10-Q 1 f10q2ndqrt2003.txt 2ND QTR AOQ 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ COMMISSION FILE NUMBER 1-3786 HOMASOTE COMPANY (Exact name of registrant as specified in its charter) NEW JERSEY 21-0388986 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 932 LOWER FERRY ROAD, WEST TRENTON, NJ 08628 (Address of principal executive office) (Zip Code) 609-883-3300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(D) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (X)Yes ( )No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). ( )Yes (X)No At August 21, 2003, 348,799 shares of common stock of the registrant were outstanding. Results of Operations

Homasote Company STATEMENTS OF OPERATIONS (UNAUDITED) For the three months For the six months ended ~~March~~ended 31June 30, June 30, 2003 2002 2003 2002 --------- --------- ~~(UNAUDITED)~~---------- ---------- Net sales $ 56,~~347~~104,~~641~~821 $ 6,~~449~~387,~~335~~251 $11,452,462 $12,836,586 Cost of sales 4,~~226~~922,~~184~~488 54,~~038~~516,~~239~~813 9,148,672 9,555,052 --------- --------- ---------- ---------- Gross profit 1,~~121~~182,~~457~~333 1,~~411~~870,~~096~~438 2,303,790 3,281,534 Selling, general and administrative expenses 1,~~467~~303,~~674~~070 1,~~721~~670,~~516~~040 2,770,744 3,391,556 --------- --------- ---------- ---------- Operating (loss) income (~~346~~120,~~217~~737) 200,398 (~~310~~466,~~420~~954) (110,022) Other income (expense): Interest income 622 4,070 1,~~263~~885 59,~~317~~387 Interest expense (1415,~~858~~404) (1622,~~798~~216) (30,262) (39,014) Other income 4,~~778~~769 23,~~509~~153 9,547 5,662 --------- --------- ---------- ---------- (810,~~817~~013) (814,~~972~~993) (18,830) (23,965) --------- --------- ---------- ---------- (Loss) income before income tax ~~expense~~(130,750) 185,405 (~~355~~485,~~034~~784) (~~319~~133,~~392~~987) expense Income tax expense --- --- --- --- --------- --------- ---------- ---------- Net (loss) income $(130,750) $ 185,405 $ (~~355~~485,~~034~~784) $ (~~319~~133,~~392~~987) ========= ========= ========== ========== Basic and diluted net (loss) income per common share $ (0.37) $ .53 $ (1.0239) $ (0.9238) ========== ========== ========== ========== Weighted average basic and diluted common shares outstanding 348,799 348,799 348,799 348,799 ========== ========== ========== ========== See accompanying notes to unaudited financial statements.

Homasote Company BALANCE SHEETS ASSETS ~~March~~June 3130, December 31, 2003 2002 ------------ ----------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ ~~314~~247,~~285~~887 $ 210,091 Accounts receivable (net of allowance for doubtful accounts of $5746,~~270~~273 in 2003 and $54,270 in 2002) 12,~~810~~000,~~831~~086 2,095,099 Inventories 43,~~033~~266,~~675~~206 3,417,984 Deferred income taxes 118,147 118,147 Prepaid expenses and other current assets ~~438~~488,~~408~~253 329,559 ----------- ----------- Total ~~Current~~current ~~Assets~~assets 6,~~715~~120,~~346~~579 6,170,880 ----------- ----------- Property, plant and equipment, at cost 4241,~~821~~138,~~973~~900 42,739,488 Less accumulated depreciation 3230,~~442~~947,~~643~~730 32,114,396 ----------- ----------- Net property, plant and equipment 10,~~379~~191,~~330~~170 10,625,092 Restricted cash 35,038 34,375 Intangible pension asset 682,855 682,855 Other assets 4542,~~097~~670 47,524 ----------- ----------- Total Assets $ 17,~~857~~072,~~666~~312 $ 17,560,726 =========== =========== (continued)

LIABILITIES AND STOCKHOLDERS' EQUITY ~~March~~June 3130, December 31, 2003 2002 ------------ ----------- (UNAUDITED) CURRENT LIABILITIES Short -term debt $ ~~884~~722,000 $ 597,000 Current installments of long-term debt ~~466~~470,~~251~~002 462,500 Accounts payable 2,~~687~~298,~~178~~928 2,138,889 Accrued expenses 446,~~092~~461 523,992 ----------- ----------- Total Current Liabilities 43,~~483~~937,~~521~~391 3,722,381 Long-term debt, excluding current installments 1,~~277~~158,~~082~~331 1,395,833 Deferred income taxes 118,147 118,147 Obligations under benefit plans 6,~~226~~237,~~983~~260 6,217,398 ----------- ----------- Total Liabilities 1211,~~105~~451,~~733~~129 11,453,759 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, par value $.20 per share; authorized 1,500,000 shares; issued 863,995 shares 172,799 172,799 Additional paid-in capital 898,036 898,036 Retained earnings 14,~~272~~141,~~480~~730 14,627,514 Accumulated other comprehensive loss (2,080,553) (2,080,553) ----------- ----------- 13,~~262~~132,~~762~~012 13,617,796 Less cost of common shares in treasury, 515,196 shares in 2003 and 2002 7,510,829 7,510,829 ----------- ----------- Total Stockholders' Equity 5,~~751~~621,~~933~~183 6,106,967 ----------- ----------- Total Liabilities and Stockholders' Equity $ 17,~~857~~072,~~666~~312 $ 17,560,726 =========== =========== See accompanying notes to unaudited financial statements.

Homasote Company STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, 2003 AND YEAR ENDED DECEMBER 31, 2002 ADDITIONAL COMMON PAID IN RETAINED STOCK CAPITAL EARNINGS ----------- ---------- ----------- Balances at January 1, 2002 $ 172,799 $ 898,036 $15,127,925 Net loss --- --- (500,411) ---------- ---------- ---------- Balances at December 31, 2002 172,799 898,036 14,627,514 Net loss --- --- (~~355~~485,~~034~~784) ---------- ---------- ---------- Balances ~~March~~June 3130, 2003 $ 172,799 $ 898,036 $14,~~272~~141,~~480~~730 ========== ========== ==========

ACCUMULATED OTHER TOTAL COMPREHENSIVE TREASURY STOCKHOLDERS' LOSS STOCK EQUITY ----------- ---------- ----------- Balances at January 1, 2002 $ --- $(7,510,829) $ 8,687,931 ----------- Net loss --- --- (500,411) Net unrealized change in: Minimum pension liability adjustment (2,080,553) --- (2,080,553) ----------- Comprehensive income (2,580,964) ---------- ---------- ----------- Balances at December 31, 2002 (2,080,553) (7,510,829) 6,106,967 ----------- Net loss --- --- (485,784) ----------- Comprehensive loss (485,784) ---------- ----------- ----------- Balances at June 30, 2003 $(2,080,553) $(7,510,829) $ 5,621,183 ========== =========== =========== See accompanying notes to unaudited financial statements.

Homasote Company STATEMENTS OF CASH FLOWS ~~For~~FOR ~~the~~THE ~~three~~SIX ~~months~~MONTHS ~~ended~~ENDED ~~March~~JUNE 3130, 2003 2002 ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss $ (~~355~~485,~~034~~784) $ (~~319~~133,~~392~~987) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ~~330~~661,~~674~~348 ~~326~~653,~~835~~669 Change in allowance on accounts receivable 3(7,~~000~~997) --- Gain on disposal of fixed assets (62,500) --- Changes in assets and liabilities: Decrease (increase) in accounts receivable ~~281~~103,~~268~~010 (68188,~~982~~834) ~~Increase~~Decrease (increase) in inventories ~~(615~~151,~~691)~~778 (~~122~~489,~~102~~632) Increase in prepaid expenses and other current assets (~~108~~158,~~849~~694) (6132,~~499~~144) Decrease in other assets --- 425 Increase in accounts payable ~~548~~160,~~289~~039 ~~436~~184,~~528~~262 (Decrease) increase in accrued expenses (77,~~900~~531) ~~136~~116,~~131~~438 Increase in obligations under benefit plans 919,~~585~~862 2652,~~359~~967 Decrease in other liabilities --- (69,562) ---------- ---------- Net cash provided by operating activities 15303,~~342~~531 ~~284~~93,~~316~~602 ---------- ---------- Cash flows from investing activities: Proceeds from sale of equipment 62,500 --- Capital expenditures (82222,~~485~~572) (~~207~~751,~~267~~430) (Increase) decrease in restricted cash (663) 6867,~~847~~559 ---------- ---------- (Continued) Net cash used in investing activities (83160,~~148~~735) (~~138~~683,~~420~~871) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of short-term debt ~~287~~125,000 ~~170~~443,000 Repayment of long-term debt (~~115~~230,000) (~~111~~222,~~250~~500) ---------- --------- Net cash (used in) provided by financing activities: ~~172,~~(105 000) 58220,~~750~~500 ---------- --------- Net increase (decrease) in cash and cash equivalents ~~104~~37,~~194~~796 ~~204~~(369,~~646~~769) Cash and cash equivalents at beginning of period 210,091 927,686 ---------- ---------- Cash and cash equivalents at end of period $ ~~314~~247,~~285~~887 $ 1557,~~132,332~~917 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1430,~~858~~262 $ 1639,~~798~~014 ========== ========== See accompanying notes to unaudited financial statements.

NOTES TO UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 2003 Note 1. The unaudited financial information of Homasote Company as of June 30, 2003 and for the three and six-month periods ended June 30, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions of Article 10 of Regulation S-X. In the opinion of management, all adjustments (none of which were non- recurring) necessary for a fair presentation of such periods have been included. The financial information for the three and six-month periods ended June 30, 2003 is not necessarily indicative of the results of operations that might be expected for the entire year ending December 31, 2003. This unaudited financial information should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2002 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2. INVENTORIES The following are the major classes of inventories as of June 30, 2003 and December 31, 2002: 2003 2002 --------- --------- Finished goods.......$2,657,499 $ 2,777,248 Work in process...... 63,301 52,484 Raw materials........ 545,406 588,252 --------- ---------- $3,266,206 $ 3,417,984 ========= ========== Inventories include the cost of materials, direct labor and manufacturing overhead. Note 3. NET LOSS PER COMMON SHARE Basic net loss per common share has been computed by dividing net loss by the weighted average number of common shares outstanding during the respective periods. Diluted net loss per share is the same as basic net loss per common share since the Company has a simple capital structure with only common stock outstanding in 2003 and 2002. Note 4. DEBT The Company is party to a loan agreement (the "Agreement") and promissory note with the New Jersey Economic Development Authority (the "Authority"). Under the Agreement, the Authority loaned the Company $4,140,000 out of the proceeds from the issuance of the Authority's Economic Growth Bonds (Greater Mercer County Composite Issue) 1996 Series E (the "Bonds") to be used in connection with specified capital expenditures described in the Agreement. Interest is charged at the variable rate of interest due on the Bonds (1.0% at June 30, 2003 and 1.65% at December 31, 2002). In connection with the Agreement, the Authority also entered into a trust indenture with a bank (the "Bank") to serve as trustee and tender agent for the loan proceeds. The trust indenture is secured in part by the Agreement and by a direct pay Letter of Credit facility in the face amount of $4,209,000, of which $1,628,333 was outstanding at June 30, 2003. Principal and interest are payable monthly to the trustee in varying amounts through 2006. The Letter of Credit facility, which was to expire on November 15, 2003, contains financial and other covenants including minimum tangible net worth, cash flow coverage, current ratio and maximum liabilities to tangible net worth (all as defined). The Agreement was amended effective as of November 14, 2002 (the "Amended Agreement"). The Amended Agreement further provides for collateralization of the Letter of Credit facility with substantially all of the Company's assets excluding real property. The Company was not in compliance with the minimum tangible net worth and maximum liabilities to tangible net worth covenants as of December 31, 2002. This non-compliance was primarily attributable to the fluctuation in 2002 in accumulated other comprehensive loss resulting from a significant increase in the minimum pension liability. On April 29, 2003, the Company received a waiver of such non- compliance as of December 31, 2002 from the Bank. As of March 31, 2003 the Company expected to not be in compliance with the maximum liabilities to tangible net worth covenant. The Company received a waiver of such non-compliance from the Bank. On April 29, 2003 the Company received a commitment (the "Commitment") from the Bank for a prospective amendment to the definition of equity for purposes of the financial covenants. In future periods, the definition of tangible net worth for purposes of covenant calculations will exclude accumulated other comprehensive income or loss attributable to the minimum pension liability. The Commitment further provides for an extension of the Letter of Credit facility through March 31, 2004, provided the Company is in compliance with all financial covenants and certain other conditions as defined. The Amended Agreement, which was further amended on May 29, 2003 (the "May 2003 Amendment"), revises the definition of tangible net worth, in accordance with the Commitment as previously discussed. The May 2003 Amendment also modifies prospectively the covenants relating to tangible net worth, cash flow coverage and current ratio. On July 24, 2003 the Company received from the Bank a waiver with respect to the Company's noncompliance as of June 30, 2003 with the Cash Flow Coverage Ratio. Other than such noncompliance as of June 30, 2003, management believes it will be in compliance with the May 2003 Amendment through March 31, 2004. The Company has a $1.5 million demand note line of credit agreement with the Bank which had an expiration date of June 30, 2003. Under the line of credit note, the Company may borrow up to a specified percentage of eligible receivables and inventory as defined. Interest is payable monthly at the Bank's prime rate (4.0% at June 30, 2003) plus 0.25%. As of June 30, 2003, $722,000 was outstanding under the line of credit. The unused credit available under this facility at June 30, 2003 was $778,000. The line of credit note also provides for an unused line of credit fee of 0.25% per annum. The note provides for prepayments and advances as required to satisfy working capital needs. The note is collateralized by substantially all of the Company's assets excluding real property. On May 29, 2003 the line of credit note was amended and restated to provide for an expiration date of March 31, 2004. All other terms of the note continued. The Company is in the process of seeking replacement financing for its bank credit facilities which expire on March 31, 2004. Management believes that cash flows from operations, coupled with its existing and/or replacement bank credit facilities, will be adequate for the Company to meet its obligations through 2004. However, there can be no assurance that the Company will be able to obtain replacement financing with similar terms to its existing credit facilities, if at all. Note 5. The Company is engaged in a dispute with a former energy supplier regarding the efforts of the supplier to change the method of pricing. The Company has filed a declaratory judgment action in the Superior Court of the State of New Jersey seeking a judgment that the supplier repudiated the contract with the Company by endeavoring to implement a method of pricing that was inconsistent with the provisions of the contract. The defendant has removed the case to the Federal District Court for the District of New Jersey. The supplier filed an answer, affirmative defenses and counterclaim against the Company, seeking damages of $171,000 plus interest and attorney's fees for breach of contract of the natural gas sales contract and for breach of the implied obligation of good faith and fair dealing as well. The matter was tried in June, 2003. Post-trial submissions were submitted on July 25,2003 and August 8, 2003. The Company believes that the outcome of this dispute will not have a material effect on the Company's financial position, results of operations or liquidity. Note 6. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 143, "Accounting for Asset Retirement Obligations". Statement No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company adopted Statement No. 143 on January 1, 2003 and such adoption had no effect on the Company's financial statements. In June 2002, the FASB issued Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement requires companies to recognize costs associated with exit or disposal activities when such costs are incurred rather than at the date of a commitment to an exit or disposal plan. Previous accounting guidance was provided by the Emerging Issues Task Force ("EITF") pursuant to Issue No. 94- 3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). Statement No. 146 replaces EITF 94-3. The Company adopted this Statement on January 1, 2003 and will apply it prospectively based on future exit or disposal activity. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Interpretation No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to the Company for existing entities on July 1, 2003. The Company has adopted Interpretation No. 46 and such adoption had no effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". Interpretation No. 45 elaborates on the disclosure requirements to be made by a guarantor about its obligations under certain guarantees it has issued. It also clarifies that the guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Interpretation No. 45 is effective for guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements for periods ending after December 15, 2002. The Company has adopted Interpretation No. 45 and such adoption had no effect on the Company's financial statements. FORM 10-Q HOMASOTE COMPANY June 30, 2003 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis and statements made elsewhere in this Form 10-Q may include forward-looking statements about the future that are necessarily subject to various risks and uncertainties. These statements are based on the beliefs and assumptions of management and on information currently available to management. These forward-looking statements are identified by words such as "estimates", "expects", "anticipates", "plans", "believes",and other similar expressions. Factors that could cause future results to differ materially from those expressed in or implied by the forward-looking statements or historical results include the impact or outcome of: - events or conditions which affect the building and manufacturing industries in general and the Company in particular, such as general economic conditions, employment levels, inflation, weather, strikes, international unrest, terrorist acts and other factors; - competitive factors such as changes in choices regarding structural building materials by architects and builders and packing products by industrial firms; Although the ultimate impact of the above and other factors are uncertain, these and other factors may cause future earnings to differ materially from results or outcomes we currently seek or expect. This quarterly report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2002. RESULTS OF OPERATIONS The Company's sales are derived from building material wholesalers and industrial manufacturers. Sales during the three months ended June 30, 2003 decreased by $282,430 or 4.4% to $6,104,821, from $6,387,251 in the three months ended June 30, 2002. Sales for the six month period ended June 30, 2003 decreased by $ 1,384,124 or 10.8% to $11,452,462, from $12,836,586 in the six months ended June 30, 2002. The poor sales performance during the three and six month periods is attributable primarily to the harsh and unusual weather conditions experienced well into the second quarter of 2003 in the Northeast and Mid-Atlantic regions, usually strong markets for the Company's products, and in part, to the continuation of deteriorated economic conditions in the packaging industry. Gross profit as a percentage of sales, was 19.4% and 29.3%, respectively, for the three-month periods ended June 30, 2003 and 2002 and 20.1% and 25.6%, respectively, for the six-month periods ended June 30, 2003 and 2002. The substantially lower levels of gross profit in the second quarter and for the first six months of 2003, as compared to the year earlier period, are due primarily to the underabsorption of the Company's fixed plant costs, resulting from a severe curtailment of production to balance inventory levels and the lack of demand for product. Inventories at June 30, 2003, exclusive of raw materials, are $2.7 million as compared to $3.2 million at June 30, 2002. Significant reductions in plant overhead, including the cost of labor and associated fringe costs and machine repairs, parts and supplies and a 2% increase in millboard product pricing to customers during the second quarter of the current year, were offset by the increased price of fuel oil and natural gas. Selling, general and administrative expenses as a percentage of sales were 21.3% and 26.1%, respectively, for the three-month periods ended June 30, 2003 and 2002 and 24.2% and 26.4%, respectively, for the six- month periods ended June 30, 2003 and 2002. Selling, general and administrative expenses decreased to $1,303,070 for the three-month period ended June 30, 2003, as compared to $1,670,040 for the three- month period ended June 30, 2002 and to $2,770,744 for the six-month period ended June 30, 2003, as compared to $3,391,556 for the six-month period ended June 30, 2002. The overall decrease in the amount of selling, general and administrative expenses reflects in part the Company's cost reduction efforts in response to declining sales. Expense reductions were achieved principally in the areas of compensation and related fringe costs, sales agent commission costs, advertising and sales incentives. Additionally, In the second quarter of 2003, the Company realized a gain of $62,500 from the sale of fully depreciated manufacturing equipment used in its discontinued foam products operation. Interest expense on debt decreased to $15,404 for the three-month period ended June 30, 2003, as compared to $22,216 for the three-month period ended June 30, 2002 and to $30,262 for the six-month period ended June 30, 2003, as compared to $39,014 for the six-month period ended June 30, 2002. The decrease is primarily attributable to reductions in the Company's cost of borrowed funds, partially offset by the Company's increase in net borrowings. As a result of the foregoing, net losses were $(130,750) and $(485,784), respectively, for the three and six-month periods ended June 30, 2003, as compared to net income of $185,405 and net loss of $(133,987), respectively, for the three and six month periods ended June 30, 2002. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities and bank borrowings are the primary sources of liquidity. Net cash provided by operating activities amounted to $0.3 million and $0.1 million in the six-month periods ended June 30, 2003 and 2002, respectively. Working capital was $2.2 million at June 30, 2003, as compared to $2.4 million at December 31, 2002, a decrease of $0.2 million, due primarily to the use of funds to finance capital expenditures and for the replacement of long-term debt with additional short term debt. Capital expenditures for new and improved facilities and equipment, which are financed primarily through internally generated funds and debt, were $0.2 million in the first six months of 2003. The Company has estimated capital expenditures for the remaining six (6) months of 2003 in the amount of $0.4 million. Such expenditures include the complete overhaul of a production line mold and other Coe Dryer related projects, utilizing in part, funds available from the settlement with its insurance carrier. Cash flows used in financing activities amounted to $0.1 million in 2003, primarily as a result of the increase in net borrowings of $0.1 million during the period ended June 30, 2003. The Company is party to a loan agreement (the "Agreement") and promissory note with the New Jersey Economic Development Authority (the "Authority"). Under the Agreement, the Authority loaned the Company $4,140,000 out of the proceeds from the issuance of the Authority's Economic Growth Bonds (Greater Mercer County Composite Issue) 1996 Series E (the "Bonds") to be used in connection with specified capital expenditures described in the Agreement. Interest is charged at the variable rate of interest due on the Bonds (1.0% at June 30, 2003 and 1.65% at December 31, 2002). In connection with the Agreement, the Authority also entered into a trust indenture with a bank (the "Bank") to serve as trustee and tender agent for the loan proceeds. The trust indenture is secured in part by the Agreement and by a direct pay Letter of Credit facility in the face amount of $4,209,000, of which $1,628,333 was outstanding at June 30, 2003. Principal and interest are payable monthly to the trustee in varying amounts through 2006. The Letter of Credit facility, which was to expire on November 15, 2003, contains financial and other covenants including minimum tangible net worth, cash flow coverage, current ratio and maximum liabilities to tangible net worth (all as defined). The Agreement was amended effective as of November 14, 2002 (the "Amended Agreement").The Amended Agreement further provides for collateralization of the Letter of Credit facility with substantially all of the Company's assets excluding real property. The Company was not in compliance with the minimum tangible net worth and maximum liabilities to tangible net worth covenants as of December 31, 2002. This non-compliance was primarily attributable to the fluctuation in 2002 in accumulated other comprehensive loss resulting from a significant increase in the minimum pension liability. On April 29, 2003, the Company received a waiver of such non-compliance as of December 31, 2002 from the Bank. As of March 31, 2003 the Company expected to not be in compliance with the maximum liabilities to tangible net worth covenant. The Company received a waiver of such non-compliance from the Bank. On April 29, 2003 the Company received a commitment (the "Commitment") from the Bank for a prospective amendment to the definition of equity for purposes of the financial covenants. In future periods, the definition of tangible net worth for purposes of covenant calculations will exclude accumulated other comprehensive income or loss attributable to the minimum pension liability. The Commitment further provides for an extension of the Letter of Credit facility through March 31, 2004, provided the Company is in compliance with all financial covenants and certain other conditions as defined. The Amended Agreement, which was further amended on May 29, 2003 (the "May 2003 Amendment"), revises the definition of tangible net worth, in accordance with the Commitment as previously discussed. The May 2003 Amendment also modifies prospectively the covenants relating to tangible net worth, cash flow coverage and current ratio. On July 24, 2003 the Company received from the Bank a waiver with respect to the Company's noncompliance as of June 30, 2003 with the Cash Flow Coverage Ratio. Other than such noncompliance as of June 30, 2003, management believes it will be in compliance with the May 2003 amendment through March 31, 2004. The Company has a $1.5 million demand note line of credit agreement with the Bank which had an expiration date of June 30, 2003. Under the line of credit note, the Company may borrow up to a specified percentage of eligible receivables and inventory as defined. Interest is payable monthly at the Bank's prime rate (4.0% at June 30, 2003) plus 0.25%. As of June 30, 2003, $722,000 was outstanding under the line of credit. The unused credit available under this facility at June 30, 2003 was $778,000. The line of credit note also provides for an unused line of credit fee of 0.25% per annum. The note provides for prepayments and advances as required to satisfy working capital needs. The note is collateralized by substantially all of the Company's assets excluding real property. On May 29, 2003 the line of credit note was amended and restated to provide for an expiration date of March 31, 2004. All other terms of the note continued. The Company is in the process of seeking replacement financing for its bank credit facilities which expire on March 31, 2004. Management believes that cash flows from operations, coupled with its existing and/or replacement bank credit facilities, will be adequate for the Company to meet its obligations through 2004. However, there can be no assurance that the Company will be able to obtain replacement financing with similar terms to its existing credit facilities, if at all. During the six-month period ended June 30, 2003, there were no material changes to the Company's contractual obligations or commercial commitments disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. RECENTLY ISSUED ACCOUNTING STANDARDS On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". Statement No. 149 amends Statement No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Statement No. 149 also amends certain other existing pronouncements. It will require contracts with comparable characteristics to be accounted for similarly. Statement No. 149 is effective for the Company for contracts entered into or modified after June 30, 2003. Management believes that Statement No. 149 will not have a material impact on the Company's financial statements. On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". Statement No. 150 establishes standards for classification and measurement of certain financial instruments with characteristics of both liabilities and equity. Management believes that Statement No. 150 will not have a material impact on the Company's financial statements. INFLATION AND ECONOMY The Company will continue to maintain a policy of constantly monitoring such factors as product demand and costs, and will adjust prices as these factors and the economic conditions warrant. Management believes the business operations of the Company have been affected by the general decline in the economy. OTHER DEVELOPMENTS The Company's primary basic raw material, wastepaper, is generally readily available from two suppliers with which the Company has purchase contracts that expire in 2009. Under the terms of the contracts, the Company is required to make purchases at a minimum price per ton, as defined, or at the prevailing market price, whichever is greater. The contracts require the Company to purchase all of the wastepaper offered by the suppliers which is generally below the Company's normal usage. Purchases in the six months ended June 30, 2003 and 2002, aggregated approximately $254,000 and $360,000, respectively. The Company is engaged in a dispute with a former energy supplier regarding the efforts of the supplier to change the method of pricing. The Company has filed a declaratory judgment action in the Superior Court of the State of New Jersey seeking a judgment that the supplier repudiated the contract with the Company by endeavoring to implement a method of pricing that was inconsistent with the provisions of the contract. The defendant has removed the case to the Federal District Court for the District of New Jersey. The supplier filed an answer, affirmative defenses and counterclaim against the Company, seeking damages of $171,000 plus interest and attorney's fees for breach of contract of the natural gas sales contract and for breach of the implied obligation of good faith and fair dealing as well. The matter was tried in June, 2003. Post-trial submissions were submitted on July 25, 2003 and August 8, 2003. The Company believes that the outcome of this dispute will not have a material effect on the Company's financial position, results of operations or liquidity. The Company is party to an agreement with a contractor for the construction by the contractor of an on-site co-generation facility to supply substantially all of the Company's electricity requirements and thermal energy for the pulping process. The project cost to the contractor is estimated at approximately $4.2 million. As presently contemplated, the Company would lease the facility under an operating lease with a term of ten years. The construction agreement is subject to the Company's obtaining construction and environmental permits and consummation of a definitive leasing agreement. The environmental permit application is currently under review by the New Jersey Department of Environmental Protection. There are no assurances that such agreement or lease will be consummated. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the Company is exposed to fluctuations in interest rates as the Company seeks debt financing to sustain its operations. The information below summarizes the Company's market risk associated with its debt obligations as of June 30, 2003. Fair value included herein has been estimated taking into consideration the nature and term of the debt instrument and the prevailing economic and market conditions at the balance sheet date. The table below presents principal cash flows by year of maturity based on the terms of the debt. The variable interest rate disclosed represents the rate at June 30, 2003. Changes in the prime interest rate during fiscal 2003 will have a positive or negative effect on the Company's interest expense. The Company had $2,350,333 of debt outstanding as of June 30, 2003. Further information specific to the Company's debt is presented in note 4 to the unaudited financial statements. ESTIMATED CARRYING YEAR OF INTEREST DESCRIPTION FAIR VALUE AMOUNT MATURITY RATE DEMAND NOTE $ 722,000 $ 722,000 2004 4.25% LONG TERM DEBT INCLUDING CURRENT INSTALLMENTS 232,500 232,500 2003 477,500 477,500 2004 493,333 493,333 2005 425,000 425,000 2006 ---------- ---------- $1,628,333 $1,628,333 1.00% ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13-a-15 under the Exchange Act, the Company evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management including the Company's Chief Executive Officer along with the Company's Chief Financial Officer. Based upon that evaluation, the Company's Chief Executive Officer along with the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no material changes in the Company's internal control over financial reporting or in other factors, which could materially affect such controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding disclosure. Part II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the normal course of business, the Company is from time to time involved in various claims and legal actions. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. The Company is engaged in a dispute with a former energy supplier regarding the efforts of the supplier to change the method of pricing. The Company has filed a declaratory judgment action in the Superior Court of the State of New Jersey seeking a judgment that the supplier repudiated the contract with the Company by endeavoring to implement a method of pricing that was inconsistent with the provisions of the contract. The defendant has removed the case to the Federal District Court for the District of New Jersey. The supplier filed an answer, affirmative defenses and counterclaim against the Company, seeking damages of $171,000 plus interest and attorney's fees for breach of contract of the natural gas sales contract and for breach of the implied obligation of good faith and fair dealing as well. The matter was tried in June, 2003. Post-trial submissions were submitted on July 25, 2003 and August 8, 2003. The Company believes that the outcome of this dispute will not have a material effect on the Company's financial position, results of operations or liquidity. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended. 31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended. 32.1 Certification of Chief Executive Officer under 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K - There are no reports on Form 8-K filed for the three months ended June 30, 2003. SIGNATURE Pursuant of the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOMASOTE COMPANY (Registrant) /s/ Warren L. Flicker /s/ James M. Reiser Warren L. Flicker James M. Reiser Chairman of the Board and Vice President and Chief Executive Officer Chief Financial Officer Date: August 21, 2003 Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED I, Warren L. Flicker, certify that: 1. I have reviewed this quarterly report of Form 10-Q of Homasote Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 21, 2003 By: /s/ Warren L. Flicker Warren L. Flicker Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002, AS AMENDED I, James M. Reiser, certify that: 1. I have reviewed this quarterly report of Form 10-Q of Homasote Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 21, 2003 By: /s/ James M. Reiser James M. Reiser Vice-President and Chief Financial Officer Exhibit 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Homasote Company. (the "Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Warren L. Flicker, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods shown in such report. Date: August 21, 2003 By: /s/ Warren L. Flicker Warren L. Flicker Chairman of the Board and Chief Executive Officer Exhibit 32.2 CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Homasote Company (the "Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James M. Reiser, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods shown in such report. Date: August 21, 2003 By: /s/ James M. Reiser James M. Reiser Vice-President and Chief Financial Officer

Filing Compare · HOMASOTE CO