipated production capability, which level is equivalent to the
Company's previous capacity with equipment the new dryer replaced.
The Company was engaged in litigation with its insurance company
over coverage and the amount to be paid with respect to the loss. On
November 14, 2000, the Company and the insurance company reached a
settlement, pursuant to which the insurance company will pay an
additional $2,250,000 to the Company for all claims arising under the
policy. Upon receipt, the additional proceeds will be reflected as
other income. The Company is currently considering alternative uses
of these funds. The insurance company had previously advanced
$1,964,000 to the Company in 1998. As a result, the total amount
received and to be received under its insurance coverage is
$4,214,000.
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 $1.3 million and $2.0 million in the nine-month
periods ended September 30, 2000 and 1999, respectively.
Working capital was $2,033,768 at September 30, 2000, as compared
to $2,564,212 at December 31, 1999, a decrease of $530,444.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally generated
funds and debt, were $1.2 million and $0.9 million in 2000 and 1999,
respectively. The Company has estimated capital expenditures for the
remaining three (3) months of 2000 in the amount of $0.3 million.
Such amounts may be revised based on the timing of receipts of
payments or settlements from its insurance carrier on the fire loss
described under "Results of Operations".
Cash flows from financing activities was ($2.2) million used in
1999 compared to ($0.3) million used in 2000. This reduction in cash
used resulted from paying down short-term debt by $1.9 million during
the period ended September 30, 1999, with no similar amount in the
year 2000 period.
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 (5.45% at
September 30, 2000).
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. The Agreement, as currently amended, contains financial and
other covenants including minimum tangible net worth, cash flow
coverage, current ratio and maximum liabilities to tangible net worth
(all as defined) with which the Company is in compliance at September
30, 2000 and December 31, 1999. The Amended Agreement further provides
for collateralization of the Letter of Credit facility by
substantially all of the Company's assets.
The Company has a $1.0 million unsecured demand note line of
credit agreement with a bank which expires July 31, 2001. Interest is
charged at the bank's index rate (9.5% at September 30, 2000) less
0.25%. As of September 30, 2000 and December 31, 1999, $0 was
outstanding under the line of credit. The note provides for
prepayments and advances as required to satisfy working capital needs.
The 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 all cash flows from operations, coupled
with its bank credit facilities, are adequate for the Company to meet
its obligations.
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 does not believe the adoption of this pronouncement will have
a material impact on its financial statements or operations.
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.
The Company utilizes a significant amount of natural gas in the
manufacture of Homasote board. To ensure a consistently effective
supply of natural gas, the Company is a party to a two-year purchase
agreement expiring October 31, 2000. Current market conditions in the
natural gas industry will cause the Company to incur a material
increase in the cost of this energy resource approximately 96%
effective November 1, 2000.
The Company has notified its millboard and industrial customers
of an energy surcharge to be effective with shipments commencing
November 22, 2000. There is no assurance this additional revenue will
compensate completely for the increased cost of natural gas.
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 the nine months ended September 30, 2000
and the nine months ended September 30, 1999, aggregated approximately
$748,000 and $605,000, respectively. The contracts expire in 2009.
Part 2
OTHER INFORMATION
September 30, 2000
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, 2000.
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)
