10-K 1 text0210k.txt 2003 10K FORM 10-K ------------------------------ 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 (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, 2002 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. ( )Yes (X)No Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12-b-2 of the Securities Exchange Act). ( )Yes (X)No As of May 22, 2003, (the last day on which a sale of the common stock was reported) the Aggregate Market Value of the Voting Stock held by non-affiliates was $1,652,121. As of July 14, 2003, there were 348,799 shares of common stock, $.20 par value, outstanding. Documents Incorporated by Reference Homasote Company 2002 Annual Report to Stockholders (Parts II And IV). Proxy Statement of the Company dated August 15, 2003 for the Annual Meeting to be held on September 15, 2003. 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 14. CONTROLS AND PROCEDURES PART IV ITEM 15. 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 FIBER 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 FIBER 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. A NEW GLASS SEPARATOR PRODUCT, Staple-Safe(TM), WAS INTRODUCED IN 2001 AND IS ENJOYING INCREASING ACCEPTANCE BY DOMESTIC AND INTERNATIONAL GLASS MANUFACTURERS. 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 10%, 11% AND 10% OF THE COMPANY'S SALES IN 2002, 2001 AND 2000, RESPECTIVELY, AND 7% AND 17% OF ACCOUNTS RECEIVABLE AT DECEMBER 31, 2002 AND 2001, 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 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, 2002, 2001 AND 2000, NO AMOUNTS WERE SPENT ON RESEARCH AND DEVELOPMENT. DURING THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000, THE REGISTRANT INCURRED QUALITY CONTROL COSTS OF $95,830, $93,684, AND $148,954, RESPECTIVELY. (XII)ENVIRONMENTAL PROTECTION AS OF DECEMBER 31, 2002, 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, RESULTS OF OPERATIONS 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 2003 FISCAL YEAR. (XIII)NUMBER OF EMPLOYEES AS OF DECEMBER 31, 2002, THE REGISTRANT EMPLOYED 194 EMPLOYEES, AS COMPARED TO 213 IN 2001. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES EXPORT SALES, PRIMARILY IN CANADA AND THE UNITED KINGDOM, ACCOUNTED FOR APPROXIMATELY 6% IN THE YEAR ENDED DECEMBER 31, 2002 AND 13% AND 11% IN THE YEARS ENDED DECEMBER 31, 2001 AND 2000, 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, WEST 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 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 GENERALLY 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 FROM TIME TO TIME THE COMPANY IS INVOLVED IN LEGAL PROCEEDINGS RELATING TO CLAIMS ARISING OUT OF THE NORMAL COURSE OF BUSINESS. THE COMPANY BELIEVES THAT THERE ARE NO MATERIAL LEGAL PROCEEDINGS PENDING OR THREATENED AGAINST THE COMPANY AS OF DECEMBER 31, 2002. HOWEVER, SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS" RESPECTING THE SETTLEMENT IN 2001 OF CERTAIN LITIGATION, INCLUDING THAT BROUGHT BY THE REGISTRANT AGAINST ITS INSURANCE CARRIER RELATIVE TO LOSSES INCURRED AS A RESULT OF FIRES INVOLVING A DRYER USED IN THE MANUFACTURING PROCESS, WHICH DISCUSSION IS INCORPORATED HEREIN BY REFERENCE TO EXHIBIT 13. 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 ARE DUE JULY 18,2003 AND AUGUST 1, 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 AND LIQUIDITY. 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 2002 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 2002 ANNUAL REPORT TO STOCKHOLDERS INCORPORATED HEREIN BY REFERENCE AS EXHIBIT 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEE MANAGEMENT'S DISCUSSION AND ANALYSIS SECTION OF THE HOMASOTE COMPANY 2002 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, 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 DECEMBER 31, 2002. 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 $2,455,333 OF DEBT OUTSTANDING AT DECEMBER 31, 2002. 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 $ 597,000 $ 597,000 2002 4.5 % LONG-TERM DEBT INCLUDING CURRENT INSTALLMENTS $ 462,500 $ 462,500 2003 477,500 477,500 2004 493,333 493,333 2005 425,000 425,000 2006 _________ _________ $ 1,858,333 $1,858,333 1.65% ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SEE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF THE HOMASOTE COMPANY 2002 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 INCORPORATED BY REFERENCE FROM THE DEFINITIVE PROXY STATEMENT OF THE COMPANY DATED AUGUST 15, 2003 FOR THE ANNUAL MEETING TO BE HELD ON SEPTEMBER 15, 2003, WHICH IS ATTACHED HERETO AS EXHIBIT 99.3. (B) EXECUTIVE OFFICERS EXPERIENCE STARTED IN YEARS IN AT NAME (5) TITLE POSITION POSITION AGE ------------------ --------- -------- -------- --- WARREN L. FLICKER CHAIRMAN OF (1) THE BOARD AND CHIEF EXECUTIVE OFFICER 1/01/00 3 59 PETER J. MCELVOGUE PRESIDENT 7/1/00 3 40 (2) JAMES M. REISER VICE PRESIDENT 3/01/99 4 60 (3) AND CHIEF FINANCIAL OFFICER JENNIFER D. BARTKOVICH (4) SECRETARY 5/03/01 2 34 (1) EMPLOYED BY THE COMPANY SINCE 1965. (2) EMPLOYED BY THE COMPANY SINCE 2000. (3) EMPLOYED BY THE COMPANY SINCE 1999. (4) EMPLOYED BY THE COMPANY SINCE 2000. (5) THE OFFICERS MENTIONED ABOVE ARE RE-ELECTED EACH YEAR BY THE BOARD OF DIRECTORS AT THEIR ANNUAL MEETING. ITEM 11. EXECUTIVE COMPENSATION INCORPORATED BY REFERENCE FROM THE DEFINITIVE PROXY STATEMENT OF THE COMPANY DATED AUGUST 15, 2003 FOR THE ANNUAL MEETING TO BE HELD ON SEPTEMBER 15, 2003, WHICH IS ATTACHED HERETO AS EXHIBIT 99.3. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT INCORPORATED BY REFERENCE FROM THE DEFINITIVE PROXY STATEMENT OF THE COMPANY DATED AUGUST 15, 2003 FOR THE ANNUAL MEETING TO BE HELD ON SEPTEMBER 15, 2003, WHICH IS ATTACHED HERETO AS EXHIBIT 99.3. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INCORPORATED BY REFERENCE FROM THE DEFINITIVE PROXY STATEMENT OF THE COMPANY DATED AUGUST 15, 2003 FOR THE ANNUAL MEETING TO BE HELD ON SEPTEMBER 15, 2003, WHICH IS ATTACHED HERETO AS EXHIBIT 99.3. ITEM 14. CONTROLS AND PROCEDURES AS REQUIRED BY RULE 13-A-15 UNDER THE EXCHANGE ACT, WITHIN THE 90 DAYS PRIOR TO THE FILING DATE OF THIS REPORT, THE COMPANY CARRIED OUT AN EVALUATION OF THE EFFECTIVENESS OF THE DESIGN AND OPERATION OF THE COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES. 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 SIGNIFICANT CHANGES IN THE COMPANY'S INTERNAL CONTROLS OR IN OTHER FACTORS, WHICH COULD SIGNIFICANTLY AFFECT INTERNAL 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 IV ITEM 15. 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 - YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 INCORPORATED HEREIN BY REFERENCE AS PART OF EXHIBIT 13. CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002 AND 2001 INCORPORATED HEREIN BY REFERENCE AS PART OF EXHIBIT 13. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - DECEMBER 31, 2002 AND 2001 INCORPORATED HEREIN BY REFERENCE AS PART OF EXHIBIT 13. CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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-INCORPORATED BY REFERENCE SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS - YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 INCORPORATED BY REFERENCE TO EXHIBIT 13. NO OTHER SCHEDULES ARE REQUIRED. (3) EXHIBITS 3 ARTICLES OF INCORPORATION AND BYLAWS* 13 HOMASOTE COMPANY 2002 ANNUAL REPORT TO STOCKHOLDERS 99.1 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. 99.2 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. 99.3 DEFINITIVE PROXY STATEMENT OF THE COMPANY DATED AUGUST 15, 2003 FILED PURSUANT TO SECTION 14 (A) OF THE SECURITIES EXCHANGE ACT OF 1934. (B) REPORT ON FORM 8-K NO REPORTS ON FORM 8-K WERE FILED IN THE THREE MONTHS ENDED DECEMBER 31, 2002. *PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) 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: JULY 28, 2003 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES 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. /S/ WARREN FLICKER CHAIRMAN, CEO JULY 28, 2003 & DIRECTOR /S/ PETER J. MCELVOGUE PRESIDENT JULY 28, 2003 /S/ JAMES M. REISER VICE PRESIDENT JULY 28, 2003 CFO & DIRECTOR /S/ JOSEPH A. BRONSARD DIRECTOR JULY 28, 2003 /S/ MICHAEL FLICKER DIRECTOR JULY 28, 2003 /S/ IRENE T. GRAHAM DIRECTOR JULY 28, 2003 /S/ PETER N. OUTERBRIDGE DIRECTOR JULY 28, 2003 /S/ CHARLES A. SABINO DIRECTOR JULY 28, 2003 /S/ NORMAN SHARLIN DIRECTOR JULY 28, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Warren L. Flicker, certify that: 1. I have reviewed this annual report on Form 10-K of Homasote Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; 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; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 28, 2003 By: /s/ Warren L. Flicker Warren L. Flicker Chairman of the Board and Chief Executive Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James M. Reiser, certify that: 1. I have reviewed this annual report on Form 10-K of Homasote Company; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; 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; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 28, 2003 By: /s/ James M. Reiser James M. Reiser Vice-President and Chief Financial Officer TO SHAREHOLDERS AND EMPLOYEES EXHIBIT 13 Herewith is presented the annual report of Homasote Company for the year ended December 31, 2002. It is evident that the country is facing a year of economic challenge. Our Company's customers in both construction and packaging have expressed their concern over an uncertain business climate. Homasote's major markets in millboard are multi-family housing and commercial construction, both of which showed periodic signs of growth, but were flat overall for the year. One major export customer was lost, but through the success of our millboard marketing sales effort, comparable volume suffered only slightly. Industrial (Pak-Line(R)) sales were also affected by the loss of a major export account. The loss of these two customers account for the majority of the sales decline in 2002. On the millboard side, applications of Homasote building products have significantly changed over the last decade. We had traditionally sold our products into commodity applications with declining success due to competitive pressure from pricing and new products. Our products, marketing efforts and sales force now target the specification professional, such as the architectural, design and builder communities. In order to successfully sell to this type of customer, the Company must first have additional fire ratings and code approvals in place as well as third party independent testing to substantiate our marketing claims. We have completed a substantial portion of this transformation. We proudly promote that our products are made from 100% recycled materials and have a finished product recycled content that is second to none in the building industry. We are also moving towards long-term sustainability through our products, our manufacturing process and our goal to achieve increased energy efficiency, all of which will improve our products life-cycle benefits. Homasote has an historic opportunity in the market. Our Company is a member of the United States Green Building Council (USGBC), a consensus organization whose mission is to champion the cause of green design in building. The USGBC developed a rating system called LEED (Leadership in Energy & Environmental Design), under which buildings are rated based on six categories: sustainable sites, water efficiency, energy and atmosphere, materials & resources, indoor air quality and innovation & design process. Each category has an accumulated potential point value. A building can achieve a rating based on the number of points it achieves during construction or renovation. Homasote products offer an opportunity to achieve points in several of the six categories mentioned above. There is tremendous momentum and exponential growth in this market, both in the public and private sectors, to achieve a LEED- rated building. Homasote's marketing plan, to be a specification-driven product line and offer unsurpassed environmental advantages, provides an unprecedented opportunity to market our products to the USGBC audience, which consists of architects, design professionals, federal, state and local governments, schools and universities, and the high end private sector, all of whom are focused on sustainable construction. On the industrial packaging side, we have focused our sales and marketing to provide a product line approach in specific industries such as glass, steel and paper. In the past, we have focused on providing packaging on a job basis, which has been a declining part of our business. Our Staple-Safe(TM) glass strip, is an innovative new product for use as a glass pad during shipping. It is now widely accepted in the market. Both new and existing customers are now stocking this product. A specialized saw has been ordered so smaller lengths can be supplied to our customers, thereby adding value to our strip lines of Staple-Safe(TM) and Homex 300(R). Similar steps have been taken to expand existing product lines in the paper and steel industries. There is also opportunity to use Homasote packaging in the returnable and sustainable packaging markets, which will fit in well with our efforts on the building products side and further enhance our Company's "green" image. Net sales for 2002 were $25,067,400 versus 2001 sales of $25,721,385, a decrease of $653,985 or 2.5%. Net loss for the year was $(500,411) resulting in diluted net loss per common share of $(1.43). Working capital was $2,448,499, a decrease of $640,505 from the previous year. Best wishes for a long and happy retirement to Les Kugler who retired at the end of 2002. We wish to thank our loyal shareholders, directors, officers, management, employees, customers, and suppliers for their continued support. Warren L. Flicker Peter J. McElvogue Chairman of the Board, President Chief Executive Officer Homasote Company and Subsidiary

Consolidated Five Year Highlights ~~2001~~2002 ~~(a)~~ ----------- Net sales $ 25,~~721~~067,~~385~~400 Depreciation and amortization $ 1,~~279~~290,~~645~~700 Net ~~earnings~~ (loss)earnings $ 1(500,~~554,771~~411) Common shares outstanding (weighted average basic and diluted) 348,799 Basic and diluted net ~~earnings~~ (loss) earnings per common share $ 4(1.4643) Dividends-declared and paid $ ~~34,880~~0.00 Dividends per share $ 0.1000 Working capital $ 32,~~089~~448,~~004~~499 Working capital ratio 1.97:1 Capital expenditures $ 1861,~~355,098~~723 Total assets $ 2017,~~395~~560,~~447~~726 Long-term debt, excluding current portion $ 1,~~858~~395,~~333~~833 Stockholders' equity $ 86,~~687~~106,~~931~~967 Common shares outstanding 348,799 Per share book value of common stock $ 2417.9151

2001 (a) ----------- Net sales $ 25,721,385 Depreciation and amortization $ 1,279,645 Net (loss) earnings $ 1,554,771 Common shares outstanding (weighted average basic and diluted) 348,799 Basic and diluted net (loss) earnings 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

Homasote Company and Subsidiary

Consolidated Five Year Highlights ~~1999~~2000 ----------- Net sales $ 2527,~~018~~744,~~201~~946 Depreciation and amortization $ 1,~~533~~262,~~583~~672 Net ~~earnings~~ (loss) earnings $ ~~(386~~313,~~820)~~692 Common shares outstanding (weighted average basic and diluted) 348,~~599~~799 Basic and diluted net ~~earnings~~ (loss) earnings per common share $ (1.~~11)~~90 Dividends-declared and paid $ ~~0.00~~34,880 Dividends per share $ 0.0010 Working capital $ 21,~~564~~928,~~212~~925 Working capital ratio 1.85:1 Capital expenditures $ 1,~~282~~519,~~412~~990 Total assets $ 19,~~560~~750,~~532~~205 Long-term debt, excluding current portion $ 2,~~738~~305,~~333~~833 Stockholders' equity $ 67,~~885~~168,~~778~~040 Common shares outstanding 348,~~599~~799 Per share book value of common stock $ 1920.7555

Homasote Company and Subsidiary

Consolidated Five Year Highlights ~~1997~~1999 ----------- Net sales $ 25,~~385~~018,~~686~~201 Depreciation and amortization $ ~~888~~1,~~944~~533,583 Net ~~earnings~~ (loss) earnings $ (~~445~~386,~~778~~820) Common shares outstanding (weighted average basic and diluted) ~~364~~348,~~479~~599 Basic and diluted net ~~earnings~~ (loss) earnings per common share $ (1.2211) Dividends-declared and paid $ ~~90,300~~0.00 Dividends per share $ 0.2600 Working capital $ 32,~~383~~564,~~330~~212 Working capital ratio 21.08:1 Capital expenditures $ 41,~~291~~282,~~324~~412 Total assets $ 2019,~~137~~560,~~096~~532 Long-term debt, excluding current portion $ 32,~~562~~738,~~500~~333 Stockholders' equity $ 76,~~974~~885,~~309~~778 Common shares outstanding 348,~~801~~599 Per share book value of common stock $ 2219.8675

Homasote Company and Subsidiary

~~CASH~~Consolidated ~~DIVIDENDS~~Five ~~Quarterly~~Year ~~cash~~Highlights ~~dividends~~1998 ~~for~~----------- ~~the~~Net ~~last~~sales ~~two~~$ ~~years~~24,302,836 ~~were~~Depreciation asand ~~follows:~~amortization ~~Quarter~~$ ~~2001~~1,365,692 ~~2000~~Net ~~----~~(loss) ~~----~~earnings ~~First~~ $ ~~0.05~~(698,229) Common shares outstanding (weighted average basic and diluted) 348,599 Basic and diluted net (loss) earnings per common share $ 0(2.00) ~~Second~~Dividends-declared ~~0.05~~and ~~0.00~~paid ~~Third~~$ 0.00 ~~0.05~~Dividends ~~Fourth~~per share $ 0.00 0Working capital $ 2,902,215 Working capital ratio 1.056:1 ~~----~~Capital expenditures $ 1,284,154 Total assets $ 21,621,616 Long-~~---~~term debt, excluding current portion $ 0.3,155,833 Stockholders' equity $ 07,272,598 Common shares outstanding 348,599 Per share book value of common stock $ 20.1086

(a) Net earnings and per share amounts include $1,708,472 related to an insurance settlement. TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON

~~STOCK~~CASH ~~PRICES~~DIVIDENDS ~~Stock~~Quarterly ~~prices~~cash ~~for~~dividends ~~the Company's Common Stock~~ for the last two years were as follows: ~~2001 2000~~ Quarter ~~High~~2002 ~~Low~~2001 ~~High Low~~ ----- ----- ~~----- -----~~ First $ 90.5000 $ 90.1305 ~~$ 8.50 $ 5.87~~ Second ~~$ 11~~0.2500 ~~$ 9~~0.2505 $Third 90.00 ~~$ 5~~0.00 ~~Third~~Fourth ~~$ 12~~0.00 ~~$ 9~~0.~~90 $ 15.~~00 $---- ~~8.50~~---- ~~Fourth~~ $ 110.~~50 $ 10.10 $ 14.~~00 $ 80.~~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.~~10

~~Homasote~~STOCK ~~Company~~PRICES ~~and~~Quarterly ~~Subsidiary~~stock ~~CONSOLIDATED~~prices ~~STATEMENTS~~for OFthe ~~OPERATIONS~~Company's ~~AND~~Common ~~RETAINED~~Stock ~~EARNINGS~~for ~~Years~~the ~~ended~~last ~~December~~two 31years ~~2001~~were ~~2000~~as ~~1999~~follows: ~~---------~~2002 ~~----------~~2001 ~~---------~~Quarter ~~Net~~High ~~sales~~Low $High ~~25,721,385~~Low ~~$ 27,744,946 $25,018,201 Cost of sales 19,608,879 20,978,855 19,570,673~~ -----~~-----~~ -----~~-----~~ -----~~-----~~ ~~Gross profit 6,112,506 6,766,091 5,447,528 Selling, general and administrative expenses 6,270,149 6,460,247 5,786,887~~ -----~~----~~ ~~----------~~First ~~----------~~$ ~~Operating~~11.50 ~~(loss)~~$ ~~income~~10.35 ~~(157,643)~~$ ~~305,844~~9.50 ~~(339,359)~~$ ~~Other income (expense): Gain on sale of assets~~ 9.13~~,600~~ ~~27,350~~Second ~~5,850~~$ ~~Interest~~11.00 ~~income~~$ ~~75,962~~10.10 ~~65,315~~$ ~~79,860~~11.25 ~~Interest~~$ ~~expense~~9.25 ~~(102,212)~~Third ~~(130,003)~~$ ~~(172,718)~~10.35 ~~Insurance~~$ ~~settlement~~10.00 ~~1,708,472~~$ ~~---~~12.00 ~~---~~$ ~~Other~~9.90 ~~income~~Fourth ~~16,592~~$ ~~45,186~~10.15 ~~19,033~~$ ~~----------~~9.30 ~~----------~~$ ~~----------~~11.50 ~~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 (010.10 ~~per~~The ~~share~~Common inStock ~~2001~~of ~~and~~the ~~2000)~~Company ~~(34,880)~~is ~~(34,880)~~traded over-the--counter. ~~----------~~The ~~----------~~number ~~----------~~of ~~Retained~~Stockholders ~~earnings~~of atrecord ~~end~~ of ~~year~~the $Company ~~15,127,925~~at $December 1331,~~608,034~~ ~~$13,329,222~~2002 ~~========== ========== ========== Basic~~ and ~~diluted~~2001 ~~net~~is ~~earnings~~221 ~~(loss) per common share $ 4.46 $ .90 $ (1.11) ========== ========== ========== Weighted average basic~~ and ~~diluted common shares outstanding 348~~223,~~799~~ ~~348,799 348,599 ========== ========== ========== See accompanying notes to consolidated financial statements~~respectively.

Homasote Company and Subsidiary CONSOLIDATED ~~BALANCE~~STATEMENTS ~~SHEETS~~OF ~~ASSETS~~OPERATIONS ~~December~~Years ~~31,~~ended December 31, 2002 2001 2000 --------- --- ------- --------- ~~CURRENT~~Net ~~ASSETS:~~sales ~~Cash~~$ ~~and~~25,067,400 ~~cash equivalents~~ $ ~~927~~25,~~686~~721,385 $ 5627,~~204~~744,946 ~~Accounts~~Cost ~~receivable (net~~ of ~~allowance~~sales ~~for~~19,275,712 ~~doubtful~~19,608,879 ~~accounts of $61~~20,~~392~~978,855 in---------- ~~2001~~---------- ~~and~~---------- ~~$51,392~~Gross inprofit ~~2000) 1~~5,~~592~~791,~~103~~688 26,~~288,016~~112 ~~Inventories 3,~~506~~,725~~ 26,~~924~~766,~~459~~091 ~~Deferred income taxes 190~~Selling,~~017~~ ~~29,369~~general ~~Prepaid expenses~~ and ~~other~~administrative ~~current~~expenses ~~assets~~6,239,838 ~~255~~6,~~707~~270,149 ~~242~~6,~~523~~460,247 --------- --- ------- ---------- ~~Total~~Operating ~~Current~~(loss) ~~Assets~~income 6(448,~~472~~150) (157,~~238~~643) 5305,~~540~~844 Other income (expense): Gain on sale of assets 900 13,~~571~~600 27,350 Interest income 13,369 75,962 65,315 Interest expense (77,182) (102,212) (130,003) Insurance settlement --- 1,708,472 --- Other income 10,652 16,592 45,186 ---------- ---------- ---------- ~~Property,~~(Loss) ~~plant~~earnings ~~and~~before ~~equipment,~~income ~~net~~tax ~~11,044,361~~expense 10(500,~~942,368~~411) ~~Restricted cash 223~~1,~~468 691~~554,~~778~~771 ~~Prepaid benefit plan costs 2~~313,~~608,035~~692 ~~2,501,603~~Income ~~Other~~tax ~~assets~~expense ~~47,345~~--- ~~73,885~~--- --- ---------- ---------- ---------- Net (loss) earnings $ 20(500,~~395~~411)$ 1,~~447~~554,771 $ 19313,~~750,205~~692 ========== ========== ========== Basic and diluted net (loss) earnings per common share $ (1.43)$ 4.46 $ .90 ========== ========== ========== Weighted average basic and diluted common shares outstanding 348,799 348,799 348,799 ========== ========== ========== See accompanying notes to consolidated financial statements.

~~LIABILITIES~~Homasote ~~AND~~Company ~~STOCKHOLDERS'~~and ~~EQUITY~~Subsidiary CONSOLIDATED BALANCE SHEETS ASSETS December 31, December 31, 2002 2001 ~~2000~~ ------------ ----------- CURRENT ~~LIABILITIES~~ASSETS: ~~Short~~Cash ~~term~~and ~~debt~~cash equivalents $ ~~564~~210,~~000~~091 $ ~~---~~927,686 ~~Current~~Accounts ~~installments~~receivable (net of ~~long-term~~allowance ~~debt~~for ~~447,500~~doubtful ~~432,500~~accounts ~~Accounts~~of ~~payable 1~~$54,~~895,924~~270 ~~2,441,560~~in ~~Accrued~~2002 ~~expenses~~and ~~475~~$61,~~810~~392 ~~737,586~~in ~~------------~~2001) ~~----------- Total Current Liabilities 3~~2,~~383~~095,~~234~~099 31,~~611~~592,~~646~~103 ~~Long-term~~Inventories ~~debt~~3, ~~excluding current installments 1~~417,~~858,333~~984 23,~~305~~506,~~833~~725 Deferred income taxes 118,147 190,017 ~~29,369~~Prepaid ~~Obligations~~expenses ~~under~~and ~~benefit~~other ~~plans~~current ~~6,083,758~~assets 5329,~~966,131~~559 ~~Other liabilities 192~~255,~~174~~707 ~~669,186~~ ------------ ----------- Total ~~Liabilities~~Current 11Assets 6,~~707~~170,~~516~~880 126,~~582~~472,~~165~~238 ~~------------ ----------- COMMITMENTS AND CONTINGENCIES (note 10) STOCKHOLDERS' EQUITY Common stock~~Property, ~~par~~plant ~~value~~and ~~$0.20 per share; Authorized 1~~equipment,~~500,000~~ ~~shares;~~net ~~Issued 863~~10,~~995 shares~~625,092 ~~outstanding 348~~11,~~799~~044,361 ~~net~~Restricted ofcash ~~treasury shares 172~~34,~~799~~375 ~~172~~223,~~799~~468 ~~Additional~~Prepaid ~~paid-in~~benefit ~~capital~~plan ~~898,036~~costs ~~898,036 Retained earnings 15,127,925 13,608,034~~ ---~~---------~~ ~~----------- 16~~2,~~198~~608,~~760~~035 ~~14,678,869~~Intangible ~~Less~~pension ~~cost~~asset ~~of common shares in treasury~~682,855 ~~515,196~~--- ~~shares~~Other inassets ~~2001 and 2000 7~~47,~~510,829~~524 747,~~510,829~~345 ------------ ----------- Total ~~Stockholders'~~Assets ~~Equity~~$ 817,~~687~~560,~~931~~726 ~~7,168,040 ------------ -----------~~ $ 20,395,447 ~~$ 19,750,205~~ ============ =========== See accompanying notes to consolidated financial statements.

~~Homasote~~LIABILITIES ~~Company~~AND ~~and~~STOCKHOLDERS' ~~Subsidiary~~EQUITY ~~CONSOLIDATED~~December ~~STATEMENTS~~31, OFDecember ~~CASH FLOWS YEARS ENDED DECEMBER~~ 31, 2002 2001 ~~2000 1999~~ ----------- -~~---------~~ ----------- ~~Cash~~CURRENT ~~flows from operating activities~~LIABILITIES: ~~Net~~Short ~~earnings~~term ~~(loss)~~debt $~~1,554,771~~ ~~$ 313~~597,~~692~~000 $ ~~(386~~564,~~820)~~000 ~~Adjustments~~Current toinstallments ~~reconcile~~of ~~net~~long-term ~~earnings~~debt ~~(loss)~~462,500 to447,500 ~~net~~Accounts ~~cash~~payable ~~provided by operating activities: Depreciation and amortization 1~~2,~~279~~138,~~645~~889 1,~~262~~895,~~672~~924 ~~1,533,583~~Accrued ~~Gain~~expenses ~~on disposal of fixed assets (13~~523,~~600)~~992 ~~(27~~475,~~350)~~810 ~~(5,850) Deferred income taxes~~ ------------ ----------- ~~117,660~~Total ~~Changes~~Current inLiabilities ~~assets and liabilities: Decrease (increase) in accounts receivable~~3, ~~net 695~~722,~~913~~381 ~~(257~~3,~~926) (132~~383,~~186)~~234 ~~(Increase)~~Long-term ~~decrease in inventories (582~~debt,~~266)~~ ~~56,511~~excluding ~~847,847 (Increase) decrease in prepaid expenses and other~~ current ~~assets~~installments ~~(13~~1,~~184) 41~~395,~~957~~833 ~~(55~~1,~~735) Increase in prepaid benefit plan costs (106~~858,~~432)~~333 ~~(235,890)~~Deferred ~~(277,557) Decrease in refundable~~ income taxes ~~--- --- 218~~118,~~377~~147 ~~(Decrease) increase in accounts payable (545~~190,~~636)~~017 ~~427,137~~Obligations ~~610,702 (Decrease) increase in accrued expenses (261,776) 18,460 (28,024) Increase in obligations~~ under benefit plans ~~117~~6,~~627 119~~217,~~573~~398 ~~263~~6,~~022~~083,758 ~~(Decrease)~~Other ~~increase in other~~ liabilities ~~(477,012)~~--- ~~(141~~192,~~636)~~174 ~~(188,854)~~ ---------- -- -------- ---~~------~~ ~~Net~~Total ~~cash~~Liabilities ~~provided by operating activities 1~~11,~~648~~453,~~050~~759 111,~~577~~707,~~200 2,~~516~~,165~~ ---------- -- -------- ---~~------~~ ~~Cash~~COMMITMENTS ~~flows~~AND ~~from~~CONTINGENCIES ~~investing~~(notes ~~activities:~~4 ~~Proceeds~~and ~~from~~10) ~~sale~~STOCKHOLDERS' ofEQUITY ~~equipment~~Common 13stock,~~600~~ ~~27,350~~par ~~5,850~~value ~~Capital~~$0.20 ~~expenditures~~per ~~(1,355,098)~~share; ~~(1,519,990)~~Authorized (1,~~282~~500,~~412)~~000 ~~Decrease~~shares; inissued ~~restricted~~863,995 ~~cash~~shares ~~468~~172,~~310~~799 ~~128~~172,~~845~~799 ~~342,978~~Additional paid-~~---------~~in ~~----------~~capital ~~---------~~898,036 ~~Net~~898,036 ~~cash~~Retained ~~used~~earnings in14,627,514 ~~investing~~15,127,925 ~~activities~~Accumulated ~~(873,188)~~other comprehensive loss (12,~~363~~080,~~795~~553) ~~(933,584)~~ --- ------- -----~~-----~~ ----------- ~~Cash flows from financing activities: Proceeds from (repayment of) short-term debt 564~~13,~~000~~617,796 ~~--- (2~~16,~~000~~198,~~000)~~760 ~~Repayment~~Less cost of ~~long-term~~common ~~debt~~shares ~~(432,500)~~in ~~(417~~treasury,~~500)~~ ~~(406~~515,~~667)~~196 ~~Dividends~~shares ~~declared~~in 2002 and ~~paid~~2001 ~~(34~~7,~~880) (34~~510,~~880)~~829 ~~--- Proceeds from sale of treasury stock --- 3~~7,~~450~~510,829 --- ---------- ---------- -~~---------~~ ~~Net~~Total ~~cash~~Stockholders' ~~provided~~Equity ~~by (used in) financing activities: 96~~6,~~620 (448~~106,~~930)~~967 (28,~~406~~687,~~667)~~931 ---------- --~~--------~~ ---------- ~~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~~ -~~---------~~ ~~----------~~Total ~~---------~~Liabilities ~~Cash~~ and ~~cash~~Stockholders' ~~equivalents~~Equity ~~at end of year~~ $ ~~927~~17,~~686 $ 56~~560,~~204~~726 $ ~~291~~20,~~729~~395,447 ========== ==~~========~~ ========= ~~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.

~~The~~Homasote ~~following~~Company ~~are~~and ~~the~~Subsidiary ~~major~~CONSOLIDATED ~~classes~~STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31 COMMON STOCK ------------ PAR SHARES VALUE ------ ----- Balances at January 1, 2000 348,799 $ 172,799 Net earnings --- Other comprehensive income Reissuance of ~~inventories~~200 asshares of treasury stock --- Dividends declared and paid ($0.10 per share) --- ---------- ---------- Balances at December 31, ~~2001~~2000 348,799 172,799 Net earnings --- Other comprehensive income Dividends declared and ~~2000:~~paid ~~2001~~($0.10 ~~2000~~per share) --- ---------- ---------- ~~Finished~~Balances ~~goods~~at $December 231,~~670,284~~ $2001 1348,~~996~~799 172,~~746~~799 ~~Work~~Net loss --- Net unrealized change in: ~~process~~Minimum ~~93,103~~pension ~~66,991~~liability ~~Raw~~adjustment ~~materials~~--- ~~743,338~~Other ~~860,722~~comprehensive loss ---------- ---------- $Balances 3December 31,~~506~~ 2002 348,~~725~~799 $ 2172,~~924,459~~799 ========== ========= ~~Inventories include the cost of materials, direct labor and manufacturing overhead.~~=

ADDITIONAL PAID IN RETAINED CAPITAL EARNINGS ---------- ----------- Balances at January 1, 2000 $ 898,036 $13,329,222 Net earnings --- 313,692 Other comprehensive income Reissuance of 200 shares of treasury stock --- --- Dividends declared and paid ($0.10 per share) --- (34,880) ---------- ----------- Balances at December 31, 2000 898,036 13,608,034 Net earnings --- 1,554,771 Other comprehensive income Dividends declared and paid ($0.10 per share) --- (34,880) ---------- ----------- Balances at December 31, 2001 898,036 15,127,925 Net loss --- (500,411) Net unrealized change in: Minimum pension liability adjustment --- --- Other comprehensive loss ---------- ----------- Balances December 31, 2002 $ 898,036 $14,627,514 ========== ===========

ACCUMULATED OTHER COMPREHENSIVE TREASURY LOSS STOCK ---------- ----------- Balances at January 1, 2000 $ --- $(7,514,279) Net earnings --- --- Other comprehensive income Reissuance of 200 shares of treasury stock Dividends declared and paid --- 3,450 (0.10 per share) ---------- ----------- Balances at December 31, 2000 --- (7,510,829) Net earnings --- --- Other comprehensive income Dividends declared and paid ($0.10 per share) --- --- ---------- ---------- Balances at December 31, 2001 --- (7,510,829) Net loss --- --- Net unrealized change in: Minimum pension liability adjustment (2,080,553) --- Other comprehensive loss ---------- ---------- Balances December 31, 2002 $(2,080,553) $(7,510,829) ========== ==========

TOTAL STOCKHOLDERS' EQUITY ----------- Balances at January 1, 2000 $ 6,885,778 Net earnings 313,692 ----------- Other comprehensive income 313,692 Reissuance of 200 shares of treasury stock Dividends declared and paid 3,450 (0.10 per share) ----------- Balances at December 31, 2000 7,168,040 ----------- Net earnings 1,554,771 ----------- Other comprehensive income 1,554,771 Dividends declared and paid ($0.10 per share) (34,880) ----------- Balances at December 31, 2001 8,687,931 ----------- Net loss (500,411) Net unrealized change in: Minimum pension liability adjustment (2,080,553) ----------- Other comprehensive loss (2,580,964) ----------- Balances December 31, 2002 $ 6,106,967 =========== See accompanying notes to consolidated financial statements.

~~NOTE~~Homasote 3Company and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 2002 2001 2000 -~~PROPERTY~~---------- ---------- ----------- Cash flows from operating activities: Net (loss) earnings $ (500,411) ~~PLANT~~$ ~~AND~~1,554,771 ~~EQUIPMENT~~$ ~~Property~~313,692 ~~plant~~Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: Depreciation and ~~equipment~~amortization ~~consists~~1,290,700 1,279,645 1,262,672 Change in allowance on accounts receivable (7,122) 10,000 --- Gain on disposal of ~~the~~fixed ~~following~~assets at(900) ~~December~~(13,600) 31(27,350) Changes in assets and liabilities: (Increase) decrease in accounts receivable, net (495,874) 685,913 (257,926) Decrease (increase) in inventories 88,741 (582,266) 56,511 (Increase) decrease in prepaid expenses and other current assets (73,852) (13,184) 41,957 Decrease (increase) in prepaid benefit plan costs 527,482 (106,432) (235,890) Increase in intangible pension asset (682,855) --- --- Increase in other assets (9,887) --- --- Increase (decrease) in accounts payable 242,965 (545,636) 427,137 Increase (decrease) in accrued expenses 48,182 (261,776) 18,460 Increase in obligations under benefit plans 133,640 117,627 119,573 Decrease in other liabilities (192,174) (477,012) (141,636) ---------- ---------- --------- ~~Estimated~~Net ~~2001~~cash ~~2000~~provided ~~Useful~~by ~~Lives~~operating activities 368,635 1,648,050 1,577,200 ---------- ---------- ---------~~---~~ ~~Land~~Cash $flows ~~591,492~~from $investing ~~591~~activities: Proceeds from sale of equipment 900 13,~~492~~600 ~~Buildings~~27,350 ~~and~~Capital ~~additions~~expenditures 9(861,~~057~~723) (1,~~465~~355,098) 8(1,~~770~~519,~~539~~990) 10Decrease in restricted cash 189,093 468,310 128,845 -50--------- ~~years~~---------- ~~Machinery~~--------- ~~and~~Net ~~equipment~~cash 29used in investing activities (671,~~862~~730) (873,~~918~~188) 29(1,~~019~~363,~~920~~795) 5-20--------- ~~years~~---------- ~~Office~~----------- ~~equipment~~Cash 1flows from financing activities: Net proceeds from issuance of short-term debt 33,~~435~~000 564,~~474~~000 1--- Repayment of long-term debt (447,~~358~~500) (432,~~858~~500) ~~3-10~~(417,500) ~~years~~Dividends ~~Automotive~~declared ~~equipment~~and ~~328~~paid --- (34,~~005~~880) ~~459~~(34,~~709~~880) Proceeds from sale of treasury stock --- --- 3,450 -5--------- ~~years~~---------- ~~Construction~~---------- Net cash (used in) ~~progress~~provided ~~694~~by financing activities (414,~~187~~500) ~~545~~96,~~628~~620 (448,930) ---------- ---------- 41---------- Net (decrease) increase in cash and cash equivalents (717,~~969~~595) 871,~~541~~482 40(235,~~746,146~~525) ~~Less~~Cash ~~accumulated~~and ~~depreciation~~cash 30equivalents at beginning of year 927,~~925~~686 56,~~180~~204 29291,~~803,778~~729 ---------- ---------- --------- Cash and cash equivalents at end of year $ 11210,~~044~~091 $ 927,~~361~~686 $ 1056,~~942~~204 ========== ========== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 77,~~368~~182 $ 102,212 $ 130,003 ========== ========== ========= See accompanying notes to consolidated financial statements.

Homasote Company and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 and 2000 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 2002 were distributed as follows: Building material wholesalers and contractors, approximately 72%; industrial manufacturers, approximately 28%; in 2001, building material wholesalers and contractors, approximately 69%; industrial manufacturers, approximately 31%; in 2000, building material wholesalers and contractors, approximately 71%; industrial manufacturers, approximately 29%. 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. Homasote International Sales Co., Inc. was dissolved as of December 31, 2002. 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. PROPERTY, PLANT AND EQUIPMENT: 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. PRODUCT WARRANTIES: Product warranty costs are accrued when the covered products are delivered to the customer. Product warranty expense is recognized based on the terms of the product warranty and the related estimated costs, considering historical claims expense. Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires. The table below presents the changes in the Company's accrual for product warranties, which is included in accrued expenses, for the year ended December 31, 2002. Balance at January 1, 2002 $ 113,621 Accruals for product warranties issued during fiscal 2002 20,000 Settlements made during the period (54,145) --------- Balance at December 31, 2002 $ 79,476 =========

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 very little judgment and subjectivity. NET (LOSS) EARNINGS PER COMMON SHARE: Basic net (loss) earnings per common share has been computed by dividing net (loss) earnings by the weighted average number of common shares outstanding during the respective periods. Diluted net (loss) earnings per share is the same as basic net (loss) earnings per common share since the Company has a simple capital structure with only common stock outstanding in 2002, 2001 and 2000. 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. Export sales, primarily to Canada and the United Kingdom, accounted for approximately 6% in the year ended December 31, 2002 and 13% and 11% in the years ended December 31, 2001 and 2000, respectively, of the Company's sales. One customer accounted for 10%, 11% and 10% of the Company's sales in 2002, 2001 and 2000, respectively, and 7% and 17% of accounts receivable at December 31, 2002 and 2001,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, a supplemental non-contributory plan covers certain key employees of the Company. The Company also 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: Long-lived assets, such as property, plant, and equipment 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 an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset, which is generally based on discounted cash flows. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in a manner similar to the Company's policy described above. Statement No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company adopted Statement No. 144 on January 1, 2002 and such adoption had no effect on the Company's consolidated financial statements. RECENTLY ADOPTED ACCOUNTING STANDARDS: On January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. The adoption of SFAS Nos. 141 and 142 did not impact the Company's financial position or results of operations. On January 1, 2002, the Company adopted the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 did not impact the Company's financial position or results of operations. On January 1, 2002, the Company adopted the provisions of Emerging Issues Task Force ("EITF") Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" which is codified within EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer". The adoption of EITF No. 00-25 did not impact the Company's financial position or results of operations. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Areas in which the Company makes such estimates include inventory valuation, the valuation of long-lived assets, accounts receivable, deferred tax assets and pension and postretirement benefits. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain reclassifications have been made to the prior years' financial statements in order to conform with the current year presentation. NOTE 2-INVENTORIES

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~~following ~~income~~are ~~tax benefit differs from~~ the ~~amounts~~major ~~computed~~classes ~~by applying the U.S. Federal Income Tax rate~~ of ~~34%~~inventories ~~to earnings (loss) before income tax benefit~~ as aof ~~result~~December of31, ~~the~~2002 ~~following:~~and 2001: ~~2000~~2002 ~~1999~~2001 ------- -- ----- ----~~---~~ ~~Computed~~Finished ~~"expected"~~goods ~~tax benefit~~ $ ~~528~~2,~~622 $ 106~~777,~~655~~248 $~~(138,494)~~ ~~State income taxes (net of Federal income tax benefit) 97~~2,~~554 21~~670,~~776~~284 ~~(35,262)~~Work ~~Change~~ in ~~valuation~~process ~~allowance (655~~52,~~943)~~484 ~~(146~~93,~~419)~~103 ~~207,237~~Raw ~~Reversal~~materials ~~of prior year overaccrual of Federal tax --- --- (70~~588,~~998)~~252 ~~Other 29~~743,~~767~~338 ~~17,988 17,003~~ ------- --~~-----~~ ------- $ --- $ ~~---~~3,417,984 $ ~~(20~~3,~~514)~~506,725 ======= == ===== ====~~===~~ ~~The~~Inventories ~~tax~~include ~~effect~~the ofcost ~~temporary differences that give rise to significant portions~~ of ~~the~~materials, ~~deferred~~labor ~~tax assets~~ and ~~deferred~~manufacturing ~~tax liabilities at December 31 are presented below:~~overhead.

~~2001~~NOTE ~~2000~~ 3-~~------ ------- Deferred tax assets: Accounts receivable~~PROPERTY, ~~due~~PLANT toAND ~~allowance~~EQUIPMENT ~~for doubtful accounts $ 24~~Property,~~520~~ $plant ~~20,557 Inventories 154,969 182,555 Other liabilities, principally due to supplemental pension~~ and ~~post-~~equipment ~~retirement~~consists ~~costs~~of ~~2,431,979~~the ~~2,384,062~~following ~~Nondeductible~~at ~~accrued~~December ~~expenses~~31: ~~48,233~~Estimated ~~37,585~~2002 ~~Net~~2001 ~~operating~~Useful ~~loss~~Lives ~~carryforwards~~-- ~~Federal and State 521,556 349,163 Alternative minimum tax credit 26,000 26,000~~ --------- ---------- ~~Total deferred tax assets 3,207,257 2,999,922 Less valuation allowance (497,085) (1,153,028)~~ --------- ---~~------~~ ~~Net~~Land ~~deferred~~$ ~~tax~~591,492 ~~assets~~$ 2591,~~710~~492 Buildings and additions 9,~~172~~057,465 19,~~846~~057,~~894~~465 10-~~--------~~50 ~~---------~~years ~~Deferred~~Machinery ~~tax~~and ~~liabilities:~~equipment ~~Fixed~~31,317,297 ~~assets~~29,862,918 ~~due~~5-20 toyears ~~accelerated~~Office ~~depreciation~~equipment 1,~~668~~373,~~416~~903 ~~843~~1,~~085 Other assets~~435,474 ~~due~~3-10 toyears ~~pension~~Automotive ~~costs~~equipment 1328,~~041,756~~005 ~~999~~328,~~140~~005 ~~Other~~ 3---5 4years Construction in progress 71,~~669~~326 694,187 ---------- ---------- ~~Total~~42,739,488 ~~deferred~~41,969,541 ~~tax~~Less ~~liabilities~~accumulated 2depreciation 32,~~710~~114,~~172~~396 130,~~846~~925,~~894~~180 ---------- ---------- ~~Net deferred tax asset~~ $ ~~---~~10,625,092 $ ~~---~~11,044,361 ========== ==========

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% to 1.9% in 2002 and 1.1% to 4.3% in 2001). 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 $1,858,333 was outstanding at December 31, 2002. Principal and interest are payable monthly to the trustee in varying amounts through 2006. The Letter of Credit facility, which expires 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 noncompliance 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 from the Bank as well as a commitment (the "Commitment") 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 respecting 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 December 31, 2003. The balance of long-term debt outstanding (including current installments) at December 31, 2002 and 2001 was $1,858,333 and $2,305,833, respectively. The aggregate maturities of long-term debt at December 31, 2002, are as follows: 2003, $462,500; 2004, $477,500; 2005, $493,333; 2006, $425,000. The Company had a $1.5 million demand note line of credit agreement with the Bank, the expiration of which was November 14, 2002. Interest was payable monthly at the Bank's prime rate less 0.25%. On November 14, 2002 the line of credit was renewed with an expiration date of June 30, 2003. Under the line of credit note, the Company may borrow up to a specified percentage of eligible receivables and inventory, as defined. Interest is payable monthly at the Bank's prime rate (4.25% at December 31, 2002) plus 0.25%. As of December 31, 2002, $597,000 was outstanding under the line of credit. The unused credit available under this facility at December 31, 2002 was $903,000. 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 continue as provided in the renewal dated November 14, 2002. Total interest costs incurred during 2002, 2001 and 2000 were approximately $77,000, $102,000 and $130,000, respectively. NOTE 5-INCOME TAXES During 2002, 2001 and 2000, the Company has no current tax (benefit) expense as a result of current losses incurred or utilization of net operating loss carryforwards coupled with a change in the deferred tax valuation allowance which was equal to the change in deferred tax assets and liabilities. The actual income tax (benefit) expense differs from the amounts computed by applying the U.S. federal income tax rate of 34% to (loss) earnings before income tax (benefit) expense as a result of the following: 2002 2001 2000 ------- ------- ------- Computed "expected" tax (benefit) expense $(170,140) $ 528,622 $ 106,655 State income taxes, net of federal income tax (benefit) expense (24,133) 97,554 21,776 Change in valuation allowance 162,269 (655,943) (146,419) Other 32,004 29,767 17,988 ------- ------- ------- $ --- $ --- $ --- ======= ======= ======= The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are presented below:

2002 2001 ~~Pension Other Change in benefit obligation Benefits Benefits~~ -------~~---------------------~~ -------~~----~~ ~~------------~~Deferred ~~Benefit~~tax ~~obligation~~assets: atAccounts ~~beginning~~receivable, ofdue ~~year~~to allowance for doubtful accounts $7 21,~~803,328~~675 $2 24,~~303~~520 Inventories 152,~~756~~311 ~~Service~~154,969 ~~cost~~Other ~~125~~liabilities,~~035~~ 60principally due to supplemental pension and post- retirement costs 2,~~956~~409,267 ~~Interest~~2,431,979 ~~cost~~Nondeductible ~~590~~accrued expenses 31,~~268~~744 ~~173~~48,~~587~~233 ~~Plan~~Net ~~amendments~~operating ~~---~~loss carryforwards--- ~~Actuarial~~Federal ~~gain~~and ~~505~~State 859,~~257~~775 ~~107~~521,~~581~~556 ~~Benefits~~Alternative ~~paid~~minimum ~~(609~~tax credit 26,~~874)~~000 ~~(136~~26,~~926)~~000 --------- --------- ~~Benefit~~Total ~~obligation~~deferred attax ~~end~~assets ~~of year $8~~3,~~414~~500,~~014~~772 $23,~~508~~207,~~954~~257 ~~=========~~Less ~~=========~~valuation ~~2000~~allowance ~~Pension~~(1,490,327) ~~Other~~(497,085) ~~Change in benefit obligation Benefits Benefits~~ --------- ---------~~----------~~ Net deferred tax assets 2,010,445 2,710,172 ----------- ---------~~---~~ ~~Benefit~~Deferred ~~obligation~~tax atliabilities: ~~beginning~~Fixed ofassets, ~~year~~due $7to accelerated depreciation 1,~~736~~814,~~476~~385 $21,~~393~~668,~~729~~416 ~~Service~~Other ~~cost 119~~assets,~~882~~ ~~78,997~~due ~~Interest~~to ~~cost~~pension ~~578~~costs 196,~~487~~060 ~~182~~1,~~214~~041,756 ~~Plan~~Other ~~amendments~~--- --- ~~(187,624)~~--------- ~~Actuarial~~--------- ~~gain~~Total ~~(26,209)~~deferred ~~(46,184)~~tax ~~Benefits~~liabilities ~~paid (605~~2,~~308)~~010,445 ~~(117~~2,~~376)~~710,172 --------- --------- ~~Benefit~~Net ~~obligation~~deferred attax ~~end~~asset of$ ~~year~~--- $~~7,803,328~~ ~~$2,303,756~~--- ========= =========

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. Based upon this assessment, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of existing valuation allowances at December 31, 2002. The amount of net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. The net change in the total valuation allowance for the years ended December 31, 2002 and 2001 was an increase of $993,242 of which $830,973 relates to the Other Accumulated Comprehensive Loss charged to stockholders' equity and a decrease of ($655,943), respectively. In addition, at December 31, 2002, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $1,811,000 and $4,057,000, respectively, which are available to reduce future income 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 retirement 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, 2002 and 2001, the Supplemental Plan was unfunded. The Company also provides a portion of certain health care and life insurance benefits for retired employees who have reached the age of 65. Partial benefits were previously provided to early retirees who had 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, 2002 and 2001, 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:

~~Accrued~~2002 ~~expenses~~Pension asOther Change in benefit obligation Benefits Benefits ---------------------------- ----------- ------------ Benefit obligation at beginning of ~~December~~year 31$8,414,014 ~~2001~~$2,508,954 ~~and~~Service ~~2000~~cost ~~consist~~156,816 54,530 Interest cost 587,649 159,749 Plan amendments --- (1,370,064) Actuarial loss 408,540 1,237,264 Benefits paid (590,105) (166,267) --------- --------- Benefit obligation at end of ~~the~~year ~~following:~~$8,976,914 $2,424,166 ========= ========= 2001 ~~2000~~Pension Other Change in benefit obligation Benefits Benefits ---------------------------- ----------- ~~Commissions~~------------ $Benefit 80obligation at beginning of year $7,~~281~~803,328 $2,303,756 ~~151~~Service cost 125,~~067~~035 ~~Payroll~~60,956 ~~131~~Interest cost 590,~~724~~268 ~~151~~173,~~708~~587 ~~Other~~Plan ~~263~~amendments --- --- Actuarial loss 505,~~805~~257 ~~434~~107,~~811~~581 Benefits paid (609,874) (136,926) --------- --------- $Benefit ~~475,810~~obligation at end of year $8,414,014 ~~737~~$2,~~586~~508,954 ========= =========

2002 Pension Other Change in plan assets Benefits Benefits ------------------------- ----------- ------------ Fair value of plan assets at beginning of year $8,175,474 $ --- Actual return on plan assets (903,298) --- Employer contributions 146,769 166,267 Administrative expenses (53,127) --- Benefits paid (590,105) (166,267) --------- --------- Fair value of plan assets at end of year $6,775,713 $ --- ========= ========= 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 $ --- ========= =========

2002 Pension Other Reconciliation of funded status Benefits Benefits ------------------------------- ----------- ------------- Funded status $(2,201,201) $(2,424,166) Unrecognized transition asset --- --- Unrecognized prior service cost 669,520 (144,141) Unrecognized actuarial loss (gain) 1,032,409 (386,411) --------- --------- Net amount recognized at year-end $ (499,272) $(2,954,718) ========= ========= 2001 Pension Other Reconciliation of funded status Benefits Benefits ------------------------------- ----------- ------------ Funded status $ (238,540) $(2,508,954) Unrecognized transition asset (5,543) --- Unrecognized prior service cost 754,938 1,214,609 Unrecognized actuarial loss (gain) (1,052,819) (1,639,414) --------- ---------- Net amount recognized at year-end $ (541,964) $(2,933,759) ========= ==========

2002 Amounts recognized in the consolidated balance sheet Pension Other consist of: Benefits Benefits ------------------------------- ----------- ------------- Prepaid benefit cost $ --- $ --- Accrued benefit liability (3,262,680) (2,954,718) Intangible asset 682,855 --- Accumulated other comprehensive income 2,080,553 --- --------- ----------- Net amount recognized at year-end $ (499,272) $(2,954,718) ========= =========== Other comprehensive income attributable to change in additional minimum liability recognition $ 2,080,553 N/A 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) Intangible asset --- --- Accumulated other comprehensive income --- --- --------- ----------- Net amount recognized at year-end $ (541,964) $ (2,933,759) ========= =========== Other comprehensive income attributable to change in additional minimum liability recognition --- N/A

2002 Additional year-end information for plans with benefit obligations Pension Other in excess of plan assets: Benefits Benefits ------------------------------- ----------- ------------ Benefit obligation $ 8,976,914 N/A Fair value of plan assets 6,775,713 N/A 2001 Additional year-end information for plans with benefit obligations Pension Other in excess of plan assets: Benefits Benefits ------------------------------- ----------- ------------ ~~Benefit obligation $ 1,993,529 N/A Fair value of plan assets --- N/A~~

2002 Additional year-end information for pension plans with accumulated benefit obligations in excess of Pension Other plan assets: Benefits Benefits ------------------------------- ----------- ------------ ~~Projected benefit obligation $ 8,976,914 N/A Accumulated benefit obligation 8,692,985 N/A Fair value of plan assets 6,775,713 N/A~~

2001 Additional year-end information for pension plans with accumulated benefit obligations in excess of Pension Other plan assets: Benefits Benefits ------------------------------- ----------- ----------- ~~Projected benefit obligation $ 1,993,529 N/A Accumulated benefit obligation 1,775,527 N/A Fair value of plan assets --- N/A~~

2002 Components of net periodic benefit Pension Other cost Benefits Benefits ------------------------------- ----------- ------------ Service cost $ 190,816 $ 54,530 Interest cost 587,649 159,749 Expected return on plan assets (671,592) --- Amortization of transitional (asset) obligation (5,543) --- Amortization of prior service cost 85,418 (11,314) Recognized actuarial gain (82,671) (15,739) --------- --------- Net periodic benefit cost $ 104,077 $ 187,226 ========= ========= 2001 Components of net periodic 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 (asset) obligation 109,101 --- Amortization of prior service cost 85,418 142,624 Recognized actuarial gain (169,328) (103,998) --------- --------- Net periodic benefit cost $ 46,124 $ 273,169 ========= ========= 2000 Components of net periodic 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 (asset) obligation 109,100 --- Amortization of prior service cost 85,418 165,121 Recognized actuarial gain (257,042) (113,550) --------- --------- Net periodic benefit cost $ (124,140) $ 312,782 ========= =========

2002 Weighted-Average Assumptions as Pension Other of December 31 Benefits Benefits ------------------------------- ----------- ------------ Discount rate 6.75% 6.75% Expected long-term return on plan assets 8.50% N/A 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~~

Assumed health care cost trend For measurement purposes, a 12.0% annual rate of increase was assumed for 2003 for Staff (executive class) employees and grandfathered AARP (American Association of Retired Persons) groups. This rate was assumed to decrease gradually to 5.0% in 2017. No trend was assumed for other participant groups. 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 2002: One-Percentage- One-Percentage- Point Increase Point Decrease ------------- ------------ ~~Effect on postretirement benefit obligation $ 96,352 $ (82,686) Effect on total of service and interest cost components 11,018 (9,161)~~

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 compensation, as defined. 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 $50,142 in 2002, $60,162 in 2001 and $29,933 in 2000. NOTE 7-ACCRUED EXPENSES

~~Disclosures~~Accrued ~~About~~expenses ~~Contractual~~as ~~Obligations~~of ~~and~~December ~~Commercial~~31, ~~Commitments:~~2002 ~~Cash~~and ~~Payments~~2001 ~~Due~~consist byof ~~Period~~the ~~Less~~following: ~~than~~2002 ~~1-3~~2001 4-~~5 After 5 Total 1 Year Years Years Years~~ ------- ------- ~~-------~~Commissions ~~------- ------- Short-term debt~~ $ ~~564~~118,~~000~~138 $ ~~564~~80,~~000~~281 $Payroll ~~--- $ --- $ --- Long-term debt including current installments 2~~153,~~305,833~~060 ~~447~~131,~~500~~724 ~~940,000~~Other ~~918~~252,~~333~~794 ~~--- Employment contracts 2~~263,~~742,000~~805 ~~350,000 700,000 700,000 992,000~~ --------- --------- ~~--------- --------- ----------~~ $~~5,611,833~~ $1523,~~361,500~~992 $~~1,640,000~~ $1475,~~618,333~~810 $======= ~~992,000~~=======

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 2002, 2001 and 2000 follows: Acquired Sold Retained in Treasury ---------------- ------------- ------------------ Shares Cost Shares Cost Shares Cost ------ ---- ------ ---- ------ ---- ~~2002 2,000 $20,800 2,000 $20,800 --- $ --- 2001 --- $ --- --- $ --- --- $ --- 2000 --- $ --- 200 $ 3,450 --- $ ---~~

NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses are reflected in the consolidated financial statements at carrying value, which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's borrowings approximates their fair value based on the current rates available to the Company for similar instruments. 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 2002, 2001 and 2000 aggregated approximately $666,000, $844,000 and $936,000, respectively. 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. 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 are due July 18,2003 and August 1, 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 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 were 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, was recorded in 2001 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, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG LLP March 4, 2003, except as to the second paragraph of note 4, which is as of July 24, 2003. Short Hills, New Jersey MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This annual report, including our Letter to Shareholders and Employees 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, 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 operating results to differ materially from results or outcomes we currently seek or expect. This Annual Report was delayed as the result of the need by the Company to negotiate the modification and extension of its existing bank arrangements, as described under the "Liquidity and Capital Resources" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS 2002-2001 The Company's sales are derived from building material wholesalers and industrial manufacturers. Net sales in 2002 decreased by $653,985 or 2.5% to $25,067,400 from $25,721,385. The decrease was attributable in part to deteriorated economic conditions in the packaging industry in general and the closing of plants, and the replacement of Homasote product by a former principal export customer. Additionally, an international customer ceased purchases of private label millboard 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. These factors were partially offset by increasing acceptance of the Company's new glass separator product, Staple-Safe(TM) (patent pending) and by improved shipments of the Company's polyisocyanurate and Nova product lines in the current year period. Gross profit as a percentage of sales decreased to 23.1% in 2002 from 23.8% in 2001. The decrease resulted primarily from production interruptions and inefficiencies due to extended maintenance shutdowns of board making lines and the primary saw operation. These events resulted in abnormally low levels of board production and under- absorption of manufacturing overhead. Significant reductions in the cost of fuel and labor and associated fringe costs as compared to the year earlier period were partially offset by increases in the cost of depreciation and insurance. Decreased demand for product as discussed above also contributed to a reduction of gross profit dollars. Selling, general and administrative expenses decreased $30,311 from $6,270,149 in 2001 to $6,239,838 in 2002, and as a percentage of sales were 24.9% in 2002 as compared to 24.4% in 2001. The increase in the relative percentage of selling, general and administrative expenses is primarily attributable to the reduced volume of sales in 2001. Decreases in administration, bonus and other compensation were partially offset by increases in the cost of Company-placed advertising and sales incentive programs, increased sales agent commission costs due to the substitution of house accounts with commissionable sales, and professional fees. Interest income decreased to $13,369 in 2002 as compared to $75,962 in 2001. The decrease in interest income is attributable to lower levels of invested funds received in the insurance settlement during 2001 as discussed below and lower prevailing interest rates. Interest expense on debt decreased to $77,182 in 2002 from $102,212 in 2001. The decrease is primarily attributable to reductions in the cost of borrowed funds, partially offset by an increase in average borrowings. As discussed below, in 2001 the Company received an insurance settlement in the amount of $1,708,472. No such proceeds were received in 2002. Other income decreased to $10,652 in 2002 from $16,592 in 2001 due primarily to decreases in the net price of corrugated paper sold as scrap. As a result of the foregoing, net loss in 2002 was $(500,411) as compared to net income of $1,554,771 in 2001. 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. 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 $0.4 million in 2002, and $1.6 million in 2001. At December 31, 2002, the Company had working capital of $2,448,499, as compared to $3,089,004 at December 31, 2001, a decrease of $640,505. Capital expenditures for new and improved facilities and equipment, financed primarily through debt and the insurance proceeds discussed above, were $0.9 million in 2002, $1.4 million in 2001 and $1.5 million in 2000. The Company has estimated capital expenditures for 2003 in the amount of $0.6 million, to implement manufacturing equipment replacement and improvement projects. 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 was $0.4 million in 2002 compared to $0.1 million provided in 2001, primarily as a result of the repayment of long-term debt of $0.4 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 (1.0% to 1.9% in 2002 and 1.1% to 4.3% in 2001). 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 $1,858,333 was outstanding at December 31, 2002. Principal and interest are payable monthly to the trustee in varying amounts through 2006. The Letter of Credit facility, which expires 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 noncompliance 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 from the Bank as well as a commitment (the "Commitment") 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 respecting 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 December 31, 2003. The Company had a $1.5 million demand note line of credit agreement with the Bank, the expiration of which was November 14, 2002. Interest was payable monthly at the Bank's prime rate less 0.25%. On November 14, 2002 the line of credit was renewed with an expiration date of June 30, 2003. Under the line of credit note, the Company may borrow up to a specified percentage of eligible receivables and inventory, as defined. Interest is payable monthly at the Bank's prime rate (4.25% at December 31, 2002) plus 0.25%. As of December 31, 2002, $597,000 was outstanding under the line of credit. The unused credit available under this facility at December 31, 2002 was $903,000. 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 continue as provided in the renewal dated November 14, 2002. Management believes that cash flows from operations, coupled with its bank credit facilities, are adequate for the Company to meet its obligations through the first quarter of 2004.

~~SUMMARIZED~~Disclosures ~~(unaudited)~~About ~~QUARTERLY~~Contractual ~~FINANCIAL~~Obligations ~~DATA~~and OFCommercial ~~THE~~Commitments: ~~COMPANY~~Cash ~~FOR~~Payments ~~THE~~Due ~~YEARS~~by ~~2001~~Period ~~AND~~Less ~~2000~~than ~~ARE~~1-3 AS4-5 ~~FOLLOWS:~~After ~~(in~~5 ~~thousands~~Total of1 ~~dollars~~Year ~~except~~Years ~~per~~Years ~~share~~Years ~~data) 2001~~ ------- ------- ------- ------- ------- ~~First~~Short-term ~~Second~~debt ~~Third~~$ ~~Fourth~~597,000 $ 597,000 $ ----- $ ----- $ --- Long--term debt including current installments 1,858,333 462,500 1,395,833 --- --- ~~Net~~Employment ~~sales~~contracts $2,392,000 6350,~~868~~000 ~~$ 6~~1,~~779~~050,000 ~~$ 6~~700,~~415~~000 ~~$ 5~~292,~~659~~000 ~~=====~~--------- ~~=====~~--------- ~~=====~~--------- ~~=====~~--------- ~~Gross~~---------- ~~profit~~ $4,847,333 $1,~~450~~409,500 $ 12,~~992~~445,833 $ 1700,~~570~~000 $ 1292,~~101~~000 ===== ===== ===== ===== ~~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)~~ ===== ===== ~~===== =====~~

In addition to the aforementioned contractual obligations and commercial commitments, the Company has certain benefit plan obligations (see note 6 of the Company's consolidated financial statements) the timing of which is presently unknown and is contingent upon the retirement dates of the respective participants. The Company is party to an agreement with a contractor for the construction 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, to be financed through an operating lease with a term of ten years. The agreement is subject to the Company's obtaining construction and environmental permits and consummation of a definitive financing 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. 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 2002, 2001 and 2000 aggregated approximately $666,000, $844,000 and $936,000, respectively. The contracts expire in 2009. 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 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 will adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. On January 1, 2003, the Company will adopt the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 amends existing accounting rules for these costs by requiring that a liability be recorded at fair value when incurred. The liability would be reviewed regularly for changes in fair value with adjustments recorded in the consolidated financial statements. SFAS No. 146 also provides specific guidance for lease termination costs and one-time employee termination benefits when incurred as part of an exit or disposal activity. SFAS No. 146 will change the measurement and timing of costs associated with exit and disposal activities initiated after December 31, 2002. The provisions of SFAS No. 146 will be applied prospectively to all such costs, and are not expected to impact the Company's financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". FIN 46 provides guidance on the identification of variable interest entities, entities for which control is achieved through means other than through voting rights, and how to determine whether a variable interest holder should consolidate the variable interest entities. This interpretation applies immediately to all variable interest entities created after January 31, 2003. The effective date for applying FIN 46's consolidation requirements to variable interest entities acquired before February 1, 2003 is the beginning of the Company's third quarter 2003. The Company does not expect the adoption of FIN 46 to have a material impact on the Comany's consolidated financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance or modification of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a roll-forward of the entity's product warranty liabilities. The Company has adopted the provisions of FIN 45 and has included the required disclosures in Note 1, "Product Warranties". FIN 45 is not expected to have a material effect on the Company's consolidated results of operations and financial position. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission has issued disclosure guidance for "critical accounting policies". The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Management is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates. The significant accounting policies are described in Note 1 of the notes to consolidated financial statements included in the Company's 2002 Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management considers the following policies to be critical within the SEC definition. PENSION AND OTHER POSTRETIREMENT BENEFITS The costs and obligations of the Company's pension and retiree medical plans are calculated using many assumptions to estimate the benefit that the employee earns while working, the amount of which cannot be completely determined until the benefit payments cease. The most significant assumptions, as presented in Other Liabilities (Note 6) in the Notes to Consolidated Financial Statements, include discount rate, expected return on plan assets, mortality rates, future trends in health care costs and future pay increases (Supplemental Plan only). The selection of assumptions is based on historical trends and known economic and market conditions at the time of valuation. Actual results may differ substantially from these assumptions. These differences may significantly impact future pension or retiree medical expenses. Annual pension and retiree expense is principally the sum of four components: 1) value of benefits earned by employees for working during the year; 2) increase in liability from interest; less 3) expected return on plan assets (Pension Plan only); and 4) other gains and losses as described below. The expected return on plan assets is calculated by applying an assumed long-term rate of return to the fair value of plan assets. In any given year, actual returns can differ significantly from the expected return. Differences between the actual and expected return on plan assets are combined with gains or losses resulting from the revaluation of plan liabilities. Plan liabilities are revalued annually, based on updated assumptions and information about the individuals covered by the plan. The combined gain or loss is generally expensed evenly over the remaining years that employees are expected to work. If the value of pension plan assets is less than the accumulated pension benefit obligation, accounting standards require a company's balance sheet to include a pension liability equal to the difference. The adjustment to record this additional liability is charged to accumulated other comprehensive loss in stockholders' equity. The Company recorded a charge of $2.1 million to accumulated other comprehensive loss in 2002 to reflect required minimum pension liabilities. 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 does not expect cash contributions to the Pension Plan to be required in 2003. The Company's policy for funding the Supplemental Plan and Postretirement Benefit Plan is to contribute benefits in amounts as determined at the discretion of management. As of December 31, 2002 and 2001, these Plans were unfunded. INVENTORIES Inventories are valued at the lower of weighted average actual cost, which approximates first-in, first-out (FIFO), or market value and have been reduced by an allowance for excess and obsolete inventories. The estimate is based on management's review of inventories on hand compared to estimated future usage and sales. Cost includes material, labor and manufacturing overhead. LONG-LIVED ASSETS Long-lived assets, such as property, plant, and equipment, 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 an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company does not have any goodwill or identifiable intangible assets. DEFERRED INCOME TAX A portion of the deferred tax assets, which have been recorded by the Company, represent net operating loss carry-forwards. A valuation allowance has been recorded for certain capital losses and other deferred tax assets. 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. Based upon this assessment, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of existing valuation allowances at December 31, 2002. The amount of net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. ACCOUNTS RECEIVABLE The Company estimates an allowance for doubtful accounts after considering the collectibility of balances due, the credit worthiness of the customer and its current level of business with the customer. Actual results could differ from these estimates. 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 As of December 31, 2002 the Company ceased the manufacture of foam products at the Company's West Trenton facility. Prior to this date, the Company negotiated a contract to private label these products with another manufacturer. The Company does not expect any change in demand for these products which continue to be sold. The manufacturing assets were fully depreciated. The Company intends to sell these manufacturing assets to third parties in future periods. Gains on these sales, if any, will be recorded in the period sold.

~~Homasote~~SUMMARIZED ~~Company~~(unaudited) ~~and~~QUARTERLY ~~Subsidiary~~FINANCIAL ~~Col~~DATA AOF ~~Col~~THE BCOMPANY ~~Col~~FOR CTHE ~~Col~~YEARS D2002 ~~Col~~AND E2001 ~~Balance~~ARE atAS ~~Additions~~FOLLOWS: ~~Other~~(in ~~Beginning~~thousands ~~Charged~~of ~~Additions~~dollars ~~Balance~~except ofper toshare ordata) ~~End~~2002 of----------------------------------- ~~Description~~First ~~Period~~Second ~~Expenses~~Third ~~(Subtractions)(a)~~Fourth ~~Period~~----- ~~Allowance~~----- ~~for~~----- ~~Doubtful~~----- ~~Accounts~~Net ~~Year~~sales ~~ended~~$ ~~December 31~~6,449 ~~2001~~ $51 6,~~000~~387 $10 5,~~000~~981 ~~---~~ $61 6,~~000~~250 ~~Year~~===== ~~ended~~===== ~~December~~===== ~~31,~~===== ~~2000~~Gross profit $51 1,~~000~~411 $ ~~---~~1,870 ~~---~~$ 1,203 $51 1,~~000~~308 ~~Year~~===== ~~ended~~===== ~~December~~===== ~~31,~~===== ~~1999~~Net ~~$42,000~~(loss) earnings $~~9,000~~ (319)$ ~~---~~185 $~~51,000~~ (a340)$ ~~Principally~~(26) ~~bad~~===== ~~debts~~===== ~~written-off,~~===== ~~less~~===== ~~recoveries~~Basic and diluted net (loss)earnings per common share $ (0.92) $ 0.53 $(0.97) $(0.08) ===== ===== ===== =====

2001 ----------------------------------- First Second Third Fourth ----- ----- ----- ----- Net sales $ 6,868 $ 6,779 $ 6,415 $ 5,659 ===== ===== ===== ===== Gross profit $ 1,450 $ 1,992 $ 1,569 $ 1,101 ===== ===== ===== ===== Net (loss) earnings $ 1,540 $ 369 $ (58) $ (296) ===== ===== ===== ===== Basic and diluted net (loss) earnings per common share $ 4.42 $ 1.06 $ (0.17) $ (0.85) ===== ===== ===== =====

INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS HOMASOTE COMPANY Under date of March 4, 2003, except as to the second paragraph of Note 4, which is as of July 24, 2003, we reported on the consolidated balance sheets of Homasote Company and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three- year period ended December 31, 2002 as contained in the 2002 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, 2002, 2001 and 2000. 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, presents fairly, in all material respects, the information set forth therein. /S/ KPMG LLP March 4, 2003 Short Hills, New Jersey

Exhibit 99.1 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Homasote Company (the "Company") on Form 10-K for the year ended December 31, 2002 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: July 28, 2003 By: /s/ Warren L. Flicker Warren L. Flicker Chairman of the Board and Chief Executive Officer Exhibit 99.2 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 Annual Report of Homasote Company (the "Company") on Form 10-Q for the year ended December 31, 2002 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: July 28, 2003 By: /s/ James M. Reiser James M. Reiser Vice-President and Chief Financial Officer Exhibit 99.3 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------- Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section240.14a-12 HOMASOTE COMPANY (Name of Registrant as Specified In Its Charter) Payment of Filing Fee (Check the appropriate box): /X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------ (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------ (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------- (5) Total fee paid: ------------------------------------------------------------- / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: --------------------------------------------------- (2) Form, Schedule or Registration Statement No.: (3) Filing Party: --------------------------------------------------- (4) Date Filed: ---------------------------------------------------------------------- HOMASOTE COMPANY LOWER FERRY ROAD, PO BOX 7240 WEST TRENTON, NJ 08628 Notice of Annual Meeting of Stockholders September 15, 2003 TO THE STOCKHOLDERS: The Annual Meeting of Stockholders of Homasote Company will be held at the Office of the Company, 932 Lower Ferry Road, West Trenton, New Jersey, on Monday, September 15, 2003, at 10:00 a.m. for the following purposes: 1.To elect 9 directors to hold office for one year and until their successors shall be elected and shall qualify, and 2.To transact such other business as may properly come before the meeting or any adjournment thereof. Pursuant to the provisions of the Bylaws, the Board of Directors has fixed the close of business on August 1, 2003 as the record date for the determination of the stockholders entitled to notice of and to vote at the meeting and at any adjournments thereof. Only stockholders of record at the close of business on that date will be entitled to notice of and to vote at the meeting. The stock transfer books will not be closed. By Order of the Board of Directors JENNIFER D. BARTKOVICH Secretary Trenton, New Jersey August 15, 2003 Whether or not you expect to be present at the meeting, please sign the accompanying Proxy and return it promptly in the enclosed self-addressed envelope, which requires no postage if mailed in the United States, so that your shares may be represented at the meeting. PROXY STATEMENT This Proxy Statement is furnished in connection with the solicitation by the Board of Directors of Homasote Company (the "Company") of Proxies to be voted at the Annual Meeting of Stockholders of the Company to be held September 15, 2003. The Company's Annual Report for the year ended December 31, 2002, Notice of Meeting, and a form of Proxy accompany this Proxy Statement. The Proxy may be revoked by the person giving it at any time prior to its use by voting in person at the meeting, by filing a later dated proxy with Jennifer D. Bartkovich, Secretary, Homasote Company, P. O. Box 7240, West Trenton, New Jersey 08628-0240, or by giving written notice of such revocation to the Secretary of the Company. The mailing address of the Company is P.O. Box 7240, West Trenton, New Jersey 08628-0240. It is anticipated that the Proxy Statement and accompanying Proxy will first be sent to the Stockholders on or about August 15, 2003. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF As of August 1, 2003, the Company had 348,799 shares of outstanding common stock, 20 cents par value, which constitutes all of the outstanding voting securities of the Company. Only holders of common stock of record at the close of business on August 1, 2003, will be entitled to one vote per share on all business of the meeting. Abstentions and any shares as to which a broker or nominee indicates that it does not have discretionary authority to vote on a particular matter will be treated as shares that are present and entitled to vote for purposes of determining the presence of a quorum but as unvoted for purposes of determining whether the approval of stockholders has been obtained with respect to any such matter and thus will have the effect of a vote to "Withhold" in the election of directors. The following table sets forth certain information as of August 1, 2003, with respect to the only persons known to the Company who beneficially owned more than 5% of the Company's voting securities.

ELECTION OF DIRECTORS The Company currently has nine Directors (Irving Flicker who was formerly a Director, became deceased on May 27, 2002) who were elected for one-year terms and serve until their respective successors are duly elected and qualified. Unless marked to the contrary, it is intended that votes will be cast pursuant to the Proxies hereby solicited for the election of the nine nominees listed in the table below to serve until the Company's Annual Meeting in 2004 and until their respective successors are duly elected and qualified. Each of the nominees listed is currently a Director of the Company, having been elected to serve as a Director at the Company's Annual Meeting in 2002. Directors will be elected by a plurality vote. The Management is informed that all of the nominees are willing to serve as Directors, but if at the time of election any of the nominees should be unavailable for election, a circumstance which is not anticipated by the Board of Directors, the Proxies will be voted for such substituted nominee or nominees as may be designated by the Board of Directors. The following table sets forth certain information with respect to the Directors and Officers of the Company. Except as otherwise provided, each of the following executive officers of the Company has served in his or her present capacity or capacities for more than the past five years.

(1) Michael R. Flicker is the brother of Warren L. Flicker. (2) Includes shares owned by the Estate of Irving Flicker of which Warren Flicker is an executor and beneficiary. (3) Joseph A. Bronsard provided consulting services to the Company in 2002 for aggregate fees of $5,188. OTHER INFORMATION The Board of Directors held four meetings in 2002. With the exception of Michael R. Flicker, Peter Outerbridge and Irving Flicker (deceased May 27, 2002), who attended 50% of the meetings, all of the Directors attended 100% of the meetings. The Directors who are not employees of the Company are each compensated with a retainer fee of $4,000 and, in addition, $500 per Board meeting attended. Directors who are employees of the Company are each compensated with a retainer fee of $1,000, but are not separately compensated for attendance at Board meetings. Warren L. Flicker, James M. Reiser, and Norman Sharlin are Trustees of The Homasote Foundation, a non-profit corporation which distributes payments made by the Company for charitable and educational purposes. The Homasote Foundation owns 1,052 shares of the common stock of the Company. The Company does not have a standing Nominating Committee or any standing committee performing a similar function. The functions customarily performed by such a committee are considered the responsibility of the Board of Directors as a whole. Report of Audit Committee The Board of Directors of the Company maintains an Audit Committee, the primary functions of which are to assist the Board in fulfilling its responsibility to (i) oversee management's conduct of the Company's financial reporting process, (ii) assist the Board in carrying out its fiduciary duties, and (iii) provide a channel of communication between the Board and the Company's outside auditors. On December 1, 2000, the Board of Directors adopted a written Charter of the Audit Committee. Since the beginning of 2002, the Audit Committee has done the following: (1) reviewed and discussed the audited financial statements of the Company for the year ended December 31, 2002 (the "Audited Financial Statements") with management of the Company, (2) discussed with the independent auditors the matters required to be discussed by SAS 61 (Communications with Audit Committees), as may be modified or supplemented, and (3) received the written disclosure and the letter from the independent auditors of the Company required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as may be modified or supplemented, and has discussed with the independent auditors their independence. Based on the review and discussions referred to in items (1) through (3) above, the Audit Committee recommended to the Board of Directors that the Audited Financial Statements be included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, for filing with the Securities and Exchange Commission. Peter N. Outerbridge, Charles A. Sabino and Norman Sharlin, Directors of the Company, are the members of the Company's Audit Committee, which held two meetings during 2002. Mr. Sabino serves as Chairman of the Audit Committee. All members of the Audit Committee are independent as defined in Rule 4200(a)(15) of the NASD's listing standards, as such Rule may be modified or supplemented. Audit And Non-Audit Fees The following table presents fees for professional audit services rendered by KPMG LLP for the audit of the Company's Audited Financial Statements for 2002, and fees billed for other services rendered by KPMG LLP. Audit Fees, excluding audit related $80,500 ====== Financial information systems design and implementation fees $ 0 ====== All other fees: Audit related fees (1) $12,000 Other non-audit services fees 0 ______ Total all other fees $12,000 ====== (1) Audit related fees consisted of audits of financial statements of certain employee benefit plans. EXECUTIVE COMPENSATION Compensation for the Company's executive officers is the responsibility of the Board of Directors, based on recommendations of the Company's Compensation Committee. The members of the Compensation Committee are Warren L. Flicker, James M. Reiser and Charles A. Sabino. Each executive officer's salary is based on his specific responsibilities, overall performance, and employment contract when applicable. The Compensation Committee also periodically recommends awards of discretionary bonuses to executive officers. The bonuses are based upon the performance of the individual executive and the financial results of the Company. The following table sets forth certain information with regard to compensation awarded to, earned by, or paid by the Company in each of the Company's last three fiscal years to (i) the Chief Executive Officer of the Company, and (ii) the two highest compensated executive officers of the Company (other than the Company's Chief Executive Officer) who were serving as executive officers of the Company at December 31, 2002.

(1) The incremental cost to the Company of perquisites and other personal benefits did not for any year exceed 10% of any named executive's total annual salary and bonus. (2) Fees paid for service as Directors. (3) Amounts for 2002 represent (i) Company contributions to its Savings Plan on behalf of Peter J. McElvogue ($1,500) and James M. Reiser ($900), and (ii) amounts paid by the Company for life insurance on Warren L. Flicker ($8010), Peter J. McElvogue ($1250) and James M. Reiser ($648). (4) The Company has an employment contract with Warren L. Flicker dated and effective as of May 7, 1999, providing for his continued employment in a full-time capacity until May 6, 2009, at an annual salary of $200,000, adjusted biennially for changes in the Consumer Price Index (as defined), with the right to receive such additional executive compensation as may be granted by the Board of Directors of the Company and its subsidiary. (5) The Company has an employment contract with Peter J. McElvogue dated and effective as of July 1, 2000, providing for his continued employment in a full-time capacity until June 30, 2010, at an annual salary rate in 2000 of $135,000, increasing to $150,000 in 2001, adjusted biennially thereafter for changes in the Consumer Price Index (as defined), with the right to receive such additional executive compensation as may be granted by the Board of Directors of the Company and its subsidiary. (6) The Company instituted a Supplemental Retirement Plan effective January 1, 1978, for certain key employees. Payment is based on "average annual earnings," which is defined as the average basic earnings in the five calendar years out of the ten calendar years of employment prior to the employee's retirement for which the employee received the highest earnings. As of this date, the Plan is unfunded. (Table on next page)

The current years of credited service of the individual set forth in the table above are: Warren L. Flicker, 37 In November 1975, the Board of Directors adopted a Savings Plan effective April 1, 1976, in which all employees are eligible to participate. Under the Savings Plan, each employee may contribute up to 50% of his or her total monetary compensation, limited to a maximum of $11,000 ($12,000 in 2003). The Savings Plan provides for contributions by the Company of 25% of the first 4% or fraction thereof contributed by each participating employee. 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. Additionally, as of such date, the Company appointed Vanguard Fiduciary Trust Company, Inc. as trustee of the Savings Plan, with funds of the Savings Plan to be invested in those mutual funds of the Vanguard Group selected by the Company's Savings Plan Administrative Committee and as designated by the participating employee. FIVE-YEAR COMPARISONS PERFORMANCE GRAPH The following graph compares for the five years ended December 31, 2002, the cumulative total shareholder return on the Company's Common Stock with the cumulative total return on the Lipper Small Company Index and with the cumulative total return on the Russell 2000 Index. The graph assumes that $100 was invested on December 31, 1997, in each of the Company's Common Stock, the Lipper Small Company Index and the Russell 2000 Index, and that all dividends were reinvested. INFORMATION CONCERNING THE COMPANY'S AUDITORS The Board of Directors has not, as of the date hereof, selected the auditors for the fiscal year ending December 31, 2003. KPMG LLP acted as the Company's independent auditors for the fiscal year ended December 31, 2002. A member of the firm of KPMG LLP is expected to be present at the meeting and, if present, will have an opportunity to make a statement if he/she desires to do so and to respond to appropriate questions. OTHER BUSINESS The Board of Directors does not know of any business to be presented at the Annual Meeting other than that which is specifically referred to in the Proxy and this Proxy Statement. However, if any other matter should properly come before the meeting, it is intended that votes will be cast pursuant to the Proxy in respect thereto in accordance with the best judgment of the persons acting as Proxies. STOCKHOLDER PROPOSALS Stockholder proposals intended to be presented at the Annual Meeting in 2004 must be received by the Company at its executive offices (please address to the attention of Jennifer D. Bartkovich, Secretary), P.O. Box 7240, West Trenton, New Jersey 08628-0240, for inclusion in the Proxy Statement and form of Proxy relating to that meeting by December 4, 2003. Any such proposal must comply with Rule 14a-8 of Regulation 14A of the Proxy Rules of the Securities and Exchange Commission. EXPENSE OF SOLICITATION OF PROXIES The cost of this solicitation of Proxies will be borne by the Company. The Proxies will be solicited principally through the use of the mails, but officers and regular employees of the Company may solicit Proxies personally or by telephone or facsimile. The Company reimburses banks, brokerage houses and other custodians, nominees, and fiduciaries for their reasonable expenses in forwarding proxy material to their principals. A copy of the Company's Annual Report on Form 10-K including the financial statements and schedules thereto is available, without charge, on written request directed to Jennifer D. Bartkovich, Secretary, Homasote Company, P.O. Box 7240, West Trenton, New Jersey 08628-0240. By Order of the Board of Directors JENNIFER D. BARTKOVICH Secretary August 15, 2003

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