UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 MARCH 31, 2003
[ ] 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 1-3786
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.)
932 LOWER FERRY ROAD, WEST TRENTON, NJ 08628
(Address of principal executive office) (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(d) 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
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12-b-2 of the Exchange Act).
( )Yes (X)No
At August 20, 2003, 348,799 shares of common stock of the
registrant were outstanding.
Results of Operations
Homasote Company
STATEMENTS OF OPERATIONS
For the three months
ended
March 31,
2003 2002
--------- ---------
(UNAUDITED)
Net sales $ 5,347,641 $ 6,449,335
Cost of sales 4,226,184 5,038,239
--------- ---------
Gross profit 1,121,457 1,411,096
Selling, general and
administrative expenses 1,467,674 1,721,516
--------- ---------
Operating loss (346,217) (310,420)
Other income (expense):
Interest income 1,263 5,317
Interest expense (14,858) (16,798)
Other income 4,778 2,509
--------- ---------
(8,817) (8,972)
--------- ---------
Loss before income
tax expense (355,034) (319,392)
Income tax expense --- ---
--------- ---------
Net loss $ (355,034) $ (319,392)
========= =========
Basic and diluted net loss
per common share $ (1.02) $ (.92)
========== ==========
Weighted average basic and
diluted common shares
outstanding 348,799 348,799
========== ==========
See accompanying notes to unaudited financial statements.
Homasote Company
BALANCE SHEETS
ASSETS
March 31, December 31,
2003 2002
------------ -----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 314,285 $ 210,091
Accounts receivable (net
of allowance for doubtful
accounts of $57,270 in
2003 and $54,270 in 2002) 1,810,831 2,095,099
Inventories 4,033,675 3,417,984
Deferred income taxes 118,147 118,147
Prepaid expenses and
other current assets 438,408 329,559
----------- -----------
Total Current Assets 6,715,346 6,170,880
----------- -----------
Property, plant and
equipment, at cost 42,821,973 42,739,488
Less accumulated
depreciation 32,442,643 32,114,396
----------- -----------
Net property, plant and
equipment 10,379,330 10,625,092
Restricted cash 35,038 34,375
Intangible pension asset 682,855 682,855
Other assets 45,097 47,524
----------- -----------
Total Assets $ 17,857,666 $ 17,560,726
=========== ===========
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2003 2002
------------ -----------
(UNAUDITED)
CURRENT LIABILITIES
Short term debt $ 884,000 $ 597,000
Current installments of
long-term debt 466,251 462,500
Accounts payable 2,687,178 2,138,889
Accrued expenses 446,092 523,992
----------- -----------
Total Current Liabilities 4,483,521 3,722,381
Long-term debt, excluding
current installments 1,277,082 1,395,833
Deferred income taxes 118,147 118,147
Obligations under
benefit plans 6,226,983 6,217,398
----------- -----------
Total Liabilities 12,105,733 11,453,759
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.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 14,272,480 14,627,514
Accumulated other
comprehensive loss (2,080,553) (2,080,553)
----------- -----------
13,262,762 13,617,796
Less cost of common shares in
treasury, 515,196 shares in
2003 and 2002 7,510,829 7,510,829
----------- -----------
Total Stockholders' Equity 5,751,933 6,106,967
----------- -----------
Total Liabilities and
Stockholders Equity 17,857,666 $ 17,560,726
=========== ===========
See accompanying notes to unaudited financial statements.
Homasote Company
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
YEAR ENDED DECEMBER 31, 2002
ADDITIONAL
COMMON PAID IN RETAINED
STOCK CAPITAL EARNINGS
----------- ---------- -----------
Balances at January 1, 2002 $ 172,799 $ 898,036 $15,127,925
Net loss --- --- (500,411)
---------- ---------- ----------
Balances at December 31, 2002 172,799 898,036 14,627,514
Net loss --- --- (355,034)
---------- ---------- ----------
Balances March 31, 2003 $ 172,799 $ 898,036 $14,272,480
========== ========== ==========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
LOSS STOCK EQUITY
----------- ---------- -----------
Balances at January 1, 2002 $ --- $(7,510,829) $ 8,687,931
-----------
Net loss --- --- (500,411)
Net unrealized change in:
Minimum pension liability
adjustment (2,080,553) --- (2,080,553)
-----------
Comprehensive income (2,580,964)
---------- ---------- -----------
Balances at
December 31, 2002 (2,080,553) (7,510,829) 6,106,967
-----------
Net loss --- --- (355,034)
-----------
Comprehensive loss (355,034)
---------- ----------- -----------
Balances at March 31, 2003 $(2,080,553) $(7,510,829) $ 5,751,933
========== =========== ===========
See accompanying notes to unaudited financial statements.
Homasote Company
STATEMENTS OF CASH FLOWS
For the three months
ended
March 31,
2003 2002
----------- -----------
(UNAUDITED)
Cash flows from operating
activities:
Net loss $ (355,034) $ (319,392)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Depreciation and amortization 330,674 326,835
Change in allowance on
accounts receivable 3,000 ---
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable 281,268 (68,982)
Increase in inventories (615,691) (122,102)
Increase in prepaid expenses
and other current assets (108,849) (61,499)
Increase in accounts payable 548,289 436,528
(Decrease) increase in accrued
expenses (77,900) 136,131
Increase in obligations
under benefit plans 9,585 26,359
Decrease in other liabilities --- (69,562)
--------- ----------
Net cash operating activities 15,342 284,316
---------- ----------
Cash flows from investing
activities:
Capital expenditures (82,485) (207,267)
(Increase) decrease in
restricted cash (663) 68,847
---------- ----------
Net cash used in
investing activities (83,148) (138,420)
---------- ----------
Cash flows from financing
activities:
Proceeds from issuance of
short-term debt 287,000 170,000
Repayment of long-term debt (115,000) (111,250)
---------- ---------
Net cash provided by
financing activities: 172,000 58,750
---------- ---------
Net increase in cash and
cash equivalents 104,194 204,646
Cash and cash equivalents
at beginning of period 210,091 927,686
---------- ----------
Cash and cash equivalents
at end of period $ 314,285 $ 1,132,332
========== ==========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 14,858 $ 16,798
========== ==========
See accompanying notes to unaudited financial statements.
NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD
ENDED MARCH 31,2003
Note 1. The unaudited financial information of Homasote Company
as of March 31, 2003 and for the three-month periods
ended March 31, 2003 and 2002 have been prepared in
accordance with accounting principles generally accepted
in the United States of America for interim financial
information and with the instructions of Article 10 of
Regulation S-X. In the opinion of management, all
adjustments (none of which were non-recurring) necessary
for a fair presentation of such periods have been
included. The financial information for the three-month
period ended March 30, 2003 is not necessarily indicative
of the results of operations that might be expected for
the entire year ending December 31, 2003. This unaudited
financial information should be read in conjunction with
the financial statements and footnotes thereto for the
year ended December 31, 2002 included in the Company's
Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
Note 2. INVENTORIES
The following are the major classes of inventories as of
March 31, 2003 and December 31, 2002:
2003 2002
--------- ---------
Finished goods.......$3,383,251 $2,777,248
Work in process...... 55,772 52,484
Raw materials........ 594,652 588,252
--------- ---------
$4,033,675 $3,417,984
========= =========
Inventories include the cost of materials, direct labor
and manufacturing overhead.
Note 3. NET LOSS PER COMMON SHARE
Basic net loss per common share has been computed by
dividing net loss by the weighted average number of
common shares outstanding during the respective periods.
Diluted net loss per share is the same as basic net loss
per common share since the Company has a simple capital
structure with only common stock outstanding in 2003 and
2002.
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 (1.15% at
March 31, 2003 and 1.65% at December 31, 2002).
In connection with the Agreement, the Authority also
entered into a trust indenture with a bank (the "Bank")
to serve as trustee and tender agent for the loan
proceeds. 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 of which $1,743,333 was
outstanding at March 31, 2003. Principal and interest are
payable monthly to the trustee in varying amounts through
2006. The Letter of Credit facility, which was to expire
on November 15, 2003, 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). The Agreement was
amended effective as of November 14, 2002 (the "Amended
Agreement"). The Amended Agreement further provides for
collateralization of the Letter of Credit facility with
substantially all of the Company's assets excluding real
property. The Company was not in compliance with the
minimum tangible net worth and maximum liabilities to
tangible net worth covenants as of December 31, 2002.
This non-compliance was primarily attributable to the
fluctuation in 2002 in accumulated other comprehensive
loss resulting from a significant increase in the minimum
pension liability. On April 29, 2003, the Company
received a waiver of such non-compliance as of December
31, 2002 from the Bank. As of March 31, 2003 the Company
expected not to be in compliance with the maximum
liabilities to tangible net worth covenant. The Company
received a waiver of such non-compliance from the Bank.
On April 29, 2003 the Company received a commitment (the
"Commitment") from the Bank for a prospective amendment
to the definition of equity for purposes of the financial
covenants. In future periods, the definition of tangible
net worth for purposes of covenant calculations will
exclude accumulated other comprehensive income or loss
attributable to the minimum pension liability. The
Commitment further provides for an extension of the
Letter of Credit facility through March 31, 2004,
provided the Company is in compliance with all financial
covenants and certain other conditions as defined. The
Amended Agreement, which was further amended on May 29,
2003 (the "May 2003 Amendment"), revises the definition
of tangible net worth, in accordance with the Commitment
as previously discussed. The May 2003 Amendment also
modifies prospectively the covenants relating to tangible
net worth, cash flow coverage and current ratio. On July
24, 2003, the Company received from the Bank a waiver
with respect to the Company's noncompliance as of June
30, 2003 with the Cash Flow Coverage Ratio. Other than
such noncompliance as of June 30, 2003, management
believes it will be in compliance with the May 2003
Amendment through March 31, 2004.
The Company has a $1.5 million demand note line of credit
agreement with the Bank which had an expiration date of
June 30, 2003. Under the line of credit note, the
Company may borrow up to a specified percentage of
eligible receivables and inventory as defined. Interest
is payable monthly at the Bank's prime rate (4.25% at
March 31, 2003) plus 0.25%. As of March 31, 2003,
$884,000 was outstanding under the line of credit. The
unused credit available under this facility at March 31,
2003 was $616,000. The line of credit note also provides
for an unused line of credit fee of 0.25% per annum. 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 excluding real property. On May 29, 2003 the line
of credit note was amended and restated to provide for an
expiration date of March 31, 2004. All other terms of
the note continued.
The Company is in the process of seeking replacement
financing for its bank credit facilities which expire on
March 31, 2004. Management believes that cash flows from
operations, coupled with its existing and/or replacement
bank credit facilities, will be adequate for the Company
to meet its obligations through 2004. However, there can
be no assurance that the Company will be able to obtain
replacement financing with similar terms to its existing
credit facilities, if at all.
Note 5. The Company is engaged in a dispute with a former energy
supplier regarding the efforts of the supplier to change
the method of pricing. The Company has filed a
declaratory judgment action in the Superior Court of the
State of New Jersey seeking a judgment that the supplier
repudiated the contract with the Company by endeavoring
to implement a method of pricing that was inconsistent
with the provisions of the contract. The defendant has
removed the case to the Federal District Court for the
District of New Jersey. The supplier filed an answer,
affirmative defenses and counterclaim against the
Company, seeking damages of $171,000 plus interest and
attorney's fees for breach of contract of the natural gas
sales contract and for breach of the implied obligation
of good faith and fair dealing as well. The matter was
tried in June, 2003. Post-trial submissions were
submitted on July 25,2003 and August 8, 2003. The
Company believes that the outcome of this dispute will
not have a material effect on the Company's financial
position, results of operations or liquidity.
Note 6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 requires the
Company to record the fair value of an asset retirement
obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement
of tangible long-lived assets that result from the
acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding
asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at
the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the
obligation. The Company adopted Statement No. 143 on
January 1, 2003 and such adoption had no effect on the
Company's financial statements.
In June 2002, the FASB issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities". This Statement requires companies to
recognize costs associated with exit or disposal
activities when such costs are incurred rather than at
the date of a commitment to an exit or disposal plan.
Previous accounting guidance was provided by the Emerging
Issues Task Force ("EITF") pursuant to Issue No. 94-3,
"Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("EITF 94-
3"). Statement No. 146 replaces EITF 94-3. The Company
adopted this Statement on January 1, 2003 and will apply
it prospectively based on future exit or disposal
activity.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities".
Interpretation No. 46 requires a variable interest entity
to be consolidated by a company if that company is
subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or
both. Interpretation No. 46 also requires disclosures
about variable interest entities that a company is not
required to consolidate but in which it has a significant
variable interest. The consolidation requirements of
Interpretation No. 46 apply immediately to variable
interest entities created after January 31, 2003. The
consolidation requirements apply to the Company for
existing entities on July 1, 2003. The Company has
adopted Interpretation No. 46 and such adoption had no
effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others". Interpretation No. 45 elaborates on the
disclosure requirements to be made by a guarantor about
its obligations under certain guarantees it has issued.
It also clarifies that the guarantor is required to
recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation No. 45 is
effective for guarantees issued or modified after
December 31, 2002, and the disclosure requirements are
effective for financial statements for periods ending
after December 15, 2002. The Company has adopted
Interpretation No. 45 and such adoption had no effect on
the Company's financial statements.
FORM 10-Q
HOMASOTE COMPANY
March 31, 2003
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,
international unrest, terrorist acts and other factors;
- competitive factors such as changes in choices regarding
structural building materials by architects and builders
and packing products by industrial firms;
Although the ultimate impact of the above and other factors are
uncertain, these and other factors may cause future earnings to
differ materially from results or outcomes we currently seek or
expect.
This quarterly report should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December
31, 2002.
This Form 10-Q filing was delayed as the result of the need by the
Company to negotiate the modification and extension of its existing
bank arrangements, as described under the "Liquidity and Capital
Resources" section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
The Company's sales are derived from building material wholesalers
and industrial manufacturers. Sales during the three months ended
March 31, 2003 decreased by $1,101,694 or 17.1% to $5,347,641 from
$6,449,335 in the three months ended March 31, 2002. The poor sales
performance in the first quarter is attributable primarily to the
harsh weather conditions experienced in the Northeast and Mid-
Atlantic regions, usually strong markets for the Company's
products, and in part, to the continuation of deteriorated economic
conditions in the packaging industry.
Gross profit as a percentage of sales was 21.0% for the three-month
period ended March 31, 2003, as compared to 21.9% for the three-
month period ended March 31, 2002. Significant reductions in the
cost of labor and associated fringe costs and machinery parts and
supplies as compared to the year earlier period were offset by the
underabsorption of the Company's fixed costs due to the decreased
demand for product.
Selling, general and administrative expenses decreased $253,842
from $1,721,516 for the three months ended March 31, 2002 to
$1,467,674 in the three months ended March 31, 2003, and as a
percentage of sales were 27.5% in 2003 as compared to 26.7% in
2002. The overall decrease in the amount of selling, general and
administrative expenses reflects in part the Company's cost
reduction efforts in response to declining sales. Expense
reductions were achieved principally in the areas of compensation,
advertising and sales incentives.
Interest income decreased to $1,263 for the three-month period
ended March 31, 2003, as compared to $5,317 for the three-month
period ended March 31, 2002. The decrease in interest income is
attributable to lower levels of invested funds and lower prevailing
interest rates.
Interest expense on debt decreased to $14,858 for the three-month
period ended March 31, 2003, as compared to $16,798 for the three-
month period ended March 31, 2002. The decrease is primarily
attributable to reductions in the Company's cost of borrowed funds,
partially offset by the Company's increase in net borrowings.
As a result of the foregoing, net earnings decreased to a loss of
$355,034 for the three-month period ended March 31, 2003, from a
net loss of $319,392 for the three-month period ended March 31,
2002.
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 $15 thousand in the three months ended March
31, 2003 and $284 thousand in the three months ended March 31,
2002.
Working capital was $2.2 million at March 31, 2003, as compared to
$2.4 million at December 31, 2002, a decrease of $0.2 million, due
primarily to the use of funds to finance capital expenditures and
for the replacement of long-term debt with additional short term
debt.
Capital expenditures for new and improved facilities and equipment,
which are financed primarily through internally generated funds and
debt, were $0.1 million in the first quarter of 2003. The Company
has estimated capital expenditures for the remaining nine months of
2003 in the amount of $0.5 million. Such expenditures include the
complete overhaul of a production line mold and other Coe Dryer
related projects, utilizing in part, funds available from the 2001
settlement with its insurance carrier.
Cash flows from financing activities were $0.2 million in the first
quarter of 2003.
The Company is party to a loan agreement (the "Agreement") and
promissory note with the New Jersey Economic Development Authority
(the "Authority"). Under the Agreement, the Authority loaned the
Company $4,140,000 out of the proceeds from the issuance of the
Authority's Economic Growth Bonds (Greater Mercer County Composite
Issue) 1996 Series E (the "Bonds") to be used in connection with
specified capital expenditures described in the Agreement.
Interest is charged at the variable rate of interest due on the
Bonds (1.15% at March 31, 2003 and 1.65% at December 31, 2002).
In connection with the Agreement, the Authority also entered into
a trust indenture with a bank (the "Bank") to serve as trustee and
tender agent for the loan proceeds. 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 of which $1,743,333 was
outstanding at March 31, 2003. Principal and interest are payable
monthly to the trustee in varying amounts through 2006. The Letter
of Credit facility, which was to expire on November 15, 2003,
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). The Agreement
was amended effective as of November 14, 2002 (the "Amended
Agreement"). The Amended Agreement further provides for
collateralization of the Letter of Credit facility with
substantially all of the Company's assets excluding real property.
The Company was not in compliance with the minimum tangible net
worth and maximum liabilities to tangible net worth covenants as of
December 31, 2002. This non-compliance was primarily attributable
to the fluctuation in 2002 in accumulated other comprehensive loss
resulting from a significant increase in the minimum pension
liability. On April 29, 2003, the Company received a waiver of
such non-compliance as of December 31, 2002 from the Bank. As of
March 31, 2003 the Company expected not to be in compliance with
the maximum liabilities to tangible net worth covenant. The
Company received a waiver of such non-compliance from the Bank. On
April 29, 2003 the Company received a commitment (the "Commitment")
from the Bank for a prospective amendment to the definition of
equity for purposes of the financial covenants. In future periods,
the definition of tangible net worth for purposes of covenant
calculations will exclude accumulated other comprehensive income or
loss attributable to the minimum pension liability. The Commitment
further provides for an extension of the Letter of Credit facility
through March 31, 2004, provided the Company is in compliance with
all financial covenants and certain other conditions as defined.
The Amended Agreement, which was further amended on May 29, 2003
(the "May 2003 Amendment"), revises the definition of tangible net
worth, in accordance with the Commitment as previously discussed.
The May 2003 Amendment also modifies prospectively the covenants
relating to tangible net worth, cash flow coverage and current
ratio. On July 24, 2003, the Company received from the Bank a
waiver with respect to the Company's noncompliance as of June 30,
2003 with the Cash Flow Coverage Ratio. Other than such
noncompliance as of June 30, 2003, management believes it will be
in compliance with the May 2003 Amendment through March 31, 2004.
The Company has a $1.5 million demand note line of credit agreement
with the Bank which had an expiration date of June 30, 2003. Under
the line of credit note, the Company may borrow up to a specified
percentage of eligible receivables and inventory as defined.
Interest is payable monthly at the Bank's prime rate (4.25% at
March 31, 2003) plus 0.25%. As of March 31, 2003, $884,000 was
outstanding under the line of credit. The unused credit available
under this facility at March 31, 2003 was $616,000. The line of
credit note also provides for an unused line of credit fee of 0.25%
per annum. 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
excluding real property. On May 29, 2003 the line of credit note
was amended and restated to provide for an expiration date of March
31, 2004. All other terms of the note continued.
The Company is in the process of seeking replacement financing for
its bank credit facilities which expire on March 31, 2004.
Management believes that cash flows from operation, coupled with
its existing and/or replacement bank credit facilities will be
adequate for the Company to meet its obligations through 2004.
However, there can be no assurance that the Company will be able to
obtain replacement financing with similar terms to its existing
credit facilities, if at all.
Management believes that cash flows from operations, coupled with
its bank credit facilities, are adequate for the Company to meet
its obligations through the first quarter of 2004.
During the three-month period ended March 31, 2003, there were no
material changes to the Company's contractual obligations or
commercial commitments discussed in the Company's Annual Report on
Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
On April 30, 2003, the Financial Accounting Standards Board
("FASB") issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". Statement No. 149
amends Statement No. 133 for derivative instruments, including
certain derivative instruments embedded in other contracts and for
hedging activities. Statement No. 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. Statement No. 149
is effective for the Company for contracts entered into or modified
after June 30, 2003. Management believes that Statement No. 149
will not have a material impact on the Company's financial
statements.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity". Statement No. 150 establishes standards
for classification and measurement of certain financial instruments
with characteristics of both liabilities and equity. Management
believes that Statement No. 150 will not have a material impact on
the Company's financial statements.
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.
Management believes the business operations of the Company have
been affected by the general decline in the economy.
OTHER DEVELOPMENTS
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 the Company to
purchase all of the wastepaper offered by the suppliers which is
generally below the Company's normal usage. Purchases in the three
months ended March 31, 2003 and the three months ended March 31,
2001, aggregated approximately $325,000 and $173,000, respectively.
The Company is engaged in a dispute with a former energy supplier
regarding the efforts of the supplier to change the method of
pricing. The Company has filed a declaratory judgment action in the
Superior Court of the State of New Jersey seeking a judgment that
the supplier repudiated the contract with the Company by
endeavoring to implement a method of pricing that was inconsistent
with the provisions of the contract. The defendant has removed the
case to the Federal District Court for the District of New Jersey.
The supplier filed an answer, affirmative defenses and counterclaim
against the Company, seeking damages of $171,000 plus interest and
attorney's fees for breach of contract of the natural gas sales
contract and for breach of the implied obligation of good faith and
fair dealing as well. The matter was tried in June, 2003. Post-
trial submissions were submitted on July 25, 2003 and August 8,
2003. The Company believes that the outcome of this dispute will
not have a material effect on the Company's financial position,
results of operations or liquidity.
The Company is party to an agreement with a contractor for the
construction by the contractor of an on-site co-generation facility
to supply substantially all of the Company's electricity
requirements and thermal energy for the pulping process. The
project cost to the contractor is estimated at approximately $4.2
million. As presently contemplated, the Company would lease the
facility under an operating lease with a term of ten years. The
construction agreement is subject to the Company's obtaining
construction and environmental permits and consummation of a
definitive leasing agreement. The environmental permit application
is currently under review by the New Jersey Department of
Environmental Protection. There are no assurances that such
agreement or lease will be consummated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to
fluctuations in interest rates as the Company seeks debt financing
to sustain its operations.
The information below summarizes the Company's market risk
associated with its debt obligations as of March 31, 2003. 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 March 31, 2003. Changes in the prime
interest rate during fiscal 2003 will have a positive or negative
effect on the Company's interest expense. The Company had
$2,627,333 of debt outstanding as of March 31, 2003. Further
information specific to the Company's debt is presented in note 4
to the unaudited financial statements.
ESTIMATED CARRYING YEAR OF INTEREST
DESCRIPTION FAIR VALUE AMOUNT MATURITY RATE
DEMAND NOTE $ 884,000 $ 884,000 2003 4.5 %
LONG TERM DEBT
INCLUDING CURRENT
INSTALLMENTS 347,500 347,500 2003
477,500 477,500 2004
493,333 493,333 2005
425,000 425,000 2006
_________ _________
$1,743,333 $1,743,333 1.15%
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13-a-15 under the Exchange Act, the Company
evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the
period covered by this report. This evaluation was carried out
under the supervision and with the participation of the Company's
management including the Company's Chief Executive Officer along
with the Company's Chief Financial Officer. Based upon that
evaluation, the Company's Chief Executive Officer along with the
Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been
no material changes in the Company's internal control over
financial reporting or in other factors, which could materially
affect such controls subsequent to the date the Company carried out
its evaluation.
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to
be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in Company reports
filed under the Exchange Act is accumulated and communicated to
management, including the Company's Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions
regarding disclosure.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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,
results of operations or liquidity.
The Company is engaged in a dispute with a former energy supplier
regarding the efforts of the supplier to change the method of
pricing. The Company has filed a declaratory judgment action in the
Superior Court of the State of New Jersey seeking a judgment that
the supplier repudiated the contract with the Company by
endeavoring to implement a method of pricing that was inconsistent
with the provisions of the contract. The defendant has removed the
case to the Federal District Court for the District of New Jersey.
The supplier filed an answer, affirmative defenses and counterclaim
against the Company, seeking damages of $171,000 plus interest and
attorney's fees for breach of contract of the natural gas sales
contract and for breach of the implied obligation of good faith and
fair dealing as well. The matter was tried in June, 2003. Post-
trial submissions were submitted on July 25,2003 and August 8,
2003. The Company believes that the outcome of this dispute will
not have a material effect on the Company's financial position,
results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, as amended.
31.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, as amended.
32.1 Certification of Chief Executive Officer under 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K - A form 8-K dated January 30, 2003,
reporting under item 5, Other Matters, was filed by the Company.
SIGNATURE
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)
/s/ Warren L. Flicker /s/ James M. Reiser
Warren L. Flicker James M. Reiser
Chairman of the Board and Vice President and
Chief Executive Officer Chief Financial Officer
Date: August 20, 2003
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED
I, Warren L. Flicker, certify that:
1. I have reviewed this quarterly report of Form 10-Q of
Homasote Company;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation, and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting, and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: August 20, 2003
By: /s/ Warren L. Flicker
Warren L. Flicker
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED
I, James M. Reiser, certify that:
1. I have reviewed this quarterly report of Form 10-Q of
Homasote Company;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, andother
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-
15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation, and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting, and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls over financial reporting.
Date: August 20, 2003
By: /s/ James M. Reiser
James M. Reiser
Vice-President and
Chief Financial Officer
Exhibit 32.1
CERTIFICATION OF CEO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Homasote Company (the
"Company") on Form 10-Q for the period ended March 31, 2003 as
filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Warren L. Flicker, Chief Executive
Officer of the Company, hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, to the best of my knowledge that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company at the dates and for the periods shown in
such report.
Date: August 20, 2003
By: /s/ Warren L. Flicker
Warren L. Flicker
Chairman of the Board and
Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Homasote Company (the
"Company") on Form 10-Q for the period ended March 31, 2003 as
filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, James M. Reiser, Chief Financial Officer
of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, to the best of my knowledge that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and
(2) The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company at the dates and for the periods shown in
such report.
Date: August 20, 2003
By: /s/ James M. Reiser
James M. Reiser
Vice-President and
Chief Financial Officer