10-Q/A 1 f2q10q2002.txt 2ND QUARTER 10-Q AMENDMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 [ ] 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.) LOWER FERRY ROAD, WEST TRENTON, NJ 08628 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code:(609) 883-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X)Yes ( )No At August 14, 2002, 348,799 shares of common stock of the registrant were outstanding. Results of Operations

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 2002 Note 1. The unaudited consolidated financial information of Homasote Company as of June 30, 2002 and for the three and six-month periods ended June 30, 2002 and 2001 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 has been included. The consolidated financial information for the three and six-month periods ended June 30, 2002 is not necessarily indicative of the results of operations that might be expected for the entire year ending December 31, 2002. This unaudited consolidated financial information should be read in conjunction with the consolidated financial statements and footnotes thereto for the year ended December 31, 2001 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 June 30, 2002 and December 31, 2001: 2002 2001 Finished goods.......$3,093,380 $ 2,670,284 Work in process...... 100,588 93,103 Raw materials........ 802,389 743,338 $3,996,357 $ 3,506,725 Inventories include the cost of materials, direct labor and manufacturing overhead. Note 3. NET EARNINGS (LOSS) PER COMMON SHARE Basic net earnings (loss) per common share has been computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the respective periods. Diluted net earnings (loss) per share is the same as basic net earnings (loss) per common share since the Company has a simple capital structure with only common stock outstanding in 2002 and 2001. 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 (1.30% at June 30, 2002). 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. 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 $2,083,333 was outstanding at June 30, 2002 and $2,305,833 at December 31, 2001. Principal and interest are payable monthly to the trustee in varying amounts through 2006. 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 is in compliance as of June 30, 2002. The Amended Agreement further provides for collateralization of the Letter of Credit facility with substantially all of the Company's assets. The Company has a $1.5 million demand note line of credit agreement with a bank which expired July 31, 2002 and has been extended through September 30, 2002. The Company and the Bank are in discussions to renew the line of credit in the amount of $1.5 million through June 30, 2003. Such renewal is expected to be consummated prior to September 30, 2002. Interest is payable monthly at the bank's prime rate (4.75% at June 30, 2002) less 0.25%. As of June 30, 2002 and December 31, 2001, $1,007,000 and $564,000, respectively, was outstanding under the line of credit. The unused credit available under this facility at June 30, 2002 was $493,000. The line of credit agreement 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. Note 5. RECLASSIFICATIONS Certain reclassifications have been made to the 2001 financial statements in order to conform with the 2002 presentation. Note 6. 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's implementation of SFAS 144 had no impact on the Company's consolidated financial statements. As the Company has no goodwill or intangible assets, the adoption of SFAS 141 and 142 had no effect on the Company's consolidated financial statements. Note 7: 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. Discovery is nearly completed and the parties are in the process of filing disposition motions. The Company believes that the outcome of this dispute will not have a material effect on the Company's financial position, results of operations and liquidity. FORM 10-Q HOMASOTE COMPANY AND SUBSIDIARY June 30, 2002 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis and statements made elsewhere in this Form 10-Q may include forward-looking statements about the future that are necessarily subject to various risks and uncertainties. These statements are based on the beliefs and assumptions of management and on information currently available to management. These forward-looking statements are identified by words such as "estimates", "expects", "anticipates", "plans", "believes",and other similar expressions. Factors that could cause future results to differ materially from those expressed in or implied by the forward-looking statements or historical results include the impact or outcome of: events or conditions which affect the building and manufacturing industries in general and the Company in particular, such as general economic conditions, employment levels, inflation, weather, strikes and other factors; competitive factors such as changes in choices regarding structural building materials by architects and builders and packing products by industrial firms; 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. RESULTS OF OPERATIONS The Company's sales are derived from building material wholesalers and industrial manufacturers. Sales during the three months ended June 30, 2002 decreased by $391,769 or 5.8% to $6,387,251, from $ 6,779,020 in the three months ended June 30, 2001. Sales for the six month period ended June 30, 2002 decreased by $810,763 or 5.9% to $12,836,586, from $13,647,349 in the six months ended June 30, 2001. The decrease is attributable in part to the continued deterioration of economic conditions in the packaging industry in general and the closing of plants and replacement of Homasote product by a former principal export customer, in particular, offset by increasing acceptance of the Company's new glass separator product, Staplesafe (patent pending). An international customer ceased purchases of private label product from the Company in the fourth quarter of 2001 due to their purchase and conversion of a plant to produce their own product, significantly reducing our sales in the current year period as compared to the prior year. Additionally, sales in the year ago period were affected positively by the implementation of a necessary 7% energy surcharge by the Company, effective for shipments during the first seven months of 2001. Gross profit as a percentage of sales, was 29.3% and 29.4%, respectively, for the three-month periods ended June 30, 2002 and 2001 and 25.6% and 25.1%, respectively, for the six-month periods ended June 30, 2002 and 2001. Second quarter 2002 margins were substantially improved over those of the first quarter due to improved production stability of the board making lines and a more profitable product mix of items sold. A continued reduction in the cost of fuel in the second quarter as compared to the year ago period was offset by increases in machinery repair and maintenance, depreciation, and insurance costs and a reduction in realized gross profit due to the decreased demand for product discussed above. Selling, general and administrative expenses as a percentage of sales were 26.1% and 23.9%, respectively, for the three-month periods ended June 30, 2002 and 2001 and 26.4% and 23.8%, respectively, for the six-month periods ended June 30, 2002 and 2001. Selling, general and administrative expenses increased to $1,670,040 for the three-month period ended June 30, 2002, as compared to $1,621,172 for the three- month ended June 30, 2001 and to $3,391,556 for the six-month period ended June 30, 2002, compared to $$3,247,041 for the six-month period ended June 30, 2001. The increase in the relative percentage of selling, general and administrative expenses is primarily attributable to the reduced volume of sales in the current year period. The increase in the amount of selling, general and administrative expenses is due in part to increases in sales agent commissions, retirement plan and insurance costs, outside contracts for product performance and building code approval testing and franchise taxes, partially offset by reduced administrative and other compensation. Interest income decreased to $4,070 for the three-month period ended June 30, 2002, as compared to $21,611 for the three-month period ended June 30, 2001 and to $9,387 for the six-month period ended June 30, 2002 as compared to $52,209 for the six-month period ended June 30, 2001. The decrease in interest income is attributable to reduced earnings from an investment of funds received in the insurance settlement discussed elsewhere in this report, resulting from lower levels of invested funds and prevailing interest rates. Interest expense on debt decreased to $22,216 for the three-month period ended June 30, 2002, as compared to $30,980 for the three-month ended June 30, 2001 and to $39,014 for the six-month period ended June 30, 2002, compared to $56,876 for the six-month period ended June 30, 2001. The decrease is primarily attributable to reductions in the Company's cost of borrowed funds on its variable rate debt, 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 were to be restricted for use under the terms of its loan agreement with the New Jersey Economic Development Authority to pay costs incurred to repair and make certain improvements to the dryer damaged in the fires. Such amount was recorded in restricted cash and other liabilities upon receipt. The balance of such funds as of June 30, 2002 is $122,786. The balance of the proceeds received, $1,708,472, was 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 $3,153 for the three-month period ended June 30, 2002, as compared to $7,138 for the three-month ended June 30, 2001 and to $5,662 for the six-month period ended June 30, 2002, compared to $9,961 for the six-month period ended June 30, 2001. The decrease is due primarily to decreases in the net price of corrugated paper sold as scrap. As a result of the foregoing, net earnings (loss) were $185,405 and $(133,987), respectively, for the three and six-month periods ended June 30, 2002, as compared to net earnings of $368,779 and $1,908,905, respectively, for the three and six month periods ended June 30, 2001. 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 $0.1 million and $1.2 million in the six-month periods ended June 30, 2002 and 2001, respectively. Working capital was $2.7 million at June 30, 2002, as compared to $3.1 million at December 31, 2001, a decrease of $0.4, due primarily to the use of funds to finance capital expenditures, partially offset by additional short-term borrowings. Capital expenditures for new and improved facilities and equipment, which are financed primarily through internally generated funds and debt, were $0.8 million and $0.6 million in 2002 and 2001, respectively. The Company has estimated capital expenditures for the remaining six (6) months of 2002 in the amount of $0.3 million. Cash flows from financing activities decreased from $0.7 million provided in 2001 to $0.2 million provided in 2002, primarily as a result of the increase in short term debt of $1.0 million during the period ended June 30, 2001 compared to an increase in short-term debt of $0.4 million during the period ended June 30, 2002. 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 (1.30% at June 30, 2002). 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. 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 $2,083,333 was outstanding at June 30, 2002 and $2,305,833 at December 31, 2001. Principal and interest are payable monthly to the trustee in varying amounts through 2006. 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 is in compliance as of June 30, 2002. The Amended Agreement further provides for collateralization of the Letter of Credit facility by substantially all of the Company's assets. The Company has a $1.5 million demand note line of credit agreement with a bank which expired July 31, 2002 and has been extended through September 30, 2002. The Company and the Bank are in discussions to renew the line of credit in the amount of $1.5 million through June 30, 2003. Such renewal is expected to be consummated prior to September 30, 2002. Interest is payable monthly at the bank's prime rate (4.75% at June 30, 2002) less 0.25%. As of June 30, 2002 and December 31, 2001, $1,007,000 and $564,000, respectively, was outstanding under the line of credit. The unused credit available under this facility at June 30, 2002 was $493,000. The line of credit agreement 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. Management believes that all cash flows from operations, coupled with its bank credit facilities, are adequate for the Company to meet its obligations through 2003. During the three-month period ended June 30, 2002, there were no material changes to the Company's contractual obligations or commercial commitments. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires companies 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. Companies also record a corresponding asset which 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 is required to adopt SFAS No. 143 on January 1, 2003 and the Company does not anticipate that the statement will have a material impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Such costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146, replaces the previous accounting guidance provided by the Emerging Issues Task Force 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)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002 and the Company does not anticipate that the statement will have a material impact on the Company's consolidated 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 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 the six months ended June 30, 2002 and the six months ended June 30, 2001, aggregated approximately $360,000 and $557,000, respectively. The contracts expire in 2009. 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. Discovery is nearly completed and the parties are in the process of filing disposition motions. The Company believes that the outcome of this dispute will not have a material effect on the consolidated financial position, results of operations and cash flows. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to fluctuations in interest rates and equity market risks as the Company seeks debt and equity capital to sustain its operations. The information below summarizes the Company's market risk associated with its debt obligations as of June 30, 2002. 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 June 30, 2002. 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 $3,090,333 of debt outstanding as of June 30, 2002. Further information specific to the Company's debt is presented in note 4 to the unaudited consolidated financial statements. VARIABLE ESTIMATED CARRYING YEAR OF INTEREST DESCRIPTION FAIR VALUE AMOUNT MATURITY RATE DEMAND NOTE $1,007,000 $1,007,000 2002 4.5% LONG TERM DEBT INCLUDING CURRENT INSTALLMENTS $ 225,000 $ 225,000 2002 462,500 462,500 2003 477,500 477,500 2004 493,333 493,333 2005 425,000 425,000 2006 ---------- ---------- $2,083,333 $2,083,333 1.30% Part II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer and 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 - There are no reports on Form 8-K filed for the six months ended June 30, 2002. 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 /s/ James M. Reiser James M. Reiser Vice President and August 14, 2002 Chief Financial Officer CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 99.1 In connection with the Quarterly Report of Homasote Company. (the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as Chief Executive Officer and 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 their 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 14, 2002 By: /s/ Warren L. Flicker Warren L. Flicker Chairman of the Board and Chief Executive Officer By: /s/ James M. Reiser James M. Reiser Vice-President and Chief Financial Officer

HOMASOTE CO 10-Q/A