FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2005 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at October 31, 2005
------------------- -------------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets--Assets as of
September 30, 2005 (unaudited) and December 31, 2004 ........ 3
Consolidating Condensed Balance Sheets--Liabilities and
Stockholders' Equity as of September 30, 2005 (unaudited)
and December 31, 2004........................................ 4
Consolidating Condensed Statements of Operations for the
three months ended September 30, 2005 and 2004 (unaudited)....5
Consolidating Condensed Statements of Operations for the
nine months ended September 30, 2005 and 2004 (unaudited).... 6
Consolidating Condensed Statements of Cash Flows for the
nine months ended September 30, 2005 and 2004 (unaudited).... 7
Notes to Unaudited Consolidating Condensed Financial
Statements................................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................35
Item 3. Quantitative and Qualitative Disclosures About Market Risk...60
Item 4. Controls and Procedures......................................61
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................62
Item 3. Defaults Upon Senior Securities...........................62
Item 5. Other Information.........................................62
Item 6. Exhibits..................................................63
Signature ...........................................................66
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations
September 30, December 31, September 30, December 31,
2005 2004 2005 2004
----------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 20,959 $ 34,691
Restricted cash 11,334 15,682
Accounts receivable, net 54,089 43,591 $(499) $(1,036)
Inventories 79,545 76,036 (200) (268)
Assets of discontinued operation 3,184 2,952
Deferred income taxes 12,636 12,636
Prepaid expense & other current
assets 10,865 6,826
----------------------------------------------------------------------
Total current assets 192,612 192,414 (699) (1,304)
Property, plant & equipment, net 117,296 124,070
Other assets:
Insurance for asbestos-related
liabilities 7,500 7,500
Goodwill, net 11,300 11,300
Other assets 19,854 20,001 (147) (186)
----------------------------------------------------------------------
38,654 38,801 (147) (186)
----------------------------------------------------------------------
Total assets $348,562 $355,285 $(846) $(1,490)
======================================================================
Congoleum American Biltrite
September 30, December 31, September 30, December 31,
2005 2004 2005 2004
---------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 17,658 $ 29,710 $ 3,301 $ 4,981
Restricted cash 11,334 15,682
Accounts receivable, net 26,159 17,621 28,429 27,006
Inventories 37,065 39,623 42,680 36,681
Assets of discontinued operation 3,184 2,952
Deferred income taxes 10,678 10,678 1,958 1,958
Prepaid expense & other current
assets 7,302 5,124 3,563 1,702
---------------------------------------------------------------------
Total current assets 110,196 118,438 83,115 75,280
Property, plant & equipment, net 75,107 79,550 42,189 44,520
Other assets:
Insurance for asbestos-related
liabilities 7,500 7,500
Goodwill, net 11,300 11,300
Other assets 14,642 14,894 5,359 5,293
---------------------------------------------------------------------
14,642 14,894 24,159 24,093
---------------------------------------------------------------------
Total assets $199,945 $212,882 $149,463 $143,893
=====================================================================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations
September 30, December 31, September 30, December 31,
2005 2004 2005 2004
----------------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 22,565 $ 18,700 $ (499) $ (57)
Accrued expenses 44,246 48,605 (979)
Asbestos-related liabilities 18,771 21,079
Liabilities of discontinued operation 204 165
Notes payable 21,575 17,036
Current portion of long-term debt 20,135 21,411
Liabilities subject to compromise 21,377 14,225
----------------------------------------------------------------------
Total current liabilities 148,873 141,221 (499) (1,036)
Long-term debt, less current portion 1,385 2,790
Asbestos-related liabilities 10,238 10,238
Other liabilities 25,582 25,237
Noncontrolling interests 1,360 623
Liabilities subject to compromise 135,694 137,104 (147) (186)
----------------------------------------------------------------------
323,132 317,213 (646) (1,222)
Stockholders' equity
Common stock 46 46 (93) (93)
Additional paid-in capital 19,548 19,548 (49,106) (49,106)
Retained earnings 36,455 49,526 35,075 35,007
Accumulated other comprehensive loss (15,487) (15,916) 6,111 6,111
Less treasury shares (15,132) (15,132) 7,813 7,813
----------------------------------------------------------------------
Total stockholders' equity 25,430 38,072 (200) (268)
----------------------------------------------------------------------
Total liabilities and stockholders'
equity $348,562 $355,285 $ (846) $ (1,490)
======================================================================
Congoleum American Biltrite
September 30, December 31, September 30, December 31,
2005 2004 2005 2004
---------------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 9,583 $ 10,295 $ 13,481 $ 8,462
Accrued expenses 23,976 28,066 20,270 21,518
Asbestos-related liabilities 18,771 21,079
Liabilities of discontinued operation 204 165
Notes payable 12,595 9,500 8,980 7,536
Current portion of long-term debt 20,135 21,411
Liabilities subject to compromise 21,377 14,225
---------------------------------------------------------------------
Total current liabilities 86,302 83,165 63,070 59,092
Long-term debt, less current portion 1,385 2,790
Asbestos-related liabilities 2,738 2,738 7,500 7,500
Other liabilities 10,678 10,678 14,904 14,559
Noncontrolling interests 1,360 623
Liabilities subject to compromise 135,841 137,290
---------------------------------------------------------------------
235,559 233,871 88,219 84,564
Stockholders' equity
Common stock 93 93 46 46
Additional paid-in capital 49,106 49,106 19,548 19,548
Retained earnings (58,455) (43,830) 59,835 58,349
Accumulated other comprehensive loss (18,545) (18,545) (3,053) (3,482)
Less treasury shares (7,813) (7,813) (15,132) (15,132)
---------------------------------------------------------------------
Total stockholders' equity (35,614) (20,989) 61,244 59,329
---------------------------------------------------------------------
Total liabilities and stockholders'
equity $199,945 $212,882 $149,463 $143,893
=====================================================================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended September 30, 2005 and 2004
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations
2005 2004 2005 2004
---------------------------------------------------------------
Net sales $114,152 $113,180 $ 54 $ 56
Cost of products sold 85,841 80,564 2 52
Selling, general & administrative expenses 23,938 26,520
---------------------------------------------------------------
Income from operations 4,373 6,096 52 4
Other (income) expense:
Interest income (91) (26)
Interest expense 3,241 3,136
Other (income) expense (417) 12 67 56
---------------------------------------------------------------
2,733 3,122 67 56
---------------------------------------------------------------
Income (loss) before taxes and other items 1,640 2,974 (15) (52)
Provision for income taxes 481 1,342
Noncontrolling interests (71) (118)
---------------------------------------------------------------
Income (loss) from continuing operations
1,088 1,514 (15) (52)
Discontinued operation (80) (70)
---------------------------------------------------------------
Net income (loss) $ 1,008 $ 1,444 $(15) $(52)
===============================================================
Congoleum American Biltrite
2005 2004 2005 2004
----------------------------------------------------------------
Net sales $60,507 $58,871 $53,591 $54,253
Cost of products sold 47,270 41,812 38,569 38,700
Selling, general & administrative expenses 10,556 12,959 13,382 13,561
----------------------------------------------------------------
Income from operations 2,681 4,100 1,640 1,992
Other (income) expense:
Interest income (91) (26) - -
Interest expense 2,670 2,417 571 719
Other (income) expense (223) (212) (261) 168
----------------------------------------------------------------
2,356 2,179 310 887
----------------------------------------------------------------
Income (loss) before taxes and other items 325 1,921 1,330 1,105
Provision for income taxes - 768 481 574
Noncontrolling interests (71) (118)
----------------------------------------------------------------
Income (loss) from continuing operations
325 1,153 778 413
Discontinued operation (80) (70)
----------------------------------------------------------------
Net income (loss) $ 325 $ 1,153 $ 698 $ 343
================================================================
Basic Diluted
2005 2004 2005 2004
-------------------------------- --------------------------------
Income per common share from continuing
operations $ 0.32 $ 0.44 $ 0.31 $ 0.44
Discontinued operation (0.02) (0.02) (0.02) (0.02)
-------------------------------- --------------------------------
Net income per common share $ 0.30 $ 0.42 $ 0.29 $ 0.42
================================ ================================
Weighted average number of common and
equivalent shares outstanding 3,442 3,442 3,475 3,466
================================ ================================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Nine Months Ended September 30, 2005 and 2004
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations
2005 2004 2005 2004
------------------------------------------------------------------
Net sales $331,118 $325,105 $178 $146
Cost of products sold 246,630 234,034 (81) (86)
Selling, general & administrative expenses 88,428 79,166
------------------------------------------------------------------
(Loss) income from operations (3,940) 11,905 259 232
Other (income) expense:
Interest income (320) (38)
Interest expense 9,772 9,185
Other (income) expense (2,582) (256) 191 215
------------------------------------------------------------------
6,870 8,891 191 215
------------------------------------------------------------------
(Loss) income before taxes and other items (10,810) 3,014 68 17
Provision (credit) for income taxes 1,436 1,395
Noncontrolling interests (632) (141)
------------------------------------------------------------------
(Loss) income from continuing operations
(12,878) 1,478 68 17
Discontinued operation (193) (342)
------------------------------------------------------------------
Net (loss) income $(13,071) $ 1,136 $ 68 $ 17
==================================================================
Congoleum American Biltrite
2005 2004 2005 2004
---------------------------------------------------------------
Net sales $176,245 $173,822 $154,695 $151,137
Cost of products sold 135,577 126,326 111,134 107,794
Selling, general & administrative expenses 48,416 37,961 40,012 41,205
---------------------------------------------------------------
(Loss) income from operations (7,748) 9,535 3,549 2,138
Other (income) expense:
Interest income (273) (26) (47) (12)
Interest expense 7,788 6,976 1,984 2,209
Other (income) expense (638) (877) (2,135) 406
---------------------------------------------------------------
6,877 6,073 (198) 2,603
---------------------------------------------------------------
(Loss) income before taxes and other items (14,625) 3,462 3,747 (465)
Provision (credit) for income taxes -- 1,384 1,436 11
Noncontrolling interests (632) (141)
---------------------------------------------------------------
(Loss) income from continuing operations
(14,625) 2,078 1,679 (617)
Discontinued operation (193) (342)
---------------------------------------------------------------
Net (loss) income $(14,625) $ 2,078 $ 1,486 $ (959)
===============================================================
Basic Diluted
2005 2004 2005 2004
-------------------------------- --------------------------------
(Loss) income per common share from
continuing operations $(3.74) $ 0.43 $(3.74) $ 0.43
Discontinued operation (0.06) (0.10) (0.06) (0.10)
-------------------------------- --------------------------------
Net (loss) income per common share $(3.80) $ 0.33 $(3.80) $ 0.33
================================ ================================
Weighted average number of common and
equivalent shares outstanding 3,442 3,442 3,442 3,455
================================ ================================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2005 and 2004
(In thousands of dollars)
ABI Consolidated Eliminations
2005 2004 2005 2004
-------------------------------------------------------
Operating activities
Net (loss) income $(13,071) $ 1,136 $ 68 $ 17
Net loss from discontinued operation 193 342
-------------------------------------------------------
Net (loss) income from continuing operations (12,878) 1,478 68 17
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Depreciation and amortization 12,669 13,246
(Gain) loss on disposal of property (2,280) 184
Asbestos related charge 15,454
Change in operating assets and liabilities:
Accounts and notes receivable (10,706) (12,326) (537) (282)
Inventories (3,564) (2,984) (68) (17)
Prepaid expenses and other assets (1,323) 6,009
Accounts payable and accrued expenses 6,932 28,870 537 282
Asbestos-related expenses (20,819) (4,500)
Asbestos-related expense reimbursements from
insurance settlement 6,091
Noncontrolling interests 737 (74)
Other (1,588) 395
-------------------------------------------------------
Net cash (used) provided by operating activities (11,275) 30,298 -- --
Investing activities
Investments in property, plant and equipment (5,425) (3,955)
Proceeds from sale of property 2,327 30
-------------------------------------------------------
Net cash (used) provided by investing activities (3,098) (3,925) -- --
Financing activities
Net short-term borrowings 4,307 982
Payments on long-term debt (2,611) (897)
Net change in restricted cash (1,441) (1,854)
-------------------------------------------------------
Net cash provided (used) by financing activities 255 (1,769) -- --
Effect of foreign exchange rate changes on cash 686 164
-------------------------------------------------------
Net cash (used) provided by continuing operations (13,432) 24,768 -- --
Net cash used by discontinued operations (300) (619)
Cash and cash equivalents at beginning of period 34,691 3,959
-------------------------------------------------------
Cash and cash equivalents at end of period $ 20,959 $ 28,108 $ -- $ --
=======================================================
Congoleum American Biltrite
2005 2004 2005 2004
------------------------------------------------------
Operating activities
Net (loss) income $(14,625) $ 2,078 $ 1,486 $ (959)
Net loss from discontinued operation 193 342
------------------------------------------------------
Net (loss) income from continuing operations (14,625) 2,078 1,679 (617)
Adjustments to reconcile net (loss) income to net
cash (used) provided by operating activities:
Depreciation and amortization 8,371 8,545 4,298 4,701
(Gain) loss on disposal of property (2,280) 184
Asbestos related charge 15,454 --
Change in operating assets and liabilities:
Accounts and notes receivable (8,538) (5,009) (1,631) (7,035)
Inventories 2,558 1,899 (6,054) (4,866)
Prepaid expenses and other assets 577 3,498 (1,900) 2,511
Accounts payable and accrued expenses 2,703 23,516 3,692 5,072
Asbestos-related expenses (20,819) (4,500)
Asbestos-related expense reimbursements from
insurance settlement 6,091
Noncontrolling interests 737 (74)
Other (1,838) 1,054 250 (659)
------------------------------------------------------
Net cash (used) provided by operating activities (10,066) 31,081 (1,209) (783)
Investing activities
Investments in property, plant and equipment (3,640) (2,246) (1,785) (1,709)
Proceeds from sale of property 30 2,327
------------------------------------------------------
Net cash (used) provided by investing activities (3,640) (2,216) 542 (1,709)
Financing activities
Net short-term borrowings 3,095 (1,594) 1,212 2,576
Payments on long-term debt (2,611) (897)
Net change in restricted cash (1,441) (1,854)
------------------------------------------------------
Net cash provided (used) by financing activities 1,654 (3,448) (1,399) 1,679
Effect of foreign exchange rate changes on cash 686 164
------------------------------------------------------
Net cash (used) provided by continuing operations (12,052) 25,417 (1,380) (649)
Net cash used by discontinued operations (300) (619)
Cash and cash equivalents at beginning of period 29,710 2,169 4,981 1,790
------------------------------------------------------
Cash and cash equivalents at end of period $ 17,658 $27,586 $ 3,301 $ 522
======================================================
See accompanying notes to consolidating condensed financial statements.
7
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, provisions for
discontinued operations and provisions to effect the plan of reorganization of
Congoleum Corporation, a majority-owned subsidiary of the Company, to settle
asbestos liability) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. For further information, refer to the
consolidating financial statements and footnotes thereto included in the
American Biltrite Inc.'s Annual Report on Form 10-K for the year ended December
31, 2004.
The consolidating balance sheet at December 31, 2004 has been derived from the
audited financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidating condensed
financial statements have been reclassified to conform to the current period's
presentations.
During 2003, the Company decided to discontinue the operations of Janus Flooring
Corporation ("Janus"), a manufacturer of pre-finished hardwood flooring, and
sell the related assets. Historical financial results have been restated to
reflect the classification of Janus as a discontinued operation in accordance
with the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets. Results of Janus, including charges resulting from the
shutdown, are being reported as a discontinued operation.
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") and two of its
subsidiaries filed voluntary petitions commencing cases for reorganization
relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") on December 31, 2003. The accompanying
8
Note A - Basis of Presentation (continued)
consolidating condensed financial statements include the results for Congoleum
for all periods presented. ABI continues to own a majority of the voting stock
of Congoleum. As a result, the Company expects to continue to control Congoleum
while it is in reorganization proceedings. In January 2004, Congoleum filed its
proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. In November 2004, Congoleum filed a modified plan of reorganization and
related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the modified
plan. In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative to make certain modifications to its proposed
plan of reorganization and related documents governing the settlement and
payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the "Plan Trust") to pay asbestos claims against
Congoleum. In July 2005, Congoleum filed an amended plan of reorganization (the
"Sixth Plan") and related documents with the Bankruptcy Court which reflected
the result of these negotiations, as well as other technical modifications. The
Bankruptcy Court approved the disclosure statement and voting procedures and
Congoleum commenced solicitation of acceptances of the Sixth Plan in August
2005. In September 2005, Congoleum learned that certain asbestos claimants were
unwilling to agree to forbear from exercising their security interest as
contemplated by the Sixth Plan. In October 2005, Congoleum sought and obtained
an extension of the voting deadline to December 14, 2005 to allow time to
address this issue. Congoleum is presently in negotiations with these claimants,
as well as other constituencies, to determine the modifications of the Sixth
Plan and other steps that may be appropriate for the implementation of the plan.
The Bankruptcy Court has given Congoleum permission to file a new amended plan
and disclosure statement by December 2, 2005. On November 7, 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof. The Bankruptcy Court
ruled that other parties may file proposed reorganization plans by December 2,
2005. It is unclear whether any person other than Congoleum will attempt to
propose a plan or what any such plan would provide or propose.
There can be no assurance that Congoleum will finalize the terms of a new
amended plan by that date, that Congoleum will receive the acceptances necessary
for confirmation of a new amended plan of reorganization, that a new amended
plan will not be modified further, that a new amended plan will receive
necessary court approvals from the Bankruptcy Court or the Federal District
Court, or that such approvals will be received in a timely fashion, that a new
amended plan will be confirmed, or that a new amended plan, if confirmed, will
become effective.
9
Note A - Basis of Presentation (continued)
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and may file objections to
any new amended plan. Certain other parties have also filed various objections
to Congoleum's previously proposed plans of reorganization and may file
objections to any new amended plan.
Although the terms of a new amended plan have not been determined, Congoleum is
negotiating amendments and modifications with reference to the terms of the
Sixth Plan. Any descriptions of the Sixth Plan provided in these Notes to
Unaudited Consolidating Condensed Financial Statements are provided to assist
the reader in understanding the basis from which any further amended plan may be
negotiated. There can be no assurance that the terms of any new amended plan
will not materially differ from the terms of the Sixth Plan or that Congoleum
will reach agreement on a new amended plan on or before December 2, 2005.
The Sixth Plan would leave Congoleum's non-asbestos creditors unimpaired and
would resolve all pending and future asbestos claims against Congoleum. The
Sixth Plan provides, among other things, for an assignment of certain rights in,
and proceeds of, Congoleum's applicable insurance to the Plan Trust that would
fund the settlement of all pending and future asbestos claims and protect
Congoleum from future asbestos-related litigation by channeling all asbestos
claims to the Plan Trust under Section 524(g) of the Bankruptcy Code. The
Bankruptcy Court has authorized Congoleum to pay its trade creditors in the
ordinary course of business. Congoleum expects that it will take until some time
in the second or third quarter of 2006 at the earliest to obtain confirmation of
any new amended plan of reorganization.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J of the Notes to Unaudited
Consolidating Condensed Financial Statements.
Although there can be no assurances with respect to the terms of any new amended
plan, the Company believes, based on the terms of the Sixth Plan and subsequent
negotiations regarding a new amended plan that have occurred to date, that there
is reasonable basis to expect it will maintain control of Congoleum under the
terms of a new amended plan, subject to Congoleum obtaining the necessary
acceptances and approvals required for confirmation of the plan. Accordingly,
the Company has elected to continue to consolidate the financial statements of
Congoleum in its consolidated results because it believes that is the
appropriate presentation given its anticipated continuing control of Congoleum.
However, the accompanying financial statements also present the details of
consolidation to separately show the financial condition, operating results and
cash flows of ABI (excluding Congoleum and its wholly owned subsidiaries) and
Congoleum and its wholly owned subsidiaries, which may be more meaningful for
certain analyses.
10
Note A - Basis of Presentation (continued)
The financial statements of Congoleum have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
The American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
31, 2003. Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy
Code are required to segregate pre-petition liabilities that are subject to
compromise and report them separately on the balance sheet. Liabilities that may
be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Liabilities for asbestos claims are recorded based upon the minimum amount
Congoleum expects to spend for its contribution to, and costs to settle asbestos
liabilities through the Plan Trust. Obligations arising post-petition, and
pre-petition obligations that are secured or that the Bankruptcy Court has
authorized Congoleum to pay, are not classified as liabilities subject to
compromise. Other pre-petition claims (which would be classified as liabilities
subject to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases pursuant to the Bankruptcy Code, or as a result of
the allowance by the Bankruptcy Court of contingent or disputed claims related
to pre-petition matters.
Note B - Stock Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"). SFAS No. 123(R)
replaces SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and
amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. Pro
forma disclosure is no longer an alternative to financial statement recognition.
SFAS No. 123(R) was originally effective for public companies at the beginning
of the first interim or annual period beginning after September 15, 2005. In
April 2005, the Securities and Exchange Commission ("SEC") provided for a
phased-in implementation process for public companies. Based on the Company's
year end of December 31, the Company must adopt SFAS No. 123(R) on January 1,
2006.
11
Note B - Stock Based Compensation (continued)
SFAS No. 123(R) allows for either prospective recognition of compensation
expense or retrospective recognition, which may be back to the original issuance
of SFAS No. 123 or only to interim periods in the year of adoption. The Company
is currently evaluating these transition methods and determining the effect on
the Company's consolidated results of operations and whether the adoption will
result in amounts that are similar to the current pro-forma disclosures under
SFAS No. 123. For 2005, the Company will continue to disclose stock-based
compensation information in accordance with FASB Statement No. 148 ("SFAS 148"),
Accounting for Stock-Based Compensation--Transition and Disclosure--an Amendment
of FASB Statement No. 123, and SFAS No. 123.
Below is a reconciliation of consolidated net income (loss), as reported, to pro
forma consolidated net income (loss) including compensation expense for the
Company's and Congoleum's stock-based plans as calculated based on the fair
value at the grant dates for awards made under these plans in accordance with
the provisions of SFAS 123 as amended by SFAS 148, as well as a comparison of as
reported and pro forma basic and diluted EPS follows (in thousands, except per
share data):
Three Months Ended Nine Months Ended
September 30 September 30
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss):
As reported $ 1,008 $ 1,444 $ (13,071) $ 1,136
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (99) (101) (293) (225)
---------- ---------- ---------- ----------
As adjusted $ 909 $ 1,343 $ (13,364) $ 911
========== ========== ========== ==========
Net income (loss) per share - basic:
As reported $ 0.30 $ 0.42 $ (3.80) $ 0.33
Pro forma compensation expense (0.03) (0.03) (0.08) (0.07)
---------- ---------- ---------- ----------
$ 0.27 $ 0.39 $ (3.88) $ 0.26
========== ========== ========== ==========
Net income (loss) per share - diluted:
As reported $ 0.29 $ 0.42 $ (3.80) $ 0.33
Pro forma compensation expense (0.03) (0.03) (0.08) (0.07)
---------- ---------- ---------- ----------
$ 0.26 $ 0.39 $ (3.88) $ 0.26
========== ========== ========== ==========
In November 2005, the Compensation Committee of the Board of Directors of the
Company approved the vesting of all outstanding and unvested options held by
directors, officers and employees under American Biltrite's stock option plans.
See Note N - Subsequent Event.
12
Note C - Inventories
Inventories at September 30, 2005 and December 31, 2004 consisted of the
following (in thousands):
September 30, December 31,
2005 2004
-------------- --------------
Finished goods $55,226 $54,597
Work-in-process 11,140 9,207
Raw materials and supplies 13,178 12,232
------------- -------------
$79,544 $76,036
============= =============
Note D - Sale of Property
In January 2005, the Company completed the sale of a warehouse building and land
located in Tullahoma, Tennessee. The building and land were owned by Tullahoma
Properties, L.L.C. ("Tullahoma Properties"), a subsidiary in which ABI owns a
62.5% interest. The building was previously leased to a third party, and upon
termination of the lease in 2003, Tullahoma Properties listed the property for
sale. The building and land were sold for $2.5 million in cash and a gain of
approximately $2.3 million was recognized and included in other income in the
first quarter 2005. After taxes and non-controlling interest, the increase in
first quarter net income as a result of the sale was $887 thousand or $0.26 per
share.
Note E - Accrued Expenses
Accrued Expenses at September 30, 2005 and December 31, 2004 consisted of the
following (in thousands):
September 30, December 31,
2005 2004
------------- ------------
Accrued warranty, marketing and
sales promotion $23,677 $24,260
Employee compensation and
related benefits 9,479 9,138
Interest 143 191
Environmental matters 1,000 1,000
Royalties 675 1,118
Taxes payable 2,511 3,709
Other 6,760 9,189
----------- ------------
$44,245 $48,605
=========== ============
See Note G for Liabilities Subject to Compromise.
13
Note F - Other Liabilities
Other Liabilities at September 30, 2005 and December 31, 2004 consisted of the
following (in thousands):
September 30, December 31,
2005 2004
------------- ------------
Pension benefits $ 2,701 $ 2,615
Environmental remediation and non-
asbestos product related liabilities 4,867 4,680
Deferred income taxes 16,559 16,531
Other 1,455 1,411
----------- ----------
$25,582 $25,237
=========== ==========
See Note G for Liabilities Subject to Compromise.
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J to the Unaudited
Consolidating Condensed Financial Statements), pursuant to SOP 90-7, Congoleum
is required to segregate pre-petition liabilities that are subject to compromise
and report them separately on its consolidated balance sheet. Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of Congoleum's pre-petition debt is recorded at face value and
is classified within liabilities subject to compromise. In addition, Congoleum's
accrued but unpaid interest expense on its 8 5/8% Senior Notes Due 2008 is also
recorded in liabilities subject to compromise. See Notes A and J to the
Unaudited Consolidating Condensed Financial Statements for further discussion of
Congoleum's asbestos liability. Liabilities subject to compromise for the
Company on a consolidated basis were as follows (in thousands):
September 30, December 31,
2005 2004
------------- ------------
Current
Other pre-petition payables and accrued interest $ 21,377 $ 14,225
Non-current
Debt (at face value) 100,000 100,000
Pension liability 15,490 16,936
Other post-retirement benefit obligation 8,067 8,303
Other pre-petition liabilities 12,284 12,051
-------------- -----------
135,841 137,290
Elimination - Payable to American Biltrite (147) (186)
-------------- -----------
135,694 137,104
-------------- -----------
Total liabilities subject to compromise $157,071 $151,329
============== ===========
14
Note G - Liabilities Subject to Compromise (continued)
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims relating to pre-petition matters.
Note H - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three and
nine months ended September 30, 2005 and 2004 (in thousands):
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
-------------------------- --------------------------
Other Other
Pension Benefits Pension Benefits
---------- ---------- ---------- ----------
Components of Net Periodic Benefit Cost:
Service cost $ 519 $ 46 $ 500 $ 50
Interest cost 1,446 130 1,402 140
Expected return on plan assets (1,370) -- (1,210) --
Recognized net actuarial
(gain) loss (60) 15 (61) 11
Amortization of transition
obligation (9) -- (35) --
Amortization of prior service
cost 255 (47) 349 (116)
---------- ---------- ---------- ----------
Net periodic benefit cost $ 781 $ 144 $ 945 $ 85
========== ========== ========== ==========
15
Note H - Pension Plans (continued)
Nine Months Ended Nine Months Ended
September 30, 2005 September 30, 2004
-------------------------- --------------------------
Other Other
Pension Benefits Pension Benefits
---------- ---------- ---------- ----------
Components of Net Periodic Benefit Cost:
Service cost $ 1,690 $ 138 $ 1,556 $ 150
Interest cost 4,334 390 4,206 420
Expected return on plan assets (3,908) -- (3,636) --
Recognized net actuarial
(gain) loss (181) 45 (183) 33
Amortization of transition
obligation (45) -- (104) --
Amortization of prior service
cost 976 (141) 1,098 (348)
---------- ---------- ---------- ----------
Net periodic benefit cost $ 2,866 $ 432 $ 2,937 $ 255
========== ========== ========== ==========
The weighted average assumptions used to determine net periodic benefit cost for
the three and nine months ended September 30, 2005 and 2004 were as follows:
2005 2004
-------------------------- --------------------------
Other Other
Pension Benefits Pension Benefits
------------- ----------- ------------- -----------
Discount rate 6.10% - 6.25% 6.25% 6.25% - 6.75% 6.25%
Expected long-term return on
plan assets 7.00% - 7.50% -- 7.00% - 7.50% --
Rate of compensation increase 4.00% - 5.50% -- 4.00% - 5.50% --
16
Note I - Commitments and Contingencies
The Company and Congoleum are subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of Congoleum's owned and previously owned
facilities. The contingencies also include claims for personal injury and/or
property damage. The exact amount of such future cost and timing of payments are
indeterminable due to such unknown factors as the magnitude of cleanup costs,
the timing and extent of the remedial actions that may be required, the
determination of the Company's and Congoleum's liability in proportion to other
potentially responsible parties, and the extent to which costs may be
recoverable from insurance. The Company has recorded provisions in the financial
statements for the estimated probable loss associated with all known general and
environmental contingencies, including those related to Congoleum. While the
Company believes these estimates of the future amount of these liabilities are
reasonable, and that they will be paid over a period of three to ten years, the
timing and amount of such payments may differ significantly from the Company's
and Congoleum's assumptions. Although the effect of future government regulation
could have a significant effect on the Company's and Congoleum's costs, the
Company is not aware of any pending legislation which would reasonably have such
an effect. There can be no assurances that the costs of any future government
regulations could be passed along to the Company's and Congoleum's customers.
Estimated insurance recoveries related to these liabilities are reflected in
other non-current assets.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company or Congoleum, as applicable, will incur costs
relating to a clean-up program or will have to make claim payments and the costs
or payments can be reasonably estimated. As assessments are revised and clean-up
programs progress, these liabilities are adjusted to reflect such revisions and
progress.
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's consolidating balance sheet. Due
to the relative magnitude and wide range of estimates of these liabilities and
that recourse related to these liabilities is generally limited to Congoleum,
these matters are discussed separately following matters for which ABI has
actual or potential liability. However, since ABI includes Congoleum in ABI's
financial statements, to the extent that Congoleum incurs a liability or
expense, it will be reflected in ABI's consolidating financial statements.
17
Note I - Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,747 pending claims involving
approximately 2,416 individuals as of September 30, 2005. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Year Ended
Nine Months Ended December 31,
September 30, 2005 2004
------------------ -------------
Beginning claims 1,838 1,954
New claims 524 678
Settlements (20) (20)
Dismissals (595) (774)
---------- -------------
Ending claims 1,747 1,838
========== =============
The total indemnity costs incurred to settle claims during the nine months ended
September 30, 2005 and twelve months ended December 31, 2004 were $1,138,000 and
$1,320,000, respectively, all of which were paid by ABI's insurance carriers
pursuant to ABI's applicable insurance policies, as were the related defense
costs. The average indemnity cost per resolved claim was approximately $1,913
for the nine months ended September 30, 2005 and $2,000 for the year ended
December 31, 2004.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable.
The Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum), based upon a strategy to actively defend or seek settlement
for those claims in the normal course of business. Factors such as recent and
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. In 2004, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability
18
Note I - Commitments and Contingencies (continued)
for resolving present and possible future asbestos claims. At September 30, 2005
and December 31, 2004, the estimated range of liability for settlement of
current claims pending and claims anticipated to be filed through 2010 was $7.5
million to $19.4 million. The Company believes no amount within this range is
more likely than any other, and accordingly has recorded the minimum liability
estimate of $7.5 million in its consolidated financial statements. The Company
also believes that, based on this minimum liability estimate, the corresponding
amount of insurance probable of recovery is $7.5 million at September 30, 2005
and December 31, 2004, which has been included in other assets. Receivables for
expected insurance recoveries are recorded if the related carriers are solvent
and paying claims under a reservation of rights or under an obligation pursuant
to coverage in place or a settlement agreement. Two insurance carriers account
for 70% and 25%, respectively, of the $7.5 million deemed probable of recovery.
The estimated liabilities and insurance recovery amounts were based on currently
known facts and a number of assumptions. However, projecting future events, such
as the number of new claims to be filed each year, the average cost of disposing
of each such claim, and the continuing solvency of various insurance companies,
as well as numerous uncertainties surrounding the potential enactment of
asbestos legislation in the United States, could cause the actual liability and
insurance recoveries for the Company to be significantly higher or lower than
those projected or recorded.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a five year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that resolution of its asbestos related liabilities
resulting from Congoleum's reorganization plan will be limited to liabilities
derivative of claims asserted against Congoleum as may be afforded under Section
524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2004 Annual Report on Form 10-K that it has
been named as a Potentially Responsible Party ("PRP") within the meaning of the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended ("CERCLA"), with respect to four sites located in three separate states.
ABI also reported that it is potentially responsible for response and
remediation costs with respect to three state-supervised sites located in two
separate states. There have been no material developments relating to these
sites during the three month period ended September 30, 2005.
In 1993, a lawsuit was brought by Olin Corporation ("Olin"), the present owner
of a former chemical plant site in Wilmington, Massachusetts (the "Olin Site"),
which alleged that ABI and three other named defendants were liable for a
portion of the site's soil and groundwater response and remediation costs at the
site. A wholly-owned subsidiary of ABI owned and operated the Wilmington plant
from 1959 to 1964, and for approximately one month during 1964, American
Biltrite Inc. held title to the property directly.
19
Note I - Commitments and Contingencies (continued)
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus pay an annual reimbursement of $100 thousand for
Olin's internal costs as long as Olin is actively working on remediating the
site. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
aggregate amounts due from ABI and TBC under the settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2005 will be approximately $6.4 million. For costs
beyond 2005, ABI has estimated the range of total response costs for the site to
be between $20.0 million and $59.0 million. As of September 30, 2005, ABI has
estimated its potential liability to Olin to be in the range of $4.4 million to
$13.8 million after allocation for the annual reimbursement of $100 thousand for
Olin's internal costs but before any recoveries from insurance and TBC.
The State of Maine Department of Environmental Protection has put Miller
Industries, Inc. ("Miller"), the present owner of a former ABI sheet vinyl plant
in Lisbon Falls, Maine, on notice to clean up a dumpsite where there is exposed
asbestos from sheet vinyl waste along with other hazardous substances. In
September 2005, a lawsuit was brought by Miller against ABI, which alleged that
ABI and one other named defendant are liable for costs to clean up the dumpsite
("Parcel A") and a second parcel of land ("Parcel B"), which is alleged to
contain polychlorinated biphenyls ("PCB's") in the soil. The lawsuit, captioned
Miller Industries, Inc. v. American Biltrite Inc. et al, was filed on September
22, 2005 in the Androscoggin Superior Court of Maine. Miller is seeking
indemnification or contribution from ABI for the clean-up of both parcels of
land (together, the "Maine Sites").
Prior to the commencement of the lawsuit by Miller, the Company had been
investigating and reviewing the condition of Parcel A and its potential
liability for its share of any clean-up costs. The Company believes, at this
time, that the cost of site investigation, remediation, maintenance and
monitoring for Parcel A will be between approximately $1.2 million and $2.9
million. Prior to the filing of the lawsuit, the Company was also in the process
of reviewing the condition of Parcel B and its potential liability for its share
of any clean-up costs. The Company cannot determine at this time the cost of
site investigation, remediation, maintenance and monitoring for Parcel B.
Furthermore, at this time, the Company is not able to determine what its
potential liability will be with regard to the Maine Sites. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of costs incurred by ABI for the
Maine Sites.
20
Note I - Commitments and Contingencies (continued)
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the three state supervised
sites, the Olin Site, and the Maine Sites. An agreement was executed by ABI and
its carriers regarding the payment of the defense costs for the Olin Site. ABI
has reached agreements with three of its insurance carriers whereby the carriers
have reimbursed the Company $1.9 million for past and current environmental
claims. One carrier has also agreed to reimburse the Company for 2.5% of the
Company's liabilities regarding future environmental expenses related to the
Olin Site, $49,600 of which was reimbursed through September 30, 2005 and 37.5%
of the amount of that reimbursement was shared with TBC pursuant to the
Company's agreement with TBC. ABI and its insurance carriers continue to discuss
ABI's remaining demands for insurance coverage for these sites. As of September
30, 2005, the Company has accrued $5.9 million for ABI's estimable and probable
amounts for environmental-related contingencies described above. The Company has
also recorded a receivable of $2.2 million for ABI's estimable and probable
recoveries for the contingencies described above.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order from the New Jersey
Department of Environmental Protection for any environmental remediation the
state may require at that location. Pursuant to the contribution in 1993 of the
Company's former tile division to Congoleum, Congoleum assumed liability for the
cost of cleaning up the site. Congoleum has established a remediation trust fund
of $100 thousand as financial assurance for certain remediation funding
obligations. The Company remains contingently liable in the event that Congoleum
fails to perform or fund any required remediation relating to this site.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary case under Chapter 11
of the Bankruptcy Code. See Note J - "Congoleum Asbestos Liabilities and
Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability and funding obligations in connection with those
other sites depends on many factors, including the volume of material
contributed to the site by Congoleum,
21
Note I - Commitments and Contingencies (continued)
the number of other PRP's and their financial viability, the remediation methods
and technology to be used and the extent to which costs may be recoverable by
Congoleum from relevant insurance policies. However, under CERCLA, and certain
other laws, as a PRP, Congoleum can be held jointly and severally liable for all
environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 81 companies, substantially all of which are large, financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998, and a groundwater treatment system was installed thereafter. The EPA
recently selected a remedy for the soil and shallow groundwater; however, the
remedial investigation/feasibility study related to the deep groundwater has not
been completed. The PRP group estimated that future costs of the remedy recently
selected by the EPA based on engineering estimates would be approximately $11
million. Congoleum's proportionate share, based on waste disposed at the site,
is estimated to be approximately 5.7%, or approximately $0.7 million. The
majority of Congoleum's share of costs incurred to date has been paid by one of
its insurance carriers, whose remaining policy limits for this claim will cover
approximately half this amount. Congoleum expects the balance to be funded by
other insurance carriers and Congoleum.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.7 million, including capital outlays and future maintenance
costs for soil and groundwater remediation, are primarily based on engineering
studies. Of this amount, $300 thousand was included in current liabilities
subject to compromise and $1.4 million was included in non-current liabilities
subject to compromise as of September 30, 2005 and December 31, 2004.
At September 30, 2005 and December 31, 2004, Congoleum had recorded a total of
$4.6 million for estimated environmental liabilities and $2.1 million for
related insurance recoveries. Receivables for expected insurance recoveries are
recorded if the related carriers are solvent and paying claims under a
reservation of rights or under an obligation pursuant to coverage in place or a
settlement agreement. Substantially all of Congoleum's recorded insurance asset
for environmental matters is collectible from a single carrier.
Congoleum anticipates that these matters will be resolved over a period of
years, and that after application of expected insurance recoveries, funding of
the costs by Congoleum will not have a material adverse impact on Congoleum's
liquidity or financial position. However, unfavorable developments in these
matters could result in significant expenses or judgments that could have a
material adverse effect on the business, operations and financial position of
Congoleum.
22
Note I - Commitments and Contingencies (continued)
Other
In addition to the matters referenced above and in Note J, in the ordinary
course of their businesses, the Company and Congoleum become involved in
lawsuits, administrative proceedings in connection with product liability claims
and other matters. In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts, and the matters may remain unresolved
for several years.
Note J - Congoleum Asbestos Liabilities and Reorganization
In early 2003, Congoleum announced a strategy for resolving current and future
asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"). As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing a pre-petition trust (the
"Collateral Trust") to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in
Congoleum's rights under its applicable insurance coverage and payments from
Congoleum's insurers for asbestos claims. Under the terms of the Sixth Plan,
participants in the Claimant Agreement who vote in favor of the plan agree to
forbear from exercising the security interest in and priority rights to
distributions from the Collateral Trust. As discussed below, in September 2005
certain asbestos claimants indicated that they are not willing to agree to
forbear from exercising their security interest as contemplated by the Sixth
Plan. Congoleum is presently in negotiations with these claimants, as well as
other constituencies, to determine the modifications of the Sixth Plan and other
steps that may be appropriate for the implementation of the plan. Although the
terms of any new amended plan have not been determined, Congoleum is negotiating
amendments and modifications with reference to the terms of the Sixth Plan.
There can be no assurance that the terms of any new amended plan will not
materially differ from the terms of the Sixth Plan.
The Claimant Agreement established a compensable disease valuation matrix (the
"Matrix") and allowed claimants who qualified to participate in the Claimant
Agreement (the "Qualifying Claimants") to settle their claims for the Matrix
value, secured in part (75%) by a security interest in the collateral granted to
the Collateral Trust. The Collateral Trust provides for distribution of trust
assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with
Congoleum and participating claimants who qualified for payment under unfunded
settlement agreements entered into by Congoleum with plaintiffs that had
asbestos claims pending against Congoleum and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of Congoleum's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
23
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the
settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. Under the Sixth Plan, after the
establishment of the Plan Trust, the assets in the Collateral Trust would be
transferred to the Plan Trust and any claims subject to the Claimant Agreement
would be channeled to the Plan Trust and paid in accordance with the terms of
the Sixth Plan, which incorporates the forbearance discussed above.
In October 2003, Congoleum began soliciting acceptances for its proposed
pre-packaged plan of reorganization and Congoleum received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the United States Bankruptcy Court for
the District of New Jersey (Case No. 03-51524) seeking relief under Chapter 11
of the Bankruptcy Code. In January 2004, Congoleum filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy Court.
In November 2004, Congoleum filed a modified plan of reorganization and related
documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the modified
plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the Asbestos Claimants' Committee and the Future
Claimants' Representative to make certain modifications to its proposed plan of
reorganization and related documents governing the settlement and payment of
asbestos-related claims against Congoleum. Under the agreed-upon modifications,
asbestos claimants with claims settled under Congoleum's pre-petition settlement
agreements would agree to forbear from exercising the security interest they
were granted and share on a pari passu basis with all other present and future
asbestos claimants in insurance proceeds and other assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan.
24
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
In October 2005, Congoleum sought and obtained an extension of the voting
deadline to December 14, 2005 to allow time to address this issue. Congoleum is
presently in negotiations with these claimants, as well as other constituencies,
to determine the modifications of the Sixth Plan and other steps that may be
appropriate for the implementation of the plan. The Bankruptcy Court has given
Congoleum permission to file a new amended plan and disclosure statement to the
court by December 2, 2005. On November 7, 2005, the Bankruptcy Court denied a
request to extend Congoleum's exclusive right to file a plan of reorganization
and solicit acceptances thereof. The Bankruptcy Court ruled that other parities
may file proposed reorganization plans by December 2, 2005. It is unclear
whether any person other than Congoleum will attempt to propose a plan or what
any such plan would provide or propose.
There can be no assurance that Congoleum will finalize the terms of a new
amended plan by that date, that Congoleum will receive the acceptances necessary
for confirmation of a new amended plan of reorganization, that a new amended
plan will not be modified further, that a new amended plan will receive
necessary court approvals from the Bankruptcy Court or the Federal District
Court or that such approvals will be received in a timely fashion, that a new
amended plan will be confirmed, or that a new amended plan, if confirmed, will
become effective.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and may file objections to
any new amended plan. Certain other parties have also filed various objections
to Congoleum's previously proposed plans of reorganization and may file
objections to any new amended plan.
During 2005, Congoleum has entered into a number of settlement agreements with
excess insurance carriers over coverage for asbestos-related claims. In May
2005, certain AIG companies agreed to pay approximately $103 million over ten
years to the Plan Trust. This settlement resolves coverage obligations of
policies with a total of $114 million in liability limits for asbestos bodily
injury claims, and is subject to the effectiveness of a plan of reorganization
that provides AIG with certain specified relief including a channeling
injunction pursuant to Section 524(g) of the Bankruptcy Code. An insurer has
appealed the approval order granted by the Bankruptcy Court to the U.S. District
Court, where it is pending. In June 2005, Congoleum entered into a settlement
agreement with certain underwriters at Lloyd's, London, pursuant to which the
certain underwriters paid approximately $20 million into an escrow account in
exchange for a release of insurance coverage obligations. The escrow agent will
transfer the funds to the Plan Trust once a plan of reorganization with the
Section 524(g) protection specified in the settlement agreement goes effective
and the Bankruptcy Court approves the transfer of the funds. In August 2005,
Congoleum entered into a settlement agreement with Federal Insurance Company
pursuant to which Federal will pay $4 million to the Plan Trust once a plan of
reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective and the Bankruptcy Court approves the transfer of the
funds. A motion to reconsider the Bankruptcy Court's approval will be heard by
25
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
the Bankruptcy Court on November 21, 2005. In October 2005, Congoleum entered
into a settlement agreement with Mt. McKinley Insurance Company and Everest
Reinsurance Company pursuant to which Mt. McKinley and Everest has paid $21.5
million into an escrow account. The escrow agent will transfer the funds to the
Plan Trust once a plan goes effective and the Bankruptcy Court approves the
transfer of the funds. Court approval of these settlement agreements has been or
may be appealed by other insurance carriers who are not party to the agreements,
or by other parties. It also is possible that a settling insurer may argue that
a new amended plan is not substantially similar to the Sixth Plan and therefore
is relieved of its settlement obligation.
Although the terms of a new amended plan have not yet been determined, Congoleum
is negotiating amendments and modifications with reference to the terms of the
Sixth Plan. The following description of the Sixth Plan is provided to assist
the reader in understanding the basis from which any further amended plan may be
negotiated. There can be no assurance that the terms of any new amended plan
will not materially differ from the terms of the Sixth Plan or that Congoleum
will reach agreement on a new amended plan on or before December 2, 2005.
Congoleum expects that it will take until the second or third quarter of 2006 at
the earliest to obtain confirmation of any new amended plan of reorganization.
Under the Sixth Plan and related documents, Congoleum's assignment of insurance
recoveries to the Plan Trust is net of costs incurred by Congoleum in connection
with insurance coverage litigation. Congoleum is entitled to withhold from
recoveries, or seek reimbursement from the Plan Trust, for coverage litigation
costs incurred after January 1, 2003 in excess of $6 million. Furthermore, once
insurance recoveries exceed $375 million, Congoleum is entitled to withhold from
recoveries, or seek reimbursement from the Plan Trust, for the first $6 million
of such costs for which it could not presently seek reimbursement due to the
above items of the Sixth Plan. Congoleum also paid $1.3 million in claims
processing fees in connection with claims settled under the Claimant Agreement.
Under the Sixth Plan, Congoleum is entitled to withhold from recoveries, or seek
reimbursement from the Plan Trust, for the $1.3 million claims processing fee
once insurance recoveries exceed $375 million. There can be no assurance that
any future plan will provide for Congoleum to recover any coverage litigation
costs or claims processing fees.
In connection with modifications to the Sixth Plan and certain prior plans and
to the Collateral Trust, Congoleum agreed to indemnify the Claimants Counsel and
the trustee of the Collateral Trust for all acts relating to the modifications
of such plan and the Collateral Trust made on or after April 1, 2005, including
attorneys' fees, up to a maximum of $3 million.
The Sixth Plan provides for the channeling of asbestos property damage claims in
addition to asbestos personal injury claims to the Plan Trust. There were no
property damage claims asserted against Congoleum at the time of its bankruptcy
filing. The Bankruptcy Court approved an order establishing a bar date of May 3,
2004 for the filing of asbestos property damage claims. The claims agent
appointed in Congoleum's bankruptcy proceeding advised Congoleum that, as
26
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
of the bar date, it received 35 timely filed asbestos property damage claims
asserting liquidated damages in the amount of approximately $0.8 million plus
additional unspecified amounts. Congoleum objected to certain claims on various
grounds, and the Bankruptcy Court ultimately allowed 19 claims valued at $133
thousand.
The Sixth Plan provides that Congoleum will issue a promissory note (the
"Congoleum Note") to the Plan Trust. Under the terms of the Sixth Plan, the
original principal amount of Congoleum Note will be $2,738,234.75 (the "Original
Principal Amount") and will be subject to increase as of the last trading day of
the 90 consecutive trading day period commencing on the first anniversary of the
effective date of Congoleum's confirmed Chapter 11 plan of reorganization (the
"Principal Adjustment Date") in an amount equal to the excess, if any, of the
amount by which 51% of Congoleum's market capitalization as of the Principal
Adjustment Date (based upon (subject to certain exceptions) the total number of
shares of Congoleum's common stock outstanding as of such date multiplied by the
average of the closing trading prices of Congoleum's Class A common stock for
the 90 consecutive trading days ending on the Principal Adjustment Date) exceeds
the Original Principal Amount (the "Additional Principal Amount"), plus any
accrued but unpaid interest or other amounts that may be added to such principal
amount pursuant to the terms of the Congoleum Note. This adjustment amount could
result in the principal amount of the note increasing materially. For example,
if the adjustment amount were calculated during the 90 consecutive day trading
period ended September 30, 2005, the resulting adjustment amount would be $14.9
million. Under the terms of the Sixth Plan, interest on the outstanding
principal of the Congoleum Note will accrue at a rate of 9% per annum, with
interest on the Original Principal Amount payable quarterly and interest on the
Additional Principal Amount added to the Additional Principal Amount as
additional principal. Upon the earlier of August 1, 2008 and the date that all
of Congoleum's outstanding 8-5/8% Senior Notes due 2008 (the "Congoleum Senior
Notes") are repaid in full, interest on the then outstanding Additional
Principal Amount will become payable quarterly.
Under the terms of the Sixth Plan, all principal on the Congoleum Note then
outstanding together with any accrued but unpaid interest will be payable in
full on the tenth anniversary of the date of the Congoleum Note, subject to the
right of the Plan Trust to accelerate all amounts then owed on the Congoleum
Note following an uncured event of default under the Congoleum Note. Events of
default under the Congoleum Note would include the failure to pay interest and
principal prior to the expiration of a 10-day grace period following the
applicable due date, the occurrence of an event of default under the indenture
governing the Senior Notes, the breach by Congoleum of any covenant or agreement
contained in the Congoleum Note which remains uncured 30 days following notice
by the Plan Trust to Congoleum and its controlling shareholder, American
Biltrite Inc. ("ABI"), of the breach and a material breach of the pledge
agreement (the "ABI Pledge Agreement") by ABI (which agreement is discussed
below) which remains uncured 30 days following notice by the Plan Trust to ABI
and Congoleum of the breach. The terms of the Congoleum Note would provide that,
upon the occurrence of an event of default under the Congoleum Note, Congoleum
and ABI would have 10 days from the date they receive notice that
27
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
an event of default has occurred to cure the event of default. If the event of
default remains uncured after the 10-day cure period, the aggregate outstanding
principal amount of the Congoleum Note together with any accrued but unpaid
interest thereon would become immediately due and payable if the event of
default relates to an uncured event of default under the indenture governing the
Congoleum Senior Notes, and with regard to other events of default under the
Congoleum Note, the Plan Trust may, upon notice to Congoleum and ABI, declare
the aggregate outstanding principal amount of the Congoleum Note together with
any accrued but unpaid interest thereon to be immediately due and payable. The
Plan Trust's rights to payment under the Congoleum Note will be subordinate and
subject in right of payment to the prior payment in full of all amounts owing
and payable pursuant to the Congoleum Senior Notes and Congoleum's credit
facility, except that regularly scheduled interest payments under the Congoleum
Note are expected to be payable by Congoleum so long as no default or event of
default has occurred or is continuing under the indenture governing the
Congoleum Senior Notes or Congoleum's credit facility.
The Sixth Plan contemplates that, pursuant to the ABI Pledge Agreement, ABI will
pledge all of the shares of Congoleum's common stock that ABI owns, together
with any other equity interests and rights ABI may own or hold in Congoleum, as
of the date of the Congoleum Note, as collateral for Congoleum's obligations
under the Congoleum Note. As additional security for the Congoleum Note, the ABI
Pledge Agreement and the terms of the Sixth Plan provide that any amounts that
Congoleum would be obligated to pay ABI pursuant to any rights of indemnity that
ABI may have against the Plan Trust for asbestos-related claims pursuant to the
Sixth Plan or a certain Joint Venture Agreement, entered into in 1992, to which
both Congoleum and ABI are parties (as amended, the "Joint Venture Agreement"),
will not be paid by the Plan Trust until after any amounts due and payable to
the Plan Trust under the Congoleum Note have been paid in full to the Plan
Trust. Until such time, any such indemnity payments that would otherwise have
been payable by the Plan Trust to ABI would be set aside by the Plan Trust and
held in escrow by the Plan Trust for ABI's benefit and pledged by ABI as
additional collateral securing Congoleum's obligations under the Congoleum Note
until released from such escrow and paid to ABI, as further provided under the
Sixth Plan, the Congoleum Note and the ABI Pledge Agreement.
The Congoleum Note, the ABI Pledge Agreement and the Sixth Plan also provide
that Congoleum would be prohibited from making any payments to ABI pursuant to
any rights of indemnity that ABI may have against Congoleum for claims pursuant
to the Joint Venture Agreement until after any amounts due and payable to the
Plan Trust under the Congoleum Note have been paid in full to the Plan Trust.
Until such time, any such indemnity payments that would otherwise have been
payable to ABI by Congoleum will be paid by Congoleum to the Plan Trust and the
Plan Trust will set aside and hold in escrow such amounts for ABI's benefit and
ABI will pledge such amounts as additional collateral securing Congoleum's
obligations under the Congoleum Note until released from such escrow and paid to
ABI, as further provided under the Sixth Plan, the Congoleum Note and the ABI
Pledge Agreement.
28
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Under the Sixth Plan, ABI would be permitted to prepay the principal amount of
the Congoleum Note, in whole but not in part, without any penalty or premium at
any time following the Principal Adjustment Date and any interest that may have
accrued but not yet paid at the time of any principal repayment would be due and
payable at the time of the principal repayment. Congoleum would be obligated to
repay ABI for any amounts paid by ABI pursuant to the Congoleum Note, which
repayment obligation would by evidenced by a promissory note or notes to be
issued by Congoleum to ABI. Any such note would have similar payment terms as
those expected to be afforded to the Plan Trust with regard to the Congoleum
Note, which rights of repayment are expected to be subordinate and subject in
right of payment to the prior payment in full of all amounts owing and payable
to the Plan Trust with regard to the Congoleum Note and with regard to amounts
owing and payable pursuant to the Congoleum Senior Notes and Congoleum's credit
facility, except that the right of full subordination with regard to the
Congoleum Senior Notes and Congoleum's credit facility would contain an
exception that would allow Congoleum to make regularly scheduled interest
payments to ABI pursuant to any such note so long as no default or event of
default has occurred or is continuing under the indenture governing the
Congoleum Senior Notes or Congoleum's credit facility.
The Sixth Plan also provides that if ABI prepays the Congoleum Note and ABI
sells all or substantially all of the shares of Congoleum's stock that it holds
as of the Principal Adjustment Date during the three-year period following such
date, ABI would be obligated to make a contribution to the Plan Trust if the
equity value of Congoleum implied by the price paid to ABI for the shares of
Congoleum's stock exceeded the greater of $2,738,234.75 or 51% of Congoleum's
market capitalization as of the Principal Adjustment Date (based upon (subject
to certain exceptions) the total number of shares of Congoleum's common stock
outstanding as of such date multiplied by the average of the closing trading
prices of Congoleum's Class A common stock for the 90 consecutive trading days
ending on the Principal Adjustment Date). In such instance, the Sixth Plan would
obligate ABI to pay to the Plan Trust an amount equal to 50% of such excess
amount. Under the terms of the Sixth Plan, Congoleum would be obligated to repay
ABI for any amounts paid by ABI to the Plan Trust pursuant to this obligation.
In satisfaction of this repayment obligation, Congoleum would issue a promissory
note to ABI in a principal amount equal to the amount of any such payments made
by ABI plus any accrued but unpaid interest or other amounts that may be added
to such principal amount pursuant to the terms of the promissory note which
would be subordinate and subject in right of payment to the prior payment in
full of all amounts owing and payable pursuant to the Congoleum Senior Notes and
Congoleum's credit facility, except that regularly scheduled interest payments
could be paid on such note so long as no default or event of default has
occurred or is continuing under the indenture governing the Congoleum Senior
Notes or Congoleum's credit facility.
The Sixth Plan provides that the Plan Trust would be able to transfer the
Congoleum Note, in whole but not in part, at any time following the Principal
Adjustment Date. Upon any transfer of the Congoleum Note, the amounts pledged by
ABI and held in escrow by the Plan Trust for ABI's benefit with regard to ABI's
indemnity rights discussed above will be paid by the Plan Trust,
29
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
first, to the Plan Trust in repayment of principal then outstanding on the
Congoleum Note together with any accrued but unpaid interest thereon and,
second, any amounts remaining would be distributed by the Plan Trust to ABI.
Under the Sixth Plan and related documents, ABI has agreed to make a cash
contribution in the amount of $250 thousand to the Plan Trust upon the formation
of the Plan Trust. Under the Sixth Plan, ABI would receive certain relief as may
be afforded under Section 524(g)(4) of the Bankruptcy Code from asbestos claims
that derive from claims made against Congoleum, which claims are expected to be
channeled to the Plan Trust. However, the Sixth Plan does not provide that any
other asbestos claims that may be asserted against ABI would be channeled to the
Plan Trust.
While Congoleum believes that it will be able to negotiate a new amended plan
which is feasible and should be confirmed by the Bankruptcy Court, there are
sufficient risks and uncertainties such that no assurances of the outcome can be
given. In addition, the remaining costs to effect the reorganization process,
consisting principally of legal and advisory fees and contributions to the Plan
Trust, including one or more notes expected to be contributed to the Plan Trust
by Congoleum, are expected to be approximately $12.7 million at a minimum, not
including any Additional Principal Amount arising from revaluation of the
Congoleum Note, and could be materially higher. Congoleum is not yet able to
determine the additional costs that may be required to effect a new amended plan
and actual amounts that will be contributed to the Plan Trust and costs for
pursuing and implementing any plan of reorganization could be materially higher.
Based on the Sixth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $26 million in prior years
and a further approximately $15.5 million in the second quarter of 2005, to
provide for the estimated minimum costs of completing its reorganization given
the revised timeline then assumed in the second quarter of 2005 for anticipated
confirmation and based on the Sixth Plan. Congoleum is not yet able to determine
the additional costs that may be required to effect a new amended plan and
actual amounts that will be contributed to the Plan Trust and costs for pursuing
and implementing any plan of reorganization could be materially higher than
currently recorded. Delays in proposing, filing and obtaining approval of any
new amended plan of reorganization could result in a proceeding that takes
longer and is more costly than Congoleum has estimated. Congoleum may record
significant additional charges should the minimum estimated cost increase.
30
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three and
nine months ended September 30, 2005 and 2004 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------ ------ -------- ------
Net income (loss) $1,008 $1,444 $(13,071) $1,136
Foreign currency translation adjustments 151 827 429 419
Minimum pension liability adjustment -- -- -- 551
------ ------ -------- ------
Total comprehensive income (loss) $1,159 $2,271 $(12,642) $2,106
====== ====== ======== ======
Note L - Earnings (Loss) Per Share
Basic and diluted earnings per share are computed in accordance with FASB
Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 requires both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common equivalent shares outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings, which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape products
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of the Company's majority-owned subsidiary K&M
Associates L.P., a national costume jewelry supplier to mass merchandisers and
department stores. The Company's Canadian division produces flooring, rubber and
other industrial products.
31
Note M - Industry Segments (continued)
Net sales by segment for the three and nine months ended September 30, 2005 and
2004 were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net sales to external customers:
Flooring products $ 60,494 $ 58,927 $ 176,232 $ 173,968
Tape products 24,043 20,569 71,873 64,922
Jewelry 16,907 22,714 46,583 53,587
Canadian division 12,708 10,970 36,430 32,628
--------- --------- --------- ---------
Total net sales to external
customers 114,152 113,180 331,118 325,105
Intersegment net sales:
Flooring products 13 -- 13 69
Tape products 23 46 81 92
Jewelry -- -- -- --
Canadian division 1,309 1,728 4,114 4,628
--------- --------- --------- ---------
Total intersegment net
sales 1,345 1,774 4,208 4,789
Reconciling items
Intersegment net sales (1,345) (1,774) (4,208) (4,789)
--------- --------- --------- ---------
Total consolidated net sales $ 114,152 $ 113,180 $ 331,118 $ 325,105
========= ========= ========= =========
Segment profit or loss is before income tax expense or benefit. Profit (loss) by
segment for the three and nine months ended September 30, 2005 and 2004 was as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------- ------- -------- -------
Segment profit (loss)
Flooring products $ 325 $ 1,920 $(14,625) $ 3,462
Tape products 600 (57) 1,522 (144)
Jewelry 1,531 2,700 1,859 3,505
Canadian division (445) (255) (1,042) (1,398)
------- ------- -------- -------
Total segment profit (loss) 2,011 4,308 (12,286) 5,425
Reconciling items
Corporate expenses (356) (1,276) 1,396 (2,444)
Intercompany profit (loss) (15) (58) 80 33
------- ------- -------- -------
Total consolidated income
(loss) before income
taxes and other items $ 1,640 $ 2,974 $(10,810) $ 3,014
======= ======= ======== =======
32
Note M - Industry Segments (continued)
Corporate expenses for the nine months ended September 30, 2005 include a gain
of $2.3 million from the sale of a warehouse during the first quarter (see Note
D). The flooring products segment's loss for the nine months ended September 30,
2005 includes a $15.5 million charge recorded by Congoleum during the second
quarter to increase its reserves for asbestos related reorganization costs (see
Note J).
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
September 30, December 31,
2005 2004
------------- -------------
Segment assets
Flooring products $ 199,945 $ 212,882
Tape products 57,174 51,788
Jewelry 39,106 37,158
Canadian division 38,285 39,953
------------- -------------
Total segment assets 334,510 341,781
Reconciling items
Assets of discontinued operation 3,184 2,952
Corporate items 27,788 22,577
Intersegment accounts receivable (16,574) (11,558)
Intersegment profit in inventory (200) (281)
Intersegment other asset (147) (186)
------------- -------------
Total consolidated assets $ 348,562 $ 355,285
============= =============
33
Note N - Subsequent Event
On November 10, 2005, the Compensation Committee of the Board of Directors of
the Company approved the vesting of all outstanding and unvested options held by
directors, officers and employees under the Company's 1993 Stock Award and
Incentive Plan, as amended and restated as of March 4, 1997, and 1999 Stock
Option Plan for Non-Employee Directors. As a result of the acceleration of
vesting, options to acquire 195,600 shares of the Company's common stock, which
otherwise would have vested from time to time over the next four years, became
immediately exercisable in full. This action was taken to eliminate, to the
extent permitted, the transition expense that the Company otherwise would incur
in connection with the adoption of SFAS No. 123(R). The exercise prices of all
of the unvested options were lower than the closing trading price of the
Company's common stock on the modification date. Under the accounting guidance
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, the accelerated vesting resulted in a charge for stock-based
compensation of approximately $23,000. The charge was recognized by the Company
in November 2005. The Company's pro forma disclosure for 2005 will include the
aggregate effect of the accelerated vesting of $799,000, as calculated under
SFAS No. 123, Accounting for Stock-Based Compensation. The remaining unvested
portion would have otherwise been recognized in the Company's consolidating
statements of operations over the next four fiscal years, upon the adoption of
SFAS No. 123(R) on January 1, 2006.
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's (and
its majority-owned subsidiary Congoleum Corporation's) expectations, as of the
date of this report, of future events and the Company undertakes no obligation
to update any of these forward-looking statements. Although the Company believes
that these expectations are based on reasonable assumptions, within the bounds
of its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Readers are
cautioned not to place undue reliance on any forward-looking statements. Factors
that could cause or contribute to the Company's actual results differing from
its expectations include those factors discussed elsewhere in this report,
including in the section of this report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors That
May Affect Future Results," in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004 and in the Company's other filings with the
Securities and Exchange Commission.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court")
(Case No. 03-51524) seeking relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") as a means to resolve claims asserted
against it related to the use of asbestos in its products decades ago. During
2003, Congoleum obtained the requisite votes of asbestos personal injury
claimants necessary to seek approval of a proposed, pre-packaged Chapter 11 plan
of reorganization. In January 2004, Congoleum filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy Court. In November
2004, Congoleum filed a modified plan of reorganization and related documents
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the Asbestos Claimants' Committee, the Future Claimants'
Representative and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the modified plan. In April 2005, Congoleum
announced that it had reached an agreement in principle with representatives of
the Asbestos Claimants' Committee and the Future Claimants' Representative to
make certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the trust to be formed upon confirmation
of the plan under Section 524(g) of the Bankruptcy Code (the "Plan Trust") to
pay asbestos claims against Congoleum. In July 2005, Congoleum filed an amended
plan of reorganization (the "Sixth Plan") and related documents with the
Bankruptcy Court which reflected the result of these negotiations as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
35
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan. In October
2005, Congoleum sought and obtained an extension of the voting deadline to
December 14, 2005 to allow time to address this issue. Congoleum is presently in
negotiations with these claimants, as well as other constituencies, to determine
the modifications of the Sixth Plan and other steps that may be appropriate for
the implementation of the Plan. The Bankruptcy Court has given Congoleum
permission to file a new amended plan and disclosure statement by December 2,
2005. On November 7, 2005, the Bankruptcy Court denied a request to extend
Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof. The Bankruptcy Court ruled that other parities may file
proposed reorganization plans by December 2, 2005. It is unclear whether any
person other than Congoleum will attempt to propose a plan or what any such plan
would provide or propose.
There can be no assurance that Congoleum will finalize the terms of a new
amended plan by that date, that Congoleum will receive the acceptances necessary
for confirmation of a new amended plan of reorganization, that a new amended
plan will not be modified further, that a new amended plan will receive
necessary court approvals from the Bankruptcy Court or the Federal District
Court, or that such approvals will be received in a timely fashion, that a new
amended plan will be confirmed, or that a new amended plan, if confirmed, will
become effective.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and may file objections to
any new amended plan. Certain other parties have also filed various objections
to Congoleum's previously proposed plans of reorganization and may file
objections to any new amended plan.
Although the terms of a new amended plan have not been determined, Congoleum is
negotiating amendments and modifications with reference to the terms of the
Sixth Plan. Any descriptions of the Sixth Plan provided in this Quarterly Report
on Form 10-Q are provided to assist the reader in understanding the basis from
which any further amended plan may be negotiated. There can be no assurance that
the terms of any new amended plan will not materially differ from the terms of
the Sixth Plan or that Congoleum will reach agreement on a new amended plan on
or before December 2, 2005. Congoleum expects that it will take until the second
or third quarter of 2006 at the earliest to obtain confirmation of any new
amended plan of reorganization.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"), which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements of approximately $491 million. As contemplated by
the Claimant Agreement, Congoleum also entered into agreements establishing a
pre-petition trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and granting the Collateral Trust a
security interest in Congoleum's rights under its applicable insurance coverage
36
and payments from Congoleum's insurers for asbestos claims. Under the terms of
the Sixth Plan, after the establishment of the Plan Trust, the assets in the
Collateral Trust would be transferred to the Plan Trust and any claims subject
to the Claimant Agreement would be channeled to the Plan Trust and paid in
accordance with the terms of the Sixth Plan. As a result of tabulating ballots
on its fourth amended plan, Congoleum is also aware of claims by claimants whose
claims were not determined under the Claimant Agreement but who have submitted
claims with a value of approximately $512 million based on the settlement values
applicable in the Sixth Plan.
Based on the Sixth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $26 million in prior years
and a further approximately $15.5 million in the second quarter of 2005, to
provide for the estimated minimum costs of completing its reorganization given
the revised timeline then assumed in the second quarter of 2005 for anticipated
confirmation and based on the Sixth Plan. Congoleum is not yet able to determine
the additional costs that may be required to effect a new amended plan, and
actual amounts that will be contributed to the Plan Trust and costs for pursuing
and implementing any plan of reorganization could be materially higher than
currently recorded. Congoleum may record significant additional charges should
the minimum estimated cost increase. Delays in proposing, filing and obtaining
approval of any new amended plan of reorganization could result in a proceeding
that takes longer and is more costly than Congoleum has estimated.
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors That May Affect Future Results - The
Company and its majority-owned subsidiary Congoleum have significant asbestos
liability and funding exposure, and the Company's and Congoleum's strategies for
resolving this exposure may not be successful" for a discussion of certain
factors that could cause actual results to differ from the Congoleum's goals for
resolving its asbestos liability through a plan of reorganization.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Results of Janus, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations. ABI and its non-debtor subsidiaries are
comprised of the Tape, Jewelry (comprised of the Company's majority-owned
subsidiary, K&M Associates L.P.) and Canadian division segments as well as
Corporate items and Janus. Congoleum is the flooring products segment.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidating financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the date of the Company's financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's actual results may differ from these estimates under different
assumptions or conditions.
37
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that its most critical accounting policies, upon which its financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, filed with the Securities and Exchange
Commission. There have been no material changes in what the Company considers to
be its critical accounting policies or the applicability of the disclosure the
Company provided regarding those policies in that Form 10-K.
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended September 30 Nine Months Ended September 30
2005 2004 2005 2004
---------------------------------------- ------------------------------------------
Net sales $ 53,591 $ 54,253 $ 154,695 $ 151,137
Cost of sales 38,569 38,700 111,134 107,794
-------- --------- --------- ---------
Gross profit 15,022 28.0% 15,553 28.7% 43,561 28.2% 43,343 28.7%
Selling, general &
administrative expenses 13,382 25.0% 13,561 25.0% 40,012 25.9% 41,205 27.3%
-------- --------- --------- ---------
Operating income (loss) 1,640 1,992 3,549 2,138
Interest expense, net 571 719 1,937 2,197
Other (income) expense, net (261) 168 (2,135) 406
-------- --------- --------- ---------
Income (loss) before taxes and
other items 1,330 1,105 3,747 (465)
Provision for (benefit from)
income taxes 481 574 1,436 11
Noncontrolling interests (71) (118) (632) (141)
-------- --------- --------- ---------
Income (loss) from continuing
operations $ 778 $ 413 $ 1,679 $ (617)
======== ========= ========= =========
Net sales in the third quarter of 2005 were $53.6 million compared to $54.3
million in the third quarter of 2004, a decrease of $0.7 million or 1.2%. This
decrease was due to lower net sales at K&M, partly offset by higher net sales at
the Tape and Canadian divisions. K&M's sales declined $5.8 million (25.6%) due
to back-to-school and children's product programs in 2004 which were not
repeated in 2005 coupled with brand transitions by certain retailers which
negatively affected sales. Tape and the Canadian divisions had increases in net
sales of $3.4 million (16.7%) and $1.7 million (15.5%), respectively. The
increase in net sales at the Tape division was mainly due to higher volume in
paper, film and HVAC products, with higher pricing contributing $ 1.2 million to
the increase. Canadian division net sales increased primarily due to higher
sales of industrial rubber products. Net sales for the first nine months of 2005
38
increased $3.6 million (2.4%) to $154.7 million from $151.1 million for the
first nine months of 2004. Tape and Canadian division net sales were higher by
10.7% and 11.1%, respectively, on higher volume and pricing, while K&M's net
sales were 13.1% lower for the first nine months of this year versus last year
principally due to lower sales to a major mass merchandiser.
Gross profit declined from 28.7% for the third quarter of 2004 to 28.0% for the
third quarter of 2005. Gross profit at the Tape division improved by 1.3 points
as a result of additional sales volume, better manufacturing performance, and
sales price increases, which helped offset increases in raw material costs.
Gross profit at the Canadian division declined by 3.8 points because of higher
raw material costs. Gross profit at K&M improved by 2.6 points as a result of
lower costs for inventory losses and fixtures. Gross profit for the nine months
ended September 30, 2005 was 28.2% compared to 28.7% for the first nine months
of 2004. Tape division gross profit was higher (1.8 points) for the nine months
compared to the prior year as a result of increased volume and pricing which
helped offset higher raw material costs. The gross profit percentage for the
Canadian division for the first nine months of 2005 declined 1.4 points versus
the first nine months of 2004 due to higher raw material costs. Gross profit for
K&M decreased by 1.3 points for the nine month period as a result of higher
provisions for markdowns and returns in the second quarter of 2005
The Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative expenses. Some companies also record such
costs in operating expenses while others record them in cost of goods sold.
Consequently, the Company's gross profit margins may not be comparable to other
companies. Had the Company recorded these expenses in cost of sales, the gross
profit margins for the quarter ended September 30, 2005 and 2004 would have been
27.6% and 28.2%, respectively. The gross profit margins for the nine months
ended September 30, 2005 and 2004 would have been 27.8% and 28.2%, respectively.
Selling, general and administrative ("SG&A") expenses in the third quarter of
2005 decreased by $179 thousand compared to the third quarter of 2004. The
decrease in expense was primarily due to lower legal and professional fees,
partly offset by higher selling expenses and freight costs. As a percentage of
net sales, SG&A was 25.0% of sales in both periods. SG&A expenses for the nine
months ended September 30, 2005 were $40.0 million (25.9% of net sales) versus
$41.2 million (27.3% of net sales) for the first nine months of 2004. The
decrease in expense is primarily due to lower payroll costs at K&M and lower
professional fees.
Interest expense for the third quarter and first nine months of 2005 declined
versus the same prior year periods, reflecting a lower average interest rate
under the Company's Note Agreements.
Other income was $261 thousand in the third quarter of 2005 compared to other
expense of $168 thousand in the third quarter of 2004 primarily due to more
favorable currency translation. Other income for the nine months ended September
30, 2005 includes a gain of $2.3 million recognized on the sale of a warehouse.
The impact of this sale on the Company's net income after taxes and
non-controlling interest was $887 thousand, or $0.26 per share.
39
The effective tax rate was 38% for the first nine months of 2005, and the full
year rate is expected to be comparable. The effective tax rate for the first
nine months of 2004 was not meaningful.
Income from continuing operations in the third quarter of 2005 was $778 thousand
compared to $413 thousand in the corresponding prior year period. For the nine
months ended September 30, 2005, income from continuing operations was $1.7
million compared to a loss of $617 thousand for the same period last year.
Excluding the net impact of the sale of the warehouse, the income from
continuing operations for the first nine months of 2005 was approximately $600
thousand.
Congoleum
Three Months Ended September 30 Nine Months Ended September 30
2005 2004 2005 2004
--------------------------------- -------------------------------------
Net sales $60,507 $58,871 $ 176,245 $173,822
------- ------- --------- --------
Cost of sales 47,270 41,812 135,577 126,326
------- ------- --------- --------
Gross profit 13,237 21.9% 17,059 29.0% 40,668 23.1% 47,496 27.3%
Selling, general &
administrative expenses 10,556 17.4% 12,959 22.0% 48,416 27.5% 37,961 21.8%
------- ------- --------- --------
Operating income (loss) 2,681 4,100 (7,748) 9,535
Interest expense, net 2,579 2,391 7,515 6,950
Other income, net 223 212 638 877
VIncome (loss) before taxes 325 1,921 (14,625) 3,462
Provision for income taxes -- 768 -- 1,384
------- ------- --------- --------
Net income (loss) $ 325 $ 1,153 $ (14,625) $ 2,078
======= ======= ========= ========
Net sales for the quarter ended September 30, 2005 were $60.5 million as
compared to $58.9 million for the quarter ended September 30, 2004, an increase
of $1.6 million or 2.7%. The increase resulted primarily from the impact of
higher sales to the manufactured housing industry reflecting hurricane-related
orders for both mobile homes and RV trailers (up 17.5%) and the impact of price
increases taken in late 2004 and early 2005 (up 5.5%) partially offset by lower
sales of residential products (down 3.0%), the reduction in inventory by a major
customer during the quarter (down 3.0%) and lower sales of do-it-yourself tile
to mass merchandisers (down 33%). Net sales for the nine months ended September
30, 2005 totaled $176.2 million as compared to $173.8 million for the same
period in the prior year, an increase of $2.4 million or 1.4%. The increase
reflects higher sales to the manufactured housing category (up 12.0%) and the
impact of selling price increases instituted in late 2004 and 2005 (up 7%)
partially offset by lower sales of do-it-yourself tile to the mass merchandiser
category (down 36%) and sales of residential products (down 6.0%)
Gross profit for the quarter ended September 30, 2005 totaled $13.2 million, or
21.9% of net sales, compared to $17.1 million, or 29.0% of net sales, for the
same period last year. The major factor leading to the deterioration in gross
margin percent was the sharp rise in raw material costs experienced during the
second half of 2004 and ongoing through 2005, which reduced margins by 7.5
percentage points of net sales, coupled with a poorer sales mix (3.5 percentage
points of net sales) and the unfavorable absorption impact of lower production
volumes (1.5 percentage points of net sales). This was partially mitigated by
the 5.5 percentage point increase in selling prices. Gross profit for the nine
40
months ended September 30, 2005 was $40.7 million or 23.1% of net sales,
compared to $47.5 million, or 27.3% of net sales for the same period in the
prior year. The lower gross profit dollars and margin percent reflect higher raw
material costs (9 percentage points of net sales) and the unfavorable absorption
impact of lower production volumes (2.5 percentage points of net sales)
partially offset by higher selling prices (7.0 percentage points of net sales).
Raw material costs are expected to remain high in 2005 and until additional
capacity becomes available.
Selling, general and administrative expenses were $10.6 million for the quarter
ended September 30, 2005 as compared to $13.0 million for the quarter ended
September 30, 2004, a decrease of $2.4 million. The decrease in expenses
reflects lower sales support and merchandising expenses of $1.1 million, lower
incentive compensation related expenses of $0.6 million and lower insurance
costs of $0.5 million. As a percent of net sales, selling, general and
administrative costs were 17.4% for the quarter ended September 30, 2005
compared to 22.0% for the same period last year. Selling, general and
administrative expenses for the nine months ended September 30, 2005 totaled
$48.4 or 27.5% of sales as compared to $38.0 million or 21.8% for the same
period last year. The increase in expenses reflects a $15.5 million charge taken
during the second quarter of 2005 for reorganization expenses partially offset
by the factors outlined for the third quarter of 2005.
Income from operations was $2.7 million for the quarter ended September 30, 2005
compared to income of $4.1 million for the quarter ended September 30, 2004. The
reduction in operating income was a result of the lower gross margin dollars
partially offset by lower operating expenses. For the nine months ended
September 30, 2005, loss from operations totaled $7.7 million as compared to
income from operations of $9.5 million for the same period in the prior year.
The decline in income from operations reflected the impact of the reorganization
charge and higher raw material costs.
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased $1.7
million in the first nine months of 2005 to $3.3 million. Net earnings, short
term borrowings, and proceeds from the sale of a warehouse provided cash that
was used to fund seasonal working capital increases, capital expenditures, and
payments on long-term debt. Working capital at September 30, 2005 was $20.0
million, up from $16.2 million at December 31, 2004. The ratio of current assets
to current liabilities at September 30, 2005 was 1.32 compared to 1.27 at
December 31, 2004, consistent with the increased amount of working capital at
September 30, 2005.
Capital expenditures in the first nine months of 2005 were $1.8 million compared
to $1.7 million for the first nine months of 2004. It is anticipated that
capital spending for the full year 2005 will be between $3 million and $4
million.
41
During the first quarter, the Company sold a warehouse for $2.5 million,
resulting in net cash proceeds of $2.3 million. The warehouse was owned by
Tullahoma Properties L.L.C., a subsidiary in which the Company owns a 62.5%
interest.
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. While the Company believes its estimate of the
future amount of these liabilities is reasonable, that most of such amounts will
be paid over a period of three to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
payments may differ significantly from the Company's assumptions. Although the
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation or
regulation relating to these matters that would have a material adverse effect
on its consolidated results of operations or financial position. There can be no
assurances that any such costs could be passed along to its customers.
American Biltrite Inc. has two principal debt agreements that it is party to as
borrower. The first of those agreements is a credit agreement (the "Credit
Facility") with Fleet National Bank, a Bank of America company ("Fleet"), and
Bank of America National Association acting through its Canada branch (the
"Canadian Lender"). The Credit Facility provides American Biltrite Inc. and its
subsidiary K&M Associates L.P. with a revolving credit facility of up to $20
million and a $12 million borrowing sublimit for AB Canada. The amount of
domestic borrowings available from time to time under the Credit Facility for
the Company may not exceed the lesser of (a) $20 million less the then
outstanding amount of borrowings by AB Canada under the Canadian sublimit
facility and (b) the applicable borrowing base. The formula used for determining
the borrowing base is based upon inventory, receivables and fixed assets of the
Company and certain of its subsidiaries (not including, among others, AB Canada
and Congoleum), reduced by amounts outstanding under the Note Agreement (as
defined below). American Biltrite Inc. and K&M Associates L.P. may also obtain
letters of credit in an aggregate amount at any time outstanding of up to $4
million, subject to the Credit Facility's maximum borrowing availability limit
discussed above.
Interest is payable quarterly on domestic revolving loans borrowed by American
Biltrite Inc. and K&M Associates L.P. under the Credit Facility periodically at
rates which vary depending on the applicable interest rate in effect and are
generally determined based upon: (a) if a LIBOR based rate is in effect, at a
rate between a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%,
depending on the Company's leverage ratio, as determined under the Credit
Facility, (b) if a fixed rate is in effect, at a rate between the fixed rate
plus 1.0% to a fixed rate plus 2.75%, depending on the Company's leverage ratio,
as determined under the Credit Facility, and (c) for loans not based on a LIBOR
or fixed rate, the higher of Fleet's applicable prime rate and 0.50% plus the
federal funds rate, as determined under the Credit Facility. Under the Credit
Facility, the Company may generally determine whether interest on domestic
revolving loans will be calculated based on a LIBOR based rate, and if Fleet
elects to make a fixed rate option available, whether interest on revolving
loans will be calculated based on a fixed rate.
42
The amount of borrowings available from time to time for AB Canada under the
Canadian sublimit facility under the Credit Facility is limited to the lesser of
(a) $12 million, (b) AB Canada's borrowing base amount, which is based upon a
percentage of AB Canada's accounts receivable, inventory and fixed assets, and
(c) $20 million less the amount of domestic borrowings outstanding under the
Credit Facility on behalf the Company and K&M Associates L.P. The Canadian
sublimit facility also allows AB Canada to obtain letters of credit in an
aggregate amount at any time outstanding of up to $1 million, subject to the
Canadian sublimit facility's maximum borrowing availability limit discussed
above. AB Canada may borrow amounts under the Canadian sublimit facility in
United States or Canadian dollar denominations; however, solely for purposes of
determining amounts outstanding and borrowing availability under the Credit
Facility, all Canadian dollar denominated amounts will be converted into United
States dollars in the manner provided in the Credit Facility.
Interest is payable quarterly on revolving loans under the Canadian sublimit
facility periodically at rates which vary depending on the applicable interest
rate in effect and are generally determined based upon: (a) if a LIBOR based
rate is in effect, at a rate between a LIBOR based rate plus 1.0% to a LIBOR
based rate plus 2.75%, depending on the Company's leverage ratio, as determined
under the Credit Agreement, and (b) if a LIBOR based rate is not in effect, for
outstanding revolving loans denominated in Canadian dollars, the higher of 0.50%
plus the applicable 30-day average bankers' acceptance rate as quoted on Reuters
CDOR page and the Canadian Lender's applicable prime rate for loans made in
Canadian dollars to Canadian customers, and for outstanding revolving loans
denominated in United States dollars, the higher of 0.50% plus the federal funds
rate as calculated under the Credit Agreement and the applicable rate announced
by the Canadian Lender as its reference rate for commercial loans denominated in
United States dollars made to a person in Canada. Under the Credit Agreement, AB
Canada may generally determine whether interest on revolving loans will be
calculated based on a LIBOR based rate.
The Credit Facility expires on September 30, 2006.
The second principal debt agreement that American Biltrite Inc. is a party to
(the "Note Agreement") is with The Prudential Insurance Company of America
("Prudential"). Under the Note Agreement, the Company previously issued notes in
an aggregate principal amount of $20 million (the "Notes"). The Notes generally
bear interest at a rate of 7.91% per annum, and the Company is obligated to pay
Prudential an additional fee on each interest payment date if the Company's and
certain of its subsidiaries' ratio of debt to EBITDA, as defined under the Note
Agreement, exceeds certain levels. The amount of those fees that may be payable
by the Company varies depending on the extent the Company's and certain of its
subsidiaries' debt exceeds EBITDA, as determined under the Note Agreement, and
is capped at 2% of the outstanding principal amount of the Series A Notes.
During 2004 and for the first quarter of 2005, the Company was obligated to pay
the full 2% of that fee. For the second quarter of 2005, the fee was 1%, and for
the third quarter of 2005 it was 0.5%. Principal on the Notes is repayable in
five annual installments of $4.0 million beginning on August 28, 2006.
43
The Credit Facility and the Note Agreement contain certain covenants that the
Company must satisfy. The covenants included in the Credit Facility and the Note
Agreement include certain financial tests, restrictions on the ability of the
Company to incur additional indebtedness or to grant liens on its assets and
restrictions on the ability of the Company to pay dividends on its capital
stock. In addition, the Credit Facility includes a financial covenant that
requires the Company's consolidated adjusted EBITDA for the four consecutive
fiscal quarters ending June 30, 2006 to exceed 150% of the Company's
consolidated pro forma fixed charges for the 12-month period beginning
immediately after June 30, 2006, as determined under the Credit Facility (the
"Pro Forma Financial Covenant"). The financial tests are required to be
calculated based on the Company accounting for its majority-owned subsidiary
Congoleum Corporation on the equity method and include a maximum ratio of total
liabilities to tangible net worth, a minimum ratio of earnings before interest,
taxes, depreciation and amortization ("EBITDA") less certain cash payments for
taxes, debt service, and dividends to interest expense, a minimum level of
tangible net worth, a requirement that there be no consecutive quarterly losses
from continuing operations, and a maximum level of capital spending. In
addition, beginning on September 30, 2006, the Note Agreement requires the
Company to satisfy a different set of financial covenants, including a minimum
ratio of current assets to current liabilities, a minimum ratio of adjusted
EBITDA to fixed charges, a cap on the amount of debt as a percentage (45%) of
tangible net worth, a cap on the amount of priority debt (generally, debt of a
Company subsidiary (not including Congoleum) that is not a guarantor under the
Note Agreement plus secured debt of the Company) as a percentage (15%) of
tangible net worth, a minimum leverage ratio, and a minimum amount of tangible
net worth.
Pursuant to the Credit Facility and the Note Agreement, the Company and certain
of its subsidiaries granted Fleet, the Canadian Lenders and Prudential a
security interest in most of the Company's and its subsidiaries' assets. The
security interest granted does not include the shares of capital stock of the
Company's majority-owned subsidiary Congoleum Corporation or the assets of
Congoleum Corporation. In addition, pursuant to the Credit Facility and the Note
Agreement, certain of the Company's subsidiaries have agreed to guarantee the
Company's obligations (excluding AB Canada's obligations) under the Credit
Facility and the Note Agreement.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. In January 2004, the Credit
Facility and the Note Agreement were amended to remove a former lender under the
Credit Facility, reduce the credit line to $20 million, and to modify the
tangible net worth, adjusted EBITDA to interest expense and consecutive
quarterly loss covenants. Fees of $83 thousand were paid to the lenders in
connection with those amendments. In April 2004, the Credit Facility and the
Note Agreement were amended to permit AB Canada the ability to grant a security
interest in certain assets under a credit agreement that AB Canada was a party
to. In November 2004, the Credit Facility was amended to extend the term of the
Credit Facility to January 1, 2006, to modify the treatment of tax refunds in
covenant calculations, and to modify the measurement levels for the adjusted
EBITDA to interest expense and current assets to current liabilities covenants
for the remainder of the extended term of the Credit Facility. A fee of $50
thousand was paid in connection with that amendment.
44
On May 20, 2005, the Company entered into amendments and restatements of its
Credit Facility and Note Agreement. The amendment to the Credit Facility
extended the maturity date of the Credit Facility to September 30, 2006, added
the Pro Forma Financial Covenant and added the $12 million Canadian sublimit
facility for AB Canada. Pursuant to the amended Credit Facility, AB Canada
granted a security interest in all of its personal property to the Canadian
Lender. During the second quarter of 2005, AB Canada repaid all amounts
outstanding under its previous credit agreement with another lender from the
proceeds of borrowings under the Credit Facility.
The amendment to the Note Agreement in May 2005 generally removed the
application of the financial covenants under the Note Agreement for any
measurement period prior to March 31, 2005, which effectively cured the
Company's preexisting failure to satisfy the adjusted EBITDA to interest expense
covenant (as determined under the Note Agreement) as of December 31, 2004. In
addition, the amendments modified the financial covenants for 2005 under the
Note Agreement to make them comparable to the financial covenants for 2005 under
the Credit Facility. The amendment also requires the Company to enter into a
definitive commitment to replace or refinance the $20 million borrowing limit
under the Credit Facility by June 30, 2006 and to consummate the replacement or
refinancing by September 30, 2006.
Fees and expenses incurred for the amendments to the Credit Facility and Note
Agreement in May 2005 were approximately $425 thousand.
There can be no assurance that the Company will not need to obtain additional
amendments or waivers of covenants under its debt agreements in 2005 or
subsequent years. If it fails to satisfy those covenants it will be in default
under the respective debt agreements.
Certain defaults under the Note Agreement, such as defaults resulting from
certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum), automatically cause all
amounts owing with respect to the Notes then outstanding under the Note
Agreement to become immediately due and payable. A default in the payment of
principal or interest under the Notes would allow each individual noteholder to
cause all amounts owed with respect to the Notes held by such holder to become
immediately due and payable. In addition, with respect to all other defaults
under the Note Agreement, holders of at least 51% of the aggregate principal
amount of the Notes then outstanding could cause all amounts then owing with
respect to the Notes to become immediately due and payable. The Company
understands that Prudential is the only holder of the Notes and, as such, any
decision to cause the acceleration of amounts owed with respect to the Notes
would be made at Prudential's discretion.
Certain events of default under the Credit Facility, such as defaults resulting
from certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum) automatically terminate
Fleet's and the Canadian Lender's obligations to make borrowings available under
the Credit Facility and causes all amounts outstanding under the Credit Facility
to become immediately due and payable. With respect to all other events of
default under the Credit Facility, Fleet and the Canadian Lender may terminate
their obligations to make borrowings available under the Credit Facility and
cause all amounts outstanding under the Credit Facility to become immediately
due and payable.
45
Pursuant to the terms of the Credit Facility and the Note Agreement, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If a default occurs, Fleet and the Canadian Lender and
Prudential could respectively require the Company to repay all amounts
outstanding under the respective debt agreements. If a default occurs and the
Company is unable to obtain a waiver from the applicable lender and the Company
is required to repay all amounts outstanding under those agreements, the Company
would need to obtain funding from another source. Otherwise, the Company would
likely be unable to repay those outstanding amounts, in which case, Fleet as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise Fleet's and the
Canadian Lender's and Prudential's rights over that collateral. Any default by
the Company under the Credit Facility or the Note Agreement that results in the
Company being required to immediately repay outstanding amounts under its debt
agreements, and for which suitable replacement financing is not timely obtained,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
As noted above, the Credit Facility and the Note Agreement restrict the
Company's ability to obtain additional financing. Moreover, since the Company
and most of its subsidiaries have already granted security interests in most of
their assets, the Company's ability to obtain any additional debt financing may
be limited. The Company currently believes that its cash flow from operations,
expected proceeds from the sale of the Janus Flooring assets and borrowings
available under its existing credit facilities will be adequate for its expected
capital expenditure, working capital and debt service needs, subject to
compliance with the covenants contained in its debt agreements and the ability
of the Company to replace or refinance its existing credit facility that is
scheduled to expire on September 30, 2006 on satisfactory terms. However, if
circumstances change, the inability of the Company to obtain any necessary
additional debt financing would likely have a material adverse effect on its
business, operations and financial condition.
Congoleum is presently in negotiations with asbestos claimants, as well as other
constituencies, to determine the modifications of its Sixth Plan of
reorganization and other steps that may be appropriate for the implementation of
a plan. The Bankruptcy Court has given Congoleum permission to file a new
amended plan and disclosure statement by December 2, 2005. On November 7, 2005,
the Bankruptcy Court denied a request to extend Congoleum's exclusive right to
file a plan of reorganization and solicit acceptances thereof. The Bankruptcy
Court ruled that other parties may file proposed reorganization plans by
December 2, 2005. It is unclear whether any person other than Congoleum will
attempt to propose a plan or what any such plan would provide or propose.
Although the terms of a new amended plan have not been determined, Congoleum is
negotiating amendments and modifications with reference to the terms of the
Sixth Plan. Any descriptions of the Sixth Plan provided in this discussion are
provided to assist the reader in understanding the basis from which any further
amended plan may be negotiated. There can be no assurance that terms of any new
amended plan will not materially differ from the terms of the Sixth Plan,
including terms governing ABI's rights, obligations, and contribution.
46
Under the Sixth Plan, it is expected that certain rights that the Company may
have to receive indemnification for claims under the Sixth Plan or the joint
venture agreement relating to the contribution by ABI to Congoleum in 1993 of
the Company's tile division (the "Joint Venture Agreement"), subject to certain
exceptions, will not be paid to the Company for so long as any obligations owed
to the Plan Trust under the promissory note expected to be contributed by
Congoleum to the Plan Trust remain outstanding. Instead, those amounts will be
held in escrow by the Plan Trust and be pledged by the Company as collateral
securing Congoleum's obligations under that promissory note until released from
such escrow and paid to the Company pursuant to the terms of the Sixth Plan, the
promissory note and the pledge agreement expected to be entered into by the
Company with regard to the collateral expected to be pledged by the Company to
secure Congoleum's obligations under the promissory note. To the extent the
amounts that are subject to that escrow are material, that could have a material
adverse effect on the Company's liquidity and capital resources since those
escrowed amounts represent amounts that would have already been paid by the
Company but not yet reimbursed to the Company to the extent they remain in
escrow.
Pursuant to the terms of the Sixth Plan, ABI will also pledge the shares of
Congoleum stock it owns as collateral securing Congoleum's obligations under
that promissory note expected to be contributed by Congoleum to the Plan Trust.
The original principal amount of that note is expected to be approximately $2.7
million and will be subject to increase as of the last trading day of the 90
consecutive trading day period commencing on the first anniversary of the
effective date of Congoleum's plan of reorganization (the "Principal Adjustment
Date") in an amount equal to the excess, if any, of the amount by which 51% of
Congoleum's market capitalization, based on the average closing prices of
Congoleum's Class A common stock over that 90 trading day period, exceeds
approximately $2.7 million. This adjustment amount could result in the principal
amount of the note increasing materially. For example, if the adjustment amount
were calculated based on the excess of 51% of the equity value of Congoleum over
$2.7 million during the 90 consecutive trading day period ended September 30,
2005, the resulting adjustment amount would be approximately $14.9 million.
Although the scheduled repayment date for this note does not occur until its
tenth anniversary of issuance, it is expected that the terms of the note will
require Congoleum to make regularly scheduled interest payments prior to the
note's maturity date. Any default by Congoleum under that note could have a
material adverse effect on the Company's liquidity and capital resources.
The Sixth Plan also provides for a possible additional contribution by ABI to
the Plan Trust in the event ABI sells its interest in Congoleum during the
three-year period beginning on the Principal Adjustment Date. The expected
amount of any additional contribution by ABI would be equal to 50% of any amount
by which 51% of the equity value of Congoleum implied by ABI's sale of its
interest in Congoleum exceeds the aggregate principal amount of the note
contributed by Congoleum to the Plan Trust outstanding as of the Principal
Adjustment Date, after taking into account any increase in the principal amount
of that note as of the Principal Adjustment Date.
In addition, the terms of the Sixth Plan provide that the Company will no longer
have certain other rights to receive indemnification under the Joint Venture
Agreement or the Sixth Plan for asbestos-related property damage claims. To the
extent that the Company pays material amounts for asbestos-related property
damage claims that the Company would have been entitled to be reimbursed for by
Congoleum absent the provisions of the Sixth Plan, that could have a material
adverse effect on the Company's liquidity and capital resources. Furthermore, to
the extent that the amount of any of the Company's indemnity claims against the
Plan Trust are reduced pursuant to the distribution procedures under the Sixth
Plan to an amount less than the corresponding amount paid by the Company, that
could have a material adverse effect on the Company's liquidity and capital
resources.
47
In addition, under the terms of the Sixth Plan, ABI expects to contribute $250
thousand in cash to the Plan Trust upon confirmation of Congoleum's plan of
reorganization.
At September 30, 2005, $9.0 million was outstanding under revolving credit lines
and $0.8 million was outstanding under letters of credit. An additional $10.2
million was available for borrowing by the Company under the Credit Facility.
The Company believes that its cash flow from operations, expected proceeds from
the sale of the Janus Flooring assets and borrowings available under the Credit
Facility will be adequate for its expected capital expenditure, working capital,
and debt service needs, subject to compliance with the covenants contained in
its debt agreements referred to above and the ability of the Company to replace
or refinance its existing credit facility that is scheduled to expire on
September 30, 2006 on satisfactory terms.
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's board of directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the Credit Facility, aggregate dividend
payments (since June 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Facility, earned from June 30, 2003.
Under the Note Agreement, aggregate dividend payments (since December 31, 2000)
generally may not exceed the sum of $6 million plus 50% of cumulative
consolidated net income (accounting for Congoleum under the equity method of
accounting), as determined under the Note Agreement, earned after December 31,
2000.
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the unaudited
condensed consolidated financial statements do not include any adjustments that
might be necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to Unaudited Consolidating Condensed Financial
Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes A
and J of the Notes to the Unaudited Consolidating Condensed Financial
Statements, which are contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q, for a discussion of Congoleum's bankruptcy proceedings. These matters
will have a material adverse impact on liquidity and capital resources. During
the third quarter of 2005, Congoleum paid $7.9 million in fees and expenses
related to implementation of its planned reorganization under Chapter 11 and
litigation with certain insurance companies, bringing the total year to date
spending in connection with these matters to $20.8 million. Pursuant to terms of
the Claimant Agreement and related documents, Congoleum is entitled to
reimbursement for certain expenses it incurs for claims processing costs and
expenses in connection with pursuit of insurance coverage. At September 30,
2005, Congoleum had $11.6 million recorded as a receivable for such
reimbursements. The amount and timing of reimbursements that will be received
48
will depend on when the trust receives funds from insurance settlements or other
sources and whether the insurance proceeds exceed $375 million, which is the
required threshold for reimbursement of the first $7.3 million spent by
Congoleum relating to these reimbursable costs and expenses. Congoleum believes
this threshold will eventually be met, although there can be no assurances to
that effect. Congoleum expects to spend a further $12.7 million at a minimum in
fees, expenses, and trust contributions in connection with obtaining
confirmation of its plan, which amount is recorded in its reserve for
asbestos-related liabilities (in addition to the $8.7 million insurance
settlement being held as restricted cash). It also expects to spend a further
$11.6 million at a minimum in connection with pursuit of insurance coverage, for
which it expects to be reimbursed as discussed above. Congoleum currently holds
$3.7 million in restricted cash that may be available to offset future costs
incurred pursuing insurance coverage, subject to approval by the Bankruptcy
Court. Required expenditures could be materially higher than these estimates.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making the
interest payments on its outstanding 8 5/8% Senior Notes due 2008 (the "Senior
Notes") since January 1, 2004. The amount of accrued interest that is due but
has not been paid on the Senior Notes during this period is approximately $18.6
million, including interest on the unpaid interest due. Pursuant to the terms of
the Sixth Plan, payment of such accrued interest would be required for such plan
to go effective.
While Congoleum is not yet able to determine the effect, if any, that the terms
of any new amended plan of reorganization may have on its liquidity and capital
resources, it is Congoleum's intent to seek plan terms that would not have a
materially different impact on its liquidity and capital resources than the
terms of the Sixth Plan, although there can be no assurances to that effect. On
November 7, 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. The Bankruptcy Court ruled that other parties may file proposed
reorganization plans by December 2, 2005. It is unclear whether any person other
than Congoleum will attempt to propose a plan or what any such plan would
provide or propose.
As part of the Sixth Plan, Congoleum expects that it will issue a promissory
note (the "Congoleum Note") to the Plan Trust. Under the terms of the Sixth
Plan, the original principal amount of Congoleum Note will be approximately $2.7
million and will be subject to increase as of the last trading day of the 90
consecutive trading day period commencing on the first anniversary of the
effective date of Congoleum's plan of reorganization in an amount equal to the
excess, if any, of the amount by which 51% of Congoleum's market capitalization
as of that date exceeds approximately $2.7 million, as determined in accordance
49
with the terms of the Sixth Plan. This adjustment amount could result in the
principal amount of the note increasing materially. For example, if the
adjustment amount were calculated for the period ended September 30, 2005, the
resulting adjustment amount would be $14.9 million. Although the scheduled
repayment date for this note does not occur until its tenth anniversary of
issuance, this debt may affect Congoleum's ability to obtain other sources of
financing or refinance existing obligations. In addition, it is expected that
the terms of the Note will require Congoleum to make regularly scheduled
interest payments prior to such note's maturity date.
The Sixth Plan would obligate Congoleum, together with the Plan Trust, to
indemnify certain asbestos claimant representatives for all costs and
liabilities (including attorneys' fees) relating to the negotiation of the
modification of the Sixth Plan and certain prior proposed plans and the
collateral trust made on or after April 1, 2005. Congoleum's indemnification
obligations in this regard are capped under the Sixth Plan and Plan Trust
agreement at $3.0 million. In addition, the Sixth Plan would further obligate
Congoleum to fund any actual costs in excess of $2.0 million incurred by such
asbestos claimant representatives in connection with the confirmation of the
Sixth Plan, subject to Bankruptcy Court approval of those costs.
Unrestricted cash and cash equivalents, including short-term investments at
September 30, 2005, were $17.7 million, a decrease of $12.1 million from
December 31, 2004. Net cash used by operations during the first nine months of
2005 was $10.1 million, as compared to $31.0 million of cash provided by
operations in the first nine months of 2004. The increase in cash used by
operations in the first nine months of 2005 versus the first nine months of 2004
was primarily due to higher receivables, higher asbestos related payments,
higher payments of accrued liabilities, and lower accounts payable. Under the
terms of its revolving credit agreement, payments on Congoleum's accounts
receivable are deposited in an account assigned by Congoleum to its lender and
the funds in that account are used by the lender to pay down any loan balance.
Funds deposited in this account but not yet applied to the loan balance, which
amounted to $2.6 million and $1.2 million at September 30, 2005 and December 31,
2004, respectively, are recorded as restricted cash. Additionally, $8.7 million
of a $14.5 million settlement received in August 2004 from an insurance carrier,
which is subject to the lien of the Collateral Trust, is included as restricted
cash at September 30, 2005. Congoleum expects to contribute these funds, less
any amounts withheld pursuant to reimbursement arrangements, to the Plan Trust
upon confirmation of its plan of reorganization. Working capital was $23.8
million at September 30, 2005, down from $35.3 million at December 31, 2004. The
ratio of current assets to current liabilities at September 30, 2005 was 1.3
versus 1.4 at December 31, 2004.
Capital expenditures for the nine months ended September 30, 2005 totaled $3.6
million. Congoleum is currently planning capital expenditures of approximately
$5.5 million in 2005 and between $6 million and $7 million in 2006, primarily
for maintenance and improvement of plants and equipment, which it expects to
fund with cash from operations and credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on
50
December 31, 2005 with borrowings up to $30.0 million. A further amendment
extending the term to December 31, 2006 has been executed and is subject to
Bankruptcy Court approval. Interest is based on 0.75% above the prime rate. This
financing agreement contains certain covenants, which include the maintenance of
minimum earnings before interest, taxes, depreciation and amortization
("EBITDA"). It also includes restrictions on the incurrence of additional debt
and limitations on capital expenditures. The covenants and conditions under this
financing agreement must be met in order for Congoleum to borrow from the
facility. Congoleum was in compliance with these covenants at September 30,
2005. Borrowings under this facility are collateralized by inventory and
receivables. At September 30, 2005, based on the level of receivables and
inventory, $27.0 million was available under the facility, of which $4.4 million
was utilized for outstanding letters of credit and $12.6 million was utilized by
the revolving loan. Congoleum anticipates that its debtor-in-possession
financing facility will be replaced with a revolving credit facility on
substantially similar terms upon confirmation of any new amended plan of
reorganization. While Congoleum expects the facilities discussed above will
provide it with sufficient liquidity, there can be no assurances that it will
continue to be in compliance with the required covenants, that Congoleum will be
able to obtain a similar or sufficient facility upon exit from bankruptcy, or
that the debtor-in-possession facility (as extended) will be renewed prior to
that facility's expiration.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Although Congoleum did
not generate net cash from operations in the first nine months of 2005,
Congoleum anticipates that it will generate net cash from operations during the
balance of 2005. Congoleum believes that net cash provided by operating
activities and borrowings under its financing agreement will be adequate to fund
working capital requirements, debt service payments, and planned capital
expenditures for the foreseeable future, plus its current estimates for costs to
settle and resolve its asbestos liabilities through its Sixth Plan. Congoleum's
inability to obtain confirmation of an amended plan in a timely manner would
have a material adverse effect on Congoleum's ability to fund its operating,
investing and financing requirements. Congoleum also anticipates it will be able
to obtain suitable exit financing upon confirmation of an amended plan although
there can be no assurance that such financing will be obtained. Such financing
will be required to replace its debtor-in-possession credit facility and permit
Congoleum to pay accrued interest on its Senior Notes and other obligations
needed to be satisfied in connection with the confirmation of an amended plan of
reorganization. If Congoleum's cash flow from operations is materially less than
anticipated, and/or if the costs in connection with seeking confirmation of an
amended plan of reorganization or in connection with the insurance coverage
litigation are materially more than anticipated, or if sufficient funds from
insurance proceeds are not available at confirmation to reimburse coverage
litigation costs as expected, the contemplated exit financing, when combined
with net cash provided from operating activities, may not provide sufficient
funds and Congoleum may not be able to obtain confirmation of and go effective
with an amended plan of reorganization.
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note I to the Unaudited
51
Consolidating Condensed Financial Statements). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of Congoleum's
owned and previously owned facilities. The contingencies also include claims for
personal injury and/or property damage. The exact amount of such future cost and
timing of payments are indeterminable due to such unknown factors as the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of Congoleum's liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance. Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on Congoleum's costs,
Congoleum is not aware of any pending legislation which would reasonably have
such an effect. There can be no assurances that the costs of any future
government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant expenses
incurred by or judgments assessed against Congoleum.
Risk Factors That May Affect Future Results
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, I and J of the Notes to Unaudited
Consolidating Condensed Financial Statements, which are included in Part I, Item
1 of this Quarterly Report on Form 10-Q, the Company and its majority-owned
subsidiary Congoleum have significant liability and funding exposure for
asbestos claims. Congoleum has entered into settlement agreements with various
asbestos claimants totaling at least $491 million and is aware of additional
unsettled claims with a proposed settlement value of approximately $512 million.
Satisfaction of this obligation pursuant to the terms of an amended plan of
reorganization is dependent on, among other things, a determination by the
Bankruptcy Court that the plan has satisfied certain criteria under the
Bankruptcy Code, among other things.
There can be no assurance that Congoleum will finalize the terms of a new
amended plan by December 2, 2005, the current deadline for Congoleum to submit a
new amended plan and disclosure statement, that Congoleum will receive the
acceptances necessary for confirmation of a new amended plan of reorganization,
that a new amended plan will not be modified further, that a new amended plan
will receive necessary court approvals from the Bankruptcy Court or the Federal
52
District Court, or that such approvals will be received in a timely fashion,
that a new amended plan will be confirmed, or that a new amended plan, if
confirmed, will become effective. On November 7, 2005, the Bankruptcy Court
denied a request to extend Congoleum's exclusive right to file a plan of
reorganization and solicit acceptances thereof. The Bankruptcy Court ruled that
other parties may file proposed reorganization plans by December 2, 2005. It is
unclear whether any person other than Congoleum will attempt to propose a plan
or what any such plan would provide or propose.
A new amended plan of reorganization and any alternative plan of reorganization
pursued by Congoleum or confirmed by the Bankruptcy Court and the Federal
District Court could materially differ from the terms of the Sixth Plan.
Furthermore, the estimated costs and contributions to effect an amended plan of
reorganization or an alternative plan could be significantly greater than
currently estimated. Any plan of reorganization pursued by Congoleum will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court and Federal District Court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained.
Confirmation of a plan of reorganization will depend on Congoleum obtaining exit
financing to provide it with sufficient liquidity to pay accrued interest and
other obligations upon the plan going effective. If Congoleum's cash flow from
operations is materially less than anticipated, and/or if the costs in
connection with seeking confirmation of an amended plan of reorganization or in
connection with the insurance coverage litigation are materially more than
anticipated, or if sufficient funds from insurance proceeds are not available at
confirmation to reimburse coverage litigation costs as expected, Congoleum may
be unable to obtain sufficient exit financing, when combined with net cash
provided from operating activities, to provide Congoleum with sufficient funds
for its operations and Congoleum may not be able to obtain confirmation and
effectiveness of an amended plan of reorganization.
As part of Congoleum's plan of reorganization, Congoleum would contribute to the
Plan Trust certain of Congoleum's rights to receive insurance proceeds for
asbestos liabilities under its applicable insurance policies. Congoleum is
currently involved in litigation with certain of its insurance carriers related
to disputed insurance coverage for asbestos-related liabilities, and certain
insurance carriers have filed various objections to Congoleum's previously filed
plan of reorganization and related matters. It is expected that these insurers
will continue to vigorously contest their obligations to provide Congoleum with
insurance coverage for Congoleum's asbestos liabilities and seek to prevent any
contribution by Congoleum of its rights to receive insurance for asbestos
matters to the Plan Trust. The first phase of the insurance coverage trial began
August 2, 2005 and will address all issues and claims relating to whether the
insurers are obligated to provide coverage under the policies at issue in this
litigation for the global Claimant Agreement entered into by Congoleum,
including all issues and claims relating to both Congoleum's decision and
conduct in entering into the Claimant Agreement and filing a pre-packaged
bankruptcy and the insurance company defendants' decisions and conduct in
opposing the Claimant Agreement and Congoleum's pre-packaged bankruptcy, the
reasonableness and good faith of the Claimant Agreement, whether the Claimant
Agreement breached any insurance policies and, if so, whether the insurance
companies suffered any prejudice, and whether the insurance companies'
opposition to the Claimant Agreement and bankruptcy and various other conduct by
the insurers constituted a breach of their duties of good faith and fair dealing
such that they are precluded from asserting that Congoleum's decision to enter
53
into the Claimant Agreement constitutes any breach on the part of Congoleum. The
second phase of the trial will address all coverage issues, including but not
limited to trigger and allocation. The final phase of the trial will address bad
faith punitive damages, if appropriate. Congoleum believes, however, that even
if the insurers were to succeed in the first phase of the coverage action, such
result would not deprive individual claimants of the right to seek payment from
the affected insurance policies nor would such result preclude Congoleum from
amending the Claimant Agreement and seeking recovery under the Claimant
Agreement, as amended; moreover, Congoleum does not believe that it would be
deprived of coverage-in-place insurance for future obligations of or demands
upon the insurers under the applicable insurance policies. However, there can be
no assurances of the outcome of these matters or their potential effect on
Congoleum's ability to obtain approval of its plan of reorganization.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses that would likely have a material adverse effect on the
Company's business, results of operations and financial position.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's goals for resolving asbestos liability include:
(i) the future cost and timing of estimated asbestos liabilities and payments;
(ii) the availability of insurance coverage and reimbursement from insurance
companies that underwrote the applicable insurance policies for Congoleum and
American Biltrite Inc. for asbestos-related claims, including insurance coverage
and reimbursement for asbestos claimants under the proposed Congoleum
reorganization plan, which certain insurers have objected to in Bankruptcy Court
and are litigating in New Jersey State Court; (iii) the costs relating to the
execution and implementation of any plan of reorganization pursued by Congoleum;
(iv) timely reaching agreement with other creditors, or classes of creditors,
that exist or may emerge; (v) satisfaction of the conditions and obligations
under American Biltrite Inc.'s and Congoleum's respective outstanding debt
instruments, and amendment of those outstanding debt instruments, as necessary,
to permit Congoleum and American Biltrite Inc. to satisfy their obligations
under Congoleum's plan of reorganization and to make certain financial covenants
in those debt instruments less restrictive; (vi) the response from time to time
of American Biltrite Inc.'s and Congoleum's lenders, customers, suppliers and
other constituencies to the Chapter 11 process and related developments arising
from the strategy to settle asbestos liability; (vii) Congoleum's ability to
maintain debtor-in-possession financing sufficient to provide it with funding
that may be needed during the pendency of its Chapter 11 case and to obtain exit
financing sufficient to provide it with funding that may be needed for its
operations after emerging from the bankruptcy process, in each case, on
reasonable terms; (viii) timely obtaining sufficient creditor and court approval
of any reorganization plan; (ix) costs of, developments in and the outcome of
insurance coverage litigation pending in New Jersey State Court involving
54
Congoleum and certain insurers; (x) the extent to which Congoleum is able to
obtain reimbursement for costs it incurs in connection with the insurance
coverage litigation; and (xi) compliance with the Bankruptcy Code, including
Section 524(g). In addition, in view of American Biltrite Inc.'s relationships
with Congoleum, American Biltrite Inc. could be affected by Congoleum's
negotiations regarding its pursuit of a plan of reorganization, and there can be
no assurance as to what that impact, positive or negative, might be. In any
event, the failure of Congoleum to obtain confirmation and consummation of its
anticipated Chapter 11 plan of reorganization would have a material adverse
effect on Congoleum's business, results of operations or financial condition and
could have a material adverse effect on American Biltrite Inc.'s business,
results of operations or financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know the effects that any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan that may be proposed in the
future. To date, Congoleum has expended significant amounts pursuant to
resolving its asbestos liability relating to its proposed Chapter 11 plan of
reorganization. To the extent any federal legislation is enacted, which does not
credit Congoleum for amounts paid by Congoleum pursuant to its plan of
reorganization or requires the Company or Congoleum to pay significant amounts
to any national trust or otherwise, such legislation could have a material
adverse effect on the Company's or Congoleum's businesses, results of operations
and financial conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A, I and J of the Notes to Unaudited Consolidating Condensed
Financial Statements, included in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
The Company relies on debt financing to help fund its operations and other
general corporate purposes and any default by it under its credit facilities or
inability to obtain any necessary debt financing would likely have a material
adverse effect on its business, operations and financial condition.
The Company relies on borrowings under its existing credit facilities to help
finance, among other things, its operations, working capital and capital
expenditures. The Company and most of its domestic and Canadian subsidiaries
have granted a security interest to the lenders under the Company's primary
credit facilities in most of the Company's and its domestic and Canadian
subsidiaries' assets. The collateral that is subject to this security interest
does not include the shares of capital stock of Congoleum or assets of
Congoleum.
55
Pursuant to the terms of the Note Agreement and the Credit Facility, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If such a default occurs, the lenders under the respective
agreements could respectively require the Company to repay all amounts
outstanding under the respective debt agreements. If a default occurs and the
Company is unable to obtain a waiver from the respective lenders and the Company
is required to repay all amounts outstanding under those agreements, the Company
would need to obtain funding from another source. Otherwise, the Company would
likely be unable to repay those outstanding amounts, in which case, Fleet as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise the lenders' rights
over that collateral. Any default by the Company under the Credit Facility or
the Note Agreement that results in the Company being required to immediately
repay outstanding amounts under its debt agreements, and for which suitable
replacement financing is not timely obtained, would have a material adverse
effect on the Company's business, results of operations and financial condition.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. There can be no assurance
that the Company will not need to obtain additional amendments or waivers of
covenants under its debt agreements in 2005 or subsequent years. If it fails to
satisfy those covenants it will be in default under the respective debt
agreements.
The Credit Facility expires on September 30, 2006. Although the Company expects
that the Credit Facility will be extended or replaced by that date, there can be
no assurances in this regard. If the Company has outstanding borrowings under
the Credit Facility at that date and the Credit Facility's term has not been
extended beyond that date, such failure would result in a breach of the Note
Agreement, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
Under the terms of the Company's debt agreements, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its subsidiaries have already granted security interests in most of
their assets, the Company's ability to obtain any additional debt financing may
be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
56
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at those facilities, in order to comply
with existing environmental laws, and those amounts may be substantial. Although
the Company and Congoleum believe that those amounts should not have a material
adverse effect on their respective financial positions, there can be no
assurance that these amounts will not have such an effect because, as a result
of environmental requirements becoming increasingly strict, neither the Company
nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies. Moreover, in addition to
potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company or Congoleum
to modify or curtail their operations, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company (including its majority-owned subsidiary Congoleum) generally design
and engineer their own products. Most of the raw materials required by the
Company for its manufacturing operations are available from multiple sources;
however, the Company does purchase some of its raw materials from a single
source or supplier. Any significant delay in or disruption of the supply of raw
materials could substantially increase the Company's cost of materials, require
product reformulation or require qualification of new suppliers, any one or more
of which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
57
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of their raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, in part due to a fire
at a large resin plant in 2004. Although the Company and Congoleum have not
experienced any significant difficulties obtaining specialty resin, there can be
no assurances that they may not have difficulty in the future, particularly if
global supply conditions deteriorate. Raw material prices in 2004 increased
significantly and are expected to remain high in 2005 and until additional
capacity becomes available.
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the United States Bankruptcy Code and emerge from
bankruptcy as continuing operating companies that have shed much of their
pre-filing liabilities, those competitors could have a cost competitive
advantage over Congoleum. In addition, in order to maintain their competitive
positions, the Company and Congoleum may need to make substantial investments in
their businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
58
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 21% of the
Company's tape division's net sales for the year ended December 31, 2004. The
loss of the largest unaffiliated customer and/or two or more of the other
unaffiliated customers could have a material adverse effect on the Company's
business, results of operations or financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations, or financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors accounted for approximately 70% of
Congoleum's net sales for the year ended December 31, 2004.
59
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 59% of its net sales for the year ended
December 31, 2004. The loss of K&M Associates L.P.'s largest customer would
likely have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to adequately perform in his current position,
could have a material adverse effect on the Company's business, results of
operations or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on their investments. The Company and Congoleum
invest primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. If market interest rates were to
increase by 10% from levels at December 31, 2004 and September 30, 2005, the
fair value of our investments as of each such respective date would decline by
an immaterial amount. The carrying amount of these investments approximates fair
value due to the short-term maturities. The substantial majority of the
Company's outstanding consolidated long-term debt as of December 31, 2004 and
September 30, 2005 consisted of indebtedness with a fixed rate of interest,
which is not subject to change based upon changes in prevailing market interest
rates.
The Company operates internationally, principally in Canada, Europe, Asia and
Central America, giving rise to exposure to market risks from changes in foreign
exchange rates. To a certain extent, foreign currency exchange rate movements
also affect the Company's competitive position, as exchange rate changes may
affect business practices and/or pricing strategies of non-U.S. based
competitors. For foreign currency exposures existing at December 31, 2004 and
September 30, 2005, a 10% unfavorable movement in currency exchange rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as of each respective date.
60
Under their current policies, neither the Company nor Congoleum currently use
derivative financial instruments, derivative commodity instruments or other
financial instruments to manage their exposure to changes in interest rates,
foreign currency exchange rates, commodity prices or equity prices and do not
hold any instruments for trading purposes.
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports
that it files or submits 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.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
61
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, and the information included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors That May Affect Future Results - The Company and its majority-owned
subsidiary Congoleum have significant asbestos liability and funding exposure,
and the Company's and Congoleum's strategies for resolving this exposure may not
be successful," included in Part I, Item 2 of this Quarterly Report on Form
10-Q, are incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due February 1, 2004, August 1, 2004,
February 1, 2005, and August 1, 2005 on the Senior Notes. As of September 30,
2005, the aggregate amount of the interest payments that was not paid on the
Senior Notes with respect to those interest payment due dates is approximately
$17.3 million, and the aggregate outstanding principal amount of the Senior
Notes is approximately $100 million. These amounts, plus approximately $1.4
million of aggregate accrued interest on the unpaid interest that was due on
February 1, 2004, August 1, 2004, February 1, 2005 and August 1, 2005 with
respect to the Senior Notes, are included in the line item "Liabilities Subject
to Compromise" in the Company's consolidating balance sheet included in this
report.
Item 5. Other Information
On November 10, 2005, the Compensation Committee of the Board of Directors of
the Company approved the vesting of all outstanding and unvested options held by
directors, officers and employees under the Company's 1993 Stock Award and
Incentive Plan, as amended and restated as of March 4, 1997 (the "1993 Plan"),
and 1999 Stock Option Plan for Non-Employee Directors (the "1999 Plan"). As a
result of the acceleration of vesting, options to acquire 195,600 shares of the
Company's common stock, which otherwise would have vested from time to time over
the next four years, became immediately exercisable in full. This action was
taken to eliminate, to the extent permitted, the transition expense that the
Company otherwise would incur in connection with the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123(R)"). The exercise prices of all of the unvested options
were lower than the closing trading price of the Company's common stock on the
modification date. Under the accounting guidance of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, the accelerated
vesting resulted in a charge for stock-based compensation of approximately
$23,000. The charge was recognized by the Company in November 2005. The
Company's pro forma disclosure for 2005 will include the aggregate effect of the
accelerated vesting of $799,000, as calculated under SFAS No. 123, Accounting
for Stock-Based Compensation. The remaining unvested portion would have
otherwise been recognized in the Company's consolidating statements of
operations over the next four fiscal years, upon the adoption of SFAS No. 123(R)
on January 1, 2006.
62
Attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q is a form of
stock option agreement in connection with the 1993 Plan. A copy of the 1993 Plan
was previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, which report was filed with the Securities
and Exchange Commission on March 27, 1997.
Attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q is a form of
stock option agreement in connection with the 1999 Plan. A copy of the 1999 Plan
was previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, which report was filed with the
Securities and Exchange Commission on August 12, 1999.
Pursuant to the terms of the 1999 Plan, options to purchase 500 shares of the
Company's common stock at an exercise price of $9.30 per share were granted on
July 1, 2005 to each of the Company's non-employee directors, Leo R. Breitman,
Gilbert K. Gailius, John C. Garrels III, Frederick H. Joseph, Mark N. Kaplan,
James S. Marcus, Natalie S. Marcus and Kenneth I. Watchmaker. Pursuant to the
terms of the 1999 Plan and the related stock option agreements, each of those
options were scheduled to vest and become fully exercisable on January 1, 2006;
however, as a result of the Compensation Committee's decision on November 10,
2005 to accelerate the vesting of all the then outstanding options to purchase
the Company's common stock granted under the 1993 Plan and the 1999 Plan, those
options became fully vested and exercisable as of that date.
Item 6. Exhibits
Exhibit No. Description
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September
11, 2004
10.1 Form of Stock Option Agreement for American
Biltrite Inc.'s 1993 Stock Award and Incentive
Plan, as amended and restated as of March 4,
1997
10.2 Form of Stock Option Agreement for American
Biltrite Inc.'s 1999 Stock Option Plan for
Non-Employee Directors
31.1 Certification of the Principal Executive Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
63
Exhibit No. Description
31.2 Certification of the Principal Financial
Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.1 III Sixth Modified Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code of
Congoleum Corporation, et al., dated as of July
22, 2005
99.2 III Proposed Disclosure Statement with respect to
the Sixth Modified Joint Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code of
Congoleum Corporation, et al., dated as of July
22, 2005
99.3 IV Amendment, dated July 29, 2005, to the
Confidential Settlement Agreement and Release,
among Congoleum Corporation, the Plan Trust and
certain underwriters at Lloyd's, London
99.4 Settlement Agreement and Release dated August
3, 2005 by, between and among Congoleum
Corporation and Federal Insurance Company
99.5 Confidential Settlement Agreement and Release
dated September 30, 2005 among Congoleum
Corporation, the Plan Trust and Mt. McKinley
Insurance Company and Everest Reinsurance
Company
64
---------------------------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
filed with the Securities and Exchange Commission on March 27,
1997 (1-4773)
II Incorporated by reference to the exhibits of the Company's Annual
Report on Form 10-K filed for the year ended December 31, 2004
and filed with the Securities and Exchange Commission on March
30, 2005
III Incorporated by reference to the exhibits of the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 28, 2005
IV Incorporated by reference to the exhibits of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005
and filed with the Securities and Exchange Commission on August
15, 2005
65
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
(Registrant)
Date: November 14, 2005 BY: /s/ Howard N. Feist III
--------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
66
INDEX OF EXHIBITS
Exhibit No. Description
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11,
2004
10.1 Form of Stock Option Agreement for American
Biltrite Inc.'s 1993 Stock Award and Incentive
Plan, as amended and restated as of March 4, 1997
10.2 Form of Stock Option Agreement for American
Biltrite Inc. 1999 Stock Option Plan for
Non-Employee Directors
31.1 Certification of the Principal Executive Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of the Principal Financial Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
32 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.1 III Sixth Modified Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code of Congoleum
Corporation, et al., dated as of July 22, 2005
99.2 III Proposed Disclosure Statement with respect to the
Sixth Modified Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code of Congoleum
Corporation, et al., dated as of July 22, 2005
67
Exhibit No. Description
99.3. IV Amendment, dated July 29, 2005, to the
Confidential Settlement Agreement and Release,
among Congoleum Corporation, the Plan Trust and
certain underwriters at Lloyd's, London
99.4 Settlement Agreement and Release dated August 3,
2005 by, between and among Congoleum Corporation
and Federal Insurance Company
99.5 Confidential Settlement Agreement and Release
dated September 30, 2005 among Congoleum
Corporation, the Plan Trust and Mt. McKinley
Insurance Company and Everest Reinsurance Company
---------------------------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
filed with the Securities and Exchange Commission and on March
27, 1997 (1-4773)
II Incorporated by reference to the exhibits of the Company's Annual
Report on Form 10-K filed for the year ended December 31, 2004
and filed with the Securities and Exchange Commission on March
30, 2005
III Incorporated by reference to the exhibits of the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 28, 2005
IV Incorporated by reference to the exhibits of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005
and filed with the Securities and Exchange Commission on August
15, 2005
68