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FORM 10-K
------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2000
OR
[ ] 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, including zip code)
609-883-3300
(Registrant's telephone number, including area code)
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 14, 2001, the Aggregate Market Value of the Voting
Stock held by non-affiliates was $1,357,608.
As of March 14, 2001, there were 348,799 shares of common
stock, $.20 par value, outstanding.
Documents Incorporated by Reference
Homasote Company 2000 Annual Report to Stockholders (Parts II
And IV).
Proxy Statement dated April 4, 2001 to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2000.(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 10% AND 11% OF THE COMPANY'S
SALES IN 2000 AND 1999, RESPECTIVELY, AND 12% AND 11%
OF ACCOUNTS RECEIVABLE AT DECEMBER 31, 2000 AND 1999
RESPECTIVELY.
(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, 2000, 1999 AND 1998 NO
AMOUNTS WERE SPENT ON RESEARCH AND DEVELOPMENT.
DURING THE YEARS ENDED DECEMBER 31, 2000, 1999 AND
1998 THE REGISTRANT INCURRED QUALITY CONTROL COSTS
OF $148,954, $84,097, AND $93,491, RESPECTIVELY.
(XII)ENVIRONMENTAL PROTECTION
AS OF DECEMBER 31, 2000, 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 2001 FISCAL YEAR.
(XIII)NUMBER OF EMPLOYEES
AS OF DECEMBER 31, 2000, THE REGISTRANT EMPLOYED 229
EMPLOYEES, AS COMPARED TO 219 IN 1999.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
FOREIGN SALES, PRIMARILY IN CANADA AND THE UNITED KINGDOM,
ACCOUNTED FOR APPROXIMATELY 11% IN THE YEAR ENDED DECEMBER
31, 2000 AND 5% AND 6% IN THE YEARS ENDED DECEMBER 31, 1999
AND 1998, 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. PRODUCTION SCHEDULING AND ACTIVITY IS DEPENDENT
DIRECTLY UPON THE ECONOMIC CONDITION OF THE BUILDING
CONSTRUCTION AND MANUFACTURING INDUSTRIES.
ITEM 3. LEGAL PROCEEDINGS
AS OF DECEMBER 31, 2000, THERE WAS NO MATERIAL PENDING
LITIGATION AGAINST THE REGISTRANT. HOWEVER, SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS" RESPECTING THE
SETTLEMENT OF CERTAIN LITIGATION BROUGHT BY THE REGISTRANT
AGAINST ITS INSURANCE CARRIER RESPECTING LOSSES INCURRED AS
A RESULT OF FIRES INVOLVING THE REGISTRANT'S 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 2000
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 2000 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 2000 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,
2000. 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, 2000. CHANGES IN THE
PRIME INTEREST RATE DURING FISCAL 2001 WILL HAVE A POSITIVE
OR NEGATIVE EFFECT ON THE COMPANY'S INTEREST EXPENSE. THE
COMPANY HAD NO DEBT OUTSTANDING AS OF DECEMBER 31, 2000.
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 2001
DEMAND NOTE $ 0 $ 0 ---
INTEREST RATE --- --- 9.25%
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF THE HOMASOTE COMPANY
2000 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 4, 2001, 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
- ------------------ --------- -------- -------- ---
WARREN L. FLICKER CHAIRMAN OF
(1) THE BOARD AND
CHIEF EXECUTIVE
OFFICER 1/01/00 1 57
PETER J. MCELVOGUE PRESIDENT 7/1/00 - 38
(2)
JOSEPH A. BRONSARD EXECUTIVE VICE
(3) PRESIDENT 1/01/95 5 67
JAMES M. REISER VICE PRESIDENT 3/01/99 2 58
(4) AND CHIEF
FINANCIAL
OFFICER
IRENE T. GRAHAM ACTING 11/12/99 1 79
(5) SECRETARY
(1) EMPLOYED BY THE COMPANY SINCE 1965.
(2) EMPLOYED BY THE COMPANY SINCE 2000.
(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 4, 2001, 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 4, 2001, 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 4, 2001, 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, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) (1) CONSOLIDATED 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, 2000, 1999 AND
1998 INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2000 AND
1999 INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998 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 -
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NO OTHER SCHEDULES ARE REQUIRED.
(3) EXHIBITS
3 ARTICLES OF INCORPORATION AND BYLAWS*
13 HOMASOTE COMPANY 2000 ANNUAL REPORT TO STOCKHOLDERS
(B) REPORT ON FORM 8-K
NO REPORTS ON FORM 8-K WERE FILED IN THE THREE
MONTHS ENDED DECEMBER 31, 2000.
*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, 2001 BY WARREN 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.
WARREN FLICKER CHAIRMAN, CEO MARCH 30, 2001
& DIRECTOR
PETER J. MCELVOGUE PRESIDENT MARCH 30, 2001
JOSEPH A. BRONSARD EXECUTIVE VICE
PRESIDENT & DIRECTOR MARCH 30, 2001
JAMES M. REISER VICE PRESIDENT, MARCH 30, 2001
CFO & DIRECTOR
IRENE T. GRAHAM CORPORATE SECRETARY MARCH 30, 2001
& DIRECTOR
IRVING FLICKER CHAIRMAN EMERITUS
& DIRECTOR MARCH 30, 2001
MICHAEL FLICKER DIRECTOR MARCH 30, 2001
PETER N. OUTERBRIDGE DIRECTOR MARCH 30, 2001
CHARLES A. SABINO DIRECTOR MARCH 30, 2001
NORMAN SHARLIN DIRECTOR MARCH 30, 2001
TO SHAREHOLDERS AND EMPLOYEES
Growing success of 440 Sound Barrier products, increased sales of
the Homex 300 product line and sales gains in Pak-Line cushioning and
packaging products highlighted the year 2000 for Homasote Company.
We introduced the 440 Sound Barrier product line in 1998, then
aggressively marketed beginning with the 1999 International Builders
Show as the added sound-reduction component in UL Series L500 floor
systems.
Until 1999, Homex 300 expansion joint and forming products had
been promoted only in the Southwest. Then we launched an aggressive
plan to market it throughout North America and introduce it in Australia
and South America.
Contractors have known that Homex 300 is a superior product, but
pricing has remained a key issue. We addressed that challenge in 1999,
by placing purchase orders for an automated slitting and packaging line
that would more than double our output, cut our production costs and
allow us to sell a more competitively priced Homex 300 for the retail
trade. In 2000 the new line operated at less-than-optimum production
rates due to problems in the accumulating and small packaging sections
and the bankruptcy of the firm designing and manufacturing the section
that automatically unitizes smaller bundles. Even at reduced rates of
production the new line had a positive impact on Homex sales in 2000,
and we expect it to be completed by the end of the second quarter of
2001.
Other Homasote Company building material products whose sales
continued to grow include Design Wall decorative indoor paneling;
Comfort BaseTM sound reduction over-concrete panels; and 4-Way Floor
Deck lines.
We continue to test our products for both fire and sound
transmission. After extensive testing we hope to be able to
aggressively market the Firestall Roof Deck line for commercial
purposes in the latter part of 2001.
The Pak-Line division, which supplies cushioning and packaging
products to manufacturers around the globe, registered sales increases
in packaging products for small component motors and paper roll
protection strips. The glass and steel separator markets also were
growth areas for Pak-Line products.
We made inroads in 2000 with Canadian and overseas commercial
furniture and display manufacturers, two vast markets in which we have
yet to dent the surface.
We purchased a used heavy duty sanding line and expect it to be
installed and operating by midyear 2001. The sanding equipment will
allow us to sell products meeting more exact thickness tolerances than
ever before. It will also open the doors to furniture manufacturers
that we previously have been unable to approach.
The new sanding process will allow us to enter a prestigious high-
end market specialty panel display board, also known as museum display
board, which in Great Britain is referred to as "pin board."
We finally reached a settlement with our insurance company. Those
results are found under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" at the rear of this
report.
Net sales for 2000 were $27,744,946 versus 1999 sales of
$25,018,201, an increase of $2,726,745 or 10.9%. Net earnings for the
year were $313,692, resulting in net earnings per common share of $.90.
Net working capital was $1,928,925, a decrease of $635,287 from the
previous year.
We note with sadness the death, in November 2000, of former
Homasote president and vice-chairman Shanley E. Flicker. Shanley, 82,
a Yardley, Pennsylvania resident, had also been vice president and
trustee of the Homasote Foundation. Shanley retired in the beginning of
the year and was looking forward to a very active retirement still
maintaining a hand in everyday business functions. He is survived by
his wife, Miriam Reader Flicker; a son, Marc; and a daughter, Barbara
Cole. Shanley is also survived by his brother, Irving Flicker, our
chairman emeritus.
Our other millennium retirees included: Andrew R. Farkas, Irving
Flicker, John Jeavons Sr., and John Robbins. Best wishes for long and
happy retirements to each of the employees who left us in 2000.
We wish to thank our loyal shareholders, directors, officers,
management, employees, customers, and suppliers for their continued
support.
Warren L. Flicker Irving Flicker Peter J. McElvogue
Chairman of the Board, Chairman Emeritus President
Chief Executive Officer
Homasote Company and Subsidiary
Consolidated Five Year Highlights
2000
---------
Net sales $ 27,744,946
Depreciation and amortization $ 1,262,672
Net earnings (loss) $ 313,692
Common shares outstanding
(weighted average basic and diluted) 348,799
Basic and diluted net earnings
(loss) per common share $ .90
Dividends-declared and paid $ 34,880
Dividends per share $ .10
Working capital $ 1,928,925
Working capital ratio 1.5:1
Capital expenditures $ 1,519,990
Total assets $ 19,750,205
Long-term debt, excluding current
portion $ 2,305,833
Stockholders' equity $ 7,168,040
Common shares outstanding 348,799
Per share book value of common stock $ 20.55
1999
---------
Net sales $ 25,018,201
Depreciation and amortization $ 1,533,583
Net earnings (loss) $ (386,820)
Common shares outstanding
(weighted average basic and diluted) 348,599
Basic and diluted net earnings
(loss) per common share $ (1.11)
Dividends-declared and paid $ 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
Homasote Company and Subsidiary
Consolidated Five Year Highlights
1998
---------
Net sales $ 24,302,836
Depreciation and amortization $ 1,365,692
Net earnings (loss) $ (698,229)
Common shares outstanding
(weighted average basic and diluted) 348,630
Basic and diluted net earnings
(loss) per common share $ (2.00)
Dividends-declared and paid $ 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
1997
---------
Net sales $ 25,385,686
Depreciation and amortization $ 888,944
Net earnings (loss) $ (445,778)
Common shares outstanding
(weighted average basic and diluted) 364,479
Basic and diluted net earnings
(loss) per common share $ (1.22)
Dividends-declared and paid $ 90,300
Dividends per share $ 0.26
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
Homasote Company and Subsidiary
Consolidated Five Year Highlights
1996
---------
Net sales $ 27,639,869
Depreciation and amortization $ 606,830
Net earnings (loss) $ 708,489
Common shares outstanding
(weighted average basic and diluted) 376,528
Basic and diluted net earnings (loss)
per common share $ 1.88
Dividends-declared and paid $ 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 of common stock $ 23.77
TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON
CASH DIVIDENDS
Quarterly cash dividends for the last two years were as follows:
Quarter 2000 1999
---- ----
First $ 0.00 $ 0.00
Second 0.00 0.00
Third 0.05 0.00
Fourth 0.05 0.00
---- ----
$ 0.10 $ 0.00
STOCK PRICES
Stock prices for the last two years were as follows:
2000 1999
Quarter High Low High Low
----- ----- ----- -----
First $ 8.50 $ 5.87 $ 14.25 $ 11.12
Second $ 9.00 $ 5.00 $ 12.50 $ 9.87
Third $ 15.00 $ 8.50 $ 11.37 $ 9.00
Fourth $ 14.00 $ 8.50 $ 9.25 $ 5.62
The number of Stockholders of record of the Company at December 31,
2000 and 1999 is 229 and 232, respectively.
PROFILE
Homasote Company manufactures building and industrial products used
in various construction and manufacturing industries.
Homasote International Sales Co., Inc. is an export company.
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31
2000 1999 1998
--------- ---------- ---------
Net sales $ 27,744,946 $ 25,018,201 $24,302,836
Cost of sales 20,754,224 19,382,472 19,035,275
---------- ---------- ----------
Gross profit 6,990,722 5,635,729 5,267,561
Selling, general and
administrative expenses 6,684,878 5,975,088 6,597,579
--------- ---------- ----------
Operating income (loss) 305,844 (339,359) (1,330,018)
Other income (expense):
Gain on sale of assets 27,350 5,850 6,218
Interest income 65,315 79,860 72,002
Interest expense (130,003) (172,718) (284,277)
Other income 45,186 19,033 500,695
---------- ---------- ----------
Earnings (loss) before
income tax benefit 313,692 (407,334) (1,035,380)
Income tax benefit --- (20,514) (337,151)
---------- ---------- ----------
Net earnings (loss) 313,692 (386,820) (698,229)
Retained earnings at
beginning of year 13,329,222 13,716,042 14,414,271
Less dividends declared and
paid (0.10 per share
in 2000) (34,880) --- ---
---------- ---------- ----------
Retained earnings at
end of year $ 13,608,034 $ 13,329,222 $13,716,042
========== ========== ==========
Basic and diluted net
earnings (loss) per
common share $ .90 $ (1.11)$ (2.00)
========== ========== ==========
Weighted average basic and
diluted common shares
outstanding 348,799 348,599 348,630
========== ========== ==========
See accompanying notes to consolidated financial statements.
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2000 1999
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 56,204 $ 291,729
Accounts receivable (net
of allowance for doubtful
accounts of $51,392 in 2000
and 1999) 2,288,016 2,030,090
Inventories 2,924,459 2,980,970
Deferred income taxes 29,369 127,992
Prepaid expenses and
other current assets 242,523 284,480
------------ -----------
Total Current Assets 5,540,571 5,715,261
------------ -----------
Property, plant and
equipment, net 10,942,368 10,655,141
Restricted cash 691,778 820,623
Other assets 2,575,488 2,369,507
------------ -----------
$ 19,750,205 $ 19,560,532
============ ===========
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
2000 1999
------------ -----------
CURRENT LIABILITIES:
Short term debt $ --- $ ---
Current installments of
long-term debt 432,500 417,500
Accounts payable 2,441,560 2,014,423
Accrued expenses 737,586 719,126
------------ -----------
Total Current Liabilities 3,611,646 3,151,049
Long-term debt, excluding
current installments 2,305,833 2,738,333
Deferred income taxes 29,369 127,992
Other liabilities 6,635,317 6,657,380
------------ -----------
Total Liabilities 12,582,165 12,674,754
------------ -----------
COMMITMENTS AND CONTINGENCIES
(note 10 and 11)
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 13,608,034 13,329,222
------------ -----------
14,678,869 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 7,168,040 6,885,778
------------ -----------
$ 19,750,205 $ 19,560,532
============ ===========
See accompanying notes to consolidated financial statements.
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2000 1999 1998
----------- ---------- -----------
Cash flows from operating
activities:
Net earnings (loss) $ 313,692 $ (386,820) $ (698,229)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating
activities:
Depreciation and amortization 1,262,672 1,533,583 1,365,692
Gain on disposal of fixed
assets (27,350) (5,850) (4,065)
Deferred income taxes --- 117,660 21,061
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable, net (257,926) (132,186) 314,544
Decrease (increase) in
inventories 56,511 847,847 (1,177,828)
Increase in other assets (235,890) (277,557) (280,086)
Decrease in refundable
income taxes --- 218,377 214,327
Decrease (increase) in prepaid
expenses and other current
assets 41,957 (55,735) 242,342
Increase (decrease) in accounts
payable 427,137 610,702 (22,469)
Increase (decrease) in accrued
expenses 18,460 (28,024) 170,617
(Decrease) increase in other
liabilities (22,063) 74,168 1,378,148
---------- ---------- ---------
Net cash provided by operating
activities 1,577,200 2,516,165 1,524,054
---------- ---------- ---------
Cash flows from investing
activities:
Proceeds from sale of
equipment 27,350 5,850 6,100
Capital expenditures (1,519,990) (1,282,412) (1,284,154)
Decrease (increase) in
restricted cash 128,845 342,978 (626,353)
---------- ---------- ---------
Net cash used in investing
activities (1,363,795) (933,584) (1,904,407)
---------- ---------- -----------
Cash flows from financing
activities:
(Repayment of) proceeds from
short-term debt --- (2,000,000) 1,000,000
Repayment of long-term debt (417,500) (406,667) (392,500)
Dividends declared and paid (34,880) --- ---
Proceeds from sale of
treasury stock 3,450 --- 58,650
Purchase of treasury
stock --- --- (62,132)
---------- ---------- --------
Net cash (used in) provided by
financing activities: (448,930) (2,406,667) 604,018
---------- ----------- ---------
Net (decrease) increase in
cash and cash equivalents (235,525) (824,086) 223,665
Cash and cash equivalents
at beginning of year 291,729 1,115,815 892,150
---------- ---------- ---------
Cash and cash equivalents
at end of year $ 56,204 $ 291,729 $1,115,815
========== ========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 130,003 $ 172,718 $ 284,277
========== ========= ==========
See accompanying notes to consolidated financial statements.
Homasote Company and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 and 1998
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 2000
were distributed as follows: Building material wholesalers and
contractors, approximately 71%; industrial manufacturers, approximately
29%; in 1999, building material wholesalers and contractors,
approximately 76%; industrial manufacturers, approximately 24%; in 1998,
building material wholesalers and contractors, approximately 79%;
industrial manufacturers, approximately 21%. 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, 2000 and 1999,
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 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,
1999 and 1998.
BUSINESS AND CREDIT CONCENTRATIONS: Sales of the Company's products are
dependent upon the economic conditions of the housing and manufacturing
industries. Changes in these industries may significantly affect
management's estimates and the Company's performance.
The majority of the Company's customers are located in the northeastern
United States, with the remainder spread throughout the United States
and Canada. One customer accounted for 10% and 11% of the Company's
sales in 2000 and 1999, respectively, and 12% and 11% of accounts
receivable at December 31, 2000 and 1999, respectively.
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 undiscounted 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.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998 the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Certain Hedging Activities." In June 2000 the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activity, an Amendment of SFAS 133." SFAS No. 133 and
SFAS No. 138 require that all derivative instruments be recorded on the
balance sheet at their respective fair values. SFAS No. 133 and SFAS
No. 138 are effective for all fiscal quarters of all fiscal years
beginning after June 30, 2000. The Company adopted SFAS No. 133 January
1, 2001. The Company presently does not have any derivative financial
instruments.
In 2000, the Company adopted the provisions of the FASB's Emerging
Issues Task Force (EITF), Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," which requires the Company to report all
amounts billed to a customer related to shipping and handling costs as
revenue. The Company has reclassified such cost amounts, which were
previously netted in sales to cost of sales. As a result of this
reclassification, sales and cost of sales were increased by $541,000 in
2000, $365,000 in 1999 and $387,649 in 1998.
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.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1999
and 1998 financial statements in order to conform with the 2000
presentation.
NOTE 2-INVENTORIES
The following are the major classes of inventories as of
December 31, 2000 and 1999:
2000 1999
--------- ---------
Finished goods $ 1,996,746 $ 2,098,051
Work in process 66,991 25,360
Raw materials 860,722 857,559
--------- ---------
$ 2,924,459 $ 2,980,970
========= =========
Inventories include the cost of materials, direct labor and
manufacturing overhead.
NOTE 3-PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at
December 31:
--------------------------------------
Estimated
2000 1999 Useful Lives
---------- ---------- ------------
Land $ 591,492 $ 591,492
Buildings and additions 8,770,539 8,724,489 10-50 years
Machinery and equipment 29,019,920 27,472,963 5-20 years
Office equipment 1,358,858 1,335,512 3-10 years
Automotive equipment 459,709 517,977 3-5 years
Construction in progress 545,628 675,439
---------- ----------
40,746,146 39,317,872
Less accumulated
depreciation 29,803,778 28,662,731
---------- ----------
$ 10,942,368 $ 10,655,141
========== ==========
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 $0.72.
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 (2.8% to 5.75% in 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 (the "Amended
Agreement"), 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 as of and for the years ended December 31,
2000 and 1999. The Amended Agreement further provides for
collateralization of the Letter of Credit facility by substantially all
of the Company's assets.
The balance of long-term debt outstanding (including current
installments) at December 31, 2000 and 1999 was $2,738,333 and
$3,155,833, respectively. The aggregate maturities of long-term debt
for each of the five years subsequent to December 31, 2000, are as
follows: 2001, $432,500; 2002, $447,500; 2003, $462,500; 2004,
$477,500; 2005, $493,333; thereafter $425,000.
The Company has a $1.0 million unsecured demand note line of credit
agreement with a bank which expires July 31, 2001. Interest is payable
monthly at the bank's index rate (9.5% at December 31, 2000) less 0.25%.
As of December 31, 2000 and 1999, there were no amounts 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. The
Company believes that the demand note line of credit will be extended in
the normal course of business into 2002.
Total interest costs incurred during 2000, 1999 and 1998 were
approximately $130,000, $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 average monthly rate of the interest payments on the Bonds
exceed 4.5%.
NOTE 5-INCOME TAXES
Income tax benefit is comprised of the following:
2000 1999 1998
------- ------- -------
Current:
Federal $ --- $ (70,998) $ (358,212)
State --- (67,176) ---
------- ------- -------
--- (138,174) (358,212)
------- ------- -------
Deferred:
Federal --- 103,911 17,902
State --- 13,749 3,159
------- ------- -------
--- 117,660 21,061
------- ------- -------
$ --- $ (20,514) $ (337,151)
======= ======= =======
The actual income tax benefit differs from the amounts computed by
applying the U.S. Federal Income Tax rate of 34% to earnings (loss)
before income tax benefit as a result of the following:
2000 1999 1998
------- ------- -------
Computed "expected" tax
benefit $ 106,655 $(138,494) $(352,029)
State income taxes (net of
Federal income tax benefit) 21,776 (35,262) 2,085
Change in valuation reserve (146,419) 207,237 ---
Reversal of prior year
overaccrual of Federal tax --- (70,998) ---
Other 17,988 17,003 12,793
------- ------- -------
$ --- $ (20,514) $(337,151)
======= ======= =======
The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31 are presented below:
2000 1999
------- -------
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 20,557 $ 20,557
Inventories 182,555 184,525
Other liabilities, principally due to
supplemental pension and post-
retirement costs 2,384,062 2,338,623
Nondeductible accrued expenses 37,585 28,201
Net operating loss carryforwards--
Federal and State 349,163 281,160
Alternative minimum tax credit 26,000 26,000
--------- ---------
Total deferred tax assets 2,999,922 2,879,066
Less valuation allowance (1,153,028) (1,299,447)
--------- ---------
Net deferred tax assets 1,846,894 1,579,619
--------- ---------
Deferred tax liabilities:
Fixed assets, due to accelerated
depreciation 843,085 663,981
Other assets, due to pension costs 999,140 906,284
Other 4,669 9,354
--------- ---------
Total deferred tax
liabilities 1,846,894 1,579,619
--------- ---------
Net deferred tax asset $ --- $ ---
========= =========
The net change in the total valuation allowance for the years ended
December 31, 2000 and 1999 was a decrease of $(146,419) and an increase
of $207,237, respectively. In addition, at December 31, 2000, the
Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $600,000 and $2,446,000,
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.
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 $23.00 per month per year of
service, as defined. Additionally, a supplemental non-contributory 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, 2000 and 1999, 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, 2000 and 1999, 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:
2000
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
Benefit obligation at beginning
of year $7,736,476 $2,393,729
Service cost 119,882 78,997
Interest cost 578,487 182,214
Plan amendments --- (187,624)
Actuarial gain (26,209) (46,184)
Benefits paid (605,308) (117,376)
--------- ---------
Benefit obligation at end of year $7,803,328 $2,303,756
========= =========
1999
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
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
========= =========
2000
Pension Other
Change in plan assets Benefits Benefits
------------------------- ----------- ------------
Fair value of plan assets at
beginning of year $9,415,014 $ ---
Actual return on plan assets 234,164 ---
Employer contributions 187,583 117,376
Administrative expenses (138,985) ---
Benefits paid (605,308) (117,376)
--------- ---------
Fair value of plan assets at end
of year $9,092,468 $ ---
========= =========
1999
Pension Other
Change in plan assets Benefits Benefits
------------------------- ----------- ------------
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 $ ---
========= =========
2000
Pension Other
Reconciliation of funded status Benefits Benefits
- ------------------------------- ----------- -------------
Funded status $ 1,289,140 $(2,303,756)
Unrecognized transition obligation 103,558 ---
Unrecognized prior service cost 840,356 1,357,233
Unrecognized actuarial gain (2,900,066) (1,850,993)
--------- ---------
Net amount recognized at year-end $ (667,012) $(2,797,516)
========= =========
1999
Pension Other
Reconciliation of funded status Benefits Benefits
- ------------------------------- ----------- ------------
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)
========= ==========
2000
Amounts recognized in the
consolidated balance sheet Pension Other
consist of: Benefits Benefits
- ------------------------------- ----------- -------------
Prepaid benefit cost(included in
other long-term assets) $ 2,501,603 $ ---
Accrued benefit liability (3,168,615) (2,797,516)
--------- ---------
Net amount recognized at year-end $ (667,012) $(2,797,516)
========= =========
Benefit obligation $ 1,754,621 $ 2,303,756
Projected benefit obligation 1,754,621 N/A
Accumulated benefit obligation 1,653,811 N/A
1999
Amounts recognized in the
consolidated balance sheet Pension Other
consist of: Benefits Benefits
- ------------------------------- ----------- -------------
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
2000
Components of net period benefit Pension Other
cost Benefits Benefits
- ------------------------------- ----------- ------------
Service cost $ 139,882 $ 78,997
Interest cost 578,487 182,214
Expected return on plan assets (779,985) ---
Amortization of transitional
obligation 109,100 ---
Amortization of prior service cost 85,418 165,121
Recognized actuarial gain (257,042) (113,550)
--------- ---------
Net periodic pension (benefit) cost $ (124,140) $ 312,782
========= =========
1999
Components of net period benefit Pension Other
cost Benefits Benefits
- ------------------------------- ----------- ------------
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
- ------------------------------- ----------- -------------
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
========= =========
2000
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
Discount rate 7.75% 7.75%
Expected return on plan assets 8.50% N/A
1999
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
Discount rate 8.00% 8.00%
Expected return on plan assets 8.50% N/A
1998
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
Discount rate 6.75% 6.75%
Expected return on plan assets 8.50% N/A
Assumed health care cost trend
A 7.5% annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2001. 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 2000:
One-Percentage- One-Percentage-
Point Increase Point Decrease
------------- ------------
Effect on postretirement benefit
obligation $ 248,346 $ (208,272)
Effect on total of service and
interest cost components 29,645 (24,244)
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. Effective November 1, 2000, the Company amended and restated
the Savings Plan in its entirety to convert the Savings Plan to a plan
that qualifies and meets the requirements under Section 401(k) of the
Internal Revenue Code. Company contributions charged to operations
under this Plan amounted to approximately $29,933 in 2000, $28,000 in
1999, and $28,000 in 1998.
Included in other liabilities at December 31, 2000 and 1999 is
$669,186 and $810,822, 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, 2000 and 1999). 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 11.
NOTE 7-ACCRUED EXPENSES
Accrued expenses as of December 31, 2000 and 1999 consist of the
following:
2000 1999
------- -------
Commissions $ 151,067 $ 185,114
Payroll 151,708 144,274
Other 434,811 389,738
------- -------
$ 737,586 $ 719,126
======= =======
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 2000, 1999 and 1998
follows:
Acquired Sold Retained in Treasury
---------------- ------------- ------------------
Shares Cost Shares Cost Shares Cost
------ ---- ------ ---- ------ ----
2000 --- $ --- 200 $ 3,450 --- $ ---
1999 --- $ --- --- $ --- --- $ ---
1998 3,602 $ 62,132 3,400 $ 58,650 202 $ 3,482
NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments at
December 31, 2000 and 1999 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 2000 and 1999
aggregated approximately $1,013,000 and $860,000, 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 employment agreements with two officers
requiring annual compensation payments of $200,000 and $150,000,
adjusted biennially for changes in the Consumer Price Index (as
defined). The agreements expire May 6, 2009 and June 30, 2010,
respectively.
NOTE 11-SUBSEQUENT EVENT
As previously reported, the Company was engaged in litigation with
its insurance company over coverage and the amount to be paid with
respect to fire losses to a new dryer on November 1, 1997 and January
30, 1998. On November 14, 2000, the Company and the insurance company
reached a settlement, pursuant to which the insurance company agreed to
pay an additional $2,250,000 to the Company for all claims related to
the fires arising under the policy. On January 24, 2001, the Company
received $2,039,286, which was net of $210,714 due, or potentially due,
to an insurance adjuster. The amount due to the adjuster is in dispute.
The Company and its bank have agreed that $330,814 of the proceeds
received will be restricted for use under the terms of its loan
agreement with the New Jersey Economic Development Authority to pay
costs incurred to repair and make certain improvements to the dryer
damaged in the fires. Such amount was recorded in restricted cash and
other liabilities upon receipt. The balance of the proceeds received
will be recorded as other income in the first quarter of 2001. The
insurance company had previously advanced $1,964,000 to the Company in
1998. As a result, the total amount received under its insurance
coverage is $4,214,000.
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, 2000 and 1999, 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,
2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of
America.
March 9, 2001
Short Hills, New Jersey
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
This 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.
As previously reported, the Company was engaged in litigation with
its insurance company over coverage and the amount to be paid with
respect to fire losses in a new dryer on November 1, 1997 and January
30, 1998. On November 14, 2000, the Company and the insurance company
reached a settlement, pursuant to which the insurance company agreed to
pay an additional $2,250,000 to the Company for all claims related to
the fires arising under the policy. On January 24, 2001, the Company
received $2,039,286, which was net of $210,714 due, or potentially due,
to an insurance adjuster. The amount due to the adjuster is in dispute.
The Company and its bank have agreed that $330,814 of the proceeds
received will be restricted for use under the terms of its loan
agreement with the New Jersey Economic Development Authority to pay
costs incurred to repair and make certain improvements to the dryer
damaged in the fires. Such amount was recorded in restricted cash and
other liabilities upon receipt. The balance of the proceeds received
will be recorded as other income in the first quarter of 2001. The
insurance company had previously advanced $1,964,000 to the Company in
1998. As a result, the total amount received under its insurance
coverage is $4,214,000.
RESULTS OF OPERATIONS 2000-1999
The Company's sales are derived from building material
wholesalers and industrial manufacturers. Net sales in 2000 increased
by $2,726,745 or 10.9% to $27,744,946 from $25,018,201. The increase
is attributable primarily to continued recognition by architects,
builders and consumers of the sound control and light weight qualities
of the Company's millboard and floor system products. Additionally,
sales during the fourth quarter were impacted positively by the
opening of new international markets. However, shipments during the
first two quarters of 1999 were adversely affected by reduced
millboard production due to the overhaul of a millboard production
line.
Gross profit as a percentage of sales increased to 25.2% in 2000
from 22.5% in 1999. The increase resulted primarily from improved
coverage of fixed costs due to increases in sales and decreases 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,
a ten day maintenance shutdown in the third quarter and an increase
in the price of natural gas during the fourth quarter of 2000.
Selling, general and administrative expenses as a percentage of
sales were 24.1% in 2000 as compared to 23.9% in 1999. The relative
percentage of selling, general and administrative expenses increased
primarily in the areas of compensation, workers' compensation costs,
and advertising, partially offset by a reduction in the cost of
depreciation.
Interest income decreased to $65,315 in 2000 as compared to
$79,860 in 1999. The decrease in interest income is attributable
primarily to a change from investing excess cash balances in a money
market fund to being applied against the Company's outstanding demand
line of credit. This change reduced interest income and interest
expense.
Interest expense on debt decreased to $130,003 in 2000 from
$172,718 in 1999. The decrease is due primarily to the change in
investment of excess cash balances as discussed above.
Other income increased to $45,186 in 2000 from $19,033 in 1999
due primarily to increases in the net price and amount of corrugated
paper sold as scrap.
There was no income tax expense in 2000 due to the effect of
temporary differences between book and taxable income and the
utilization of federal and state operating loss carryforwards. The
Company recorded an income tax benefit of $20,514 in 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, net income in 2000 improved to
$313,692 from a net loss of $386,820 in 1999.
RESULTS OF OPERATIONS 1999-1998
Sales in 1999 increased by $715,365 or 2.9% to $25,018,201 from
$24,302,836. 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 to 22.5% in 1999
from 21.7% in 1998. 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 $0.72.
Selling, general and administrative expenses as a percentage of
sales were 23.9% in 1999 as compared to 27.1% 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.
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 $1.6 million in 2000, $2.5 million in 1999, and
$1.5 million in 1998. At December 31, 2000, the Company had working
capital of $1,928,925 as compared to $2,564,212 at December 31, 1999,
a decrease of $635,287.
Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally generated
funds and debt, were $1.5 million in 2000, and $1.3 million in 1999
and 1998. The Company has estimated capital expenditures for 2001 in
the amount of $1.5 million, in part to complete 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, available in
part from the settlement with its insurance carrier, will be expended
to overhaul one of the Company's production lines and install a heavy
duty sanding line and on other replacement projects.
Cash flows from financing activities was ($0.4) million used in
2000 compared to ($2.4) million used in 1999. This reduction in cash
used resulted from paying down short-term debt by $2.0 million in 1999
with no similar amount in 2000.
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 (2.8% to
5.75% in 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 (the
"Amended Agreement"), 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 as of and for the year ended December
31, 2000 and 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 payable monthly at the bank's index rate (9.5% at December 31,
2000) less 0.25%. As of December 31, 2000 and 1999, there were no
amounts 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. The Company believes that the demand note line of credit will
be extended in the normal course of business into 2002.
Management believes that cash flows from operations, coupled
with its bank credit facilities, are adequate for the Company to meet
its obligations throughout 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Certain Hedging
Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activity, an
Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that
all derivative instruments be recorded on the balance sheet at their
respective fair values. SFAS No. 133 and SFAS No. 138 are effective
for all fiscal quarters of all fiscal years beginning after June 30,
2000. The Company adopted SFAS No. 133 January 1, 2001. The Company
presently does not have any derivative financial instruments.
In 2000, the Company adopted the provisions of the FASB's
Emerging Issues Task Force (EITF), Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs," which requires the Company to
report all amounts billed to a customer related to shipping and
handling costs as revenue. The Company has reclassified such cost
amounts, which were previously netted in sales to cost of sales. As
a result of this reclassification, sales and cost of sales were
increased by $541,000 in 2000, $365,000 in 1999 and $387,649 in 1998.
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 was party to a two-year purchase
agreement expiring October 31, 2000. Market conditions in the natural
gas industry caused the Company to incur a material increase in the
cost of this energy resource of approximately 96% effective November
1, 2000. The Company notified its millboard and industrial customers
of an energy surcharge effective with shipments commencing November
27, 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 2000, 1999, and 1998 aggregated
approximately $1,013,000, $860,000 and $1,000,000, respectively. The
contracts expire in 2009.
As previously reported, the Company was engaged in litigation
with its insurance company over coverage and the amount to be paid
with respect to fire losses in a new dryer on November 1, 1997 and
January 30, 1998. On November 14, 2000, the Company and the insurance
company reached a settlement, pursuant to which the insurance company
agreed to pay an additional $2,250,000 to the Company for all claims
related to the fires arising under the policy. On January 24, 2001,
the Company received $2,039,286, which was net of $210,714 due, or
potentially due, to an insurance adjuster. The amount due to the
adjuster is in dispute. The Company and its bank have agreed that
$330,814 of the proceeds received will be restricted for use under the
terms of its loan agreement with the New Jersey Economic Development
Authority to pay costs incurred to repair and make certain
improvements to the dryer damaged in the fires. Such amount was
recorded in restricted cash and other liabilities upon receipt. The
balance of the proceeds received will be recorded as other income in
the first quarter of 2001. The insurance company had previously
advanced $1,964,000 to the Company in 1998. As a result, the total
amount received under its insurance coverage is $4,214,000.
SUMMARIZED (unaudited) QUARTERLY FINANCIAL DATA OF THE COMPANY FOR
THE YEARS 2000 AND 1999 ARE AS FOLLOWS:
(in thousands of dollars except per share data)
2000
-----------------------------------
First Second Third Fourth
----- ----- ----- -----
Net sales $ 6,673 $ 6,712 $ 6,688 $ 7,672
===== ===== ===== =====
Gross profit $ 1,663 $ 1,808 $ 1,531 $ 1,989
===== ===== ===== =====
Net earnings (loss) $ 139 $ 163 $ (248) $ 260
===== ===== ===== =====
Basic and diluted net
earnings (loss)
per common share $ 0.40 $ 0.47 $(0.71) $ 0.74
===== ===== ===== =====
1999
-----------------------------------
First Second Third Fourth
----- ----- ----- -----
Net sales $ 6,589 $ 6,060 $ 6,219 $ 6,150
===== ===== ===== =====
Gross profit $ 1,576 $ 1,461 $ 1,198 $ 1,401
===== ===== ===== =====
Net earnings (loss) $ (84) $ (155) $ (165) $ 17
===== ===== ===== =====
Basic and diluted net
earnings (loss)
per common share $ (0.24) $ (0.45) $(0.47) $ 0.05
===== ===== ===== =====
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HOMASOTE COMPANY
Under date of March 9, 2001, we reported on the consolidated
balance sheets of Homasote Company and subsidiary as of December 31,
2000 and 1999, and the related consolidated statements of operations
and retained earnings, and cash flows for the years then ended, as
contained in the 2000 annual report on Form 10-K. In connection with
our audits of the aforementioned consolidated financial statements,
we also audited the related Schedule of Valuation and Qualifying
Accounts for the years ended December 31, 2000, 1999 and 1998. 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 9, 2001
Short Hills, New Jersey
Schedule II, Valuation and Qualifying Accounts
Years Ended DECEMBER 31, 2000, 1999 and 1998
Homasote Company and Subsidiary
Col A Col B Col C Col D Col E
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,
2000 $51,000 --- --- $51,000
Year ended
December 31,
1999 $42,000 $9,000 --- $51,000
Year ended
December 31,
1998 $59,000 $40,000 $(57,000) $42,000
(a) Principally bad debts written-off, less recoveries.