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, 2001
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 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, 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 13, 2002, the Aggregate Market Value of the Voting
Stock held by non-affiliates was $1,966,256.
As of March 13, 2002, there were 348,799 shares of common
stock, $.20 par value, outstanding.
Documents Incorporated by Reference
Homasote Company 2001 Annual Report to Stockholders (Parts II
And IV).
Proxy Statement dated April 3, 2002 to be filed with the
Securities and Exchange Commission within 120 days of December 31,
2001.(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
RISKS
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, FLOOR 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 "LETTER TO
SHAREHOLDERS AND EMPLOYEES" WHICH IS INCORPORATED
HEREIN BY REFERENCE AS PART OF EXHIBIT 13.
(III)RAW MATERIALS
THE COMPANY'S PRIMARY RAW MATERIAL, WASTEPAPER, IS
GENERALLY READILY AVAILABLE FROM TWO SUPPLIERS
WITH WHICH THE COMPANY HAS PURCHASE CONTRACTS THAT
EXPIRE IN 2009.
(IV) PATENTS
THERE ARE NO PATENTS, LICENSES, FRANCHISES OR
CONCESSIONS IMPORTANT TO THE CONDUCT OF THE BUSINESS
OF THE REGISTRANT OR ITS SUBSIDIARY.
(V) SEASONAL BUSINESS
NO MATERIAL PORTION OF THE BUSINESS OF THE
REGISTRANT IS SEASONAL.
(VI) WORKING CAPITAL REQUIREMENTS
THE REGISTRANT BELIEVES THAT ITS OPERATION DOES NOT
REQUIRE ANY UNUSUAL WORKING CAPITAL NEEDS.
AVAILABLE CREDIT FACILITIES AND CASH GENERATED FROM
OPERATIONS ARE SUFFICIENT TO MEET WORKING CAPITAL
REQUIREMENTS. SEE "LIQUIDITY AND CAPITAL RESOURCES"
UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS",
WHICH IS INCORPORATED HEREIN BY REFERENCE AS PART
OF EXHIBIT 13.
(VII)MATERIAL CUSTOMERS
ONE CUSTOMER ACCOUNTED FOR 11% AND 10% OF THE COMPANY'S
SALES IN 2001 AND 2000, RESPECTIVELY, AND 17% AND 12%
OF ACCOUNTS RECEIVABLE AT DECEMBER 31, 2001 AND 2000,
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, 2001, 2000 AND 1999 NO
AMOUNTS WERE SPENT ON RESEARCH AND DEVELOPMENT.
DURING THE YEARS ENDED DECEMBER 31, 2001, 2000 AND
1999 THE REGISTRANT INCURRED QUALITY CONTROL COSTS
OF $93,684, $148,954, AND $84,097, RESPECTIVELY.
(XII)ENVIRONMENTAL PROTECTION
AS OF DECEMBER 31, 2001, 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 2002 FISCAL YEAR.
(XIII)NUMBER OF EMPLOYEES
AS OF DECEMBER 31, 2001, THE REGISTRANT EMPLOYED 213
EMPLOYEES, AS COMPARED TO 229 IN 2000.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS AND EXPORT SALES
FOREIGN SALES, PRIMARILY IN CANADA AND THE UNITED KINGDOM,
ACCOUNTED FOR APPROXIMATELY 13% IN THE YEAR ENDED DECEMBER
31, 2001 AND 11% AND 5% IN THE YEARS ENDED DECEMBER 31, 2000
AND 1999, 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 AT 932
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, 2001, 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 A DRYER USED IN THE
MANUFACTURING PROCESS, 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 2001
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 CONSOLIDATED FINANCIAL DATA
SEE CONSOLIDATED FIVE YEAR HIGHLIGHTS SECTION OF THE
HOMASOTE COMPANY 2001 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 2001 ANNUAL REPORT TO STOCKHOLDERS
INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
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,
2001. 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, 2001. CHANGES IN THE
PRIME INTEREST RATE DURING FISCAL 2002 WILL HAVE A POSITIVE
OR NEGATIVE EFFECT ON THE COMPANY'S INTEREST EXPENSE. THE
COMPANY HAD $2,869,833 OF DEBT OUTSTANDING AT DECEMBER 31,
2001. FURTHER INFORMATION SPECIFIC TO THE COMPANY'S DEBT
IS PRESENTED IN NOTE 4 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
ESTIMATED CARRYING YEAR OF INTEREST
DESCRIPTION FAIR VALUE AMOUNT MATURITY RATE
DEMAND NOTE $ 564,000 $ 564,000 2002 4.5 %
LONG TERM DEBT
INCLUDING CURRENT
INSTALLMENTS $ 447,500 $ 447,500 2002
462,500 462,500 2003
477,500 477,500 2004
493,333 493,333 2005
425,000 425,000 2006
_________ _________
$ 2,305,833 $2,305,833 1.60%
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS OF THE HOMASOTE COMPANY
2001 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 3, 2002, 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 2 58
PETER J. MCELVOGUE PRESIDENT 7/1/00 1 39
(2)
JOSEPH A. BRONSARD EXECUTIVE VICE
(3) PRESIDENT 1/01/95 6 68
JAMES M. REISER VICE PRESIDENT 3/01/99 3 59
(4) AND CHIEF
FINANCIAL
OFFICER
JENNIFER D. BARTKOVICH
(5) SECRETARY 5/03/01 0 33
(1) EMPLOYED BY THE COMPANY SINCE 1965.
(2) EMPLOYED BY THE COMPANY SINCE 2000.
(3) EMPLOYED BY THE COMPANY SINCE 1968. Retired 12/31/01.
(4) EMPLOYED BY THE COMPANY SINCE 1999.
(5) EMPLOYED BY THE COMPANY SINCE 2000.
(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 3, 2002, 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 3, 2002, 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 3, 2002, 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, 2001, 2000 AND
1999 INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2001 AND
2000 INCORPORATED HEREIN BY REFERENCE AS PART OF
EXHIBIT 13.
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 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, 2001, 2000 AND 1999
NO OTHER SCHEDULES ARE REQUIRED.
(3) EXHIBITS
3 ARTICLES OF INCORPORATION AND BYLAWS*
13 HOMASOTE COMPANY 2001 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, 2001.
*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 29, 2002 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 29, 2002
& DIRECTOR
PETER J. MCELVOGUE PRESIDENT MARCH 29, 2002
JAMES M. REISER VICE PRESIDENT, MARCH 29, 2002
CFO & DIRECTOR
IRVING FLICKER CHAIRMAN EMERITUS
& DIRECTOR MARCH 29, 2002
JOSEPH A. BRONSARD DIRECTOR MARCH 29, 2002
MICHAEL FLICKER DIRECTOR MARCH 29, 2002
IRENE T. GRAHAM DIRECTOR MARCH 29, 2002
PETER N. OUTERBRIDGE DIRECTOR MARCH 29, 2002
CHARLES A. SABINO DIRECTOR MARCH 29, 2002
NORMAN SHARLIN DIRECTOR MARCH 29, 2002
TO SHAREHOLDERS AND EMPLOYEES
We began 2001 with anticipated steady growth and an upbeat mode.
Our 440 Sound Barrier Floor Systems were being widely accepted by
builders of multiple dwellings. Until late spring, we shipped our 440
Sound Barrier product at a steady pace to various locales across the
country. Our multi-ply decking (4 Way Floor Deck) also started to
gain acceptance with these same builders in mid-America.
By late June, we started to see a decline in orders for these and
other products due to the recession. This softness in sales continued
until the tragedy that changed our country. Following 9/11, there was
a drop in business from which we have yet to fully recover.
During the same period a large export customer stopped purchasing
our product due to their purchase and conversion of a plant to produce
their own product line of display and pin boards. We feel that this
market is large enough for us to enter and have signed on two
distributors to represent us.
Foam sales for the year were up; this can be attributed to new
pricing which includes freight and a sustained effort to stay
competitive.
The Pak-line division, which supplies cushioning and packaging
products to customers around the globe, showed sharp declines in sales
related to a downturn in the appliance industry and the overall
recession in manufacturing. One of our principal customers closed
plants and replaced our product.
The steel separator business showed increases in export sales but
was unable to offset declines domestically. The glass separator
business increased both domestically and overseas. A new glass
separator product, StapleSafe (patent pending) is capturing the
attention of glass manufacturers around the world.
Net sales for 2001 were $25,721,385 versus 2000 sales of
$27,744,946, a decrease of $2,023,561 or 7.3%. Net earnings for the
year were $1,554,771, resulting in net earnings per common share of
$4.46. Net income includes other income of $1,708,472 from an
insurance settlement. Net working capital was $3,089,004, an increase
of $1,160,079 from the previous year.
Our 2001 retirees included: Joseph A. Bronsard, Angel Cortes,
Charles Downs, Carl Good and Wayne Tettemer. Best wishes for long and
happy retirement to each of the employees who left us in 2001.
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
2001 (a)
---------
Net sales $ 25,721,385
Depreciation and amortization $ 1,279,645
Net earnings (loss) $ 1,554,771
Common shares outstanding
(weighted average basic and diluted) 348,799
Basic and diluted net earnings
(loss) per common share $ 4.46
Dividends-declared and paid $ 34,880
Dividends per share $ .10
Working capital $ 3,089,004
Working capital ratio 1.9:1
Capital expenditures $ 1,355,098
Total assets $ 20,395,447
Long-term debt, excluding current
portion $ 1,858,333
Stockholders' equity $ 8,687,931
Common shares outstanding 348,799
Per share book value of common stock $ 24.91
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
Homasote Company and Subsidiary
Consolidated Five Year Highlights
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
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
Homasote Company and Subsidiary
Consolidated Five Year Highlights
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
(a) Net income and per share amounts include $1,708,472 related to an
insurance settlement.
TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON
CASH DIVIDENDS
Quarterly cash dividends for the last two years were as follows:
Quarter 2001 2000
---- ----
First $ 0.05 $ 0.00
Second 0.05 0.00
Third 0.00 0.05
Fourth 0.00 0.05
---- ----
$ 0. $ 0.10
STOCK PRICES
Stock prices for the Company's Common Stock for the last two years
were as follows:
2001 2000
Quarter High Low High Low
----- ----- ----- -----
First $ 9.50 $ 9.13 $ 8.50 $ 5.87
Second $ 11.25 $ 9.25 $ 9.00 $ 5.00
Third $ 12.00 $ 9.90 $ 15.00 $ 8.50
Fourth $ 11.50 $ 10.10 $ 14.00 $ 8.50
The Common Stock of the Company is traded over-the-counter.
The number of Stockholders of record of the Company at December 31,
2001 and 2000 is 223 and 229, respectively.
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Years ended December 31
2001 2000 1999
--------- ---------- ---------
Net sales $ 25,721,385 $ 27,744,946 $25,018,201
Cost of sales 19,608,879 20,978,855 19,570,673
---------- ---------- ----------
Gross profit 6,112,506 6,766,091 5,447,528
Selling, general and
administrative expenses 6,270,149 6,460,247 5,786,887
--------- ---------- ----------
Operating (loss) income (157,643) 305,844 (339,359)
Other income (expense):
Gain on sale of assets 13,600 27,350 5,850
Interest income 75,962 65,315 79,860
Interest expense (102,212) (130,003) (172,718)
Insurance settlement 1,708,472 --- ---
Other income 16,592 45,186 19,033
---------- ---------- ----------
Earnings (loss) before
income tax benefit 1,554,771 313,692 (407,334)
Income tax benefit --- --- (20,514)
---------- ---------- ----------
Net earnings (loss) 1,554,771 313,692 (386,820)
Retained earnings at
beginning of year 13,608,034 13,329,222 13,716,042
Less dividends declared and
paid (0.10 per share
in 2001 and 2000) (34,880) (34,880) ---
---------- ---------- ----------
Retained earnings at
end of year $ 15,127,925 $ 13,608,034 $13,329,222
========== ========== ==========
Basic and diluted net
earnings (loss) per
common share $ 4.46 $ .90 $ (1.11)
========== ========== ==========
Weighted average basic and
diluted common shares
outstanding 348,799 348,799 348,599
========== ========== ==========
See accompanying notes to consolidated financial statements.
Homasote Company and Subsidiary
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, December 31,
2001 2000
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 927,686 $ 56,204
Accounts receivable (net
of allowance for doubtful
accounts of $61,392 in 2001
and $51,392 in 2000) 1,592,103 2,288,016
Inventories 3,506,725 2,924,459
Deferred income taxes 190,017 29,369
Prepaid expenses and
other current assets 255,707 242,523
------------ -----------
Total Current Assets 6,472,238 5,540,571
------------ -----------
Property, plant and
equipment, net 11,044,361 10,942,368
Restricted cash 223,468 691,778
Prepaid benefit plan costs 2,608,035 2,501,603
Other assets 47,345 73,885
------------ -----------
$ 20,395,447 $ 19,750,205
============ ===========
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
2001 2000
------------ -----------
CURRENT LIABILITIES:
Short term debt $ 564,000 $ ---
Current installments of
long-term debt 447,500 432,500
Accounts payable 1,895,924 2,441,560
Accrued expenses 475,810 737,586
------------ -----------
Total Current Liabilities 3,383,234 3,611,646
Long-term debt, excluding
current installments 1,858,333 2,305,833
Deferred income taxes 190,017 29,369
Obligations under
benefit plans 6,083,758 5,966,131
Other liabilities 192,174 669,186
------------ -----------
Total Liabilities 11,707,516 12,582,165
------------ -----------
COMMITMENTS AND CONTINGENCIES
(note 10)
STOCKHOLDERS' EQUITY
Common stock, par value $0.20
per share; Authorized
1,500,000 shares;
Issued 863,995 shares,
outstanding 348,799, net
of treasury shares 172,799 172,799
Additional paid-in capital 898,036 898,036
Retained earnings 15,127,925 13,608,034
------------ -----------
16,198,760 14,678,869
Less cost of common shares in
treasury, 515,196 shares in
2001 and 2000
7,510,829 7,510,829
------------ -----------
Total Stockholders' Equity 8,687,931 7,168,040
------------ -----------
$ 20,395,447 $ 19,750,205
============ ===========
See accompanying notes to consolidated financial statements.
Homasote Company and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2001 2000 1999
----------- ---------- -----------
Cash flows from operating
activities:
Net earnings (loss) $1,554,771 $ 313,692 $ (386,820)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating
activities:
Depreciation and amortization 1,279,645 1,262,672 1,533,583
Gain on disposal of fixed
assets (13,600) (27,350) (5,850)
Deferred income taxes --- --- 117,660
Changes in assets and
liabilities:
Decrease (increase) in
accounts receivable, net 695,913 (257,926) (132,186)
(Increase) decrease in
inventories (582,266) 56,511 847,847
(Increase) decrease in prepaid
expenses and other current
assets (13,184) 41,957 (55,735)
Increase in prepaid benefit
plan costs (106,432) (235,890) (277,557)
Decrease in refundable
income taxes --- --- 218,377
(Decrease) increase in accounts
payable (545,636) 427,137 610,702
(Decrease) increase in accrued
expenses (261,776) 18,460 (28,024)
Increase in obligations under
benefit plans 117,627 119,573 263,022
(Decrease) increase in other
liabilities (477,012) (141,636) (188,854)
---------- ---------- ---------
Net cash provided by operating
activities 1,648,050 1,577,200 2,516,165
---------- ---------- ---------
Cash flows from investing
activities:
Proceeds from sale of
equipment 13,600 27,350 5,850
Capital expenditures (1,355,098) (1,519,990) (1,282,412)
Decrease in restricted cash 468,310 128,845 342,978
---------- ---------- ---------
Net cash used in investing
activities (873,188) (1,363,795) (933,584)
---------- ---------- -----------
Cash flows from financing
activities:
Proceeds from (repayment of)
short-term debt 564,000 --- (2,000,000)
Repayment of long-term debt (432,500) (417,500) (406,667)
Dividends declared and paid (34,880) (34,880) ---
Proceeds from sale of
treasury stock --- 3,450 ---
---------- ---------- ----------
Net cash provided by (used in)
financing activities: 96,620 (448,930) (2,406,667)
---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents 871,482 (235,525) (824,086)
Cash and cash equivalents
at beginning of year 56,204 291,729 1,115,815
---------- ---------- ---------
Cash and cash equivalents
at end of year $ 927,686 $ 56,204 $ 291,729
========== ========== =========
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 102,212 $ 130,003 $ 172,718
========= ========= =========
See accompanying notes to consolidated financial statements.
Homasote Company and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
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 2001
were distributed as follows: Building material wholesalers and
contractors, approximately 69%; industrial manufacturers, approximately
31%; in 2000, building material wholesalers and contractors,
approximately 71%; industrial manufacturers, approximately 29%; in 1999,
building material wholesalers and contractors, approximately 76%;
industrial manufacturers, approximately 24%. 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, 2001 and 2000,
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 title and risk of loss pass to the buyer.
The Company generally has no obligations after the product is shipped
except for routine and customary warranties. Consequently, the point at
which the Company recognizes revenue is subject to virtually no judgment
and subjectivity.
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 2001,
2000 and 1999.
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 abroad. Foreign sales, primarily in Canada and the United Kingdom,
accounted for approximately 13% in the year ended December 31, 2001 and
11% and 5% in the years ended December 31, 2000 and 1999, respectively,
of the Company's sales. One customer accounted for 11%, 10% and 11% of
the Company's sales in 2001, 2000 and 1999, respectively, and 17%, 12%,
and 11% of accounts receivable at December 31, 2001, 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 of a particular customer or
the local economy 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Certain Hedging Activities ("SFAS 133"). In
June 2000 the FASB issued Statement of Financial Accounting Standards
No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activity, an Amendment of SFAS 133 (SFAS 138). 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 and SFAS
No. 138 on January 1, 2000. The adoption of these pronouncements has
not had a material effect on the Company's consolidated financial
statements.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations ("SFAS 141") and Statement No.
142, Goodwill and Other Intangible Assets ("SFAS 142") and in August
2001 the FASB issued statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS 144"). SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated or completed after June 30, 2001. SFAS 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
SFAS 142 requires, commencing January 1, 2002, that goodwill and
intangible assets with indefinite useful lives no longer be amortized.
Instead, they will be tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 will also require
that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS 144. The
Company has no goodwill or intangible assets. Consequently, the
adoption of these standards had no effect on the Company's consolidated
financial statements.
The Company has 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 as
revenue. The Company reports all costs incurred for shipping and
handling as cost of goods sold. The Company has reclassified certain
costs which were previously included in selling, general and
administrative expenses to cost of sales. As a result of this
reclassification, selling, general and administrative expenses in 2000
and 1999 were reduced by, and cost of sales was increased by $225,000
and $188,000, respectively.
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 2000
and 1999 financial statements in order to conform with the 2001
presentation.
NOTE 2-INVENTORIES
The following are the major classes of inventories as of
December 31, 2001 and 2000:
2001 2000
--------- ---------
Finished goods $ 2,670,284 $ 1,996,746
Work in process 93,103 66,991
Raw materials 743,338 860,722
--------- ---------
$ 3,506,725 $ 2,924,459
========= =========
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
2001 2000 Useful Lives
---------- ---------- ------------
Land $ 591,492 $ 591,492
Buildings and additions 9,057,465 8,770,539 10-50 years
Machinery and equipment 29,862,918 29,019,920 5-20 years
Office equipment 1,435,474 1,358,858 3-10 years
Automotive equipment 328,005 459,709 3-5 years
Construction in progress 694,187 545,628
---------- ----------
41,969,541 40,746,146
Less accumulated
depreciation 30,925,180 29,803,778
---------- ----------
$ 11,044,361 $ 10,942,368
========== ==========
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 (1.1% to 4.3 % in 2001).
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 of
which $2,305,833 was outstanding at December 31, 2001. 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, 2001. 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, 2001 and 2000 was $2,305,833 and
$2,738,333, respectively. The aggregate maturities of long-term debt
for each of the five years subsequent to December 31, 2001, are as
follows: 2002, $447,500; 2003, $462,500; 2004, $477,500; 2005,
$493,333; 2006, $425,000.
The Company had an unsecured demand note line of credit agreement
with a bank which expired July 31, 2001. The line of credit was renewed
in the amount of $1.0 million and expires July 31, 2002. On September
10, 2001, the amount of the line of credit was amended to $1.5 million.
Interest is payable monthly at the bank's prime rate (4.75% at December
31, 2001) less 0.25%. As of December 31, 2001 and 2000, $564,000 and
$0, respectively, was outstanding under the line of credit. The unused
credit available under this facility at December 31, 2001 was $936,000.
Additionally, the amended line of credit provides for an unused line 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. The Company believes that the
demand note line of credit will be extended in the normal course of
business into 2003.
Total interest costs incurred during 2001, 2000 and 1999 were
approximately $102,212, $130,000 and $173,000, respectively.
NOTE 5-INCOME TAXES
Income tax benefit is comprised of the following:
2001 2000 1999
------- ------- -------
Current:
Federal $ --- $ --- $ (70,998)
State --- --- (67,176)
------- ------- -------
--- --- (138,174)
------- ------- -------
Deferred:
Federal --- --- 103,911
State --- --- 13,749
------- ------- -------
--- --- 117,660
------- ------- -------
$ --- $ --- $ (20,514)
======= ======= =======
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:
2001 2000 1999
------- ------- -------
Computed "expected" tax
benefit $ 528,622 $ 106,655 $(138,494)
State income taxes (net of
Federal income tax benefit) 97,554 21,776 (35,262)
Change in valuation allowance (655,943) (146,419) 207,237
Reversal of prior year
overaccrual of Federal tax --- --- (70,998)
Other 29,767 17,988 17,003
------- ------- -------
$ --- $ --- $ (20,514)
======= ======= =======
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:
2001 2000
------- -------
Deferred tax assets:
Accounts receivable, due to allowance
for doubtful accounts $ 24,520 $ 20,557
Inventories 154,969 182,555
Other liabilities, principally due to
supplemental pension and post-
retirement costs 2,431,979 2,384,062
Nondeductible accrued expenses 48,233 37,585
Net operating loss carryforwards--
Federal and State 521,556 349,163
Alternative minimum tax credit 26,000 26,000
--------- ---------
Total deferred tax assets 3,207,257 2,999,922
Less valuation allowance (497,085) (1,153,028)
--------- ---------
Net deferred tax assets 2,710,172 1,846,894
--------- ---------
Deferred tax liabilities:
Fixed assets, due to accelerated
depreciation 1,668,416 843,085
Other assets, due to pension costs 1,041,756 999,140
Other --- 4,669
--------- ---------
Total deferred tax
liabilities 2,710,172 1,846,894
--------- ---------
Net deferred tax asset $ --- $ ---
========= =========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment.
The net change in the total valuation allowance for the years ended
December 31, 2001 and 2000 was a decrease of $(655,943) and a decrease
of ($146,419), respectively. In addition, at December 31, 2001, the
Company has net operating loss carryforwards for federal and state
income tax purposes of approximately $1,031,000 and $2,877,000,
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, 2001 and 2000, 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, 2001 and 2000, 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:
2001
Pension Other
Change in benefit obligation Benefits Benefits
---------------------------- ----------- ------------
Benefit obligation at beginning
of year $7,803,328 $2,303,756
Service cost 125,035 60,956
Interest cost 590,268 173,587
Plan amendments --- ---
Actuarial gain 505,257 107,581
Benefits paid (609,874) (136,926)
--------- ---------
Benefit obligation at end of year $8,414,014 $2,508,954
========= =========
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
========= =========
2001
Pension Other
Change in plan assets Benefits Benefits
------------------------- ----------- ------------
Fair value of plan assets at
beginning of year $9,092,468 $ ---
Actual return on plan assets (429,232) ---
Employer contributions 171,172 136,926
Administrative expenses (49,060) ---
Benefits paid (609,874) (136,926)
--------- ---------
Fair value of plan assets at end
of year $8,175,474 $ ---
========= =========
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 $ ---
========= =========
2001
Pension Other
Reconciliation of funded status Benefits Benefits
- ------------------------------- ----------- ------------
Funded status $ (238,540) $(2,508,954)
Unrecognized transition obligation (5,543) ---
Unrecognized prior service cost 754,938 1,214,609
Unrecognized actuarial gain (1,052,819) (1,639,414)
--------- ----------
Net amount recognized at year-end $ (541,964) $ (2,933,759)
========= ==========
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)
========= =========
2001
Amounts recognized in the
consolidated balance sheet Pension Other
consist of: Benefits Benefits
- ------------------------------- ----------- -------------
Prepaid benefit cost $ 2,608,035 $ ---
Accrued benefit liability (3,149,999) (2,933,759)
--------- ---------
Net amount recognized at year-end $ (541,964) $ (2,933,759)
========= =========
Benefit obligation $ 1,993,529 $ 2,508,954
Projected benefit obligation 1,993,529 N/A
Accumulated benefit obligation 1,775,527 N/A
2000
Amounts recognized in the
consolidated balance sheet Pension Other
consist of: Benefits Benefits
- ------------------------------- ----------- -------------
Prepaid benefit cost $ 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
2001
Components of net period benefit Pension Other
cost Benefits Benefits
- ------------------------------- ----------- -------------
Service cost $ 180,035 $ 60,956
Interest cost 590,268 173,587
Expected return on plan assets (749,370) ---
Amortization of transitional
obligation 109,101 ---
Amortization of prior service cost 85,418 142,624
Recognized actuarial gain (169,328) (103,998)
--------- ---------
Net periodic pension (benefit) cost $ 46,124 $ 273,169
========= =========
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
========= =========
2001
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
Discount rate 7.25% 7.25%
Expected long-term
return on plan assets 8.50% N/A
2000
Weighted-Average Assumptions as Pension Other
of December 31 Benefits Benefits
- ------------------------------- ----------- ------------
Discount rate 7.75% 7.75%
Expected long-term
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 long-term
return on plan assets 8.50% N/A
Assumed health care cost trend
A 7.0% annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2002. 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 2001:
One-Percentage- One-Percentage-
Point Increase Point Decrease
------------- ------------
Effect on post-retirement benefit
obligation $ 282,959 $ (236,586)
Effect on total of service and
interest cost components 32,941 (26,822)
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 $60,162 in 2001, $29,933 in
2000 and $28,000 in 1999.
Included in other liabilities at December 31, 2001 and 2000 is
$192,174 and $669,186, respectively, of monies received by the Company
in January 2001 and December 1998 from its insurance company related to
certain equipment (dryer) fires (included in restricted cash in the
accompanying consolidated balance sheet at December 31, 2001 and 2000).
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 certain equipment (dryer) damaged in
the fires described in note 11.
NOTE 7-ACCRUED EXPENSES
Accrued expenses as of December 31, 2001 and 2000 consist of the
following:
2001 2000
------- -------
Commissions $ 80,281 $ 151,067
Payroll 131,724 151,708
Other 263,805 434,811
------- -------
$ 475,810 $ 737,586
======= =======
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 2001, 2000 and 1999
follows:
Acquired Sold Retained in Treasury
---------------- ------------- ------------------
Shares Cost Shares Cost Shares Cost
------ ---- ------ ---- ------ ----
2001 --- $ --- --- $ --- --- $ ---
2000 --- $ --- 200 $3,450 --- $ ---
1999 --- $ --- --- $ --- --- $ ---
NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments,
including Short-term Debt, at December 31, 2001 and 2000 approximate
fair value because of the short maturity of those instruments and with
respect to the Bonds and Short-term Debt (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 the Company to purchase all of the wastepaper offered
by the suppliers which is generally below the Company's normal usage.
Purchases in 2001, 2000 and 1999 aggregated approximately $844,000,
$936,000 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 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 proceedings are in the
discovery stage, which is nearing completion. The Company does not
anticipate that the outcome of this dispute will have a material affect
on the consolidated financial statements.
The Company is a party to employment agreements with two officers
requiring aggregate annual compensation payments of $350,000 adjusted
biennially for changes in the Consumer Price Index (as defined). The
agreements expire May 6, 2009 and June 30, 2010, respectively.
NOTE 11-INSURANCE SETTLEMENT
As previously reported, on January 24, 2001, the Company received
$2,039,286 related to an insurance settlement, 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 agreed that
$330,814 of the proceeds received are 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, $1,708,472, has been recorded under other income. The Company
is in the process of reinvesting the proceeds of this settlement in like
kind assets (as defined by the Internal Revenue Code) and, as such, the
proceeds are not currently taxable.
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, 2001 and 2000, 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,
2001. 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, 2001 and 2000, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of
America.
KPMG LLP
March 8, 2002
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;
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.
RESULTS OF OPERATIONS 2001-2000
The Company's sales are derived from building material wholesalers
and industrial manufacturers. Net sales in 2001 decreased by $2,023,561
or 7.3% to $25,721,385 from $27,744,946. The decrease is attributable
primarily to deteriorating economic conditions in the building products
and packaging industries. Additionally, the implementation of a
necessary 7% energy surcharge by the Company effective for shipments
during the first seven months of 2001 encountered significant resistance
from millboard and industrial distributors, retailers and end users. In
the industrial division, the energy surcharge and other price
adjustments adversely affected the specification of Homasote in
packaging products, principally major appliances. A key industrial
account of the Company that supplies the appliance industry closed
several of its manufacturing facilities which also contributed to the
shortfall in sales. The severe downturn in the steel industry,
partially due to the impact of imports, resulted in reduced sales of
steel separators. Lower sales in the fourth quarter of 2001 as compared
to 2000 were the result of factors discussed above as well as reductions
of customer inventory levels in response to economic conditions and the
cessation of sales to an international customer.
Gross profit as a percentage of sales decreased to 23.8% in 2001 from
24.4% in 2000. The decrease resulted primarily from increased energy
costs in the first quarter of 2001, partially offset by the energy
surcharge discussed above, and extended maintenance shutdowns of a
production line in both the first and third quarters. Increased
productivity and efficiencies realized from the production line
overhauls were partially offset by increases in wage rates and health
and general insurance costs.
Selling, general and administrative expenses decreased $190,098 from
$6,460,247 in 2000 to $6,270,149 in 2001, and as a percentage of sales
were 24.4% in 2001 as compared to 23.3% in 2000. The increase in the
relative percentage of selling, general and administrative expenses is
due primarily to the lower level of sales in 2001. Decreases in the
level of sales agent commission costs, Company-placed advertising and
customer incentive programs were partially offset by increases in the
cost of compensation, retirement benefits and a new cooperative
advertising program.
Interest income increased to $75,962 in 2001 as compared to $65,315
in 2000. The increase in interest income is attributable primarily to
the earnings from an investment of funds received in the insurance
settlement discussed elsewhere in this discussion and analysis.
Interest expense on debt decreased to $102,212 in 2001 from $130,003
in 2000. 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 previously reported, on January 24, 2001, the Company received
$2,039,286 related to an insurance settlement, 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 agreed that
$330,814 of the proceeds received are 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, $1,708,472, has been recorded under other income. The Company
is in the process of reinvesting the proceeds of this settlement in like
kind assets (as defined by the Internal Revenue Code) and, as such, the
proceeds are not currently taxable.
Other income decreased to $16,592 in 2001 from $45,186 in 2000 due
primarily to decreases in the net price of corrugated paper sold as
scrap.
There was no income tax expense in 2001 due to a decrease in the
deferred tax valuation allowance and the utilization of federal and
state operating loss carryforwards.
As a result of the foregoing, net income in 2001 improved to
$1,554,771 from $313,692 in 2000.
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 24.4% in 2000 from
21.8% 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 23.3% in 2000 as compared to 23.1% 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.
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 2001 and 2000, and $2.5 million in 1999. At
December 31, 2001, the Company had working capital of $3,089,004 as
compared to $1,928,925 at December 31, 2000, an increase of $1,160,079.
Capital expenditures for new and improved facilities and equipment,
which are financed primarily through internally generated funds and
debt, were $1.4 million in 2001, $1.5 million in 2000 and $1.3 million
in 1999. The Company has estimated capital expenditures for 2002 in the
amount of $1.1 million, in part to upgrade the Company's computer
hardware and software systems and implement other manufacturing
equipment replacement and improvement projects. Additional funds,
available in part from the settlement with its insurance carrier, will
be expended to install an automated feeder system on the primary saw,
complete the overhaul of a production line mold and on other Coe dryer
related projects.
Cash flows from financing activities was $.1 million provided in 2001
compared to ($0.4) million used in 2000, primarily as a result of
proceeds of short-term debt of $.6 million.
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 (1.1% to 4.3% in 2001).
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 of
which $2,305,833 was outstanding at December 31, 2001. 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, 2001 and 2000. The Amended
Agreement further provides for collateralization of the Letter of Credit
facility by substantially all of the Company's assets.
The Company had an unsecured demand note line of credit agreement with
a bank which expired July 31, 2001. The line of credit was renewed in
the amount of $1.0 million and expires July 31, 2002. On September 10,
2001, the amount of the line of credit was amended to $1.5 million.
Interest is payable monthly at the bank's prime rate (4.75% at December
31, 2001) less .25%. As of December 31, 2001 and 2000, $564,000 and $0,
respectively, was outstanding under the line of credit. The unused
credit available under this facility at December 31, 2001 was $936,000.
Additionally, the amended line of credit provides for an unused line 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. 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 through 2003. The Company utilizes long-term debt to
finance discretionary capital expenditures.
Disclosures About Contractual Obligations and Commercial Commitments:
Cash Payments Due by Period
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
------- ------- ------- ------- -------
Short-term debt $ 564,000 $ 564,000 $ --- $ --- $ ---
Long-term debt
including
current
installments 2,305,833 447,500 940,000 918,333 ---
Employment
contracts 2,742,000 350,000 700,000 700,000 992,000
--------- --------- --------- --------- ----------
$5,611,833 $1,361,500 $1,640,000 $1,618,333 $ 992,000
In addition to the aforementioned contractual obligations and commercial
commitments, the Company has certain benefit plan obligations (see note
6) the timing of which is presently unknown and is contingent upon the
retirement dates of the respective participants.
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 the Company to purchase all of the
wastepaper offered by the suppliers which is generally below the
Company's normal usage. Purchases in 2001, 2000 and 1999 aggregated
approximately $844,000, $936,000 and $860,000, respectively. The
contracts expire in 2009.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations ("SFAS 141") and Statement No.
142, Goodwill and Other Intangible Assets ("SFAS 142") and in August
2001 the FASB issued statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS 144"). SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated or completed after June 30, 2001. SFAS 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
SFAS 142 requires, commencing January 1, 2002, that goodwill and
intangible assets with indefinite useful lives no longer be amortized.
Instead, they will be tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 will also require
that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS 144. The
Company has no goodwill or intangible assets. Consequently, the
adoption of these standards had no effect on the Company's consolidated
financial statements.
The Company has 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 as
revenue. The Company reports all costs incurred for shipping and
handling as cost of goods sold. The Company has reclassified certain
costs which were previously included in selling, general and
administrative expenses to cost of sales. As a result of this
reclassification, selling, general and administrative expenses in 2000
and 1999 were reduced by, and cost of sales was increased by $225,000
and $188,000, respectively.
CRITICAL ACCOUNTING POLICY
Revenue Recognition: Revenue from product sales is recognized when
the related goods are shipped and title and risk of loss pass to the
buyer. The Company generally has no obligations after the product is
shipped except for routine and customary warranties. Consequently, the
point at which the Company recognizes revenue is subject to virtually no
judgement and subjectivity.
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 that has been accelerated by the
terrorist attacks of September 11, 2001.
OTHER DEVELOPMENTS
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. Upon renewal, 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. Effective May 1, 2001 the Company contracted with
its energy suppliers to ensure a constant supply of these resources and
enable product pricing to remain at the surcharge inclusion levels. A
reduction in the cost of natural gas and realized production
efficiencies are reflected in revised prices for most of the Company's
products which were effective July 30, 2001.
SUMMARIZED (unaudited) QUARTERLY FINANCIAL DATA OF THE COMPANY FOR THE
YEARS 2001 AND 2000 ARE AS FOLLOWS:
(in thousands of dollars except per share data)
2001
-----------------------------------
First Second Third Fourth
----- ----- ----- -----
Net sales $ 6,868 $ 6,779 $ 6,415 $ 5,659
===== ===== ===== =====
Gross profit $ 1,450 $ 1,992 $ 1,570 $ 1,101
===== ===== ===== =====
Net earnings (loss) $ 1,540 $ 369 $ (58) $ (296)
===== ===== ===== =====
Basic and diluted net
earnings (loss)
per common share $ 4.42 $ 1.06 $ (0.17) $ (0.85)
===== ===== ===== =====
2000
-----------------------------------
First Second Third Fourth
----- ----- ----- -----
Net sales $ 6,673 $ 6,712 $ 6,688 $ 7,672
===== ===== ===== =====
Gross profit $ 1,605 $ 1,757 $ 1,472 $ 1,932
===== ===== ===== =====
Net earnings (loss) $ 139 $ 163 $ (248) $ 260
===== ===== ===== =====
Basic and diluted net
earnings (loss)
per common share $ 0.40 $ 0.47 $(0.71) $ 0.74
===== ===== ===== =====
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HOMASOTE COMPANY
Under date of March 8, 2002, we reported on the consolidated
balance sheets of Homasote Company and subsidiary as of December 31,
2001 and 2000, 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, 2001 as contained in the 2001
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, 2001, 2000 and 1999. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statement
schedule based on our audits.
In our opinion, such financial statement schedule when considered
in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set
forth therein.
KPMG LLP
March 8, 2002
Short Hills, New Jersey
Schedule II, Valuation and Qualifying Accounts
Years Ended DECEMBER 31, 2001, 2000 and 1999
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,
2001 $51,000 $10,000 --- $61,000
Year ended
December 31,
2000 $51,000 $ --- --- $51,000
Year ended
December 31,
1999 $42,000 $9,000 $ --- $51,000
(a) Principally bad debts written-off, less recoveries.