SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, MA 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES |_| NO |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_| NO |X|
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 and (2) has been subject to such filing requirements for
the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES |_| NO |X|
The aggregate market value of the voting stock of the registrant held by
non-affiliates as of June 30, 2005 was $14.2 million.
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of March 15, 2006 was 3,441,551.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be
held on May 9, 2006, which will be filed by the registrant within 120 days after
December 31, 2005, are incorporated by reference into Part III of this Annual
Report on Form 10-K.
Factors That May Affect Future Results - 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 Registrant's expectations, as of the date of this
report, of future events. Except as required by applicable law, the Registrant
undertakes no obligation to update any of these forward-looking statements.
Although the Registrant believes that its 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
Registrant's actual results differing from its expectations include those
factors discussed elsewhere in this report, including in Item 1A (Risk Factors).
PART I
ITEM 1. BUSINESS
General Development of Business
American Biltrite Inc. (together with, unless the context otherwise indicates,
its wholly-owned subsidiaries and K&M Associates L.P., "ABI" or the "Company")
was organized in 1908 and is a Delaware corporation. ABI's major operations
include its Tape Division as well as a controlling interest in Congoleum
Corporation, a Delaware corporation ("Congoleum"), a controlling interest in K&M
Associates L.P., a Rhode Island limited partnership ("K&M"), and ownership of a
Canadian subsidiary, American Biltrite (Canada) Ltd. ("AB Canada").
The Tape Division produces adhesive-coated, pressure-sensitive papers and films
used to protect material during handling or storage or to serve as a carrier for
transferring decals or die-cut lettering. The Tape Division also produces
pressure sensitive tapes and adhesive products used for applications in the
heating, ventilating and air conditioning (HVAC), footwear, automotive,
electrical and electronic industries.
In 1995, ABI acquired a controlling interest in K&M, a designer, supplier,
distributor and servicer of a wide variety of adult, children's and specialty
items of fashion jewelry and related accessories throughout the U.S. and Canada.
ABI, through wholly-owned subsidiaries, owns an aggregate 94.5% interest (7% as
sole general partner and 87.5% in limited partner interests) in K&M. K&M
wholesales its products to mass merchandisers, specialty stores and department
stores.
Congoleum is a leading manufacturer of resilient sheet and tile flooring. In
1993, ABI acquired an ownership position in Congoleum in exchange for its U.S.
tile business (the "Tile Division"). In 1995, ABI acquired voting control when
Congoleum sold a new issue of shares of its Class A common stock to the public
which had one vote per share and used the proceeds to redeem most of the
two-vote-per-share Class B shares held by the then majority shareholder. ABI's
interest has increased further since then as a result of Congoleum's repurchases
of its common stock combined with open market purchases of Congoleum common
stock by ABI. As of December 31, 2005, ABI's ownership of 151,100 shares of
Congoleum's Class A common stock and 4,395,605 shares of Class B common stock
represented 69.4% of the outstanding equity voting interests of Congoleum.
Congoleum is a defendant in a large number of asbestos-related lawsuits. On
December 31, 2003, Congoleum and two of its subsidiaries each filed their
respective voluntary petitions commencing cases for reorganization relief under
Chapter 11 of the United States Bankruptcy Code in order to resolve Congoleum's
asbestos-related liabilities pursuant to a prepackaged Chapter 11 plan of
reorganization filed in the Congoleum Chapter 11 cases. 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 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
1
claimants necessary to seek approval of a proposed, pre-packaged Chapter 11 plan
of reorganization. In January 2004, the Company 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 agreed upon modifications, 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, and the Sixth Plan was
subsequently withdrawn. In November 2005, the Bankruptcy Court denied a request
to extend Congoleum's exclusive right to file a plan of reorganization and
solicit acceptances thereof. In February 2006, Congoleum filed a new amended
plan of reorganization (the "Seventh Plan"). On February 27, 2006, Congoleum
announced its intention to make additional changes to its plan of
reorganization, and on March 17, 2006 it filed a new amended plan (the "Eighth
Plan"). In addition, an insurance company has filed a plan of reorganization
(the "CNA Plan"), and the Official Committee of Bondholders has also filed a
plan (the "Bondholder Plan"). The Bankruptcy Court has scheduled a hearing to
consider the adequacy of the disclosure statements with respect to these plans
for April 27, 2006. The Eighth Plan, if confirmed, will result in significant
dilution of ABI's ownership of Congoleum. See Notes 1 and 9 of the Notes to
Consolidated Financial Statements, which are contained in Item 8 of this Annual
Report on Form 10-K.
Outside the United States, the Tape Division operates facilities in Belgium,
Italy and Singapore, where bulk tape products are converted into various sizes,
a sales and distribution facility in Italy, to enable quicker response to
customer demands in the European and Asian markets, and a sales representative
office in Shanghai, China. The Company's wholly-owned Canadian subsidiary,
American Biltrite (Canada) Ltd., produces resilient floor tile, rubber tiles and
rolled rubber flooring and industrial products (including conveyor belting,
truck and trailer splash guards and sheet rubber material) and imports certain
rubber and tile products from China for resale. K&M maintains a purchasing
office in China, from which it sources the majority of the products its sells.
2
ABI owns 50% of Compania Hulera Sula, S.A. de C.V. ("Hulera Sula"), a Honduran
corporation, which produces soles, heels, sandals and other footwear products
under license from ABI. Hulera Sula in turn owns 100% of Hulera Sacatepequez,
S.A., a Guatemalan corporation which manufactures products in Guatemala similar
to those of Hulera Sula. Fomtex, S.A., a Guatemalan corporation 60% owned by
Hulera Sula, manufactures foam mattresses, beds and other foam products. In
October 2003, ABI discontinued the operations of its wholly owned subsidiary
Janus Flooring Corporation ("Janus Flooring"), which manufactured pre-finished
hardwood flooring in Canada. Results from Janus Flooring, including charges
resulting from the shutdown, are being reported as a discontinued operation.
For financial reporting purposes, ABI operates in four industry segments:
flooring products, tape products, jewelry and the Canadian division, which
produces flooring and rubber products. See Note 14 of Notes to the Consolidated
Financial Statements, set forth in Item 8 below.
Financial Information about Industry Segments
Business segment information is in Note 14 of Notes to the Consolidated
Financial Statements, set forth in Item 8 below.
Narrative Description of Business
Marketing, Distribution and Sales - The Tape Division's protective papers and
films are sold domestically and throughout the world, principally through
distributors, but also directly to certain manufacturers. Other tape products
are marketed through the Tape Division's own sales force and by sales
representatives and distributors throughout the world. ABI's Belgian, Italian
and Singapore facilities sell these products throughout Europe and the Far East.
The products of K&M are sold domestically and in Canada through its own direct
sales force and through third-party sales representatives. K&M's business and
operations experience seasonal variations. In general, fashion jewelry supply,
distribution and service businesses respond to the seasonal demands of mass
merchandisers and other major retailers, which typically peak in preparation for
end-of-year holiday shopping. Accordingly, K&M's working capital needs tend to
be greatest in the second and third fiscal quarters as it increases inventories
in advance of its peak selling season, while its revenues tend to be greater
toward the end of each fiscal year, especially in the latter part of the third
quarter and the first half of the fourth quarter.
AB Canada's floor tile, rubber products and industrial products are marketed
principally through distributors. Seasonal variations in the sales and working
capital requirements of this division are not significant.
Congoleum currently sells its products through approximately 15 distributors
providing approximately 86 distribution points in the United States and Canada,
as well as directly to a limited number of mass market retailers. Congoleum
considers its distribution network to be very important to maintaining a
competitive position. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
customers, the loss of a major customer could have a materially adverse impact
on Congoleum's business, results of operations and financial condition, at least
until a suitable replacement is in place. The sales pattern for Congoleum's
products is seasonal, with peaks in retail sales typically occurring during
March/April/May and September/October. Orders are generally shipped as soon as a
truckload quantity has been accumulated, and backorders can be canceled without
penalty.
3
Hulera Sula's footwear and foam products are marketed and distributed in certain
Central American countries.
Financial information about products that contributed more than 10% of the
Company's consolidated revenue during the last three fiscal years is included in
Note 14 of Notes to the Consolidated Financial Statements, set forth in Item 8
below.
Working Capital and Cash Flow - In general, ABI's working capital requirements
are not affected by accelerated delivery requirements of major customers or by
obtaining a continuous allotment of raw material from suppliers. ABI does not
provide special rights for customers to return merchandise and does not provide
special seasonal or extended terms to its customers. K&M does provide
pre-approved allowances in the form of markdowns and return authorizations as
required.
Congoleum produces goods for inventory and sells on credit to customers.
Generally, Congoleum's distributors carry inventory as needed to meet local or
rapid delivery requirements. Congoleum's typical credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
In 2006, Congoleum anticipates spending a minimum of $28.4 million to obtain
confirmation of its plan of reorganization under Chapter 11 of the United States
Bankruptcy Code and $11.5 million in connection with the related insurance
coverage litigation, which will have a material impact on its liquidity and cash
flow. While Congoleum expects to recover the $11.5 million in future coverage
litigation costs and $14.8 million in past costs from insurance settlements upon
confirmation of a plan of reorganization, there can be no assurances that
Congoleum will recover such costs. In February 2006, the Bankruptcy Court
ordered a law firm formerly representing Congoleum to disgorge all fees and
certain expenses it was paid by Congoleum. The law firm is expected to appeal
from this ruling once an order embodying the ruling has been entered by the
Bankruptcy Court. It is expected that the amount of the disgorgement will range
from approximately $8.2 million to $9.8 million. Pursuant to the terms of the
Eighth Plan, holders of Congoleum's 8-5/8% Senior Notes due 2008 (the "Senior
Notes") would forego $10 million in interest accrued during the post-petition
period and would receive the right to any funds (net of related expenses) from
the fee disgorgement and other causes of action against the law firm and one of
the service providers retained by that law firm, subject to a maximum of $10
million plus interest at 8.625% from the effective date of the plan until the
time such payment is made (the "Maximum Additional Bondholder Recovery"). Any
net recoveries in excess of the Maximum Additional Bondholder Recovery would be
paid to the Plan Trust. Pending confirmation and effectiveness of the Eighth
Plan, Congoleum anticipates that its existing cash (including restricted cash),
cash generated from operations and credit arrangements should be sufficient to
fund its operating needs and costs associated with the insurance coverage
litigation. Congoleum further anticipates that its existing cash (including
restricted cash), cash generated from operations, credit arrangements and
recoveries of costs for the coverage litigation from insurance recoveries upon
effectiveness of the Eighth Plan should be sufficient to fund its obligations
under the Eighth Plan to pay interest, cash to the Plan Trust, and provide
adequate working capital for operations.
4
In connection with Congoleum's plan of reorganization, ABI expects to spend $1.0
million in 2006, which is not expected to have a material adverse effect on
ABI's working capital or cash flow. ABI and Congoleum have separate credit
facilities which are governed by independent credit agreements, and ABI is
generally not otherwise liable for the separate obligations of Congoleum.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - ABI and Non-Debtor Subsidiaries"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Congoleum" in Item 7 below.
Raw Materials - ABI generally designs and engineers its own products. Most of
the raw materials required by ABI for its manufacturing operations are available
from multiple sources; however, ABI 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 ABI's cost of materials,
require product reformulation or require qualification of new suppliers, any one
or more of which could materially adversely affect the business, operations or
financial condition of ABI. Congoleum does not have readily available
alternative sources of supply for specific designs of transfer print film, which
are produced utilizing print cylinders engraved to Congoleum's specifications.
Although no loss of this source of supply is anticipated, replacement could take
a considerable period of time and interrupt production of certain products.
Congoleum maintains a raw material inventory and has an ongoing program to
develop new sources, which is designed to provide continuity of supply for its
raw material requirements. Although the Company and Congoleum have generally not
had difficulty in obtaining their requirements for these materials, they have
occasionally experienced significant price increases for some of these
materials. In particular, industry supply conditions for specialty resins used
in flooring have been very tight, despite significant price increases, due to
several factors, including an explosion at a large resin plant in 2004 that
destroyed the plant, the decision by another major supplier to exit the
business, and the effect of hurricanes in 2005. Although the Company has been
able to obtain sufficient supplies of specialty resin and other raw materials,
there can be no assurances that it may not experience difficulty in the future,
particularly if global supply conditions deteriorate, which could have a
material adverse effect on profit margins. Raw material prices in 2005 increased
significantly and may remain high in 2006 and until additional capacity becomes
available.
Competition - All businesses in which ABI is engaged are highly competitive,
principally based upon pricing of the product, the quality of the product and
service to the customer. ABI's tape products compete with products of some of
the largest fully integrated rubber and plastic companies, as well as those of
smaller producers. Included among its competitors are 3M, Nitto Permacel,
Ivex/Novasol and R-Tape. AB Canada's flooring products compete with those of
other manufacturers of rubber and resilient floor tiles and with all other types
of floor covering. AB Canada also competes with Armstrong World Industries,
Inc., Flexco/Roppe, Nora and Mondo and with other manufacturers of alternate
floor covering products. In the rubber products category, AB Canada has several
competitors, principally among them being GRT Division of Enpro, The Biltrite
Corporation and West America Rubber Company.
5
The market for Congoleum's products is highly competitive. Resilient sheet and
tile compete for both residential and commercial customers primarily with
carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. Congoleum believes, based upon its market research, that purchase
decisions are influenced primarily by fashion elements such as design, color and
style, durability, ease of maintenance, price and ease of installation. Both
tile and sheet resilient flooring are easy to replace for repair and
redecoration and, in Congoleum's view, have advantages over other floor covering
products in terms of both price and ease of installation and maintenance.
Congoleum encounters competition from three other manufacturers in North America
and, to a lesser extent, foreign manufacturers. In the resilient category,
Armstrong World Industries, Inc. has the largest market share. Some of
Congoleum's competitors have substantially greater financial and other resources
and access to capital than Congoleum.
K&M competes with other companies that make similar products on the basis of
product pricing and the effectiveness of merchandising services offered. In
assessing K&M's products and services, customers tend to focus on margin dollars
realized from the sales of product and return on inventory investment needed to
generate sales. In its business of supplying and servicing fashion jewelry and
accessory products, K&M competes with a variety of competitors, among them are
Liz Claiborne Inc., Jones Apparel Group and a number of other companies offering
similar products and/or services. K&M also competes with numerous importers and
overseas suppliers of similar items.
Patents and Trademarks - ABI and its subsidiaries own many trademarks, including
the Congoleum brand name, the AB(R) logo, TransferRite(R) and Ideal(R) at the
Tape Division, Estrie(R), AB Colors Plus(R) and Dura-Shield(R) at AB Canada, and
Amtico(R), which is used solely in the Canadian market. K&M also licenses the AK
Anne Klein(R), Panama Jack(R), Guess?(R), Bratz(R) and MUDD(R) trademarks as
well as certain others. These trademarks are important for the Company in
maintaining its competitive position. The licensing agreements are subject to
expiration dates and other termination provisions, and the licensor or the
Company may choose not to extend or renew certain agreements. The Company has an
ongoing program seeking additional or replacement licenses. The Company also
believes that patents and know-how play an important role in maintaining
competitive position. For example, Congoleum utilizes a proprietary transfer
printing process for certain tile products that it believes produces visual
effects that only one other competitor is presently able to duplicate.
Research and Development - Research and development efforts at the Company
concentrate on new product development, increasing efficiencies of the various
manufacturing processes, and improving the features and performance of existing
products. Expenditures for research and development were $7.0 million, $5.8
million, and $4.8 million, on a consolidated basis, for the years ended December
31, 2005, 2004 and 2003, respectively.
6
Key Customers - For the year ended December 31, 2005, two customers of Congoleum
accounted for over 10% of ABI's consolidated net sales. The two customers
together accounted for 67% of Congoleum's net sales of $237.6 million. These
customers are Congoleum's distributor to the manufactured housing market,
LaSalle-Bristol, and its largest retail distributor, Mohawk Industries, Inc. No
other customer accounted for more than 10% of ABI's consolidated sales.
K&M's top three customers in terms of net sales in 2005 together accounted for
58% of K&M's net sales. The loss of the largest of these customers would have a
material adverse effect on K&M's business, results of operations and financial
condition and would likely have a material adverse effect on the Company's
business, results of operations or financial condition.
Sales to five unaffiliated customers of the Tape Division together constitute
approximately 23% of the net sales for the Division. The loss of the largest of
these unaffiliated customers and/or two or more of the other three unaffiliated
customers could have a significant, adverse effect on the Tape Division's
business, results of operations and financial condition. AB Canada's sales to
Congoleum accounted for approximately 10% of AB Canada's net sales in 2005. The
loss of Congoleum's business would have a significant, adverse affect on AB
Canada's revenue. These intercompany sales are eliminated from the Company's
consolidated financial statements, in accordance with generally accepted
accounting principles. See Note 14 of Notes to Consolidated Financial Statements
set forth in Item 8 of this report.
Backlog - The dollar amount of backlog of orders believed to be firm as of
December 31, 2005 and 2004 was $16.0 million and $13.3 million, respectively. It
is anticipated that all of the backlog as of December 31, 2005 will be filled
within the current fiscal year. There are no seasonal or other significant
aspects of the backlog. In the opinion of management, backlog is not significant
to the business of ABI.
Environmental Compliance - Because of the nature of the operations conducted by
ABI and Congoleum, each company's 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 owned or leased facilities and off-site disposal
locations.
ABI and its subsidiaries, including Congoleum, have historically expended
substantial amounts for compliance with existing environmental laws and
regulations, including those matters described in Item 3 (Legal Proceedings)
below. ABI will continue to be required to expend amounts in the future, due to
the nature of past activities at its facilities, to comply with existing
environmental laws, and those amounts may be substantial. Because environmental
requirements have grown increasingly strict, however, ABI is unable to determine
the ultimate cost of compliance with environmental laws and enforcement
policies. The Company has established accruals for matters for which management
considers a loss to be probable and reasonably estimable. ABI and Congoleum
believe that compliance with existing federal, state, local and foreign
provisions will not have a material adverse effect upon their financial
positions nor do ABI and Congoleum expect to incur material recurring costs or
capital expenditures relating to environmental matters, except as disclosed in
Item 3 (Legal Proceedings) of this report. However, there can be no assurances
that the ultimate liability concerning these matters will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
7
Employees - As of December 31, 2005, ABI and its subsidiaries employed
approximately 1,650 people.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations is in Note 14
of Notes to the Consolidated Financial Statements, set forth in Item 8 below.
The Company's consolidated export sales from the United States were $25.1
million in 2005, $23.0 million in 2004, and $23.7 million in 2003.
Available Information
The Company is subject to the reporting and other information requirements of
the Securities Exchange Act of 1934, as amended, and files annual, quarterly,
and current reports, proxy statements and other documents with the Securities
and Exchange Commission pursuant to those requirements. The public may read and
copy any materials that the Company files with the Securities and Exchange
Commission at the Securities and Exchange Commission's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. Also, the Securities and Exchange
Commission maintains an Internet website that contains reports, proxy and
information statements, and other information regarding issuers, including the
Company, that file electronically with the Securities and Exchange Commission.
The public can obtain any documents that the Company files with the Securities
and Exchange Commission at http://www.sec.gov.
Congoleum is also subject to the reporting and other information requirements of
the Securities Exchange Act of 1934, as amended, and files annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission pursuant to those requirements. Such reports, proxy
statements and other information filed by or in connection with Congoleum with
the Securities and Exchange Commission (the "Congoleum Reports") are available
from the Securities and Exchange Commission in a similar manner as are the
reports, proxy statements and other information filed by the Company with the
Securities and Exchange Commission. The Company is providing this information
regarding the availability of Congoleum Reports for informational purposes only.
The Congoleum Reports are expressly not incorporated into or made a part of this
report or any other reports, statements or other information filed by the
Company with the Securities and Exchange Commission or otherwise made available
by the Company. The Company expressly disclaims any liability for information
disclosed or omitted in the Congoleum Reports and, except as required by the
federal securities laws, expressly disclaims any obligation to update or correct
any information included in the Congoleum Reports.
8
Item 1A. RISK FACTORS
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 1, 8 and 9 of Notes to Consolidated Financial
Statements, which is included in this report, the Company and Congoleum have
significant liability and funding exposure for asbestos personal injury claims.
In connection with Congoleum's strategy for resolving its asbestos liability, in
2003, Congoleum entered into settlement agreements with various asbestos
claimants totaling in excess of $491 million. Under the terms of the Eighth
Plan, asbestos personal injury claimants voting to accept the plan would
irrevocably consent or would be deemed to have irrevocably consented to the
forbearance of any claim and lien rights under such settlement agreements. Under
the terms of the Eighth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under such settlement
agreements.
There can be no assurance that Congoleum will obtain approval to solicit
acceptances for the Eighth Plan, that Congoleum will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth 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 the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof, and plans have been
filed by an insurance company and the Official Committee of Bondholders. It is
unclear whether any other person will attempt to propose a plan or what any such
plan would provide or propose, and whether the Bankruptcy Court would approve a
plan other than Congoleum's proposed plan.
The Eighth Plan and any alternative plan of reorganization pursued by Congoleum
or another plan proponent or confirmed by the Bankruptcy Court and the Federal
District Court could materially differ from the description of the Eighth Plan
contained in this Annual Report on Form 10-K. Furthermore, the estimated costs
and contributions to effect the Eighth Plan 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.
There can be no assurance that Congoleum will obtain approval to solicit
acceptances for the Eighth Plan, that Congoleum will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth 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 the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof, and plans have been
filed by an insurance company and the Official Committee of Bondholders. It is
unclear whether any other person will attempt to propose a plan or what any such
plan would provide or propose, and whether the Bankruptcy Court would approve a
plan other than Congoleum's proposed plan.
9
Confirmation of a plan of reorganization will depend on Congoleum obtaining exit
financing to provide it with sufficient liquidity to fund obligations upon the
plan becoming effective. If Congoleum's cash flow from operations is materially
less than anticipated, and/or if the costs in connection with seeking
confirmation of the Eighth Plan or in connection with Congoleum's New Jersey
state court insurance coverage litigation discussed elsewhere in this report are
materially more than anticipated, or if sufficient funds from insurance proceeds
or other sources are not available at confirmation to reimburse coverage
litigation costs as expected, Congoleum may be unable to obtain exit financing,
when combined with net cash provided from operating activities, that would
provide it with sufficient funds, which would likely result in Congoleum not
being able to confirm an amended plan of reorganization or have such plan become
effective.
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 financial position.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's objectives 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
asbestos-related claims, including insurance coverage and reimbursement for
asbestos claimants under Congoleum's proposed modified plan, which certain
insurers have objected to in Bankruptcy Court and are litigating in New Jersey
State Court; (iii) costs relating to the execution and implementation of any
plan of reorganization pursued by Congoleum or relating to any other plan of
reorganization proposed by any other party in interest; (iv) timely reaching an
agreement with other creditors, or classes of creditors, that exist or may
emerge; (v) satisfaction of the conditions and obligations under the Company's
and Congoleum's respective outstanding debt instruments, and amendment of those
outstanding debt instruments, as necessary, to permit Congoleum and the Company
to satisfy their obligations under Congoleum's proposed plan of reorganization;
(vi) the response from time-to-time of the Company'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 and the court overruling any
objections to the plan that may be filed; (ix) developments in costs associated
with and the outcome of insurance coverage litigation pending in New Jersey
State Court involving 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; (xi) compliance with the Bankruptcy Code,
including section 524(g); and (xii) the possible adoption of another party in
10
interest's proposed plan of reorganization which may prove to be unfeasible. In
addition, in view of American Biltrite's relationships with Congoleum, American
Biltrite could be affected by Congoleum's negotiations, 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'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 of this
legislation, the Company does not know what effects any such legislation, if
adopted, may have upon its or Congoleum's businesses, results of operations or
financial conditions, or upon any plan of reorganization Congoleum may decide to
pursue. To date, Congoleum has expended significant amounts to resolve its
asbestos liability pursuant to a 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 strategy 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 or Congoleum's businesses, results of operations or 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 1, 8 and 9 of the Notes to Consolidated Financial Statements,
which are included in this report.
Any plan of reorganization for Congoleum will likely result in substantial
dilution of Congoleum's equity holders, including the Company.
Under the terms of the Eighth Plan, on the effective date of that plan,
reorganized Congoleum would issue 3.8 million shares of its Class A common
stock, which based on the number of shares of Congoleum Class A and Class B
common stock outstanding as of March 17, 2006, would represent 31.5% of
Congoleum's outstanding common stock and 22.8% of Congoleum's outstanding voting
equity interests, and would reduce the Company's equity ownership in Congoleum
to 37.7% and voting equity interest in Congoleum to 53.6%, in each case, after
giving effect to the stock issuance. On a fully diluted basis, the Company's
equity ownership would be reduced to 35.2% with a voting equity interest of
51.0%.
11
In addition, under the Eighth Plan, Congoleum would issue a new convertible
security to the Plan Trust on the effective date of the plan. The liquidation
preference or principal amount of that convertible security, as applicable, is
expected to be approximately $2.7 million and subject to possible future
increase. Under the terms of the Eighth Plan, the convertible security would be
convertible into 5.7 million shares of reorganized Congoleum Class A common
stock (or the equivalent thereof on a fully diluted basis) upon a specified
default of the obligation to pay dividends or interest, as applicable, on the
convertible security and a failure to cure such default within any cure period,
which, when combined with the 3.8 million newly issued shares of reorganized
Congoleum Class A common stock to be contributed to the Plan Trust on the
effective date of the plan, would result in the Plan Trust owning 51% of the
voting common stock on a fully diluted basis. If this further additional
issuance were to occur, based on the number of shares of Congoleum Class A and
Class B common stock outstanding as of March 17, 2006, the Company's equity
ownership and voting equity interest in Congoleum would be reduced to 24.4%,
resulting in a loss of voting control of Congoleum by ABI.
In addition, any proposed plans of reorganization proposed for Congoleum by
other parties in interest may provide for even greater dilution of the Congoleum
equity interests than that contemplated by the Eighth Plan. There can be no
assurance as to how the equity interests in Congoleum, including ABI's Congoleum
equity interests, will be treated under any plan of reorganization for Congoleum
that may be confirmed by the Bankruptcy Court and consummated.
A substantial portion of the Company's debt must be amended or refinanced and
the Company's ability to obtain additional financing may be limited.
The credit agreement governing the Company's credit facility with Bank of
America ("BofA") includes a covenant that takes effect for periods after June
30, 2006 that the Company does not anticipate it will meet, and the Company also
does not anticipate it will meet certain covenants under the note agreement
governing its outstanding $20 million aggregate principal amount notes that take
effect September 30, 2006. In addition, pursuant to the terms of those
agreements, 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 those 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 lenders under those
agreements 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, the administrative agent over the collateral securing
the amounts outstanding under those agreements might exercise the lenders'
rights over that collateral. Any default by the Company under those agreements
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.
The credit facility expires on September 30, 2006. Although the Company expects
that its credit facility will be extended or replaced by that date, and that it
will obtain a modification or waiver of covenants as needed prior to such
extension or replacement, as well as a modification of the covenants under the
note agreement governing its outstanding $20 million aggregate principal amount
notes, there can be no assurances in this regard. If the Company has outstanding
borrowings under its existing credit facility at that date and the term of the
credit facility has not been extended beyond that date, such failure would
result in a breach of the note agreement governing its outstanding $20 million
aggregate principal amount notes, which for the reasons discussed in the
preceding paragraph, could have a material adverse effect on the Company's
business, results of operations or financial condition.
12
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 domestic 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
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 their 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 is no certainty
that these amounts will not have a material adverse effect on their respective
financial positions 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 or
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 or
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.
13
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 and 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
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 its raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, due to several
factors, including an explosion at a large resin plant in 2004 that destroyed
the plant, the decision by another major supplier to exit the business, and the
effect of hurricanes in 2005. Although the Company has been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material adverse effect
on profit margins. Raw material prices in 2005 increased significantly and may
remain high in 2006 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.
14
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.
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.
15
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 23% of the
Company's Tape Division's net sales for the year ended December 31, 2005 and 21%
of its net sales for the year ended December 31, 2004. The loss of the largest
unaffiliated customer and/or two or more of the other three 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 67% of
Congoleum's net sales for the year ended December 31, 2005 and 70% of
Congoleum's net sales for the year ended December 31, 2004.
The Company's subsidiary K&M Associates L.P. ("K&M") 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's customers
accounted for approximately 58% of its net sales for the year ended December 31,
2005 and 59% of its net sales for the year ended December 31, 2004. The loss of
the largest of these customers would have a material adverse effect on K&M's
business, results of operations and financial condition and 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 perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
16
ITEM 2. PROPERTIES
At December 31, 2005, ABI and its subsidiaries owned ten manufacturing plants
and a jewelry distribution center and leased additional office and warehousing
space as follows:
Owned Industry Segment
Or For Which
Location Square Feet Leased Properties Used
------------------------------------------------------------------------------------------------------------------
Trenton, NJ 1,050,000 Owned Flooring products
Marcus Hook, PA 1,000,000 Owned Flooring products
Trenton, NJ 282,000 Owned Flooring products
Finksburg, MD 107,000 Owned Flooring products
Mercerville, NJ 56,000 Leased Flooring products
Sherbrooke, Quebec 379,000 Owned Canadian division
Moorestown, NJ 226,000 Owned Tape products
Lowell, MA 57,000 Owned Tape products
Billerica, MA 30,000 Leased Tape products
Renaix, Belgium 84,000 Owned Tape products
Singapore 32,000 Owned Tape products
Providence, RI 103,000 Owned Jewelry products
New York, NY, Qingdoa, China, Orlando,
FL and Bentonville, AK 27,200 Leased Jewelry products
Toronto, Ontario 152,000 Owned Discontinued operation
ABI knows of no material defect in the titles to any such properties or material
encumbrances thereon other than mortgages on the owned properties in Renaix,
Belgium, and Singapore securing outstanding debt in amounts equal to
approximately 25% and 55% of the original cost of the property, respectively,
and under the terms of the Company's principal debt agreements, pursuant to
which the Company has granted a security interest in the properties in
Moorestown, NJ, Lowell, MA and Providence, RI. ABI believes that all of its and
its subsidiaries' properties are in good condition and have been well
maintained.
17
It is estimated that during 2005, ABI's and its subsidiaries' plants for the
manufacture of floor covering products operated at approximately 77% of
aggregate capacity, its plants for the manufacture of tape products operated at
approximately 93% of aggregate capacity and the Canadian division operated at
approximately 80% of aggregate capacity. All estimates of aggregate capacity
have been made on the basis of a five-day, three-shift operation.
ITEM 3. LEGAL PROCEEDINGS
ABI has been named by the Environmental Protection Agency as a Potentially
Responsible Party ("PRP") within the meaning of the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended, as to five
sites in four separate states. In addition, at one of the sites, ABI has entered
into a settlement agreement that resolved one environmental lawsuit. In
addition, ABI has been named a PRP by the State of Maine's Department of
Environmental Protection with regard to two sites in Maine. See Note 8 of Notes
to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K for additional information about these matters.
In accordance with SFAS No. 5, Accounting for Contingencies, ABI has recorded a
reserve of approximately $3.4 million, which represents a probable and
reasonably estimable amount to cover the anticipated remediation costs at all
sites, net of recoveries, based on facts and circumstances known to the Company
at the present time.
ABI is a co-defendant with many other manufacturers and distributors of
asbestos-containing products in approximately 1,703 pending claims involving
approximately 2,495 individuals as of December 31, 2005. These claims relate to
products of the Company's former Tile Division, which was previously acquired by
Congoleum. The claimants allege personal injury from exposure to asbestos or
asbestos-containing products. The Company utilizes an actuarial study to assist
it in developing estimates of the Company's potential liability for resolving
present and possible future asbestos claims. Projecting future asbestos claims
costs requires estimating numerous variables that are extremely difficult to
predict, including the incidence of claims, the disease that may be alleged by
future claimants, future settlement and trial results, future court dismissal
rates for claims, and possible asbestos legislation developments. Furthermore,
any predictions with respect to these variables are subject to even greater
uncertainty as the projection period lengthens. In light of these inherent
uncertainties, and based upon consultations with third party advisors, the
Company believes that five years is the most reasonable period over which to
include future claims that may be brought against the Company for recognizing a
reserve for future costs. The Company believes that costs for claims that might
be brought after that period are not reasonably estimable.
The estimated range of liability for settlement of current claims pending and
claims anticipated to be filed through 2011 was $9.5 million to $18.8 million as
of December 31, 2005. The Company believes no amount within this range is more
likely than any other and, accordingly, has recorded a liability of $9.5 million
in its financial statements, which represents the minimum probable and
reasonably estimable amount for the future liability at the present time. The
Company also believes that based on this liability estimate, the corresponding
amount of insurance probable of recovery is $9.0 million at December 31, 2005,
which has been included in other assets. The estimated amount of insurance that
18
is probable of recovery depends on the liability estimate as well as a number of
additional factors, including the financial viability of some of the insurance
companies, the method in which losses will be allocated to the various insurance
policies and the years covered by those policies, how legal and other loss
handling costs will be covered by the insurance policies, and interpretation of
the effect on coverage of various policy terms and limits and their
interrelationships. The recorded liability and related insurance asset do not
include any related defense costs, which are typically paid in addition to the
indemnity limits under the primary layer insurance policies. Defense costs
historically paid by ABI's carriers have been approximately 156% of the related
indemnity costs.
The recorded 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, the
allocation of claims to specific insurance policies, and the continuing solvency
of various insurance companies, as well as numerous uncertainties surrounding
asbestos legislation in the United States, could cause the actual liability and
insurance recoveries for the Company to be higher or lower than those projected
or recorded.
There can be no assurance that the Company's actual asbestos-related settlement
and defense costs will not exceed its accrued asbestos liabilities, or that its
accrued insurance recoveries will be realized. It is reasonably possible that
the Company will incur charges for resolution of asbestos claims in the future,
which could exceed the Company's existing reserves. The Company will continue to
vigorously defend itself and believes it has substantial insurance coverage to
mitigate future costs related to this matter.
See Note 8 of Notes to the Consolidated Financial Statements included in Item 8
of this Annual Report on Form 10-K for additional information about these
claims.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of 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 Plan Trust. In July 2005, Congoleum filed the Sixth Plan and
related documents with the Bankruptcy Court which reflected the agreed upon
modifications as well as other technical modifications. The Bankruptcy Court
19
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 and the Sixth Plan was subsequently withdrawn. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof. In February 2006,
Congoleum filed the Seventh Plan. On February 27, 2006, Congoleum announced its
intention to make additional changes to its plan of reorganization, and on March
17, 2006 it filed the Eighth Plan. In addition, an insurance company has filed
the CNA Plan and the Official Committee of Bondholders has filed the Bondholder
Plan. The Bankruptcy Court has scheduled a hearing to consider the adequacy of
the disclosure statements with respect to these plans for April 27, 2006. See
Notes 1 and 9 of the Notes to Consolidated Financial Statements, which is
included in Item 8 of this Annual Report on Form 10-K.
There can be no assurance that Congoleum will obtain approval to solicit
acceptances for the Eighth Plan, that Congoleum will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth 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 the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. Furthermore, the
Eighth Plan, if confirmed and effective, will result in significant dilution of
ABI's ownership of Congoleum.
Congoleum, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility. ABI had also signed a similar consent
order with regard to its former Trenton tile facility. Congoleum agreed to be
financially responsible for the clean-up of the Trenton tile facility as part of
the acquisition of ABI's former Tile Division. See Note 8 of Notes to
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K for additional information about these matters.
Together with a large number (in most cases, hundreds) of other companies,
Congoleum is named as a PRP in pending proceedings under CERCLA and similar
state laws. See Note 8 of Notes to the Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K for additional information
about these matters.
Congoleum also accrues remediation costs for certain of its owned facilities on
an undiscounted basis. Estimated total cleanup costs, including capital outlays
and future maintenance costs for soil and groundwater remediation are primarily
based on engineering studies. In the ordinary course of its business, ABI and
its consolidated entities become involved in lawsuits, administrative
proceedings, product liability 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.
Notes 1, 8 and 9 of Notes to the Consolidated Financial Statements included in
Item 8 of this Annual Report on Form 10-K, to the extent addressing matters
reportable under this Item 3, are incorporated by reference herein.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The registrant's Common Stock, par value $.01 per share, is traded on the
American Stock Exchange (ticker symbol: ABL). At the close of business on March
15, 2006, the closing price of ABI's Common Stock was $11.49 per share and the
approximate number of record holders was 305. High and low stock prices for the
last two years were:
Sale Prices of Common Shares
2005 2004
-------------------------------------------------------------------
Quarter Ended High Low High Low
--------------------------------------------------------------------------------------------------
March 31 $12.47 $11.00 $12.49 $ 7.80
June 30 11.17 8.90 11.70 8.85
September 30 12.35 9.00 12.75 9.20
December 31 13.09 9.90 13.70 11.20
No dividends were issued during 2005 and 2004.
Debt agreements to which the Company and Congoleum are separately parties
restrict the ability of the Company and Congoleum to declare and pay dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - ABI and Non-Debtor Subsidiaries"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Congoleum" in Item 7 below. In
addition, Congoleum would not be able to declare and pay dividends during the
pendency of its Chapter 11 case prior to consummation of its plan of
reorganization.
21
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's
equity compensation plans as of December 31, 2005.
Number of
Securities
Remaining
Number of Available for
Securities to Be Weighted- Future Issuance
Issued Upon Average Exercise Under Equity
Exercise of Price of Compensation
Outstanding Outstanding Plans (excluding
Options, Options, securities
Warrants and Warrants and reflected in
Plan Category Rights Rights Column (a))
------------------------------------------ ---------------------- ---------------------- ----------------------
(a) (b) (c)
Equity Compensation Plans Approved by
Security Holders 455,500 $15.58 77,520
Equity Compensation Plans Not Submitted
to Security Holders for Approval 27,500 12.86 22,500
---------------- -----------------
Total 483,000 15.42 100,020(1)
================ =================
(1) Includes 77,520 shares of Common Stock available for issuance under the
Company's 1993 Stock Award and Incentive Plan, as amended and restated as
of March 4, 1997. In addition to stock options, awards under the Company's
1993 Stock Award and Incentive Plan, as amended and restated as of March
4, 1997, may take the form of stock appreciation rights (SARs), limited
SARs, restricted stock units and other stock awards specified in the Plan.
If such awards are granted, they will reduce the number of shares of
Common Stock available for issuance pursuant to future stock option
awards.
On July 1, 1999 the Company established its 1999 Stock Option Plan for
Non-Employee Directors (as amended, the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase up to
50,000 shares of Common Stock. The 1999 Plan was not submitted to stockholders
for approval. The options granted under the 1999 Plan have ten-year terms and
fully vest 6 months from the grant date. The exercise price for each Option is
100% of the fair market value on the date of the grant. As of December 31, 2005
an aggregate of 27,500 shares of common stock were issuable upon the exercise of
outstanding Options.
Congoleum maintains separate equity compensation plans.
22
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
2005 2004 2003 2002 2001
---------------------------------------------------------------------
(In thousands, except per share amounts)
Financial Position
Total assets $ 356,844 $ 355,285 $ 318,933 $ 361,870 $ 423,918
Long-term debt(1) 122,414 124,201 124,915 125,271 126,161
Total stockholders' equity 18,485 38,072 32,979 47,538 77,248
Summary of Operations
Net sales $ 445,172 $ 433,869 $ 416,569 $ 434,495 $ 403,509
(Loss) income before
income taxes and other items (18,294) 808 (9,946) (11,813) 5,961
(Benefit from) provision for
income taxes (1,534) (1,681) (3,323) 1,248 2,345
Noncontrolling interests (636) (107) (174) 6,221 435
(Loss) income from
continuing operations (17,396) 2,382 (6,797) (6,840) 4,051
Discontinued operation (2) (237) (429) (7,361) (2,073) (1,235)
Cumulative effect of
accounting change (3) -- -- -- (7,742) --
Net (loss) income (17,633) 1,953 (14,158) (16,655) 2,816
(Loss) earnings per share
Basic $ (5.12) $ 0.57 $ (4.11) $ (4.84) $ 0.82
Diluted(4) (5.12) 0.54 (4.11) (4.84) 0.82
Cash dividends per common
share -- -- 0.1875 0.50 0.50
Number of shares used in
computing (loss) earnings
per share:
Basic 3,442 3,442 3,442 3,442 3,455
Diluted 3,442 3,458 3,442 3,442 3,455
----------
(1) Long-term debt includes Congoleum's $100,000 8 5/8% Senior Notes due 2008.
At December 31, 2005 and 2004, these notes were classified as a liability
subject to compromise as a result of Congoleum's Chapter 11 filing. See
Notes 5 and 9 of the Notes to Consolidated Financial Statements, which is
contained in Item 8 of this Annual Report on Form 10-K.
(2) 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 Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
(3) Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142). In accordance with the provisions
of SFAS No. 142, the Company recorded a transitional goodwill impairment
charge of $7.7 million.
(4) Diluted earnings per share for the year ended December 31, 2004 includes
the dilutive effect of Congoleum's stock options during the year. During
the years ended December 31, 2005, 2003, 2002 and 2001, Congoleum's stock
options had no effect on American Biltrite Inc.'s diluted earnings per
share.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American Biltrite's consolidated financial statements include its majority-owned
subsidiary, Congoleum. On December 31, 2003, Congoleum filed a voluntary
petition with the Bankruptcy Court seeking relief under Chapter 11 of 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 Plan Trust. In July 2005, Congoleum filed the Sixth Plan and
related documents with the Bankruptcy Court which reflected the agreed upon
modifications 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 and the Sixth Plan was subsequently withdrawn. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof. In February 2006,
Congoleum filed the Seventh Plan. On February 27, 2006, Congoleum announced its
intention to make additional changes to its plan of reorganization, and on March
17, 2006 it filed the Eighth Plan. In addition, an insurance company has filed
the CNA Plan and the Official Committee of Bondholders has filed the Bondholder
Plan. The Bankruptcy Court has scheduled a hearing to consider the adequacy of
the disclosure statements with respect to these plans for April 27, 2006.
There can be no assurance that Congoleum will obtain approval to solicit
acceptances for the Eighth Plan, that Congoleum will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth 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 the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. It is unclear whether
the Bankruptcy Court will approve the CNA Plan or the Bondholder Plan or whether
either of such plans, if confirmed, would be feasible.
24
Moreover, it is unclear whether any other person will attempt to propose a plan
or what any such plan would provide or propose, and whether the Bankruptcy Court
would approve a plan other than Congoleum's proposed plan. Furthermore, the
Eighth Plan, if confirmed and effective, will result in significant dilution of
ABI's ownership of Congoleum.
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 are expected to file
objections to the Eighth Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eighth Plan.
Congoleum expects that the terms of the Eighth Plan may be amended or modified
as a result of further negotiations with various parties. The terms of the CNA
Plan and the Bondholder Plan are materially different from the terms of the
Eighth Plan, and these plans may also be amended, modified, or may be withdrawn.
There can be no assurance that the terms of the reorganization plan that is
ultimately confirmed, if any, will not materially differ from the terms of the
Eighth Plan. Congoleum expects that it will take until some time in the fourth
quarter of 2006 at the earliest to obtain confirmation of any 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 in excess of $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
and payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced an avoidance action seeking to void the security interest
granted to the Collateral Trust. Under the terms of the Eighth Plan, asbestos
personal injury claimants voting to accept the plan would irrevocably consent or
would be deemed to have irrevocably consented to the forbearance of claim and
any lien rights related to the Claimant Agreement. Under the terms of the Eighth
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 Eighth Plan. Settlement values under the Eighth Plan may
differ from values under the Sixth Plan and the Claimant Agreement, which,
together with the outcome of litigation regarding the enforceability of the
Claimant Agreement and security interest, may materially affect the liability
associated with the asbestos personal injury claims against Congoleum. As a
result of tabulating ballots on Congoleum's fourth modified plan of
reorganization, 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 contemplated Eighth 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.
25
Congoleum recorded charges aggregating approximately $26 million in prior years
and a further approximately $25.3 million in 2005, to provide for the estimated
minimum costs of completing its reorganization. Actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing the Eighth
Plan or any other 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 the Eighth Plan or any new amended plan of reorganization, or the
continued pursuit of alternative plans of reorganization by certain insurers,
the Official Committee of Bondholders or other parties in interest, could result
in a proceeding that takes longer and is more costly than Congoleum has
estimated.
ABI estimates that it will spend an additional $900 thousand for legal fees and
its anticipated contribution to the Plan Trust (of $250 thousand) in connection
with Congoleum's reorganization plan, which it has accrued. Actual amounts that
will be contributed to the Plan Trust by Congoleum and ABI and costs for
pursuing and implementing the plan of reorganization could be materially higher,
and Congoleum and the Company may record significant additional charges should
the minimum estimated cost increase. Under the terms of the Eighth Plan,
Congoleum would issue 3.8 million new shares of Class A Common Stock that would
reduce ABI's economic interest in Congoleum from approximately 55% at present to
approximately 35% on a fully diluted basis. ABI's voting interest would be
reduced from approximately 69% at present to approximately 51% on a fully
diluted basis. Congoleum would also issue a convertible security that, upon
certain events of default, would convert into 5.7 million shares of Class A
Common Stock, further diluting ABI's economic interest and resulting in a loss
of voting control by ABI.
In addition, ABI is also a defendant in a number of asbestos-related lawsuits in
addition to those brought against Congoleum. See Note 8 of the Notes to
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K, which is incorporated herein by reference. These matters could have a
material adverse impact on the Company's financial position and results of
operations.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary, a manufacturer of pre-finished hardwood
flooring, and sell the related assets. Results of Janus Flooring, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's reorganization 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.
26
Results of Operations
ABI and Non-Debtor Subsidiaries
2005 2004 2003
--------- --------- ---------
(In thousands of dollars)
Net sales $ 207,256 $ 204,219 $ 195,919
Cost of sales 150,705 147,456 140,839
--------- --------- ---------
Gross profit 56,551 27.3% 56,763 27.8% 55,080 28.1%
Selling, general & administrative expenses 50,619 24.4% 54,765 26.8% 53,931 27.5%
--------- --------- ---------
Operating income 5,932 1,998 1,149
Interest expense, net (2,416) (3,005) (2,542)
Other income, net 2,238 1,440 2,083
--------- --------- ---------
Income before taxes and other items 5,754 433 690
Provision for income taxes 1,041 864 551
Noncontrolling interests (636) (107) (174)
--------- --------- ---------
Income (loss) from continuing operations $ 4,077 $ (538) $ (35)
========= ========= =========
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net sales for the year ended December 31, 2005 were $207.3 million, an increase
of $3.1 million or 1.5% from sales of $204.2 million in 2004. Tape segment sales
increased 12.3% due to increased volume and selling price increases, with all
product lines contributing to the increase. Canadian segment sales increased
12.7% on increased sales of flooring and industrial products coupled with the
result of foreign currency translation. Jewelry segment sales declined 17.1% to
the mass merchandiser channel primarily due to a product strategy change by a
major customer, which resulted in lost business and additional markdowns. While
the number of SKU's for this customer under its new strategy is comparable to
the number of SKU's for this customer before it adopted its new strategy, it is
too early to determine the effect on future sales. Lower sales to mid-tier
retailers due to fewer programs also contributed to the decline.
Gross profit was 27.3% of net sales in 2005 compared to 27.8% in 2004. Gross
margins in the Tape segment improved 1.4 points as a percentage of net sales due
to higher selling prices and increased volume, which mitigated increases in raw
material costs and other expenses. Canadian segment gross margins were level
with the prior year as margin increases in flooring products were offset by
lower margins on industrial sales. Margins in the jewelry business declined 2.3
points as a percentage of net sales due to the effect of markdowns and higher
product costs which could not be recovered in pricing. The decline in jewelry
sales, which is the highest margin segment, as a percent of total sales, also
contributed to the overall margin decline.
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 years ended December 31, 2005 and 2004 have been 26.9%
and 27.2%, respectively.
27
Selling, general and administrative expenses for the year ended December 31,
2005 were $50.6 million, down from $54.8 million in 2004. During 2005, ABI
entered into a settlement agreement with one of its insurance carriers. The
settlement resolved disputes regarding the carrier's coverage obligations for
environmental liability defense and indemnity costs at certain sites where ABI,
as a result of activities conducted many years ago, is alleged to have damaged
property. As a result of this settlement, ABI received $2.9 million in cash,
which reduced selling, general and administrative expenses and accounted for the
majority of the decrease from 2004 to 2005. Also contributing to the decrease
was a significant decline in professional fees in connection with the Congoleum
reorganization and modification of the Company's debt agreements. Selling,
general and administrative expenses increased $.7 million, primarily due to
increased freight costs and inflation on salaries and benefits, offset by
expense reduction initiatives. As a percentage of sales, selling, general and
administrative expenses declined from 26.8% of net sales in 2004 to 24.4% of net
sales in 2005.
Net interest expense decreased from $3.0 million in 2004 to $2.4 million in 2005
due to a decrease in the leverage fee under the Company's note agreement
governing its outstanding $20 million aggregate principal amount notes. Interest
rates on the Company's revolving credit facility were slightly higher in 2005
compared with 2004, but average borrowings were lower.
Other income increased from $1.4 million in 2004 to $2.2 million in 2005 as a
result of income from the sale of a warehouse in 2005 for $2.3 million after
expenses partly offset by a $900 thousand decrease in management fees paid by
Congoleum to ABI from 2004 to 2005. The impact of the warehouse sale on the
Company's net income after taxes and non-controlling interest was $887 thousand,
or $0.26 per share.
The effective tax rate in 2005 of 18% arises primarily from the Company's
ability to recognize certain tax benefits not previously recognized, coupled
with the effect of combining various segments with differing statutory rates.
Future effective tax rates are expected to be closer to statutory rates, but
could fluctuate widely depending on the actual and relative results of
individual segments, as well as other factors.
Income from continuing operations was $4.1 million in 2005, compared with a loss
of $538 thousand in 2004. This improvement was largely due to the sale of the
warehouse and insurance settlement in 2005. Net income was $3.8 million in 2005
compared with a net loss of $1.0 million in 2004 reflecting the improved results
from continuing operations.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net sales for the year ended December 31, 2004 were $204.2 million, an increase
of $8.3 million or 4.2% from sales of $195.9 million in 2003. Tape segment sales
increased 5.4% as volume, and to a lesser extent product mix, improved
worldwide; sales of paper, film and HVAC products were up while automotive
product sales decreased. Canadian segment sales increased as a result of foreign
currency translation, and higher industrial product sales offset lower flooring
sales. Jewelry segment sales were essentially level as decreased sales to the
mass merchandiser channel and lower service revenues were offset by growth in
sales to department stores, and specialty and mid-tier retailers.
28
Gross profit was 27.8% of net sales in 2004 compared to 28.1% in 2003. Gross
margins in the Tape segment declined 1.0 point as a percentage of net sales due
to higher raw material costs. Canadian segment margins improved 0.5 points as a
percentage of net sales as improved manufacturing performance and spending
reductions more than offset higher raw material costs. Margins in the jewelry
business improved 0.6 points as a percentage of net sales on a more profitable
customer mix.
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 years ended December 31, 2004 and 2003 have been 27.2%
and 27.5%, respectively.
Selling, general and administrative expenses for the year ended December 31,
2004 were $54.8 million, up from $53.9 million in 2003, as a result of higher
employee benefit costs and freight and selling expense increases. As a
percentage of sales, selling, general and administrative expenses declined from
27.5% of net sales in 2003 to 26.8% of net sales in 2004.
Net interest expense increased from $2.5 million in 2003 to $3.0 million in 2004
due to higher interest rates under certain of the Company's debt agreements.
The effective tax rate in 2004 of 200% arises primarily from combining
profitable segments providing for taxes at higher statutory rates with
unprofitable segments whose resulting tax benefits are at lower statutory rates.
Furthermore, the Canadian division recorded a valuation allowance against
deferred tax assets arising from its losses. Future effective tax rates are
expected to be closer to statutory rates, but could fluctuate widely depending
on the actual and relative results of individual segments, as well as other
factors.
The loss from continuing operations was $538 thousand in 2004, compared with $35
thousand in 2003, as improved income from operations was offset by higher
interest and taxes and less favorable net foreign exchange gains/losses. The net
loss was $1.0 million in 2004 compared with a net loss of $7.4 million in 2003
when the charges related to the closure of the Janus Flooring operations were
recognized.
29
Congoleum
2005 2004 2003
--------- --------- ---------
(In thousands of dollars)
Net sales $ 237,626 $ 229,493 $ 220,706
Cost of sales 183,734 167,844 166,864
--------- --------- ---------
Gross profit 53,892 22.7% 61,649 26.9% 53,842 24.4%
Selling, general & administrative expenses 43,503 18.3% 47,925 20.9% 53,206 24.1%
Asbestos-related reorganization expenses 25,326 5,000 3,705
--------- --------- ---------
Operating (loss) income (14,937) 8,724 (3,069)
Interest expense, net (9,973) (9,332) (8,843)
Other income, net 760 1,011 1,276
--------- --------- ---------
(Loss) income before taxes (24,150) 403 (10,636)
Benefit from income taxes (2,575) (2,545) (3,874)
--------- --------- ---------
Net (loss) income $ (21,575) $ 2,948 $ (6,762)
========= ========= =========
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net sales for the year ended December 31, 2005 totaled $237.6 million as
compared to $229.5 million for the year ended December 31, 2004, an increase of
$8.1 million or 3.5%. The increase in sales resulted primarily from the impact
of selling price increases instituted in late 2004 and during 2005 (7% of net
sales), increased sales of residential tile (up $7.8 million) and higher
shipments to the manufactured housing industry reflecting post-hurricane demand
for both manufactured housing and RV homes. This was partially offset by a sales
decrease of do-it-yourself tile reflecting the loss of a major mass merchandiser
customer coupled with decreased demand for residential sheet specials.
Gross profit for the year ended December 31, 2005 totaled $53.9 million, or
22.7% of net sales, compared to $61.6 million or 26.9% of net sales for the year
ended December 31, 2004. The decrease in gross margins was driven by the sharp
increase in raw material pricing which increased costs by 8.4% of net sales, a
less favorable product mix which reduced gross margin by 2.5% of net sales, and
the negative impact of lower production volumes over which to spread fixed
manufacturing overhead costs (1.7% of net sales). This was partially mitigated
by price increases instituted during late 2004 and 2005 (7.0% of net sales),
lower warranty claims expense (0.5% of net sales) and the favorable impact of
manufacturing cost reduction programs initiated (1.0% of net sales).
Selling, general and administrative expenses were $43.5 million for the year
ended December 31, 2005 as compared to $47.9 million for the year ended December
31, 2004, a decrease of $4.4 million. As a percent of net sales, selling,
general and administrative expenses were 18.3% and 20.9% for the years ended
December 2005 and 2004, respectively. Selling, general and administrative
expenses were down $4.4 million (2.9% of net sales) reflecting cost savings
initiatives instituted in late 2005, including workforce reductions and related
benefits ($1.0 million) and the impact of lower unit sales volume on freight and
other incentive programs ($3.0 million).
30
Asbestos-related charges in 2005 were $25.3 million, compared to $5.0 million in
2004. Congoleum recorded a charge of $9.9 million in the fourth quarter of 2005
to increase its estimated recorded liability for resolving asbestos-related
claims. The recorded liability at December 31, 2005 represents the minimum
estimated cost that Congoleum would incur to resolve its asbestos-related
liability through the execution of Congoleum's proposed plan of reorganization.
If Congoleum is not successful in obtaining confirmation of its proposed plan of
reorganization in a timely manner, actual costs could be significantly higher.
The Eighth Plan also would require Congoleum to make additional contributions to
the Plan Trust comprised of approximately $7.7 million in cash, 3.8 million
shares of newly issued Congoleum Class A common stock and a newly issued
convertible security. The redemption or principal value of the convertible
security will be increased one year after confirmation of the plan to the
amount, if any, by which 36% of the value of Congoleum's shares at that time
exceeds approximately $2.7 million. No provision has been made for the cost of
this possible additional contribution, which could be material. Congoleum will
adjust its recorded liability should its estimates change. In addition, it is
expected that the terms of the convertible security will require Congoleum to
make dividend or interest payments prior to such security's redemption or
maturity date.
Loss from operations was $14.9 million for the year ended December 31, 2005
compared to income of $8.7 million for the same period in the prior year, a
decline of $23.6 million. This decline in operating income reflects the charges
for asbestos related claims taken in 2005, coupled with lower gross margins,
partially offset by reductions in operating expenses.
Interest income was $0.4 million, which was $0.3 million higher than the prior
year reflecting higher cash balances and interest rates. Interest expense
increased from $9.4 million in 2004 to $10.4 million in 2005, primarily
reflecting the interest accrued on the unpaid interest on its Senior Notes. Due
to the Chapter 11 proceedings, Congoleum was precluded from making the interest
payments due February 1, 2004, August 1, 2004, February 1, 2005 and August 1,
2005 on the Senior Notes.
Congoleum recorded a tax benefit of $2.6 million on a loss before income taxes
of $24.2 million in 2005, and it also recorded a tax benefit of $2.5 million on
income before taxes of $0.4 million in 2004. This relates primarily to
anticipated tax benefits associated with certain prior year expenditures for
resolving asbestos related liabilities, which Congoleum has determined may be
carried back but were not previously recognized.
31
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net sales for the year ended December 31, 2004 totaled $229.5 million as
compared to $220.7 million for the year ended December 31, 2003, an increase of
$8.8 million or 4%. The increase in sales resulted from the effect of selling
price increases initiated during 2004 (2.5%) and higher shipments to the
manufactured housing industry partially offset by declines in do-it-yourself
tile sales to mass merchandisers and less demand for residential sheet specials.
Gross profit for the year ended December 31, 2004 totaled $61.6 million, or
26.9% of net sales, compared to $53.8 million or 24.4% of net sales for the year
ended December 31, 2003. The increase in gross margins were driven by the impact
of the price increase (2.5% of net sales), improvement in product mix due to a
high-end residential sheet introduction (1.0% of net sales) coupled with
improved manufacturing efficiencies and the impact of cost reduction programs
initiated during the second half of 2003 (2.0% of net sales). These factors
helped offset sharply higher raw material costs experienced during the second
half of the year, which negatively impacted gross margins by 3.1% of net sales.
Selling, general and administrative expenses were $47.9 million for the year
ended December 31, 2004 as compared to $53.2 million for the year ended December
31, 2003, a decrease of $5.3 million. As a percent of net sales, selling,
general and administrative expenses were 20.9% and 24.1% for the years ended
December 31, 2004 and 2003, respectively. The lower selling, general and
administrative expenses reflect the impact of several cost savings initiatives
instituted in the second half of 2003, including work force reductions ($2.1
million), and reduced merchandising and sampling expenses reflecting new product
launch expenses incurred in 2003 ($4.0 million). These initiatives, coupled with
further cost reduction steps taken in the fall of 2004, helped offset the
inflationary cost impact of pension / medical benefits and other incentive
programs ($2.5 million).
Congoleum recorded a charge of $5.0 million during the fourth quarter of 2004
compared to $3.7 million in 2003 to increase its estimated recorded liability
for resolving asbestos-related claims. The recorded liability at December 31,
2004 represents the then minimum estimated cost that Congoleum would incur to
resolve its asbestos-related liability through the execution of Congoleum's then
proposed plan of reorganization.
Income from operations was $8.7 million for the year ended December 31, 2004
compared to a loss of $3.1 million for the same period in the prior year, an
improvement of $11.8 million. This improvement in operating income reflects
higher sales and margins coupled with reductions in operating expenses.
Interest income was unchanged at $0.1 million for the years ended December 31,
2004 and 2003, respectively. Interest expense increased from $8.9 million in
2003 to $9.4 million in 2004, primarily reflecting the interest accrued on the
unpaid interest due on the Senior Notes. Due to the Chapter 11 proceedings,
Congoleum was precluded from making the interest payments due February 1, 2004
and August 1, 2004 on the Senior Notes.
Congoleum recorded a tax benefit of $2.5 million on income before taxes of $0.4
million in 2004. This relates primarily to anticipated tax benefits associated
with certain prior year expenditures for resolving asbestos related liabilities,
which Congoleum has determined may be carried back but were not previously
recognized.
32
Liquidity and Capital Resources - ABI and Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased by $308
thousand to $4.7 million. Net earnings, proceeds from the sale of a warehouse
and proceeds from an insurance settlement provided cash that was used to fund
seasonal working capital increases, capital expenditures, and payments on
long-term debt. Working capital at December 31, 2005 was $19.9 million, up from
$16.2 million at December 31, 2004. The ratio of current assets to current
liabilities at December 31, 2005 was 1.33 compared to 1.27 at December 31, 2004,
consistent with the increased amount of working capital at December 31, 2005.
Capital expenditures for 2005 were $2.6 million compared to $2.4 million for
2004. 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. During the fourth quarter, the Company received a net payment of $2.9
million from an insurance company for the settlement of disputed claims for
coverage of environmental related expenses.
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 one 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 ("BofA"), 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.
33
Interest is payable quarterly on domestic revolving loans borrowed by American
Biltrite Inc. and K&M Associates L.P. under the Credit Facility 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 BofA'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 BofA elects to make a fixed rate
option available, whether interest on revolving loans will be calculated based
on a fixed rate.
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 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 Company expects that it
will be able to extend the maturity or obtain a replacement facility on
substantially similar terms before the expiration date of the current facility,
although there can be no assurances in this regard.
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 and fourth 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.
34
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. The Company does not presently expect to meet all of the different
set of financial covenants which take effect on September 30, 2006 and expects
it will need to negotiate amendments to or waivers of certain covenants,
although there can be no assurance it will be successful in that regard.
Pursuant to the Credit Facility and the Note Agreement, the Company and certain
of its subsidiaries granted BofA, 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.
35
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.
As indicated above, the Company will need to extend or replace the Credit
Facility and expects that it will need to obtain additional amendments or
waivers of covenants under the Note Agreement during 2006. There can be no
assurance that the Company will be successful in doing so.
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.
36
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
BofA'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, BofA 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.
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, BofA 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, BofA as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise BofA'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.
Under the terms of the Eighth Plan, ABI expects to contribute $250 thousand in
cash to the Plan Trust on the effective date of the plan. Under the terms of the
Eighth Plan, unlike under the Sixth Plan, ABI would not pledge any of its
assets, including shares of Congoleum stock it owns or certain rights it has to
receive indemnification payments from Congoleum pursuant to a joint venture
agreement that ABI and Congoleum are party to, as security for Congoleum's
obligations under the new convertible security (as was contemplated, under the
Sixth Plan with respect to Congoleum's obligations under the Promissory Note
described in the Sixth Plan). In addition, the Eighth Plan does not, unlike the
Sixth Plan, contemplate that ABI would be required to make any additional
contributions to the Plan Trust if ABI were to sell its Congoleum stock under
the circumstances provided under the Sixth Plan, a description of which ABI
provided in previous periodic reports it filed with the SEC.
37
Under the Eighth Plan, ABI would receive certain relief as may be afforded under
Section 524(g)(4) of the Bankruptcy Code from asbestos personal injury claims
that derive from claims made against Congoleum, which claims are expected to be
channeled to the Plan Trust. However, the Eighth Plan does not provide that any
other asbestos claims that may be asserted against ABI would be channeled to the
Plan Trust. 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 Congoleum's
plan of reorganization, 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 Congoleum's plan of
reorganization 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.
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.
The following table summarizes the Company's obligations at December 31, 2005
for future principal payments and related interest on its long-term debt
(assuming any necessary amendments or waivers are obtained from its lenders),
future minimum rental payments on its non-cancelable operating leases and future
minimum royalty and advertising payments for licensed brand names on K&M
products.
Payments due by Period
(In thousands)
2011 and
Total 2006 2007 2008 2009 2010 Thereafter
------------------------------------------------------------------------------
Long-term debt $22,414 $ 4,451 $4,491 $4,414 $4,082 $4,085 $ 891
Interest 5,369 1,738 1,380 1,016 662 316 257
Operating leases 5,692 1,653 1,479 1,111 767 371 311
Pension plan
funding (1) 3,030 825 670 410 290 415 420
Royalty &
advertising
commitments 2,496 2,445 51 -- -- -- --
------------------------------------------------------------------------------
$39,001 $11,112 $8,071 $6,951 $5,801 $5,187 $1,879
==============================================================================
(1) The projected pension plans funding was actuarially determined using the
following assumptions: i) current funding laws remain unchanged, ii) there
are no gains or losses for 2006 and later, iii) the discount rates used
for the projection are the same as the rates used for the pension
valuations as of December 31, 2005 (see Note 7 of Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report
on Form 10-K), and iv) for years after 2011, projected contributions are
assumed to increase with inflation.
38
Liquidity and Capital Resources - 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 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 Consolidated Financial Statements contained in Item 8 of
this Annual Report on Form 10-K, 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 1
and 9 of the Notes to the Consolidated Financial Statements, which are contained
in Item 8 of this Annual Report on Form 10-K, for a discussion of Congoleum's
bankruptcy proceedings. These matters will have a material adverse impact on
liquidity and capital resources. During 2005, Congoleum paid $27.2 million in
fees and expenses related to implementation of its planned reorganization under
Chapter 11 and litigation with certain insurance companies. Pursuant to terms of
the Eighth Plan 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 December 31, 2005, Congoleum
had $14.8 million recorded as a receivable for such reimbursements. The amount
and timing of reimbursements that will be received will depend on when Congoleum
or the Plan Trust receives funds from insurance settlements or other sources.
There can be no assurances that these reimbursements will be received, or that
the terms providing for such reimbursements will not be modified. Congoleum
expects to spend a further $19.5 million at a minimum in fees, expenses, and
trust contributions in connection with obtaining confirmation of its plan of
reorganization, which amount is recorded in its reserve for asbestos-related
liabilities in addition to the $8.9 million insurance settlement being held as
restricted cash. It also expects to spend a further $11.5 million at a minimum
in connection with pursuit of insurance coverage, for which it expects to be
reimbursed as discussed above. Required expenditures could be materially higher
than these estimates. 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.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making
interest payments on its outstanding Senior Notes since January 1, 2004. The
amount of accrued interest that is due but has not been paid on the Senior Notes
at December 31, 2005 was approximately $19.0 million, including interest on the
unpaid interest due. In February 2006, the Bankruptcy Court ordered a law firm
formerly representing Congoleum to disgorge all fees and certain expenses it was
paid by Congoleum. The law firm is expected to appeal from this ruling once an
order embodying the ruling has been entered by the Bankruptcy Court. It is
expected that the amount of the disgorgement will range from approximately $8.2
million to $9.8 million. Pursuant to the terms of the Eighth Plan, holders of
the Senior Notes would forego $10 million in interest accrued during the
post-petition period and would receive the right to any funds (net of related
39
expenses) from the fee disgorgement and other causes of action against the law
firm and one of its service providers, subject to a maximum of $10 million plus
interest at 8.625% from the effective date of the plan until the time such
payment is made (the "Maximum Additional Bondholder Recovery"). There can be no
assurance that the Plan, which is ultimately confirmed, will provide for such
interest forgiveness. Any net recoveries in excess of the Maximum Additional
Bondholder Recovery would be paid to the Plan Trust.
Pursuant to the terms of the Eighth Plan Congoleum is to make a cash
contribution of approximately $7.7 million to the Plan Trust when the plan goes
effective. The Eighth Plan also provides that the maturity of the Senior Notes
will be extended by three years from August 2008 to August 2011. There can be no
assurance that the plan which is ultimately confirmed, if any, will provide for
such interest forgiveness or maturity extension.
As part of the Eighth Plan, Congoleum expects that it will issue a convertible
security (the "New Convertible Security") to the Plan Trust. Under the terms of
the Eighth Plan, the New Convertible Security means either shares of preferred
stock or convertible promissory notes to be issued by reorganized Congoleum and
contributed to the Plan Trust on the effective date in satisfaction of section
524(g) of the Bankruptcy Code. If the New Convertible Security is to be shares
of preferred stock of reorganized Congoleum, it shall have the following terms:
(i) an initial liquidation preference equal to $2,738,234.75 in the aggregate,
such amount being subject to increase in the amount, if any, by which 36% of
reorganized Congoleum's market capitalization based on average trading prices
for reorganized Congoleum's Class A common stock at the close of trading for the
90 consecutive trading days beginning on the one year anniversary of the
effective date of the plan of reorganization, exceeds such initial liquidation
preference; (ii) an initial dividend rate equal to 9% of the liquidation
preference per annum, payable semi-annually in arrears, with such dividend rate
to reset at the rate of 5% of the liquidation preference per annum on the tenth
anniversary of the effective date of the plan of reorganization and payable at
such reset dividend rate per annum unless and until redeemed; (iii) redeemable
for the liquidation preference at the option of the Plan Trust or reorganized
Congoleum following the tenth anniversary of the effective date of the plan of
reorganization; (iv) a mandatory redemption on the fifteenth anniversary of the
effective date of the plan of reorganization if not redeemed earlier; (v)
convertible into 5,700,000 shares of Congoleum Class A common stock (or the
equivalent thereof on a fully diluted basis) upon a specified default of the
obligation to pay dividends and a failure to cure such default within any cure
period, which, when combined with the 3.8 million newly issued shares of
Congoleum Class A common stock to be contributed to the Plan Trust, will result
in the Plan Trust owning 51% of the voting common shares of reorganized
Congoleum on a fully diluted basis; and (vi) no voting rights. If the New
Convertible Security is convertible promissory notes, such notes will be on
economic terms substantially equivalent to provisions (i) and (v) of the
preferred stock described herein, with other terms substantially the same as the
Promissory Note described in the Sixth Plan. Although the earliest redemption or
repayment date for the New Convertible Security does not occur until its tenth
anniversary of issuance, this obligation 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 New Convertible Security will
require Congoleum to make regularly scheduled dividend or interest payments
prior to such instrument's redemption or maturity date.
40
Unrestricted cash and cash equivalents, including short-term investments at
December 31, 2005, were $24.5 million, a decrease of $5.2 million from December
31, 2004. 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 $2.7 million and $1.2 million at December
31, 2005 and December 31, 2004, respectively, are recorded as restricted cash.
Additionally, $8.9 million remaining from 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 December 31, 2004. Congoleum
expects to contribute these funds, less any amounts withheld pursuant to
reimbursement arrangements, to the Plan Trust. Working capital was $28.0 million
at December 31, 2005, down from $35.3 million one year earlier. The ratio of
current assets to current liabilities at December 31, 2005 was 1.3 to 1.0,
compared to 1.4 to 1.0 at December 31, 2004. The ratio of debt to total capital
at December 31, 2005 was 0.48 to 1.0 compared to 0.47 to 1.0 at December 31,
2004. Net cash provided by operations during the year ended December 31, 2005
was $1.6 million, as compared to net cash provided by operations of $31.1
million in 2004. Net cash from operations decreased from 2004 to 2005 due to a
decline in operating results, lower accrued expenses and the non-recurrence of
the one time benefit realized in 2004 from the resumption of normal trade credit
which had contracted at the end of 2003.
Capital expenditures in 2005 totaled $4.3 million. Congoleum is currently
planning capital expenditures of approximately $5 million in 2006 and between $5
million and $7 million in 2007, 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
December 31, 2006 with borrowings up to $30 million. 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. 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 December 31, 2005.
Borrowings under this facility are collateralized by inventory and receivables.
At December 31, 2005, based on the level of receivables and inventory, $16.8
million was available under the facility, of which $4.4 million was utilized for
outstanding letters of credit and $9.4 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 and effectiveness of its 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 its expiration if Congoleum's
plan of reorganization is not confirmed before that time.
41
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 8 to the Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form 10-K).
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.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Congoleum generated
$1.6 million in cash from operations in 2005 (as more fully discussed above),
which includes the benefit of $9.9 million of accrued but unpaid interest on
long-term debt. Congoleum believes these sources will be adequate to fund
working capital requirements, debt service payments, and planned capital
expenditures for the foreseeable future. To meet the funding obligations under
the Eighth Plan, Congoleum anticipates it will need to obtain the contemplated
forgiveness of interest on the Senior Notes and obtain reimbursement for any
unreimbursed coverage litigation costs. Actual sources and uses of funds to
consummate the effectiveness of the Eighth Plan or any other plan may differ
from this description, but confirmation of any plan is dependent on such plan
demonstrating it leaves Congoleum with sufficient liquidity that further
reorganization will not be needed. Congoleum's inability to obtain confirmation
of the Eighth Plan in a timely manner would have a material adverse effect on
Congoleum's ability to fund its operating, investing and financing requirements.
42
The following table summarizes Congoleum's contractual obligations, adjusted for
terms of the Eighth Plan, for future principal and interest payments on its
debt, future minimum rental payments on its non-cancelable operating leases,
future minimum pension plans and other post-employment benefits ("OPEB") funding
and obligations to the Plan Trust pursuant to the Eighth Plan at December 31,
2005. Congoleum does not have payment obligations under capital leases or
long-term purchase contracts.
Payments due by Period
(In thousands)
2011 and
Total 2006 2007 2008 2009 2010 Thereafter
-----------------------------------------------------------------------------------
Long-term debt $100,000 $100,000
Interest on long-
term debt(1) 59,157 $19,612 $ 8,628 $ 8,628 $ 8,628 $ 8,628 5,033
Operating leases 11,758 2,637 2,625 2,428 2,229 1,839 --
Pension plans
funding(2) 53,591 4,848 4,923 4,993 5,132 5,285 28,410
OPEB funding(3) 6,890 481 539 594 605 661 4,010
Contribution to
Plan Trust(4) 7,658 7,658 -- -- -- -- --
Principal and
dividend or
interest for
Security to Plan
Trust(4) 5,198 -- 246 246 246 246 4,214
----------------------------------------------------------------------------------------------
$244,252 $35,236 $16,961 $16,889 $16,840 $ 16,659 $141,667
==============================================================================================
(1) The principal and interest payments assume Congoleum's reorganization plan
is effective as of December 31, 2006 and that $10 million of interest
during the pendency of the reorganization is forgiven, and the maturity
date of the Senior Notes extended by three years, as contemplated in the
Eighth Plan.
(2) The projected pension plans funding was actuarially determined using the
following assumptions: i) current funding laws remain unchanged, ii) there
are no gains or losses for 2006 and later, iii) the discount rates used
for the projection are the same as the rates used for the pension
valuations as of December 31, 2005 (see Note 7 of Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report
on Form 10-K), and iv) for years after 2011, projected contributions are
assumed to increase with inflation.
(3) Congoleum's other post employment benefit plan is an unfunded plan.
Funding requirements each year are assumed to approximate the expenses for
each year (see Note 7 of Notes to Consolidated Financial Statements),
which are contained in Item 8 of this Annual Report on Form 10-K.
(4) Payments of cash, principal and dividend or interest to the Plan Trust
assume Congoleum's Eighth Plan is effective December 31, 2006 and do not
include any additional principal or dividends or interest thereon
resulting from any adjustments to the New Convertible Security upon the
one year anniversary of the plan effective date.
43
Contingencies
ABI has recorded what it believes are adequate provisions for environmental
remediation and product-related liabilities, including provisions for testing
for potential remediation of conditions at its own facilities. While ABI
believes its estimate of the future amount of these liabilities is reasonable
and that they will be paid for the most part over a period of one to ten years,
the timing and amount of such payments may differ significantly from ABI's
assumptions. Although the effect of future government regulation could have a
significant effect on ABI's costs, ABI is not aware of any pending legislation
which could significantly affect the liabilities ABI has established for these
matters. There can be no assurances that the costs of any future government
regulations could be passed along by ABI to its customers.
Certain legal and administrative claims are pending or have been asserted
against ABI. Among these claims, ABI is a named party in several actions
associated with waste disposal sites and asbestos-related claims. These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites. The
exact amount of such future costs to ABI is 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 ABI's liability in proportion
to other potentially responsible parties and the extent to which costs may be
recoverable from insurance. ABI has recorded provisions in its consolidated
financial statements for the estimated probable loss associated with all known
environmental and asbestos-related contingencies. The contingencies also include
claims for personal injury and/or property damage. (See Notes 1, 8 and 9 of
Notes to Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K.)
During 2003, the Company decided to cease operations at its Janus Flooring
division and recorded a charge of $8.5 million in the second quarter 2003
consisting primarily of $3.0 million to reduce inventories to net realizable
value, $0.5 million in accounts receivable allowances, a $2.5 million asset
impairment charge related to machinery and equipment and a $1.9 million income
tax provision to write off deferred tax assets deemed not probable of recovery.
The Company disposed of substantially all of the assets of Janus Flooring, other
than the real estate, during 2003. Future expenditures related to this
discontinued operation are not expected to be material, and the Company expects
to realize approximately $4.0 million in net future cash proceeds from the sale
of the real estate. Any net sales proceeds are expected to be applied to
repaying amounts outstanding under the Company's credit facilities. During 2005,
the Company entered into a purchase and sale agreement for the land and building
for an amount in excess of the carrying value of the property. The Company
expects the sale will close in the second quarter of 2006. If the Company is
unable to timely sell or otherwise dispose of the assets of Janus on terms
acceptable to ABI and in accordance with applicable regulatory or other legal
requirements, including Canadian regulations and laws, such inability could have
a material adverse effect on the Company's business, results of operations and
financial condition.
44
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results and conditions may differ from these estimates
and assumptions.
Critical accounting policies are defined as those that entail 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 below. For a discussion on the application of
these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Asbestos Liabilities - As discussed previously, the Company is party to a
significant number of lawsuits stemming from their previous manufacture of
asbestos-containing products. ABI has recorded in its consolidated balance sheet
a liability and corresponding insurance receivable based on its estimates of the
future costs and related insurance recoveries to settle asbestos litigation and
pay for related legal and loss handling costs. These estimates are based on a
number of subjective assumptions, including the anticipated costs to settle
claims, the claims dismissal rate, the cost to litigate claims, the number of
claims expected to be received, and the applicability and allocation of
insurance coverage to these costs. Additionally, due to the numerous
uncertainties related to future asbestos litigation trends and costs, the
Company does not believe reasonable estimates can be developed for claim
developments beyond a five year horizon. Accordingly, the Company's estimated
liability is based on claims currently filed as well as claims anticipated to be
filed over the next five years. A change in assumptions could have a material
effect on the Company's estimated liability. For example, it is estimated that a
1% decrease in the Company's dismissal rate would result in a 38% increase in
liability assuming all other variables remained constant.
Due to the highly subjective nature of these assumptions, the Company has
estimated a wide range of potential future costs and insurance recoveries and,
because management believes that no amount within the range is more likely than
any other, has recorded a liability and insurance receivable based on the low
end of the range in accordance with accounting principles generally accepted in
the United States. As such, the selection of a different amount within the range
could have a material effect on the Company's consolidated financial statements,
as could future developments, which may differ from those assumed in developing
the Company's estimates. The same factors that affect developing forecasts of
potential indemnity costs for asbestos-related liabilities also affect estimates
of the total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
45
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. The Company analyzes these estimates on an annual
basis and reassesses the assumptions used as additional information becomes
available over the course of time.
Congoleum is a party to a significant number of lawsuits stemming from its
manufacture of asbestos-containing products. During 2005, Congoleum paid $27.2
million in fees and expenses related to implementation of its planned
reorganization under Chapter 11 of the Bankruptcy Code and litigation with
certain insurance companies. 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 December 31, 2005, Congoleum had $14.8 million recorded
as a receivable for such reimbursements. The amount and timing of reimbursements
that will be received will depend on when Congoleum or the Plan Trust receives
funds from insurance settlements or other sources. There can be no assurances
that these reimbursements will be received or that the terms providing for such
reimbursements will not be modified. Congoleum expects to spend a further $19.5
million at a minimum in fees, expenses, and trust contributions in connection
with obtaining confirmation of its plan or reorganization, which amount is
recorded in its reserve for asbestos-related liabilities (in addition to the
$8.9 million insurance settlement being held as restricted cash). It also
expects to spend a further $11.5 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.
Congoleum expects that insurance will provide the substantial majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of Congoleum itself.
Congoleum does not have the necessary financial resources to litigate and/or
settle asbestos claims in the ordinary course of business.
In light of its bankruptcy filing and proposed plan of reorganization, Congoleum
believes the most meaningful measure of its probable loss due to asbestos
litigation is the amount it will have to contribute to the Plan Trust plus the
costs to effect the reorganization. Congoleum estimates the minimum remaining
amount of the contributions and costs to be $19.5 million, which it has recorded
as a current liability. These amounts do not include the liability associated
with a $14.5 million insurance settlement recorded as restricted cash, which
Congoleum expects to contribute, less any amounts withheld pursuant to
reimbursement arrangements, to the Plan Trust. At December 31, 2005 this
liability (comprised of the original settlement plus interest to date, less $6.1
million in reimbursements approved by the bankruptcy court) amounted to $8.9
million and is included in current asbestos-related liabilities. 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.
Congoleum will update its estimates, if appropriate, as additional information
becomes available during the reorganization process, which could result in
potentially material adjustments to Congoleum's earnings in future periods.
46
Consolidation of Congoleum - The Company's subsidiary Congoleum filed for
bankruptcy protection on December 31, 2003. The accompanying consolidated
financial statements include the results for Congoleum for all periods
presented. ABI continues to own a majority of the voting stock of Congoleum. The
Company expects to continue to control Congoleum while it is in bankruptcy.
Additionally, under the terms of the Eighth Plan, which remains subject to
creditor acceptance, Bankruptcy Court approval, and numerous other
contingencies, ABI would continue to have control through a majority of share
votes. 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 (including its non-debtor subsidiaries)
and Congoleum, which may be more meaningful for certain analyses. ABI's reported
consolidated financial condition, operating results and cash flows consolidated
results would be materially different if they did not include Congoleum.
Environmental Contingencies - As discussed previously, the Company has incurred
liabilities related to environmental remediation costs at both third party sites
and Company owned sites. The Company accrues for its estimate of future
remediation activities when it is probable that a liability has been incurred
and the amount can be reasonably estimated. The most likely cost to be incurred
is accrued based on an evaluation of currently available facts with respect to
each individual site, including the extent of clean-up activities to be
performed, the methods employed in the clean-up activities, the Company's
relative share in costs at sites where other parties are involved, existing
technology, current laws and regulations and prior remediation experience. Where
no amount within a range of estimates is more likely to occur than another, the
minimum is accrued. For sites with multiple potentially responsible parties, the
Company considers its likely proportionate share of the anticipated remediation
costs and the ability of the other parties to fulfill their obligations in
establishing a provision for those costs. When future liabilities are determined
to be reimbursable by insurance coverage or payment from third parties, an
accrual is recorded for the potential liability and a receivable is recorded
related to the expected recovery. A receivable reserve is recorded when
recoveries are disputed or are not highly probable. These estimates are based on
certain assumptions such as the Company's relative share in costs at sites where
other parties are involved, and the ultimate insurance coverage available. These
projects tend to be long-term in nature, and these assumptions are subject to
refinement as facts change. As such, it is possible that the Company may need to
revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods. The Company closely monitors existing and potential
environmental matters in an effort to minimize costs.
Valuation of Deferred Tax Assets - The Company provides for valuation reserves
against its deferred tax assets in accordance with the requirements of SFAS 109.
In evaluating the recovery of deferred tax assets, the Company makes certain
assumptions as to the future reversal of existing taxable temporary differences,
taxable income in prior carryback years, the feasibility of tax planning
strategies, and estimated future taxable income. The valuation allowance can be
affected by changes to tax laws, changes to statutory tax rates and changes to
future taxable income estimates. It is possible that the facts underlying these
assumptions may not materialize in future periods, which may require the Company
to record additional deferred tax valuation allowances, or to reduce previously
recorded valuation allowances.
47
Pension and Other Postretirement Benefits - The Company sponsors several
noncontributory defined benefit pension plans covering most of the Company's
employees. The Company also maintains health and life insurance programs for
retirees. Benefits under the plans are based on years of service and employee
compensation. The costs and obligations associated with these plans are
dependent upon various actuarial assumptions used in calculating such amounts.
These assumptions include the long-term rate of return on plan assets, discount
rates and other factors. These assumptions are evaluated and updated annually by
management in consultation with outside actuaries and investment advisors. Other
assumptions used include employee demographic factors such as retirement
patterns, mortality, turnover and the rate of compensation increases.
To determine the expected long-term rate of return on plan assets, we consider
the current and expected asset allocation, as well as historical and expected
returns on each plan asset class. In 2005, the Company assumed that the expected
long-term rate of return on plan assets will be 7.0%-7.5%. The assumed long-term
rate of return on assets is applied to a calculated value of plan assets, which
recognizes changes in the fair value of plan assets in a systematic manner over
four years. This produces the expected return on plan assets that is included in
pension expense. The difference between this expected return and the actual
return on plan assets is deferred. The net deferral of past actuarial gains or
losses affects the calculated value of plan assets and, ultimately, future
pension expense.
At the end of each year, the Company determines the discount rate to be used to
calculate the present value of plan liabilities. The discount rate is used to
determine expected future benefit payments as a present value on the measurement
date, reflecting the current rate at which the pension liabilities could be
effectively settled. In estimating this rate, the Company looks to rates of
return on high-quality, fixed-income investments that receive one of the two
highest ratings given by a recognized ratings agency. At December 31, 2005, the
Company determined this rate to be 6.0%.
Allowance for Doubtful Accounts - The Company's allowance for doubtful accounts
is determined based on a variety of factors that affect the potential
collectibility of the related receivables, including length of time receivables
are past due, customer credit ratings, financial stability of customers,
specific one-time events and past customer history. In addition, in
circumstances where the Company is made aware of specific customer's inability
to meet its financial obligations, a specific allowance is established. The
majority of accounts are individually evaluated on a regular basis and
appropriate reserves are established as deemed appropriate based on the criteria
previously noted. The remainder of the reserve is based on management's
estimates and takes into consideration historical trends, market conditions and
the composition of the Company's customer base. The risk associated with this
estimate is that the Company would not become aware of potential collectibility
issues related to specific accounts and thereby become exposed to potential
unreserved losses. Historically, the Company's estimates and assumptions around
the allowance have been reasonably accurate and the Company has processes and
controls in place to closely monitor customers and potential credit issues.
48
Inventory Allowances - The Company maintains obsolescence and slow-moving
allowances for inventory. Products and materials that are specifically
identified as obsolete are fully reserved. The remainder of the allowance is
based on management's estimates and fluctuates with market conditions, design
cycles and other economic factors. Risks associated with this allowance include
unforeseen changes in business cycles that could affect the marketability of
certain products and an unforecasted decline in current production. Management
closely monitors the market place and related inventory levels and has
historically maintained reasonably accurate allowance levels. In addition, the
Company values certain inventories using the last-in, first-out ("LIFO") method.
Accordingly, a LIFO valuation reserve is maintained to properly value these
inventories.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments. The Company invests primarily in highly liquid
debt instruments with strong credit ratings and short-term (less than one year)
maturities. The carrying amount of these investments approximates fair value due
to the short-term maturities. If market interest rates were to increase by 10%
from levels at December 31, 2005, the fair value of our investments would
decline by an immaterial amount. In addition, substantially all of the Company's
outstanding long-term debt as of December 31, 2005 consisted of indebtedness
with a fixed rate of interest, which is not subject to change based upon changes
in prevailing market interest rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Canada, Belgium and Singapore and sells those products in
those markets as well as countries of Europe and Asia. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and Canadian dollar and the U.S. dollar and the Euro. When the U.S.
dollar strengthens against the Canadian dollar or Euro, the U.S. dollar value of
foreign currency sales decreases. When the U.S. dollar weakens, the U.S. dollar
value of the foreign currency amount of sales increases.
Under its current policies, the Company does not use derivative financial
instruments, derivative commodity instruments or other financial instruments to
manage its exposure to changes in interest rates, foreign currency exchange
rates, commodity prices or equity prices and does not hold any instruments for
trading purposes.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets with Consolidating Details - Assets
(In thousands of dollars)
December 31 Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 29,184 $ 34,691 $ 24,511 $ 29,710 $ 4,673 $ 4,981
Restricted cash 11,644 15,682 11,644 15,682
Accounts and notes receivable,
less allowances for doubtful
accounts and discounts of
$2,820 in 2005 and $2,745
in 2004 41,742 43,591 $(455) $(1,036) 17,092 17,621 25,105 27,006
Inventories 77,127 76,036 (166) (268) 34,607 39,623 42,686 36,681
Assets of discontinued operation 3,142 2,952 3,142 2,952
Deferred income taxes 18,036 12,636 16,735 10,678 1,301 1,958
Prepaid expenses & other
current assets 24,062 6,826 20,139 5,124 3,923 1,702
-------------------------------------------------------------------------------------------
Total current assets 204,937 192,414 (621) (1,304) 124,728 118,438 80,830 75,280
Property, plant & equipment, net 115,336 124,070 73,207 79,550 42,129 44,520
Other assets:
Insurance for asbestos-
related liabilities 8,950 7,500 8,950 7,500
Goodwill, net 11,726 11,300 11,726 11,300
Other assets 15,895 20,001 (147) (186) 9,412 14,894 6,630 5,293
-------------------------------------------------------------------------------------------
36,571 38,801 (147) (186) 9,412 14,894 27,306 24,093
-------------------------------------------------------------------------------------------
Total assets $356,844 $355,285 $(768) $(1,490) $207,347 $212,882 $150,265 $143,893
===========================================================================================
See accompanying notes.
50
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets with Consolidating Details -
Liabilities and Stockholders' Equity
(In thousands of dollars, except per share amounts)
December 31 Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Accounts payable $ 22,144 $ 18,700 $ (455) $ (57) $ 12,245 $ 10,295 $ 10,354 $ 8,462
Accrued expenses 42,976 48,605 -- (979) 22,703 28,066 20,273 21,518
Asbestos-related liabilities 28,369 21,079 28,369 21,079
Liabilities of discontinued
operation 200 165 200 165
Notes payable 19,062 17,036 9,404 9,500 9,658 7,536
Current portion of
long-term debt 20,451 21,411 20,451 21,411
Liabilities subject to
compromise 23,990 14,225 23,990 14,225
------------------------------------------------------------------------------------------
Total current liabilities 157,192 141,221 (455) (1,036) 96,711 83,165 60,936 59,092
Long-term debt, less
current portion 1,963 2,790 1,963 2,790
Asbestos-related liabilities 9,500 10,238 -- 2,738 9,500 7,500
Other liabilities 29,625 25,237 16,735 10,678 12,890 14,559
Noncontrolling interests 1,365 623 1,365 623
Liabilities subject to compromise 138,714 137,104 (147) (186) 138,861 137,290
------------------------------------------------------------------------------------------
Total liabilities 338,359 317,213 (602) (1,222) 252,307 233,871 86,654 84,564
Stockholders' equity
Common stock, par value
$.01, authorized 15,000,000
shares, issued 4,607,902 shares 46 46 (93) (93) 93 93 46 46
Additional paid-in capital 19,570 19,548 (49,126) (49,106) 49,126 49,106 19,570 19,548
Retained earnings 31,913 49,526 35,129 35,007 (65,405) (43,830) 62,189 58,349
Accumulated other comprehensive loss (17,912) (15,916) 6,111 6,111 (20,961) (18,545) (3,062) (3,482)
Less cost of 1,166,351 shares
of common stock in treasury (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
------------------------------------------------------------------------------------------
Total stockholders' equity 18,485 38,072 (166) (268) (44,960) (20,989) 63,611 59,329
------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $356,844 $355,285 $ (768) $ (1,490) $207,347 $212,882 $150,265 $143,893
==========================================================================================
See accompanying notes.
51
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Operations with Consolidating Details
(In thousands of dollars, except per share amounts)
Years Ended December 31 Eliminations
2005 2004 2003 2005 2004 2003
------------------------------------------------------------
Net sales $445,172 $433,869 $416,569 $ 290 $ 157 $(56)
Cost of products sold 334,324 315,270 307,647 (115) (30) (56)
Selling, general & administrative
expenses 94,122 101,790 107,137 -- (900) --
Asbestos-related reorganization
charges 25,326 5,000 3,705
------------------------------------------------------------
(Loss) income from operations (8,600) 11,809 (1,920) 405 1,087 --
Other income (expense)
Interest income 639 128 191
Interest expense (13,028) (12,465) (11,576)
Other income (expense) 2,695 1,336 3,359 (303) (1,115) --
------------------------------------------------------------
(9,694) (11,001) (8,026) (303) (1,115) --
------------------------------------------------------------
(Loss) income before taxes and
other items (18,294) 808 (9,946) 102 (28) --
(Benefit from) provision for
income taxes (1,534) (1,681) (3,323)
Noncontrolling interests (636) (107) (174)
------------------------------------------------------------
Net (loss) income from continuing
operations (17,396) 2,382 (6,797) 102 (28) --
Discontinued operation (net of
tax benefit of $2,178 in 2003) (237) (429) (7,361)
------------------------------------------------------------
Net (loss) income $(17,633) $ 1,953 $(14,158) $ 102 $ (28) $ --
============================================================
Congoleum American Biltrite
2005 2004 2003 2005 2004 2003
------------------------------------------------------------------
Net sales $237,626 $229,493 $220,706 $207,256 $204,219 $195,919
Cost of products sold 183,734 167,844 166,864 150,705 147,456 140,839
Selling, general & administrative
expenses 43,503 47,925 53,206 50,619 54,765 53,931
Asbestos-related reorganization
charges 25,326 5,000 3,705
------------------------------------------------------------------
(Loss) income from operations (14,937) 8,724 (3,069) 5,932 1,998 1,149
Other income (expense)
Interest income 438 114 63 201 14 128
Interest expense (10,411) (9,446) (8,906) (2,617) (3,019) (2,670)
Other income (expense) 760 1,011 1,276 2,238 1,440 2,083
------------------------------------------------------------------
(9,213) (8,321) (7,567) (178) (1,565) (459)
------------------------------------------------------------------
(Loss) income before taxes and
other items (24,150) 403 (10,636) 5,754 433 690
(Benefit from) provision for
income taxes (2,575) (2,545) (3,874) 1,041 864 551
Noncontrolling interests (636) (107) (174)
------------------------------------------------------------------
Net (loss) income from continuing
operations (21,575) 2,948 (6,762) 4,077 (538) (35)
Discontinued operation (net of
tax benefit of $2,178 in 2003) (237) (429) (7,361)
------------------------------------------------------------------
Net (loss) income $(21,575) $ 2,948 $ (6,762) $ 3,840 $ (967) $ (7,396)
==================================================================
Basic Diluted
2005 2004 2003 2005 2004 2003
-------------------------------- ---------------------------------
Net (loss) income per common share $(5.05) $ 0.69 $ (1.97) $(5.05) $ 0.66 $(1.97)
from continuing operations
Discontinued operation (0.07) (0.12) (2.14) (0.07) (0.12) (2.14)
-------------------------------- ---------------------------------
Net (loss) income per common share $(5.12) $ 0.57 $ (4.11) $(5.12) $ 0.54 $(4.11)
================================ =================================
Weighted average number of
common and equivalent shares
outstanding 3,442 3,442 3,442 3,442 3,458 3,442
================================ =================================
Dividends declared per common share $ -- $ -- $0.1875
================================
See accompanying notes.
52
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows with Consolidating Details -
Operating Activities
(In thousands of dollars)
(Revised, See Note 1)
Years Ended December 31 Eliminations
2005 2004 2003 2005 2004 2003
--------------------------------------------------------
Operating activities
Net (loss) income $(17,633) $ 1,953 $(14,158) $ 102 $ (28) $ --
Net loss from discontinued operation 237 429 7,361
--------------------------------------------------------
Net (loss) income from continuing
operations (17,396) 2,382 (6,797) 102 (28) --
Adjustments to reconcile net (loss)
income to net cash provided
(used) by operating activities:
Depreciation and amortization 16,468 17,539 18,026
Provision for doubtful accounts
and discounts 2,922 2,631 2,691
Deferred income taxes (588) 457 (2,243)
Asbestos-related charge 25,326 5,000 3,705
Gain on sale of property (2,303) -- --
Change in operating assets and
liabilities:
Accounts and notes receivable (1,091) (11,146) 3,470 (434) (756) --
Inventories (599) 6,620 10,722 (102) 28 --
Prepaid expenses & other current
assets (5,368) 4,733 7,495
Accounts payable and accrued
expenses 8,793 25,528 (26,373) 434 756 --
Asbestos-related liabilities (27,220) (10,754) (21,233)
Asbestos-related reimbursement
from insurance settlement 6,091 -- 2,466
Noncontrolling interests 742 107 174
Other (2,299) (3,046) (1,050)
--------------------------------------------------------
Net cash provided (used) by operating 3,478 40,051 (8,947) -- -- --
activities of continuing operations
Net cash (used) provided by operating
activities of discontinued operations (289) (1,002) 1,693
--------------------------------------------------------
Net cash provided (used) by
operating activities $ 3,189 $ 39,049 $ (7,254) $ -- $ -- $ --
========================================================
Congoleum American Biltrite
2005 2004 2003 2005 2004 2003
----------------------------------------------------------------
Operating activities
Net (loss) income $(21,575) $ 2,948 $ (6,762) $ 3,840 $ (967) $(7,396)
Net loss from discontinued operation 237 429 7,361
-----------------------------------------------------------------
Net (loss) income from continuing
operations (21,575) 2,948 (6,762) 4,077 (538) (35)
Adjustments to reconcile net (loss)
income to net cash provided
(used) by operating activities:
Depreciation and amortization 11,002 11,428 11,761 5,466 6,111 6,265
Provision for doubtful accounts
and discounts 2,922 2,631 2,691
Deferred income taxes -- -- (882) (588) 457 (1,361)
Asbestos-related charge 25,326 5,000 3,705
Gain on sale of property (2,303) -- -
Change in operating assets and
liabilities:
Accounts and notes receivable 529 (4,061) 3,473 (1,186) (6,329) (3)
Inventories 5,016 5,372 5,730 (5,513) 1,220 4,992
Prepaid expenses & other current
assets (3,160) 2,340 1,920 (2,208) 2,393 5,575
Accounts payable and accrued
expenses 7,866 21,894 (18,469) 493 2,878 (7,904)
Asbestos-related liabilities (27,220) (10,754) (21,233)
Asbestos-related reimbursement
from insurance settlement 6,091 -- 2,466
Noncontrolling interests 742 107 174
Other (2,315) (3,102) (1,664) 16 56 614
-----------------------------------------------------------------
Net cash provided (used) by operating
activities of continuing operations 1,560 31,065 (19,955) 1,918 8,986 11,008
Net cash (used) provided by operating
activities of discontinued operations (289) (1,002) 1,693
-----------------------------------------------------------------
Net cash provided (used) by
operating activities $ 1,560 $ 31,065 $(19,955) $ 1,629 $ 7,984 $12,701
=================================================================
See accompanying notes.
53
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows with Consolidating Details -
Investing & Financing Activities
(In thousands of dollars)
(Revised, See Note 1)
Years Ended December 31 Eliminations
2005 2004 2003 2005 2004 2003
-----------------------------------------------------------
Investing activities
Investments in property, plant and
equipment $(6,885) $(5,855) $(7,445)
Proceeds from sale of property 2,327 30 --
Acquisition (1,400) -- --
-----------------------------------------------------------
Net cash used by investing activities
of continuing operations (5,958) (5,825) (7,445)
Net cash provided by investing
activities of discontinued operations -- -- 369
-----------------------------------------------------------
Net cash used by investing activities (5,958) (5,825) (7,076)
Financing activities
Net short-term borrowings (payments) 1,742 (1,675) 2,586
Payments on long-term debt (2,748) (941) (1,203)
Net change in restricted cash (2,408) 605 (1,757)
Dividends paid -- -- (645)
Exercise of subsidiary stock options 20 1 --
-----------------------------------------------------------
Net cash (used) provided by financing
activities of continuing operations (3,394) (2,010) (1,019)
Net cash provided by financing
activities of discontinued operations -- -- 1,007
-----------------------------------------------------------
Net cash (used) provided by financing
activities (3,394) (2,010) (12)
Effect of foreign exchange rate changes
on cash 656 (482) (1,859)
-----------------------------------------------------------
Net (decrease) increase in cash (5,507) 30,732 (16,201)
Cash and cash equivalents at beginning
of year 34,691 3,959 20,160
-----------------------------------------------------------
Cash and cash equivalents at end of year $29,184 $34,691 $ 3,959
===========================================================
Congoleum American Biltrite
2005 2004 2003 2005 2004 2003
-----------------------------------------------------------------
Investing activities
Investments in property, plant and
equipment $(4,274) $(3,428) $ (4,628) $(2,611) $(2,427) $(2,817)
Proceeds from sale of property -- 30 -- 2,327 -- --
Acquisition (1,400) -- --
-----------------------------------------------------------------
Net cash used by investing activities
of continuing operations (4,274) (3,398) (4,628) (1,684) (2,427) (2,817)
Net cash provided by investing
activities of discontinued operations -- -- 369
-----------------------------------------------------------------
Net cash used by investing activities (4,274) (3,398) (4,628) (1,684) (2,427) (2,448)
Financing activities
Net short-term borrowings (payments) (97) (732) 10,232 1,839 (943) (7,646)
Payments on long-term debt (2,748) (941) (1,203)
Net change in restricted cash (2,408) 605 (1,757)
Dividends paid -- -- (645)
Exercise of subsidiary stock options 20 1 --
-----------------------------------------------------------------
Net cash (used) provided by financing
activities of continuing operations (2,485) (126) 8,475 (909) (1,884) (9,494)
Net cash provided by financing
activities of discontinued operations -- -- 1,007
-----------------------------------------------------------------
Net cash (used) provided by financing
activities (2,485) (126) 8,475 (909) (1,884) (8,487)
Effect of foreign exchange rate changes
on cash 656 (482) (1,859)
-----------------------------------------------------------------
Net (decrease) increase in cash (5,199) 27,541 (16,108) (308) 3,191 (93)
Cash and cash equivalents at beginning
of year 29,710 2,169 18,277 4,981 1,790 1,883
-----------------------------------------------------------------
Cash and cash equivalents at end of year $24,511 $29,710 $ 2,169 $ 4,673 $ 4,981 $ 1,790
=================================================================
See accompanying notes.
54
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands of dollars, except per share amounts)
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Loss Stock Equity
--------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 46 $19,548 $ 62,376 $(19,300) $(15,132) $ 47,538
Comprehensive loss:
Net loss for 2003 (14,158) (14,158)
Other comprehensive income 244 244
-----------
Total comprehensive loss (13,914)
Dividends declared ($.1875 per share) (645) (645)
--------------------------------------------------------------------------------------------
Balance at December 31, 2003 46 19,548 47,573 (19,056) (15,132) 32,979
Comprehensive income:
Net income for 2004 1,953 1,953
Other comprehensive income 3,140 3,140
-----------
Total comprehensive income 5,093
--------------------------------------------------------------------------------------------
Balance at December 31, 2004 46 19,548 49,526 (15,916) (15,132) 38,072
Comprehensive loss:
Net loss for 2005 (17,633) (17,633)
Other comprehensive loss (1,996) (1,996)
-----------
Total comprehensive loss (19,629)
Stock compensation 22 22
Effect of Congoleum stock option
exercises 20 20
--------------------------------------------------------------------------------------------
Balance at December 31, 2005 $ 46 $19,570 $ 31,913 $(17,912) $(15,132) $ 18,485
============================================================================================
See accompanying notes.
55
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of American Biltrite
Inc. and its wholly-owned subsidiaries (referred to as "ABI" or the "Company"),
as well as entities over which it has voting control. In 1995, ABI gained voting
control over Congoleum Corporation ("Congoleum") and K&M Associates L.P.
("K&M"). Upon consolidation, intercompany accounts and transactions, including
transactions with associated companies that result in intercompany profit, are
eliminated.
As discussed more fully below and elsewhere in these footnotes, the Company's
subsidiary Congoleum filed for bankruptcy protection on December 31, 2003. The
accompanying consolidated financial statements include the results for Congoleum
for all periods presented. Congoleum's results include losses (including other
comprehensive losses) of $45.0 million in excess of the value of ABI's
investment in Congoleum at December 31, 2005. ABI continues to own a majority of
the voting stock of Congoleum. The Company expects to continue to control
Congoleum while it is in bankruptcy. Additionally, under the terms of
Congoleum's Eighth Plan, which remains subject to Bankruptcy Court approval and
numerous other conditions, ABI would continue to maintain voting control,
although its interest in Congoleum would be diluted by the issuance of
additional Congoleum Class A Common Stock to the Plan Trust. Congoleum believes
that its bankruptcy proceeding could be concluded during 2006. 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 (including
its non-debtor subsidiaries) and Congoleum, which may be more meaningful for
certain analyses.
As more fully discussed in Notes 8 and 9 of Notes to Consolidated Financial
Statements, the Company's subsidiary Congoleum is a party to a significant
number of lawsuits stemming from its manufacture of asbestos-containing products
and is seeking confirmation of a plan of reorganization under Chapter 11 of the
United States Bankruptcy Code as part of its strategy to resolve this liability.
As part of Congoleum's plan of reorganization, ABI expects that Congoleum's
indemnification obligations to ABI with respect to current and future asbestos
personal injury claims related to ABI's former Tile Division operations not
covered by ABI insurance will be channeled to the plan trust established under
section 524(g) of the Bankruptcy Code pursuant to Congoleum's Chapter 11 plan of
reorganization. However, Congoleum's current plan of reorganization does not
provide that any other asbestos claims that may be asserted against ABI would be
channeled to the Plan Trust.
56
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
ABI and Congoleum expect to contribute, among other things, to the plan trust
that would be established pursuant to Congoleum's Chapter 11 reorganization $250
thousand in cash from ABI, approximately $7.7 million in cash from Congoleum's
3.8 million shares of newly issued Class A Common stock from Congoleum, and a
security from Congoleum in an aggregate principal or redemption amount equal to
approximately 36% of the equity value of Congoleum one year after its
reorganization plan goes effective. ABI does not expect that Congoleum's
contribution to the plan trust would have a material adverse effect on ABI's
liquidity or capital resources. The initial principal or redemption amount of
the security that Congoleum will contribute to the trust under the proposed plan
is $2.7 million but is subject to increase based upon the average equity value
of Congoleum during the 90 consecutive trading days ending on the first
anniversary of the effective date of Congoleum's confirmed Chapter 11 plan of
reorganization, which could be materially higher.
For more information regarding Congoleum's and ABI's asbestos liabilities and
plans for resolving those liabilities, please refer to Notes 8 and 9 of Notes to
Consolidated Financial Statements.
AICPA 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.
The Company implemented this guidance in consolidated financial statements for
periods after December 31, 2003.
Pursuant to SOP 90-7, companies 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. Substantially all of Congoleum's liabilities as of
December 31, 2003 have been reclassified as liabilities subject to compromise.
Obligations arising post-petition, and pre-petition obligations that are
secured, are not classified as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Included in other assets on the accompanying balance sheets is ABI's investment
in Compania Hulera Sula, S.A., a 50%-owned venture. The investment is accounted
for on the cost method due to the uncertainty of the political climate and
currency restrictions in Honduras.
57
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Use of Estimates and Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent liabilities, at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Some of the more significant estimates
include asbestos liabilities, environmental contingencies, valuation of deferred
tax assets, and actuarial assumptions for the pension plan and post-retirement
benefits. Although the Company believes it uses reasonable and appropriate
estimates and assumptions in the preparation of its financial statements and in
the application of accounting policies, if business conditions were different,
or if the Company used different estimates and assumptions, it is possible that
actual results could differ from such estimates.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses in previous
years have generally been within management's expectations. For the years ended
December 31, 2005, 2004 and 2003, the Company had two customers that accounted
for 36%, 37%, and 35% of net sales, respectively. At December 31, 2005 and 2004,
one customer accounted for 13% and 18% of trade receivables outstanding,
respectively. Also at December 31, 2005 and 2004 another customer accounted for
10% and 15% of trade receivables outstanding, respectively.
Cash
Cash equivalents represent highly liquid investments with maturities of three
months or less at the date of purchase. The carrying value of cash equivalents
approximates fair value.
Under the terms of Congoleum's revolving credit agreement, payments on its
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. Restricted cash includes funds deposited in this account but not
immediately applied to the loan balance.
58
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts is determined based on a variety
of factors that affect the potential collectibility of the related receivables,
including length of time receivables are past due, customer credit ratings,
financial stability of customers, specific one-time events and past customer
history. In addition, in circumstances where the Company is made aware of a
specific customer's inability to meet its financial obligations, a specific
allowance is established. The majority of accounts are individually evaluated on
a regular basis and appropriate reserves are established as deemed appropriate
based on the criteria previously mentioned. The remainder of the reserve is
based on management's estimates and takes into consideration historical trends,
market conditions and the composition of the Company's customer base.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for most of the Company's domestic inventories.
The use of LIFO results in a better matching of costs and revenues. Cost is
determined by the first-in, first-out (FIFO) method for the Company's foreign
inventories. The Company records as a charge to cost of products sold any
amounts required to reduce the carrying value of inventories to net realizable
value.
Inventory costs include expenses that are directly or indirectly incurred in the
acquisition and production of merchandise and manufactured products for sale.
Expenses include the cost of materials and supplies used in production, direct
labor costs and allocated overhead costs such as depreciation, utilities,
insurance, employee benefits, and indirect labor.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for
improvements that increase asset values and extend useful lives are capitalized.
Depreciation, which is determined using the straight-line method, is provided
over the estimated useful lives (thirty to forty years for buildings and
building improvements, ten to fifteen years for production equipment and
heavy-duty vehicles, and three to ten years for light-duty vehicles and office
furnishings and equipment).
Debt Issue Costs
Costs incurred in connection with the issuance of debt have been capitalized and
are being amortized over the life of the related debt agreements. Debt issue
costs at December 31, 2005 and 2004 amounted to $0.8 million and $1.2 million,
respectively, net of accumulated amortization of $2.5 million and $2.6 million,
respectively, and are included in other noncurrent assets.
59
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of acquisition costs over the estimated fair
value of the net assets acquired and was amortized through year-end 2002 using
the straight-line method principally over 40 years. The Company evaluates the
recoverability of goodwill and indefinite-lived intangible assets annually in
the fourth quarter, or more frequently if events or changes in circumstances,
such as a decline in sales, earnings, or cash flows, or material adverse changes
in the business climate, indicate that the carrying value of an asset might be
impaired. Goodwill is considered to be impaired when the net book value of a
reporting unit exceeds its estimated fair value. The Company completed its
annual impairment test in the fourth quarter of 2005 and concluded that no
adjustment was required to the carrying value of goodwill based on the analysis
performed.
During the fourth quarter of 2005, the Company acquired certain assets and
assumed certain liabilities of Jay Jewelry, a Florida distributor of costume
jewelry (see Note 15). Goodwill of $426 thousand was recorded for this
acquisition.
Impairment of Long-Lived Assets
The Company assesses its long-lived assets other than goodwill and
indefinite-lived assets for impairment whenever facts and circumstances indicate
that the carrying amount may not be fully recoverable. To analyze
recoverability, it projects undiscounted net future cash flows over the
remaining life of such assets. If these projected cash flows are less than the
carrying amount, an impairment would be recognized, resulting in a write-down of
the assets with a corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amount and the fair
value of the assets.
Product Warranties
The Company provides product warranties for specific product lines and accrues
for estimated future warranty cost in the period in which the revenue is
recognized. The following table sets forth activity in the Company's warranty
reserves (in thousands):
2005 2004 2003
--------------------------------
Beginning balance $3,039 $ 3,554 $ 3,095
Accruals 4,318 5,280 7,588
Charges (4,814) (5,795) (7,129)
--------------------------------
Ending balance $2,543 $ 3,039 $ 3,554
================================
60
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Environmental and Product Liabilities
The Company accrues for costs associated with its environmental claims when it
is probable that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on an evaluation
of currently available facts with respect to each individual site, including the
extent of clean-up activities to be performed, the methods employed in the
clean-up activities, the Company's relative share in costs at sites where other
parties are involved, existing technology, current laws and regulations and
prior remediation experience. Where no amount within a range of estimates is
more likely to occur than another, the minimum is accrued. For sites with
multiple potentially responsible parties, the Company considers its likely
proportionate share of the anticipated remediation costs and the ability of the
other parties to fulfill their obligations in establishing a provision for those
costs. When future liabilities are determined to be reimbursable by insurance
coverage or other reimbursement, an accrual is recorded for the potential
liability and a receivable is recorded related to the expected recovery. A
receivable reserve is recorded when recoveries are disputed or are not highly
probable. Legal fees associated with these claims are accrued when the Company
deems that their occurrence is probable and the fees are reasonably estimable
(see Notes 4, 6 and 8).
Asbestos Liabilities and Congoleum Plan of Reorganization
The Company is a party to a number of lawsuits stemming from its manufacture of
asbestos-containing products. The Company records a liability and a
corresponding insurance receivable based on its estimates of the future costs
and related insurance recoveries to settle asbestos litigation. In estimating
the Company's asbestos-related exposures, the Company analyzes and considers the
possibility of any uncertainties including the anticipated costs to settle
claims, the claims dismissal rate, the number of claims expected to be received,
the applicability and allocation of insurance coverage to these costs, and the
solvency of insurance carriers. The same factors that affect developing
forecasts of potential indemnity costs for asbestos-related liabilities also
affect estimates of the total amount of insurance that is probable of recovery,
as do a number of additional factors. These additional factors include the
financial viability of some of the insurance companies, the method in which
losses will be allocated to the various insurance policies and the years covered
by those policies, how legal and other loss handling costs will be covered by
the insurance policies, and interpretation of the effect on coverage of various
policy terms and limits and their interrelationships.
61
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Company's subsidiary Congoleum is a defendant in a large number of
asbestos-related lawsuits and is seeking confirmation of a plan of
reorganization under Chapter 11 of the United States Bankruptcy Code as part of
its strategy to resolve this liability (see Notes 8 and 9). The recorded
liability for Congoleum's asbestos-related exposures is based on the minimum
estimated cost to resolve these liabilities through the proposed plan of
reorganization.
Accounting for asbestos-related costs includes significant assumptions and
estimates, and actual results could differ materially from the estimates
recorded.
Revenue Recognition
Revenue is recognized when products are shipped and title has passed to the
customer. Net sales are comprised of the total sales billed during the period
less the sales value of estimated returns and sales incentives, which consist
primarily of trade discounts and customers' allowances. The Company defers
recognition of revenue for its estimate of potential sales returns under
right-of-return agreements with its customers until the right-of-return period
lapses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are charged to income as incurred.
Expenses incurred for promoting and selling products are classified as selling
expenses and include such items as advertising, sales commissions and travel.
Advertising expense (including cooperative advertising) amounted to $2.3
million, $2.4 million and $4.1 million for 2005, 2004 and 2003, respectively.
General and administrative expenses include such items as officers' salaries,
office supplies, insurance and office rental. In addition, general and
administrative expenses include other operating items such as provision for
doubtful accounts, professional (accounting and legal) fees, and environmental
remediation costs. The Company also records shipping, handling, purchasing and
finished goods inspection costs in general and administrative expenses. Shipping
and handling costs for the years ended December 31, 2005, 2004 and 2003 were
$7.9 million, $7.3 million and $6.5 million, respectively. Purchasing and
finished goods inspection costs were $2.3 million, $2.7 million and $2.9 million
for 2005, 2004 and 2003, respectively.
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes, the Company
recognizes deferred income taxes based on the expected future tax consequences
of differences between the financial statement basis and the tax basis of assets
and liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
62
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Company reduces its deferred tax assets by a valuation allowance if, based
upon the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Relevant
evidence, both positive and negative, is considered in determining the need for
a valuation allowance. Information evaluated includes the Company's financial
position and results of operations for the current and preceding years as well
as an evaluation of currently available information about future years.
The Company operates within multiple taxing jurisdictions and could be subject
to audit in these jurisdictions. These audits can involve complex issues, which
may require an extended period of time to resolve and may cover multiple years.
In the Company's opinion, adequate provisions for income taxes have been made
for all years subject to audit.
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.
On November 10, 2005, 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 $22
63
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
thousand. The charge was recognized by the Company in November 2005. The
Company's pro forma disclosure for 2005 includes the aggregate effect of the
accelerated vesting of $479 thousand, net of taxes, 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. The Company has disclosed 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.
The fair value for the ABI options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2005, 2004 and 2003, respectively: risk-free interest rate of
3.96%, 4.53% and 4.31%, expected dividend yield of zero percent for 2005 and
2004 and 3.00% for 2003, volatility factor of the expected market price of the
Company's common stock of .302, .347 and .286, and a weighted-average expected
life of the options of seven and one-half years.
The weighted-average fair value of options granted under ABI's 1999 Stock Award
and Incentive Plan for Directors during 2005, 2004 and 2003 was $3.95, $4.58 and
$1.90, respectively.
For purposes of pro forma disclosures, the estimated fair value of the ABI
options is amortized to expense over the options' vesting period. The estimated
pro forma compensation expense for 2005 includes the aggregate compensation
expense that would have 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. This expense was eliminated because of the
accelerated vesting of outstanding options in November 2005.
The Company's pro forma information follows (in thousands, except per share
amounts):
Years ended December 31
2005 2004 2003
---------------------------------
Net (loss) income $(17,633) $1,953 $(14,158)
Estimated pro forma compensation expense
from stock options, net of taxes (720) (105) (18)
---------------------------------
Pro forma net (loss) income $(18,353) $1,848 $(14,176)
=================================
Pro forma (loss) income per share:
Basic $ (5.33) $ 0.54 $ (4.12)
Diluted (5.33) 0.53 (4.12)
64
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Research and Development Costs
Expenditures relating to the development of new products are charged to
operations as incurred and amounted to $6.3 million, $5.8 million and $4.8
million for the years ended December 31, 2005, 2004 and 2003, respectively.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the applicable
local currency. Balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate, and income statement items are translated at the
average exchange rate for the period; resulting translation adjustments are made
directly to accumulated other comprehensive income (loss) in stockholders'
equity. Realized exchange gains and losses (immaterial in amount) are included
in current operations.
Issuances of Stock by Subsidiaries
The Company accounts for issuances of stock by its subsidiaries as capital
transactions.
Earnings Per Share
Basic earnings per share have been computed based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share have
been computed based upon the weighted-average number of common shares
outstanding during the year, adjusted for the dilutive effect of shares issuable
upon the exercise of stock options (common stock equivalent) unless their
inclusion would be antidilutive. In calculating diluted earnings per share, the
dilutive effect of a stock option is computed using the average market price for
the period.
Under its stock option plans, Congoleum grants stock options to employees and
non-employee directors. Congoleum's outstanding stock options may have a
dilutive effect on American Biltrite's earnings per share. The dilutive effect
of Congoleum's stock options is determined based on Congoleum's diluted earnings
per share and the number of shares of Congoleum stock owned by American
Biltrite.
65
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Recently Issued Accounting Principles
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151 Inventory Costs, an amendment of ARB No. 43, Chapter 4 ("SFAS 151").
SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and spoilage. In additions, SFAS 151 requires that
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of SFAS 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of SFAS 151 will not have a material impact on the
Company's results of operations and financial position.
Reclassifications
Certain amounts in prior years have been reclassified to permit comparison with
2005 classifications. In 2005, the Company has separately disclosed the
operating, investing and financing portions of the cash flows attributed to its
discontinued operations (see Note 16), which in prior periods were reported on a
combined basis as a single amount.
2. Inventories
Inventories at December 31 consisted of the following (in thousands):
2005 2004
----------------------
Finished goods $50,515 $54,597
Work-in-process 10,370 9,207
Raw materials and supplies 16,242 12,232
----------------------
$77,127 $76,036
======================
At December 31, 2005, domestic inventories determined by the LIFO inventory
method amounted to $44.1 million ($47.6 million at December 31, 2004). If the
FIFO inventory method, which approximates replacement cost, had been used for
these inventories, they would have been $3.8 million and $0.9 million higher at
December 31, 2005 and 2004, respectively. During 2005, 2004 and 2003, certain
inventory quantities were reduced, which resulted in liquidations of LIFO
inventory layers. The effect of the liquidations was to increase cost of sales
by $445 thousand for 2005, decrease cost of sales by $109 thousand for 2004, and
increase cost of sales by $175 thousand for 2003.
66
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property, Plant and Equipment
A summary of the major components of property, plant and equipment at December
31 is as follows (in thousands):
2005 2004
-------------------------
Land and improvements $ 5,526 $ 5,526
Buildings 75,162 74,690
Machinery and equipment 270,203 267,620
Construction-in-progress 5,467 2,289
-------------------------
356,358 350,125
Less accumulated depreciation 241,022 226,055
-------------------------
$115,336 $124,070
=========================
Interest is capitalized in connection with the construction of major facilities.
Capitalized interest is recorded as part of the asset to which it relates and is
amortized over the asset's estimated useful life. Capitalized interest costs
were approximately $100 thousand for 2005, $200 thousand for 2004 and $300
thousand for 2003.
Depreciation expense amounted to $16.0 million, $17.0 million and $17.4 million
in 2005, 2004 and 2003, respectively.
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 (before non-controlling interest) was recognized and
included in other income in the first quarter of 2005.
67
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Accrued Expenses
Accrued expenses at December 31 consisted of the following (in thousands):
2005 2004
------------------------
Accrued advertising and sales promotions $24,089 $24,260
Employee compensation and related benefits 9,499 9,138
Interest 265 191
Environmental liabilities 1,124 1,000
Royalties 806 1,118
Income taxes 1,330 3,709
Other 5,863 9,189
------------------------
$42,976 $48,605
========================
As a result of Congoleum's Chapter 11 bankruptcy filing and in accordance with
SOP 90-7, certain liabilities are included in liabilities subject to compromise
on the balance sheet as of December 31, 2005 and 2004 (see Note 9).
5. Financing Arrangements
Long-term debt at December 31 consisted of the following (in thousands):
2005 2004
-----------------------
Note Purchase Agreement $20,000 $20,000
Other Notes 2,414 4,201
-----------------------
22,414 24,201
Less current portion 20,451 21,411
-----------------------
$ 1,963 $ 2,790
=======================
Note Purchase Agreement
American Biltrite Inc. is a party to a debt agreement (the "Note Agreement")
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
68
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
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 and fourth quarters 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.
The total amount of the Notes have been classified as a current obligation
because the Company must extend or replace the Credit Agreement described below
by September 30, 2006. A default by the Company under the Credit Agreement would
result in a cross-default under the Note Agreement. The Company expects the
Credit Agreement will be extended or replaced by September 30, 2006, and that it
will obtain a modification or waiver of covenants as needed prior to such
extension or replacement, as well as a modification of the covenants under the
Note Agreement.
Other Notes
In 1998, the Company obtained loans from local banks in connection with the
acquisition of buildings in Belgium and Singapore. The loans were for 25,000
Belgian francs (US $681 thousand at the foreign currency exchange rate in effect
when the loan was entered into) and 2,700 Singapore dollars (US $1.5 million at
the foreign currency exchange rate in effect when the loan was obtained). The
loans are payable in equal installments through 2008 and 2018, respectively. The
interest rates on the loans are 5.6% for the Belgian loan and 1.5% above the
local bank's prime rate (5.0% at December 31, 2005) for the Singapore loan. The
loans are secured by the property acquired.
The Company, through a Canadian subsidiary, was party to a credit agreement (the
"Canadian Credit Agreement") providing a $7.5 million Canadian dollar (US$4.7
million at the foreign currency exchange rate in effect when the credit
agreement was obtained) capital loan and an operating loan facility of $10.0
million Canadian dollars. At December 31, 2004, the amounts outstanding on the
capital loan and operating loan facility were $2.6 million and $7.5 million,
respectively. In May 2005, the Company repaid the borrowings under the Canadian
Credit Agreement with proceeds of borrowings under the credit facility under an
amended credit agreement with Fleet National Bank (see below). The Canadian
Credit Agreement is no longer in effect.
69
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
Revolving Credit Agreement
American Biltrite Inc. is party to a credit agreement (the "Credit Facility")
with Fleet National Bank, a Bank of America company ("BofA"), 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. 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. At December 31, 2005, $9.7
million was outstanding under this credit facility, and outstanding letters of
credit totaled $1.4 million. Unused borrowing availability under this agreement
at December 31, 2005 was $8.9 million.
Interest is payable quarterly on domestic revolving loans borrowed by American
Biltrite Inc. and K&M Associates L.P. under the Credit Facility 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 BofA'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 BofA elects to make a fixed rate
option available, whether interest on revolving loans will be calculated based
on a fixed rate.
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
70
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
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 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. Although the Company expects
that the Credit Facility will be extended or replaced by that date, and that it
will obtain a modification or waiver of covenants as needed prior to such
extension or replacement, as well as a modification of the covenants under the
Note Agreement, there can be no assurances in this regard.
Debt Covenants
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,
71
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
taxes, depreciation and amortization 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 BofA, 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 or the assets of
the Company's subsidiary Congoleum. 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.
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
72
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
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.
The credit agreement governing the Company's Credit Facility includes a covenant
that takes effect for periods after June 30, 2006 that the Company does not
anticipate it will meet, and the Company also does not anticipate it will meet
certain covenants under the Note Agreement that take effect September 30, 2006.
Pursuant to the terms of those agreements, a default by the Company under one of
those agreements triggers a cross-default under the other agreement. The Company
expects it will obtain a modification or waiver of covenants as needed prior to
an extension or replacement of the Credit Facility, as well as a modification of
the covenants under the Note Agreement.
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
December 31, 2006 with borrowings up to $30 million. 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. 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 December 31, 2005.
Borrowings under this facility are collateralized by inventory and receivables.
At December 31, 2005, based on the level of receivables and inventory, $16.8
million was available under the facility, of which $4.4 million was utilized for
outstanding letters of credit and $9.4 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 and effectiveness of its plan of reorganization. While
73
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
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 its expiration if Congoleum's
plan of reorganization is not confirmed before that time.
The terms of certain of the Company's loan agreements include restrictions on
incurring additional indebtedness, restrictions on some types of payments
including dividends, and limitations on capital expenditures. Certain agreements
also have covenants requiring maintenance of minimum net worth levels, current
ratios, and fixed charge coverage ratios and maximum debt levels and debt to
EBITDA ratios. Retained earnings, which were unrestricted as to such
distributions, amounted to $2.9 million at December 31, 2005.
Interest paid on all outstanding debt amounted to $3.2 million in 2005, $3.3
million in 2004 and $11.5 million in 2003. As noted above, in connection with
its Chapter 11 bankruptcy proceedings, Congoleum did not pay the interest due on
its $100 million 8 5/8% Senior Notes during 2005 and 2004.
Principal payments on the Company's long-term debt obligations (other than
Congoleum debt classified as liability subject to compromise) due in each of the
next five years are as follows (in thousands):
2006 $4,451
2007 4,491
2008 4,414
2009 4,082
2010 4,085
2011 and thereafter 891
The amounts above include five annual payments of $4 million, beginning August
2006, for the $20 million of notes outstanding under the Note Agreement. As
discussed above, the total amount of the Notes has been classified as a current
obligation because the Company must extend or replace the Credit Agreement by
September 30, 2006.
74
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
8 5/8% Senior Notes due 2008
On August 3, 1998, Congoleum issued $100 million of 8 5/8% Senior Notes maturing
August 1, 2008 priced at 99.505 to yield 8.70%. The Senior Notes are redeemable
at the option of Congoleum, in whole or in part, at any time on or after August
1, 2003 at predetermined redemption prices (ranging from 104% to 100%), plus
accrued and unpaid interest to date of redemption. The Indenture under which the
notes were issued includes certain restrictions on additional indebtedness and
uses of cash, including dividend payments. During 2003, the indenture was
amended to explicitly permit Congoleum to take steps in connection with
preparing and filing its prepackaged plan of reorganization under Chapter 11 of
the Bankruptcy Code. In addition, due to the Chapter 11 proceedings, Congoleum
was precluded from making the interest payments on the Senior Notes due in
February and August of both 2005 and 2004 and February 2006. The amount of
accrued interest that was not paid on the Senior Notes as of December 31, 2005
was approximately $17.3 million (not including accrued interest on overdue
interest). The amount of interest accrued at December 31, 2005 and 2004 was
approximately $19.0 million and $12.7 million, respectively. As of December 31,
2005 and 2004, the principal amount of the Senior Notes, net of unamortized
original issue discount, was $99.9 million and $99.8 million, respectively.
These amounts, plus accrued interest, are included in liabilities subject to
compromise on the balance sheet.
6. Other Liabilities
Other liabilities at December 31 consisted of the following (in thousands):
2005 2004
--------------------
Pension benefit obligations (less current portion) $ 2,557 $ 2,615
Environmental remediation and product related liabilities 4,259 4,680
Deferred income taxes 21,343 16,531
Other 1,466 1,411
--------------------
$29,625 $25,237
====================
As a result of Congoleum's Chapter 11 bankruptcy filing and in accordance with
SOP 90-7, certain liabilities are included in liabilities subject to compromise
on the balance sheet as of December 31, 2005 and 2004 (see Note 9).
75
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans
The Company sponsors several noncontributory defined benefit pension plans
covering most of the Company's employees. Benefits under the plan are based on
years of service and employee compensation. Amounts funded annually by the
Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below under "Other Benefits").
The following summarizes the change in the benefit obligation, the change in
plan assets, the funded status and reconciliation to the amounts recognized in
the balance sheets for the pension benefits and other benefits plans. The
measurement date for all items set forth below is the last day of the fiscal
year presented.
Pension Benefits Other Benefits
2005 2004 2005 2004
--------------------------- ---------------------------
(In thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 94,957 $ 94,037 $ 8,542 $ 9,177
Service cost 1,991 1,996 183 170
Interest cost 5,792 5,598 520 484
Plan participants contributions 156 168
Actuarial (gain) loss 4,242 (1,661) 212 (760)
Medicare Rx subsidy -- (74)
Foreign currency exchange rate changes 391 776
Benefits paid (5,834) (5,957) (469) (455)
--------------------------- ---------------------------
Benefit obligation at end of year $101,695 $ 94,957 $ 8,988 $ 8,542
=========================== ===========================
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 75,170 $ 68,175
Actual return on plan assets 4,639 6,160
Employer contribution 5,086 5,754
Plan participants contribution 156 168
Foreign currency exchange rate changes 395 870
Benefits paid (5,834) (5,957)
---------------------------
Fair value of plan assets at end of year $ 79,612 $ 75,170
===========================
Unfunded status $(22,084) $(19,787) $(8,988) $(8,542)
Unrecognized net actuarial loss 21,663 18,271 118 (35)
Unrecognized transition obligations 118 (281) 47 (141)
Unamortized prior service cost 937 852
--------------------------- ---------------------------
Accrued benefit cost $ 634 $ (945) $(8,823) $(8,718)
=========================== ===========================
Accumulated benefit obligation at end of year $ 93,274 $ 88,042
===========================
76
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
The weighted-average assumptions used to determine benefit obligation for the
pension benefits as of year-end were as follows:
2005 2004
------------- -------------
Discount rate 5.35% - 6.00% 6.10% - 6.25%
Expected long-term return on plan assets 7.00% - 7.50% 7.00% - 7.50%
Rate of compensation increase 4.00% - 5.00% 4.00% - 5.50%
The weighted-average discount rate used to determine the benefit obligation for
the Other Benefits as of year-end was 6.00% and 6.25% for 2005 and 2004,
respectively.
Some of the Company's pension plans have projected benefit obligations (PBO) and
accumulated benefit obligations (ABO) in excess of plan assets. The aggregate
benefit obligations and fair value of plans assets for such plans as of December
31, 2005 and 2004 are as follows (in thousands):
2005 2004
-------------------------
PBO greater than plan assets
Projected benefit obligation $ 88,365 $ 84,343
Fair value of plan assets 66,029 62,865
ABO greater than plan assets
Accumulated benefit obligation 83,955 80,046
Fair value of plan assets 66,029 62,865
The net amount for pension and other postretirement benefits recognized in the
balance sheet as of December 31, 2005 and 2004 are as follows (in thousands):
Pension Benefits Other Benefits
2005 2004 2005 2004
------------------------------------------------------
Accrued benefit liability $(19,636) $(19,552) $(8,823) $(8,718)
Accrued expenses (825) (166)
Prepaid benefit obligation -- --
Intangible asset 134 228
Deferred tax asset -- --
Accumulated other comprehensive loss 18,213 15,797
------------------------- -------------------------
Net amount recognized $ (2,114) $ (3,693) $(8,823) $(8,718)
========================= =========================
77
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
The accrued pension benefit liability includes Congoleum's pension liability of
$17.1 million and $16.9 million as of December 31, 2005 and 2004, respectively.
The accrued other benefits liability is Congoleum's liabilities for
post-retirement benefits. These amounts have been included in liabilities
subject to compromise as of December 31, 2005 and 2004 (see Note 9).
The components of net periodic benefit cost for the years ended December 31,
2005, 2004 and 2003 are as follows (in thousands):
Pension Benefits Other Benefits
2005 2004 2003 2005 2004 2003
------------------------------ -------------------------------
Service cost $ 1,991 $ 1,996 $ 1,854 $ 183 $ 170 $ 189
Interest cost 5,792 5,598 5,440 520 484 546
Expected return on plan assets (5,301) (4,832) (4,052)
Recognized net actuarial loss (gain) 1,225 1,375 1,499 59 49 34
Amortization of transition obligation (99) (114) (111)
Amortization of prior service cost (193) (198) (206) (188) (462) (462)
------------------------------ -------------------------------
Net periodic benefit cost $ 3,415 $ 3,825 $ 4,424 $ 574 $ 241 $ 307
============================== ===============================
The weighted-average assumptions used to determine net periodic benefit cost
related to the pension benefits were as follows:
2005 2004 2003
------------- ------------- -------------
Discount rate 6.10% - 6.25% 6.10% - 6.25% 6.25% - 6.75%
Expected long-term return on plan assets 7.00% - 7.50% 7.00% - 7.50% 7.00% - 7.50%
The weighted-average discount rate used to determine net periodic benefit cost
related to the Other Benefits was 6.25% for 2005 and 6.25% for 2004.
78
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
In developing the overall expected long-term return on plan assets assumption, a
building block approach was used in which rates of return in excess of inflation
were considered separately for equity securities, debt securities, and other
assets. The excess returns were weighted by the representative target allocation
and added along with an appropriate rate of inflation to develop the overall
expected long-term return on plan assets assumption. The Company believes this
determination is consistent with SFAS 87.
Assumed healthcare cost trend rates as of year-end were as follows:
December 31
2005 2004
-----------------
Healthcare cost trend rate assumed for next year 10.0% 9.0%
Ultimate healthcare cost trend rate 5.0% 5.0%
Year that the assumed rate reaches the ultimate rate 2011 2010
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for healthcare benefits. A one-percentage point change in assumed
healthcare cost trend rates would have the following effects (in thousands):
1 Percentage Point 1 Percentage Point
Increase Decrease
------------------ ------------------
Effect on total of service and interest cost components $ 61 $ 55
Effect on post-retirement benefit obligation 647 591
For the pension plan, the weighted-average asset allocation at December 31, 2005
and 2004, by asset category, are as follows:
December 31
2005 2004
------------------
Equity securities 59% 59%
Debt securities 37% 38%
Other 4% 3%
------------------
Total 100% 100%
==================
79
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
The Company has an investment strategy for the pension plan that emphasizes
total return; that is, the aggregate return from capital appreciation and
dividend and interest income. The primary investment management objective for
the plan's assets is long-term capital appreciation primarily through investment
in equity and debt securities with an emphasis on consistent growth;
specifically, growth in a manner that protects the Plan's assets from excessive
volatility in market value from year to year. The investment policy takes into
consideration the benefit obligations, including timing of distributions. The
Company selects professional money managers whose investment policies are
consistent with the Company's investment strategy and monitors their performance
against appropriate benchmarks. The Company's target asset allocation is
consistent with the weighted-average allocation at December 31, 2005.
Contributions
Congoleum expects to contribute $4.9 million to its pension plan and $0.5
million to its other postretirement plan in 2006. American Biltrite expects to
contribute $0.8 million to its pension plan in 2006.
Estimated Future Benefit Payments
The following benefit payments, which reflect future service as appropriate, are
expected to be paid. The benefit payments are based on the same assumptions used
to measure the Company's benefit obligation at the end of fiscal 2005.
Pension Other
Benefits Benefits
-------- --------
(In thousands)
2006 $ 6,181 $ 481
2007 6,334 539
2008 6,440 594
2009 6,623 605
2010 6,794 661
2011 - 2015 36,445 4,010
The Company also has three 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
to 20% of compensation with the Company partially matching contributions.
Defined contribution pension expense for the Company was $802 thousand, $982
thousand and $984 thousand for the years ended December 31, 2005, 2004 and 2003,
respectively.
80
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies
Leases
The Company occupies certain warehouse and office space and uses certain
equipment and motor vehicles under lease agreements expiring at various dates
through 2010. The leases generally require the Company to pay for utilities,
insurance, taxes and maintenance, and some contain renewal options. Total rent
expense charged to operations was $5.7 million in 2005, $6.0 million in 2004 and
$5.9 million in 2003.
Future minimum payments relating to operating leases are as follows (in
thousands):
2006 $ 4,290
2007 4,104
2008 3,539
2009 2,996
2010 2,210
Thereafter 311
---------------
Total future minimum lease payments $17,450
===============
Royalty and Advertising Commitments
K&M maintains certain license arrangements for branded jewelry products. Under
the terms of these arrangements, K&M must make minimum royalty and advertising
payments based on defined percentages of net sales during the license terms.
These arrangements also include guaranteed minimum yearly royalty and
advertising payments based either on minimum levels of net sales or fixed
payment amounts. At December 31, 2005, the Company's minimum royalty and
advertising payments for 2006 and 2007 were $2.4 million and $51 thousand,
respectively. No commitments have been made beyond 2007.
Environmental and Other Liabilities
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described in the following footnote. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts, and the
matters may remain unresolved for several years.
81
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
The Company records a liability for environmental remediation claims when it
becomes probable that the Company 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.
As of December 31, 2005 and 2004, liabilities of Congoleum comprised the
substantial majority of the environmental and other liabilities reported on the
Company's consolidated balance sheets as shown in the following table. As a
result of Congoleum's Chapter 11 bankruptcy filing and in accordance with SOP
90-7, certain liabilities are included in liabilities subject to compromise on
the balance sheet as of December 31, 2005 and 2004. 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 the discussion of ABI liabilities. However,
since Congoleum is included in ABI's consolidated financial statements, to the
extent that Congoleum incurs a liability or expense, it will be reflected in the
accompanying consolidated financial statements. Congoleum has filed a plan of
reorganization under Chapter 11 of the United States Bankruptcy Code as part of
a plan to resolve its asbestos-related liabilities. See Notes 1 and 9 for a
discussion of this subject.
The following table summarizes American Biltrite's and Congoleum's recorded
assets and liabilities for environmental, asbestos and other contingencies:
December 31
2005 2004
Liability Receivable Liability Receivable
---------------------------------------------------------
(In thousands)
American Biltrite
Environmental liabilities
Accrued expenses $ 1,124 $ 1,000
Other liabilities, non-current 4,259 4,680
Other assets, non-current -- $ 1,974 -- $ 2,118
--------------------------- --------------------------
5,383 1,974 5,680 2,118
Asbestos product liability
Asbestos-related liabilities, non-current 9,500 -- 7,500 --
Insurance for asbestos-related liabilities -- 8,950 -- 7,500
--------------------------- --------------------------
9,500 8,950 7,500 7,500
--------------------------- --------------------------
$14,883 $10,924 $13,180 $ 9,618
=========================== ==========================
82
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
December 31
2005 2004
Liability Receivable Liability Receivable
--------------------------- ---------------------------
(In thousands)
Congoleum
Environmental liabilities
Liabilities subject to compromise, current $ 640 $ 640
Liabilities subject to compromise, non-current 3,630 3,956
Other assets, non-current -- $ 1,910 -- $ 2,105
--------------------------- ---------------------------
4,270 1,910 4,596 2,105
Asbestos product liability
Asbestos-related liabilities, current 28,369 -- 21,079
Asbestos-related liabilities, non-current 2,738
Other assets, current -- 14,793 -- 1,509
Other assets, non-current -- 7,300
--------------------------- ---------------------------
28,369 14,793 23,817 8,809
Other
Liabilities subject to compromise, current 55 -- 854 --
Liabilities subject to compromise, non-current 1,056 -- 31 --
Other assets, non-current -- 265 -- 130
--------------------------- ---------------------------
1,111 265 885 130
--------------------------- ---------------------------
$33,750 $16,968 $29,298 $11,044
=========================== ===========================
Consolidated
Environmental liabilities
Accrued expenses $ 1,124 $ 1,000
Liabilities subject to compromise, current 640 640
Liabilities subject to compromise, non-current 3,630 3,956
Other liabilities, non-current 4,259 4,680
Other assets, non-current -- $ 3,884 -- $ 4,223
--------------------------- ---------------------------
9,653 3,884 10,276 4,223
Asbestos product liability
Asbestos-related liabilities, current 28,369 -- 21,079
Asbestos-related liabilities, non-current 9,500 -- 10,238
Other assets, current -- 14,793 -- 1,509
Insurance for asbestos-related liabilities -- 8,950 -- 7,500
Other assets, non-current -- -- -- 7,300
--------------------------- ---------------------------
37,869 23,743 31,317 16,309
Other
Liabilities subject to compromise, current 55 854 --
Liabilities subject to compromise, non-current 1,056 31 --
Other assets, non-current 265 -- 130
--------------------------- ---------------------------
1,111 265 885 130
--------------------------- ---------------------------
$48,633 $27,892 $42,478 $20,662
=========================== ===========================
83
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,703 pending claims involving
approximately 2,495 individuals as of December 31, 2005. These claims relate to
products of ABI's former Tile Division, which was previously acquired by
Congoleum. The claimants allege personal injury or death from exposure to
asbestos or asbestos-containing products. Activity related to asbestos claims
during the years ended December 31 was as follows:
2005 2004
------------------
Claims at January 1 1,838 1,954
New claims 621 678
Settlements (24) (20)
Dismissals (732) (774)
------------------
Claims at December 31 1,703 1,838
==================
The total indemnity costs incurred to settle claims were approximately $1.3
million for each of the years 2005 and 2004 and $270 thousand for 2003, all of
which were paid by ABI's insurance carriers, as were the related defense costs.
The average indemnity cost per resolved claim was approximately $1.7 thousand,
$2.0 thousand and $0.9 thousand in 2005, 2004 and 2003, respectively. 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 for indemnity
to 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 court dismissal rate of claims, 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. Changes in factors could have a material impact on the Company's
liability. For example, it is estimated that a 1% decrease in the Company's
dismissal rate would result in a 38% increase in liability assuming all other
variables remained constant.
84
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
The Company utilizes an actuarial study to assist it in developing estimates of
the Company's potential liability for resolving present and possible future
asbestos claims. Projecting future asbestos claim costs requires estimating
numerous variables that are extremely difficult to predict, including the
incidence of claims, the disease that may be alleged by future claimants, future
settlement and trial results, future court dismissal rates for claims, and
possible asbestos legislation developments. Furthermore, any predictions with
respect to these variables are subject to even greater uncertainty as the
projection period lengthens. In light of these inherent uncertainties, and based
upon consultations with third party advisors, the Company believes that five
years is the most reasonable period over which to include future claims that may
be brought against the Company for recognizing a reserve for future costs. The
Company believes that costs for claims that might be brought after that period
are not reasonably estimable.
The estimated range of liability for settlement of current claims pending and
claims anticipated to be filed through 2011 was $9.5 million to $18.8 million as
of December 31, 2005. The Company believes no amount within this range is more
likely than any other, and accordingly has recorded a liability of $9.5 million
in its financial statements which represents a probable and reasonably estimable
amount for the future liability at the present time. The Company also believes
that based on this liability estimate, the corresponding amount of insurance
probable of recovery is $9.0 million at December 31, 2005, which has been
included in other assets. The same factors that affect developing forecasts of
potential indemnity costs for asbestos-related liabilities also affect estimates
of the total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. These 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 asbestos legislation in the United
States, could cause the actual liability and insurance recoveries for the
Company to be higher or lower than those projected or recorded.
There can be no assurance that the Company's accrued asbestos liabilities will
approximate its actual asbestos-related settlement costs, or that its accrued
insurance recoveries will be realized. The Company believes that it is
reasonably possible that it will incur charges for resolution of asbestos claims
in the future, which could exceed the Company's existing reserves. The Company
will continue to vigorously defend itself and believes it has substantial
insurance coverage to mitigate future costs related to this matter.
85
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and proposed plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for claims 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.
ABI 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 five sites located in four separate
states. At one of the five sites, which is located in Southington, Connecticut,
(the "Southington Site"), an ABI subsidiary ("Ideal") is also named as a PRP. At
the Southington Site, the currently estimated aggregate future cost of
remediation and monitoring is between $34 million and $55 million. In addition,
the Environmental Protection Agency (the "EPA") has estimated its reimbursable
costs to be approximately $20 million. Subject to a final allocation among the
PRPs, ABI's and Ideal's aggregate share of the EPA's past costs and the future
remediation costs is currently estimated to be between $619 thousand and $860
thousand. Under an agreement, Ideal will share a percentage of this cost with
the former owner of Ideal's assets. Under an agreement between ABI and The
Biltrite Corporation ("TBC"), TBC is liable for 37.5% of the remediation costs
incurred by ABI with respect to the Southington Site.
At another site, ABI, together with a number of other PRPs, signed a consent
decree and site remediation agreement (the "Agreements"), which, without
admission of liability by the PRPs, requires remediation of the ILCO Superfund
site located in Leeds, Alabama (the "ILCO Site"). The currently estimated
aggregate future cost of remediation and associated transactional costs at the
ILCO Site ranges from $3.5 million to $5.5 million. Pursuant to a final
allocation among consent decree participants, ABI's share of the currently
estimated future remediation costs range from approximately $43 thousand to
about $95 thousand. These estimates consider commitments from de minimis and de
maximus settlors, the City of Leeds and its insurers, amounts currently held in
an escrow fund, a RCRA Closure Fund refund, and TBC's share, which by agreement
is 37.5% of the remediation costs incurred by ABI. A substantial share of ABI's
future remediation costs with respect to the ILCO site will be payable over the
next one to five years.
There are two EPA sites in Georgia. At one of the EPA sites, ABI has been named
along with seven other PRPs with respect to three neighborhood sites ("Sites")
in Atlanta, Georgia where properties within the boundaries of the Sites contain
lead in the surface soil in concentrations that exceed the EPA's residential
lead screening level. The EPA has requested that ABI sign an Administrative
Order on Consent ("AOC"). ABI has reviewed the EPA notification letter and the
AOC and is assessing its responsibility with respect to the Sites and whether it
86
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
is in its interest to sign the consent order. The former owners have signed an
AOC and will remediate the sites and seek contribution from the other PRPs. At
the other site in Fulton County (together with the "Sites," the "Georgia
Sites"), a former smelting and refinery site, ABI has not entered into any
negotiations with other PRP's or the site owner. ABI believes, based upon
current information available, that its liability at either site will not be
material. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
remediation costs, incurred by ABI at these Georgia Sites.
A lawsuit was brought by Olin Corporation, the present owner of a former
chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three 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, ABI held title to the property
directly.
In 2000, ABI and 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 $18.0 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 site after January 1, 1999, plus an annual
reimbursement of $100 thousand for Olin's internal costs. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of the costs that may be incurred
by ABI in connection with this lawsuit and 37.5% of the amounts due under the
settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the site. Olin has estimated that the total
response costs for 2006 will be approximately $7.2 million. ABI has estimated
total costs, including 2006, to be in the range of $15.7 million to $45.3
million. As of December 31, 2005, ABI has estimated its potential liability for
Olin to be in the range of $3.5 million to $10.8 million after allocation for
the annual reimbursement of $100 thousand for Olin's internal costs and before
any recoveries from insurance and TBC. Costs are expected to be paid over the
next ten years. In January 2006, the EPA assumed the responsibility for the
oversight of the Olin Site from the Massachusetts Department of Environmental
Protection.
The State of Maine Department of Environmental Protection ("Maine DEP") has put
Miller Industries, Inc, ("Miller") the present owner of a former 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 of 2005, a lawsuit was brought by Miller against ABI, which alleged
that ABI and one other named defendant were liable for costs to clean up a
dumpsite ("Parcel A") and a second parcel of land ("Parcel B"), which is alleged
87
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
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 was
seeking indemnification or contribution from ABI for the clean-up of both
parcels of land (together, the "Maine Sites"). The lawsuit was dismissed by the
Superior Court of Maine on February 3, 2006 for lack of subject matter
jurisdiction and failure to state a claim upon which relief can be granted. In
January 2006, ABI was notified by the Maine DEP that it is a PRP as to both
Parcel A and Parcel B.
Prior to the commencement of the lawsuit by Miller, ABI had been investigating
and reviewing the condition of the Parcel A and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
between approximately $1.2 million and $1.5 million. Prior to the filing of the
lawsuit, ABI was reviewing the condition of the Parcel B and its potential
liability for its share of any clean-up costs. ABI cannot determine at this time
the cost of site investigation, remediation, maintenance and monitoring for
Parcel B. ABI has been assessing the potential availability of insurance
coverage for such costs. ABI is not at this time 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.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA Sites and the state supervised
sites in Maine and Massachusetts. 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 four of its insurance carriers whereby the carriers have
reimbursed the Company $6.5 million for past and current environmental claims
and 37.5% of the amount of that reimbursement was shared with TBC pursuant to
the Company's agreement with TBC. Included in this insurance reimbursement is a
payment of $4.6 million by one carrier in December 2005. Another carrier has
agreed to reimburse the Company for 2.5% of the Company's liabilities regarding
the future environmental expenses related to the Olin Site, $57 thousand of
which was reimbursed through December 31, 2005 and 37.5% of the amount of that
reimbursement was shared with TBC pursuant to the Company's agreement with TBC.
ABI and one of its insurance carriers continue to discuss ABI's remaining
demands for insurance coverage for these sites.
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.
88
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
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 and cash flows of the
Company.
In accordance with SFAS No. 5, Accounting for Contingencies, as of December 31,
2005, ABI maintains a reserve of approximately $5.4 million, which represents a
probable and reasonably estimable amount to cover the anticipated remediation
costs described above based on facts and circumstances known to the Company at
the present time. The Company has also recorded a receivable of $2.0 million for
ABI's estimable and probable recoveries for the contingencies described above.
These projects tend to be long-term in nature, and these assumptions are subject
to refinement as facts change. As such, it is possible that the Company may need
to revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods. The Company closely monitors existing and potential
environmental matters to consider the reasonableness of its estimates and
assumptions.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and is
seeking confirmation of a plan of reorganization under Chapter 11 of the United
States Bankruptcy Code. See Note 9.
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
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 in connection with those sites depends on many factors, including the
volume of material contributed to the site, 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 from insurance. However, under CERCLA,
and certain other laws, as a PRP, the Company 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. EPA
recently selected a remedy for the soil and shallow groundwater; however, the
89
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
remedial investigation/feasibility study related to the deep groundwater
remediation has not been completed. The PRP group estimated that future costs of
the remedy 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 $700 thousand.
The majority of Congoleum's share of costs is presently being paid by one of its
insurance carriers, whose remaining policy limits for this claim will cover
approximately half this amount, with 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
cleanup costs of $1.6 million, including capital outlays and future maintenance
costs for soil and groundwater remediation, are primarily based on engineering
studies.
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 will not have a material adverse effect 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 financial position of Congoleum.
Other
In the ordinary course of its business, ABI and Congoleum become involved in
lawsuits, administrative proceedings, product liability 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.
90
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned 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.
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").
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%. In December 2005, Congoleum commenced
an avoidance action seeking to void the security interest granted to the
Collateral Trust.
Under the terms of the Eighth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under the Claimant
Agreement and related documents.
Under the terms of the Eighth 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 Eighth Plan.
91
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
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 (the "Fourth Plan") 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 Fourth
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 and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In February 2006, Congoleum filed the Seventh Plan. On February 27,
2006, Congoleum announced its intention to make additional changes to its plan
of reorganization, and on March 17, 2006 it filed the Eighth Plan. In addition,
an insurance company has filed the CNA Plan and the Official Committee of
Bondholders has filed the Bondholder Plan. The Bankruptcy Court has scheduled a
hearing to consider the adequacy of the disclosure statements of these plans for
April 27, 2006.
92
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
There can be no assurance that Congoleum will obtain approval to solicit
acceptances for the Eighth Plan, that Congoleum will receive the acceptances
necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be
modified further, that the Eighth 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 the Eighth Plan will be confirmed, or
that the Eighth Plan, if confirmed, will become effective. It is unclear whether
the Bankruptcy Court will approve the CNA Plan or the Bondholder Plan or whether
either of such plans, if confirmed, would be feasible. Moreover, it is unclear
whether any other person will attempt to propose a plan or what any such plan
would provide or propose, and whether the Bankruptcy Court would approve a plan
other than Congoleum's proposed plan.
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 are expected to file
objections to the Eighth Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eighth Plan.
During 2005, Congoleum 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. Payment is subject to various conditions, including without
limitation, 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. The Future
Claimants' Representative has appealed the approval order granted by the
Bankruptcy Court to the U.S. District Court, where it is pending. 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 have paid $21.5 million into an escrow account. The escrow agent will
93
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
transfer the funds to the Plan Trust once a plan goes effective and the
Bankruptcy Court approves the transfer of the funds. An insurer and the Future
Claimants' Representative have appealed the approval order granted by the
Bankruptcy Court to the U.S. District Court, where it is pending. In March 2006,
Congoleum entered into a settlement agreement with Harper Insurance Limited.
Under the terms of this settlement, Harper will pay $1.4 million to Congoleum or
the Plan Trust once certain conditions are satisfied, including the
effectiveness of a plan of reorganization containing the Section 524(g)
protection specified in the settlement agreement. A motion for Bankruptcy Court
approval of this settlement is pending. In addition to other uncertainties with
respect to payments of the above settlements, it also is possible that a
settling insurer may argue that the Eighth Plan is not substantially similar to
the Sixth Plan and therefore is relieved of its settlement obligation.
Congoleum expects that it will take until some time in the fourth quarter of
2006 at the earliest to obtain confirmation of the Eighth Plan.
Under the Eighth Plan, 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. Congoleum also paid $1.3 million in claims processing fees in
connection with claims settled under the Claimant Agreement. Under the Eighth
Plan, Congoleum is entitled to withhold from recoveries, or seek reimbursement
from the Plan Trust, for the $1.3 million claims processing fee. There can be no
assurance that any future plan will provide for Congoleum to recover any
coverage litigation costs or claims processing fees.
There were no asbestos related 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 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 Eighth Plan will pay
those claims in full from certain insurance proceeds.
The Eighth Plan, would require Congoleum to contribute approximately $7.7
million in cash, 3.8 million newly issued shares of Congoleum Class A common
stock, and a new security (the "New Convertible Security") to the Plan Trust.
Pursuant to the terms of the Eighth Plan, holders of the Company's 8 5/8% Senior
Notes would forego $10 million in interest accrued during the post-petition
period and would receive the right to any funds (net of related expenses) from
94
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
the fee disgorgement and other causes of action against a law firm that formerly
represented Congoleum and one of its service providers, subject to a maximum of
$10 million plus interest at 8.625% from the effective date of the plan until
the time such payment is made (the "Maximum Additional Bondholder Recovery").
Any net recoveries in excess of the Maximum Additional Bondholder Recovery would
be paid to the Plan Trust. The terms of the Eighth Plan also would extend the
maturity of the Senior Notes for three years from August 2008 to August 2011.
The Eighth Plan provides that on the Effective Date, Congoleum will issue the
New Convertible Security in the form of either shares of preferred stock or
convertible promissory notes and contribute it to the Plan Trust on the
effective date of its plan of reorganization in satisfaction of section 524(g)
of the Bankruptcy Code. If the New Convertible Security is to be shares of
preferred stock of reorganized Congoleum, it will have the following terms: (i)
an initial liquidation preference equal to $2,738,234.75 in the aggregate, such
amount being subject to increase in the amount (the "Market Reset Obligation"),
if any, by which 36% of reorganized Congoleum's market capitalization based on
average trading prices for reorganized Congoleum's Class A common stock at the
close of trading for the 90 consecutive trading days beginning on the one year
anniversary of the effective date of its plan of reorganization, exceeds such
initial liquidation preference; (ii) an initial dividend rate equal to 9% of the
liquidation preference per annum, payable semi-annually in arrears, with such
dividend rate to reset at the rate of 5% of the liquidation preference per annum
on the tenth anniversary of the effective date and payable at such reset
dividend rate per annum unless and until redeemed; (iii) redeemable for the
liquidation preference at the option of the Plan Trust or Reorganized Congoleum
following the tenth anniversary of such effective date; (iv) a mandatory
redemption on the fifteenth anniversary of such effective date if not redeemed
earlier; (v) convertible into 5,700,000 shares of Congoleum Class A common stock
(or the equivalent thereof on a fully diluted basis) upon a specified default of
the obligation to pay dividends and a failure to cure such default within any
cure period, which, when combined with the 3.8 million newly issued shares of
Congoleum Class A common stock to be contributed to the Plan Trust, will result
in the Plan Trust owning 51% of the voting common shares of reorganized
Congoleum on a fully diluted basis; and (vi) no voting rights. If the New
Convertible Security is convertible promissory notes, such notes will be on
economic terms substantially equivalent to provisions (i) and (v) of the
preferred stock described herein, with other terms substantially the same as the
Promissory Note described in the Sixth Plan.
Under the Eighth 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 Eighth Plan, ABI would receive certain relief as
may be afforded under Section 524(g)(4) of the Bankruptcy Code from personal
injury asbestos claims that derive from claims made against Congoleum, which
claims are expected to be channeled to the Plan Trust. However, the Eighth Plan
95
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
does not provide that any other asbestos claims that may be asserted against ABI
would be channeled to the Plan Trust. Under the terms of the Eighth Plan,
Congoleum's issuance of 3.8 million new shares of Class A Common Stock would
reduce ABI's economic interest in Congoleum from approximately 55% at present to
approximately 35% on a fully diluted basis. ABI's voting interest would be
reduced from approximately 69% at present to approximately 51% on a fully
diluted basis. Congoleum would also issue the New Convertible Security that,
upon certain events of default, would convert into 5.7 million shares of Class A
Common Stock, further diluting ABI's economic interest and resulting in a loss
of voting control by ABI.
Under the terms of the Eighth Plan, unlike the terms of the Sixth Plan, ABI
would not pledge any of its assets, including shares of Congoleum stock it owns
or certain rights it has to receive indemnification payments from Congoleum
pursuant to a joint venture agreement that ABI and Congoleum are party to, as
security for Congoleum's obligations under the new convertible security (as was
contemplated, under the Sixth Plan with respect to Congoleum's obligations under
the Promissory Note described in the Sixth Plan). In addition, the Eighth Plan
does not, unlike the Sixth Plan, contemplate that ABI would be required to make
any additional contributions to the Plan Trust if ABI were to sell its Congoleum
stock under the circumstances provided under the Sixth Plan, a description of
which ABI provided in previous periodic reports it filed with the SEC.
There are sufficient risks and uncertainties related to Congoleum's efforts to
confirm a plan of reorganization 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, are expected to be approximately $19.5 million at a minimum, not
including any Market Reset Obligation arising from revaluation of the New
Convertible Security, and could be materially higher.
Based on the Eighth 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 $25.3 million in 2005, to provide for the estimated
minimum costs of completing its reorganization as based on the Eighth Plan.
Congoleum is not yet able to determine the additional costs that may be required
to effect the Eighth Plan or any other 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 the Eighth Plan or any new amended
plan of reorganization, or the continued pursuit of the CNA Plan or the
Bondholder Plan by the proponents of such plans, or the proposal of additional
plans by other parties 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.
96
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
Liabilities Subject to Compromise
Pursuant to SOP 90-7, Congoleum is required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
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 interest expense on its
Senior Notes is also recorded in liabilities subject to compromise.
Liabilities subject to compromise at December 31 were as follows (in thousands):
2005 2004
-----------------------
Current
Pre-petition other payables and accrued interest $ 23,990 $ 14,225
Non-current
Debt (at face value) 100,000 100,000
Pension liability 16,871 16,936
Other post-retirement benefit obligation 8,407 8,303
Pre-petition other liabilities 13,583 12,051
-----------------------
138,861 137,290
Elimination--Payable to American Biltrite (147) (186)
-----------------------
138,714 137,104
-----------------------
Total liabilities subject to compromise $162,704 $151,329
=======================
Additional pre-petition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
97
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2005 and
2004 were as follows (in thousands):
2005 2004
----------------------
Deferred tax assets:
Accruals and reserves $ 4,392 $ 4,065
Environmental reserves 14,305 14,115
Postretirement benefit obligations 4,713 4,739
Net operating losses and credit carryforwards 9,564 8,037
----------------------
Total deferred tax assets 32,974 30,956
Less valuation allowance 5,134 5,331
----------------------
Net deferred tax assets 27,840 25,625
Deferred tax liabilities:
Depreciation 16,639 18,469
Insurance receivable 10,524 5,796
Inventory 1,742 2,261
Foreign taxes 958 957
Other 1,284 2,037
----------------------
Total deferred tax liabilities 31,147 29,520
----------------------
Net deferred tax liability $ (3,307) $ (3,895)
======================
Credit carryforwards consisted primarily of alternative minimum tax credits and
state tax credits.
At December 31, 2005 and 2004, the Company had available federal net operating
loss carry forwards of approximately $12.7 million and $6.6 million,
respectively. These carry forwards were generated from Congoleum's losses and
may be utilized to offset Congoleum's future taxable income. The Company has
determined that a partial valuation allowance is necessary to reduce the
deferred tax assets to the amount expected to be realized. The federal loss
carry forwards will begin to expire in 2025.
The Company is subject to income taxes in the United States and certain foreign
jurisdictions. Judgment is required in determining our consolidated provision
for income taxes and recording the related assets and liabilities. In the
ordinary course of our business, there are transactions and calculations where
the ultimate tax determination is uncertain. Accruals for tax contingencies are
provided for in accordance with the requirements of SFAS No. 5, Accounting for
Contingencies.
98
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
The Internal Revenue Service (IRS) has completed and closed its audits of
American Biltrite Inc.'s income tax returns through 2003. In December 2005, the
Company entered into a closing agreement with the IRS for tax years 2000 through
2003, resulting in certain adjustments to our federal income tax liability for
those years. Accordingly, the Company's 2005 tax provision has been reduced by
$1.6 million as a result of reversing previously established reserves.
The components of (loss) income before the provision for income taxes (and other
items) for the years ended December 31 are as follows (in thousands):
2005 2004 2003
-------------------------------
Domestic $(17,328) $ 1,870 $(12,607)
Foreign (966) (1,062) 2,661
-------------------------------
$(18,294) $ 808 $ (9,946)
===============================
Significant components of the (benefit from) provision for income taxes for the
years ended December 31 were as follows (in thousands):
2005 2004 2003
----------------------------------
Current:
Federal $ (998) $ 159 $(1,856)
Foreign (119) (119) 727
State 303 708 334
----------------------------------
Total current (814) 748 (795)
Deferred:
Federal (108) (3,525) (2,052)
Foreign (132) (257) (27)
State (283) (1,657) (449)
Valuation allowance (197) 3,010 --
----------------------------------
Total deferred (720) (2,429) (2,528)
----------------------------------
$(1,534) $(1,681) $(3,323)
==================================
99
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense (benefit) for the years ended December 31 was as
follows:
2005 2004 2003
---------------------------
U.S. statutory rate (34.0)% 34.0% (34.0)%
State income taxes, net of federal benefits
and valuation allowance 1.8 (14.8) (1.0)
Valuation allowance 11.2 272.7 --
Benefit of net operating losses -- (496.5) --
Reorganization expenses 18.9 -- --
Change in tax liability reserves (8.7) -- --
Other 2.4 (3.4) 1.6
---------------------------
Effective tax rate (8.4)% (208.0)% (33.4)%
===========================
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was
signed into law. The Act creates a temporary incentive for U.S. multinationals
to repatriate accumulated income earned outside the U.S. at an effective tax
rate of 5.25%. On December 21, 2004, the FASB issued FASB Staff Position,
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (FAS 109-2). FAS 109-2
allows companies additional time to evaluate the effect of the law on whether
unrepatriated foreign earnings continue to qualify for SFAS 109's exception to
recognizing deferred tax liabilities and would require explanatory disclosures
from those who need the additional time. During 2005, the Company determined it
would not repatriate any accumulated earnings from foreign locations.
Through December 31, 2005, the Company has not provided U.S. income taxes on
approximately $22.1 million of unremitted foreign earnings because such earnings
are intended to be indefinitely reinvested outside the U.S. The Company will
make no change in its current intention to indefinitely reinvest accumulated
earnings of its foreign subsidiaries, except in instances where the Company can
remit such earnings without a significant associated tax cost. The Company
believes that any U.S. tax liability due upon remittance of such earnings would
be immaterial due to availability of U.S. foreign tax credits generated from
such remittance.
During 2005 and 2003, the Company made payments for income taxes of $3.0 million
and $434 thousand, respectively. During 2004, the Company received net income
tax refunds of $4.0 million.
100
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Other Comprehensive Income
The Company records unrealized gains or losses on foreign currency translation
adjustments and changes in certain minimum pension liabilities in other
comprehensive income.
Components of other comprehensive income (loss) for the years ended December 31
consisted of the following (in thousands):
2005 2004 2003
----------------------------------
Foreign currency translation adjustments $ 420 $ 1,301 $ 3,181
Change in minimum pension liability (2,416) 1,839 (2,937)
----------------------------------
$(1,996) $ 3,140 $ 244
==================================
Accumulated balances related to each component of other comprehensive loss as of
December 31, net of related taxes, were as follows (in thousands):
2005 2004
-----------------------
Foreign currency translation adjustments $ 301 $ (119)
Minimum pension liability (18,213) (15,797)
-----------------------
$(17,912) $(15,916)
=======================
101
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Income (Loss) Per Share
The following table sets forth the computation of basic and diluted loss per
share for the years ended December 31 (in thousands, except per share amounts):
2005 2004 2003
--------------------------------
Numerator:
Net (loss) income $(17,633) $1,953 $(14,158)
================================
Denominator:
Basic income per share:
Weighted-average shares 3,442 3,442 3,442
Dilutive employee stock options -- 16 --
--------------------------------
Diluted income per share:
Adjusted weighted-average shares and assumed
conversions 3,442 3,458 3,442
================================
Basic (loss) income per share $ (5.12) $ 0.57 $ (4.11)
================================
Diluted (loss) income per share $ (5.12) $ 0.54 $ (4.11)
================================
Diluted earnings per share for the year ended December 31, 2004 includes the
dilutive effect of Congoleum's stock options during the year. The impact of
Congoleum's dilutive stock options was $0.02 per share and was determined based
on Congoleum's diluted earnings per share of $0.35 for the year ended December
31, 2004. During 2005 and 2003, Congoleum's stock options had no effect on
American Biltrite Inc.'s diluted earnings per share.
13. Stock Option Plans
ABI Stock Plans
During 1999, ABI adopted a stock option plan, which permits the issuance of
50,000 options for common stock to non-employee directors. Under the terms of
the plan, options granted are nonqualified and are issued at a price equal to
100% of fair market value at the date of grant. Options granted under the plan
are exercisable six months after the date of grant.
ABI maintains a stock award and incentive plan which permits the issuance of
options, stock appreciation rights (SARs), limited SARs, restricted stock,
restricted stock units and other stock-based awards to selected employees and
independent contractors of the Company. The plan reserved 400,000 shares of
common stock for grant and provides that the term of each award be determined by
the committee of the Board of Directors (the "Committee") charged with
administering the plan. During 1997, the Board of Directors approved an
amendment to the plan to increase the number of shares reserved for grant from
400,000 to 550,000.
102
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price, determined by the Committee, may
not be less than the fair market value of a share on the date of grant. SARs and
limited SARs granted in tandem with an option shall be exercisable only to the
extent the underlying option is exercisable and the grant price shall be equal
to the exercise price of the underlying option. In addition, the Committee may
grant restricted stock to participants of the plan at no cost to them. No SARs
or restricted stock have been granted under the plan since its adoption. Other
than the restrictions that limit the sale and transfer of these SARs and
restricted stock, participants are entitled to all the rights of a shareholder.
The following tables summarize information about ABI's stock options:
2005 2004 2003
-----------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------
Outstanding at beginning of year 486,000 $15.42 228,500 $22.04 469,940 $19.48
Granted 4,000 9.30 261,500 9.66 3,500 7.10
Exercised -- -- -- -- -- --
Forfeited (7,000) 11.65 (4,000) 16.64 (244,940) 16.90
------------- ------------ -------------
Outstanding at end of year 483,000 $15.42 486,000 $15.42 228,500 $22.04
============= ============ =============
Options exercisable at end of year 483,000 223,300 218,100
Available for grant at end of year 100,020 97,020 354,520
Weighted-
Weighted- Weighted- Average
Outstanding at Average Exercisable at Average Remaining
Range of December 31, Exercise December 31, Exercise Contractual Life
Exercise Price 2005 Price 2005 Price (Years)
-------------------------------------------------------------------------------------------------------------------
$7.10-$14.00 270,500 $ 9.74 270,500 $ 9.74 8.32
$14.01-$17.25 21,000 $14.82 21,000 $14.82 4.07
$17.26-$23.625 191,500 $23.53 191,500 $23.53 1.40
103
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
Congoleum Stock Option Plans
Congoleum maintains a Stock Option Plan and a Directors' Stock Option Plan.
Under these plans, options to purchase up to 850,000 shares of Congoleum's Class
A common stock may be issued to directors, officers and key employees. These
options may be either incentive stock options or nonqualified stock options, and
the options' exercise price must be at least equal to the fair value of
Congoleum's Class A common stock on the date of grant.
The following table summarizes information about Congoleum's stock options:
2005 2004 2003
---------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------
Outstanding at beginning of year 703,500 $1.99 668,000 $1.99 691,500 $2.10
Granted 9,500 4.98 41,000 1.98 30,500 0.39
Canceled -- -- -- -- --
Exercised (11,200) 1.81 (400) 2.05 -- --
Forfeited (8,300) 1.14 (5,100) 3.06 (54,000) 2.05
------------ ------------ -------------
Outstanding at end of year 693,500 2.04 703,500 1.99 668,000 2.02
============ ============ =============
Options exercisable at end of year 400,600 2.03 270,100 2.03 140,300 2.12
Available for grant at end of year 142,900 144,100 180,000
Weighted-Average Remaining
Contractual Life of Options
Outstanding (Years) 6.65 7.64 8.53
14. 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 segment consists of Congoleum, which manufactures vinyl and vinyl
composition floor coverings and sells them primarily through floor covering
distributors to retailers and contractors for commercial and residential use.
The tape products segment consists of two production facilities in the United
States, and finishing and sales facilities in Belgium and Singapore. The tape
products segment manufactures paper, film, HVAC, electrical, shoe, and other
tape products for use in industrial and automotive markets. The jewelry segment
consists of K&M Associates L.P., a national costume jewelry supplier to mass
merchandisers and department stores. The Company's Canadian division produces
flooring, rubber products, including materials used by footwear manufacturers,
and other industrial products.
104
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
Factors Used to Identify Reportable Segments
Reportable segments are business units that offer different products and are
each managed separately. The Company's Canadian division manufactures certain
products which are similar to products of the flooring segment; however, the
Canadian division is managed and reports separately from the flooring segment.
Measurement of Segment Profit or Loss and Segment Assets
Costs specific to a segment, such as pension expense, are charged to the
segment. Certain Corporate office expenses are allocated to certain segments
based on resources allocated. Significant assets of the Corporate office include
cash, insurance assets related to accrued liabilities, and deferred tax assets.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales or transfers.
Segment Profit and Assets
Years ended December 31
2005 2004 2003
--------------------------------------
(In thousands)
Revenues
Revenues from external customers:
Flooring products $237,916 $229,650 $220,650
Tape products 96,103 85,560 81,141
Jewelry 62,790 75,757 76,157
Canadian division 48,363 42,902 38,621
--------------------------------------
Total revenues from external customers 445,172 433,869 416,569
Intersegment revenues:
Flooring products 13 58 56
Tape products 81 120 126
Jewelry -- -- --
Canadian division 5,144 6,207 6,856
--------------------------------------
Total intersegment revenues 5,238 6,385 7,038
--------------------------------------
Total revenues 450,410 440,254 423,607
Reconciling items
Intersegment revenues (5,238) (6,385) (7,038)
--------------------------------------
Total consolidated revenues $445,172 $433,869 $416,569
======================================
105
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
Approximately 48%, 48% and 51% of the Canadian division's revenues from external
customers were for flooring products for 2005, 2004 and 2003, respectively. The
remaining revenues from the Canadian division's external customers were from
sale of rubber and other industrial products.
For 2005, 2004 and 2003, one customer of the flooring division accounted for
21%, 23% and 22%, respectively, of the Company's consolidated revenues. Another
customer of the flooring division accounted for 15%, 14% and 13% of the
Company's consolidated revenues for 2005, 2004 and 2003, respectively.
Years ended December 31
2005 2004 2003
-----------------------------------
(In thousands)
Interest income
Flooring products $ 438 $ 114 $ 63
Tape products -- 4 16
Jewelry -- 3 7
Canadian division -- -- 9
-----------------------------------
Total segment interest revenue 438 121 95
Corporate office interest revenue 201 7 96
-----------------------------------
Total consolidated interest income $ 639 $ 128 $ 191
===================================
Interest expense
Flooring products $10,411 $ 9,446 $ 8,906
Tape products 95 106 111
Jewelry 456 416 416
Canadian division 649 575 66
-----------------------------------
Total segment interest expense 11,611 10,543 9,499
Corporate office interest expense 1,417 1,922 2,077
-----------------------------------
Total consolidated interest expense $13,028 $12,465 $11,576
===================================
Depreciation and amortization expense
Flooring products $11,002 $11,428 $11,761
Tape products 2,619 2,812 2,939
Jewelry 832 860 900
Canadian division 2,005 2,427 2,412
-----------------------------------
Total segment depreciation and amortization 16,458 17,527 18,012
Corporate office depreciation 10 12 14
-----------------------------------
Total consolidated depreciation and amortization $16,468 $17,539 $18,026
===================================
106
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
Years ended December 31
2005 2004 2003
----------------------------------------
(In thousands)
Segment (loss) profit
Flooring products $(24,150) $ 403 $(10,636)
Tape products 1,101 (630) 300
Jewelry 2,162 5,400 4,782
Canadian division (1,673) (2,264) (2,072)
----------------------------------------
Total segment (loss) profit (22,560) 2,909 (7,626)
Reconciling items
Corporate income (expenses) 4,154 (2,089) (2,214)
Intercompany profit 112 (12) (106)
----------------------------------------
Total consolidated (loss) earnings from continuing
operations before income taxes and other items $(18,294) $ 808 $ (9,946)
========================================
Segment profit or loss is before income tax expense or benefit. The flooring
products segment loss includes charges related to asbestos claims of $25.3
million in 2005, $5.0 million in 2004 and $3.7 million in 2003. Corporate income
for 2005 includes a gain of $2.3 million (before non-controlling interest) from
the sale of a warehouse during the first quarter and an expense recovery of $2.9
million from an insurance settlement during the fourth quarter.
December 31
2005 2004
------------------------
(In thousands)
Segment assets
Flooring products $207,347 $212,882
Tape products 51,679 51,788
Jewelry 39,421 37,158
Canadian division 43,139 39,953
------------------------
Total segment assets 341,586 341,781
Reconciling items
Assets of discontinued operation 3,142 2,952
Corporate office assets 33,080 22,577
Intersegment accounts receivable (20,650) (11,558)
Intersegment profit in inventory (167) (281)
Intersegment other asset (147) (186)
------------------------
Total consolidated assets $356,844 $355,285
========================
107
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
The Jewelry segment assets include goodwill of $11.7 million and $11.3 million
at December 31, 2005 and 2004, respectively. The increase in goodwill is due to
the acquisition of Jay Jewelry (see Note 15). Corporate office assets increased
as a result of in increase in intercompany accounts receivable.
Years ended December 31
2005 2004 2003
--------------------------------
(In thousands)
Additions to long-lived assets
Flooring products $4,274 $3,428 $4,628
Tape products 858 670 973
Jewelry 578 1,105 801
Canadian division 1,175 652 1,038
Corporate office -- -- 5
--------------------------------
Total additions to long-lived assets $6,885 $5,855 $7,445
================================
December 31
2005 2004
----------------------
(In thousands)
Long-Lived Assets by Area
United States $135,874 $146,078
Canada 13,045 13,527
Europe 904 1,115
Asia 2,084 2,151
----------------------
Total long-lived assets $151,907 $162,871
======================
Geographic Area Information
Years ended December 31
2005 2004 2003
---------------------------------
(In thousands)
Revenues from external customers
United States $368,931 $361,410 $354,392
Canada 40,589 39,808 30,660
Mexico 5,141 3,602 4,639
Europe 17,950 17,494 17,308
Asia 10,743 9,153 7,899
Other 1,818 2,402 1,671
---------------------------------
Total revenues from external customers $445,172 $433,869 $416,569
=================================
Revenues are attributed to regions based on the location of customers.
108
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Acquisition
On October 31, 2005, the Company acquired certain assets and assumed certain
liabilities of JayRam, Inc., comprising of JayRam Inc.'s Jay Jewelry division, a
Florida distributor of costume jewelry with a market focus on theme parks,
tourist attractions and surf and beach shops. The purchase price consisted of
$2.4 million, comprised of a cash payment of $1.4 million on the closing date
and a note payable to the seller for $1.0 million, plus an additional payment to
the seller based on 25% of the acquired business's future earnings before
interest, taxes, depreciation and amortization for a period of three years. The
note is payable in equal monthly installments through October 2008 with interest
at 6%.
The transaction was accounted for under the purchase method of accounting and,
accordingly, the assets and liabilities acquired were recorded at their
estimated fair values at the closing date of the acquisition. The recorded fair
value of tangible assets acquired and liabilities assumed were $690 thousand and
$91 thousand, respectively. The purchase agreement includes a non-competition
and non-solicitation agreement with the seller. The Company obtained a valuation
for these intangible assets as well as the acquired trade name and customer
list. The aggregate value of these assets was $1.4 million, resulting in
goodwill of $426 thousand. The values assigned to the amortizable intangible
assets acquired and the amortization periods are as follows:
Value Amortization
Assigned Period
-----------------------------
(In thousands)
Non-competition and non-solicitation agreement $ 616 2 years
Customer list 640 7 years
Trade name 119 15 years
----------
$1,375
==========
Amortization expense in each of the next five years is as follows (in
thousands):
2006 $ 407
2007 356
2008 99
2009 99
2010 99
109
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Discontinued Operation
During the second quarter of 2003, the Company reassessed operations at its
Toronto, Canada subsidiary, Janus Flooring Corporation, a manufacturer of
prefinished hardwood flooring, and decided to exit and dispose of this business
before the end of 2003 due to its history of operating losses. The Company
acquired Janus in 2000 intending it to serve as a strategic addition to the
flooring product business. In connection with this decision to exit and dispose
of Janus Flooring, the Company recorded a charge of $8.5 million in second
quarter 2003 consisting primarily of $3.0 million to reduce inventories to net
realizable value, $0.5 million in accounts receivable allowances, a $2.5 million
asset impairment charge related to machinery and equipment and a $1.9 million
income tax provision to write off deferred tax assets deemed not probable of
recovery. Results of Janus Flooring, including this charge, are being reported
as a discontinued operation. Assets of discontinued operation at December 31,
2005 and 2004 consisted primarily of land and building held for sale and
liabilities of discontinued operation consist primarily of accrued expenses.
During 2005, the Company entered into a purchase and sale agreement covering the
land and building for an amount in excess of the carrying value of the property.
The property is under contract, and the Company expects the sale will close in
the second quarter of 2006.
17. Fair Value of Financial Instruments
The Company's cash and cash equivalents, restricted cash, accounts receivable,
accounts payable, notes payable and long-term debt are financial instruments.
Congoleum's $100 million 8 5/8% Notes due in 2008 had a book value of $99.9
million and a fair market value of $63.5 million at December 31, 2005. The
corresponding amounts at December 31, 2004 were a book value of $99.8 million
and a fair market value of $64.0 million. The carrying value of the Company's
remaining financial instruments approximates their fair value at December 31,
2005.
The fair value of the Company's publicly traded long-term debt is determined
based on quoted market values. The fair value of the Company's other financial
instruments is determined based on discounted cash flows. Due to the short
period over which the cash flows are expected to be realized, the carrying value
of the financial instruments approximates the net present value of cash flows
and changes in interest rate assumptions would not have a material effect on the
calculation.
110
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------
(In thousands, except per share amounts)
2005(1)
Net sales $107,424 $109,542 $114,152 $114,054
Gross profit 28,568 27,609 28,311 26,360
Income (loss) from continuing operations 680 (14,646) 1,088 (4,518)
Discontinued operation (56) (57) (80) (44)
Net income (loss) 624 (14,703) 1,008 (4,562)
Net income (loss) per share, basic:
Income (loss) from continuing operations 0.20 (4.25) 0.32 (1.31)
Discontinued operation (0.02) (0.02) (0.02) (0.01)
Net income (loss) 0.18 (4.27) 0.30 (1.32)
Net income (loss) per share, diluted:
Income (loss) from continuing operations 0.19 (4.25) 0.31 (1.31)
Discontinued operation (0.02) (0.02) (0.02) (0.01)
Net income (loss) 0.17 (4.27) 0.29 (1.32)
2004(2)
Net sales $ 99,415 $112,510 $113,180 $108,764
Gross profit 25,217 33,238 32,616 27,528
(Loss) income from continuing operations (1,863) 1,827 1,514 904
Discontinued operation (162) (110) (70) (87)
Net (loss) income (2,025) 1,717 1,444 817
Net (loss) income per share, basic:
(Loss) income from continuing operations (0.54) 0.53 0.44 0.27
Discontinued operation (0.05) (0.03) (0.02) (0.03)
Net (loss) income (0.59) 0.50 0.42 0.24
Net (loss) income per share, diluted(3) :
(Loss) income from continuing operations (0.54) 0.52 0.43 0.25
Discontinued operation (0.05) (0.03) (0.02) (0.03)
Net (loss) income (0.59) 0.49 0.41 0.22
(1) The second and fourth quarters of 2005 include asbestos-related charges of
$15.5 million and $9.8 million, respectively, in Congoleum's selling,
general and administrative ("SG&A") expenses for costs related to
Congoleum's reorganization plan. The impact of these charges to American
Biltrite's basic and diluted earnings per share for the second and fourth
quarters was $4.50 and $2.85, respectively.
(2) The fourth quarter of 2004 includes a $5.0 million asbestos-related charge
recorded in SG&A expenses by Congoleum and a $650 thousand charge recorded
in SG&A expenses by American Biltrite for costs related to Congoleum's
reorganization plan. The impact of these charges to American Biltrite's
basic and diluted earnings per share for the fourth quarter was $1.45 and
$0.19, respectively.
(3) Diluted earnings per share for the second, third and fourth quarters of
2004 include the dilutive effect of Congoleum's stock options during those
periods. Congoleum's stock options had no effect on American Biltrite
Inc.'s diluted earnings per share during 2005.
111
Report of Registered Independent Public Accounting Firm
Board of Directors and Stockholders
American Biltrite Inc.
We have audited the accompanying consolidated balance sheets of American
Biltrite Inc. and subsidiaries (the Company) as of December 31, 2005 and 2004,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2005.
Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Biltrite
Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 17, 2006
112
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's management,
with the participation of the Company's Chief Executive Officer, or CEO, and
Chief Financial Officer, or CFO, evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of December 31, 2005.
Based on this evaluation, the Company's CEO and CFO concluded that, as of
December 31, 2005, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company, including
the Company's consolidated subsidiaries, is made known to the Company's CEO and
CFO by others within those entities, particularly during the period in which
this Annual Report on Form 10-K 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 Securities
Exchange Act of 1934, as amended, 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 Controls. No change in the Company's internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) occurred during the fiscal quarter
ended December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
113
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has adopted a code of ethics (as that term is defined in Item 406 of
Regulation S-K of the regulations promulgated by the SEC) that applies to the
principal executive officer, principal financial officer, principal accounting
officer or controller and all other employees of the Company. The text of the
Company's code of ethics is posted on our Internet website www.ambilt.com or may
be obtained without charge by sending a written request to Mr. Henry W.
Winkleman, Secretary of the Company, at the Company's office at 57 River Street,
Wellesley Hills, Massachusetts 02481. We intend to satisfy the disclosure
requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver
from, a provision of our code of ethics and conduct that applies to our
principal executive officer, our principal financial and accounting officer or
controller by posting such information on our website at www.ambilt.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 9, 2006 to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2005 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in part in Item 5 hereof and
in part in ABI's Proxy Statement for its Annual Stockholders' Meeting to be held
May 9, 2006 to be filed with the Securities and Exchange Commission within 120
days after December 31, 2005 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 9, 2006 to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2005 and
is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 9, 2006 to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2005 and
is incorporated herein by reference.
114
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of American Biltrite
Inc. and its subsidiaries are included in Item 8:
Consolidated Balance Sheets with Consolidating Details -
December 31, 2005 and 2004, pages 50 & 51
Consolidated Statements of Operations with Consolidating
Details - Years ended December 31, 2005, 2004 and 2003, page
52
Consolidated Statements of Cash Flows with Consolidating
Details - Years ended December 31, 2005, 2004 and 2003, page
53 & 54
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2005, 2004 and 2003, page 55
Notes to Consolidated Financial Statements, pages 56 through
111
(2) The following financial statement schedule is included in Item 15(d)
SCHEDULE II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
(3) Listing of Exhibits
The listing of exhibits required under this item is
incorporated herein by reference to pages 119 through 125 of
this Form 10-K.
(b) Exhibits: The required exhibits are filed herewith or incorporated by
reference following the required Exhibit Index.
(c) Financial Statement Schedule: The required consolidated financial
statement schedule is included on page 116 of this Form 10-K.
115
American Biltrite Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
Years ended December 31, 2005, 2004 and 2003
(In thousands of dollars)
------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
------------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts -- Deductions - Balance at
Description Period Expenses Describe Other Describe End of Period
------------------------------------------------------------------------------------------------------------------------------------
2005
Allowances for doubtful
accounts and cash discounts $2,745 $2,922 $2,847 (A) $2,820
=================================================================================================
2004
Allowances for doubtful
accounts and cash discounts $2,615 $2,648 $2,518 (A) $2,745
=================================================================================================
2003
Allowances for doubtful
accounts and cash discounts $2,764 $2,691 $2,840 (A) $2,615
=================================================================================================
(A) Represents accounts charged off during the year, net of recoveries.
116
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN BILTRITE INC.
(Registrant)
Date: March 27, 2006 by: /s/ Howard N. Feist III
------------------ -----------------------------------------------
Howard N. Feist III, Vice President Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 27, 2006 by: /s/ Roger S. Marcus
------------------ -----------------------------------------------
Roger S. Marcus, Chairman of the Board, Chief
Executive Officer and Director
Date: March 27, 2006 by: /s/ Richard G. Marcus
------------------ -----------------------------------------------
Richard G. Marcus, President, Chief Operating
Officer and Director
Date: March 27, 2006 by: /s/ William M. Marcus
------------------ -----------------------------------------------
William M. Marcus, Executive Vice President,
Treasurer, Chairman of the Executive Committee
and Director
Date: March 27, 2006 by: /s/ Leo R. Breitman
------------------ -----------------------------------------------
Leo R. Breitman, Director
Date: March 27, 2006 by: /s/ Gilbert K. Gailius
------------------ -----------------------------------------------
Gilbert K. Gailius, Director
Date: March 27, 2006 by: /s/ John C. Garrels III
------------------ -----------------------------------------------
John C. Garrels III, Director
Date: March 27, 2006 by: /s/ Frederick H. Joseph
------------------ -----------------------------------------------
Frederick H. Joseph, Director
Date: March 27, 2006 by: /s/ Mark N. Kaplan
------------------ -----------------------------------------------
Mark N. Kaplan, Director
Date: March 27, 2006 by: /s/ James S. Marcus
------------------ -----------------------------------------------
James S. Marcus, Director
117
Date: March 27, 2006 by: /s/ Natalie S. Marcus
------------------ -----------------------------------------------
Natalie S. Marcus, Director
Date: March 27, 2006 by: /s/ Kenneth I. Watchmaker
------------------ -----------------------------------------------
Kenneth I. Watchmaker, Director
Date: March 27, 2006 by: /s/ Howard N. Feist III
------------------ -----------------------------------------------
Howard N. Feist III, Vice President Finance,
Chief Financial Officer and Principal
Accounting Officer
118
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3 (1) VII Restated Certificate of Incorporation
3 (2) I By-Laws, amended and restated as of September 11, 2004
4 (1) XV Amended and Restated Note Purchase Agreement and Facility
Guarantee, dated as of May 20, 2005, among American
Biltrite Inc., certain domestic subsidiaries of American
Biltrite Inc. and The Prudential Insurance Company of
America
4 (2) XIV Security Agreement, dated as of October 14, 2003, among
American Biltrite Inc., K&M Associates L.P., Fleet
National Bank and the subsidiaries of American Biltrite
Inc. from time to time party thereto
4 (3) XV Intercreditor and Collateral Agency Agreement, dated as
of May 20, 2005, by and among Fleet National Bank, a Bank
of America company, The Prudential Insurance Company of
America, and the other banks from time to time party
thereto, and Fleet National Bank, a Bank of America
company, as administrative agent, and the Acknowledgment
of and Consent and Agreement to Intercreditor and
Collateral Agency Agreement by American Biltrite Inc. and
certain of its domestic guarantor subsidiaries
4 (4) XV Joinder Agreement, dated as of May 20, 2005, between
Abimex, LLC and Fleet National Bank, a Bank of America
company, as domestic agent
4 (5) XV Joinder Agreement, dated as of May 20, 2005, between
ABItalia, Inc. and Fleet National Bank, a Bank of America
company, as domestic agent
4 (6) XV Joinder Agreement, dated as of May 20, 2005, between
American Biltrite Far East, Inc. and Fleet National Bank,
a Bank of America company, as domestic agent
4 (7) XV Joinder Agreement, dated as of May 20, 2005, between K&M
Legendary Services, Inc. and Fleet National Bank, a Bank
of America company, as domestic agent
4 (8) I Indenture, dated as of August 3, 1998, by and between
Congoleum Corporation and First Union National Bank, as
trustee
4 (9) I First Supplemental Indenture, dated as of March 28, 2003,
between Congoleum Corporation and Wachovia Bank, National
Association (as successor to First Union National Bank),
as trustee
4 (10) I Second Supplemental Indenture, dated as of August 7,
2003, between Congoleum Corporation and Wachovia Bank,
National Association (as successor to First Union
National Bank), as trustee
10 (1) III Joint Venture Agreement dated as of December 16, 1992 by
and among American Biltrite Inc., Resilient Holdings
Incorporated, Congoleum Corporation, Hillside Industries
Incorporated and Hillside Capital Corporation
119
Exhibit No. Description
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10 (2) IV Closing Agreement dated as of March 11, 1993 by and among
American Biltrite Inc., Resilient Holdings Incorporated,
Congoleum Corporation, Hillside Industries Incorporated
and Hillside Capital Corporation
10 (3) VIII, II 1993 Stock Award and Incentive Plan as Amended and
Restated as of March 4, 1997
10 (4) VI K&M Associates L.P. Amended and Restated Agreement of
Limited Partnership
10 (5) V Purchase Agreement dated as of March 31, 1995 by and
among Ocean State Jewelry, Inc. and certain limited
partners of K&M Associates L.P.
10 (6) V Agreement and Plan of Merger dated as of April 1, 1995 by
and among the Company, Jewelco Acquisition Co., Inc.,
AIMPAR, Inc., Arthur I. Maier, Bruce Maier and Edythe J.
Wagner
10 (7) V Option Agreement dated as of April 1, 1995 by and among
Ocean State Jewelry, Inc. and certain limited partners of
K&M Associates L.P.
10 (8) V Agreement and Plan of Merger dated as of May 3, 1995 by
and among the Company, Zirconia Acquisition Co., Inc.,
Wilbur A. Cowett Incorporated and Wilbur A. Cowett
10 (9) VII, II Split-Dollar Agreement dated as of December 20, 1996 by
and between American Biltrite Inc. and the Marcus Family
1996 Irrevocable Insurance Trust Dated October 28, 1996
10 (10) VII, II Split-Dollar Agreement dated as of December 20, 1996 by
and between American Biltrite Inc. and The Richard G.
Marcus Irrevocable Insurance Trust of 1990 Dated June 1,
1990
10 (11) VII, II Split-Dollar Agreement dated as of December 20, 1996 by
and between American Biltrite Inc. and the Roger S.
Marcus Irrevocable Insurance Trust Dated November 29,
1996, Richard G. Marcus, Trustee
10 (12) VII, II Split-Dollar Agreement dated as of January 9, 1997 by and
between American Biltrite Inc. and Joseph D. Burns
10 (13) VII, II Description of Supplemental Retirement Benefits for
Gilbert K. Gailius
10 (14) IX, II American Biltrite Inc. Deferred Compensation Plan
10 (15) IX American Biltrite 1999 Stock Option Plan for Non-Employee
Directors
10 (16) X, II Description of Employment Arrangement for Gilbert K.
Gailius.
10 (17) II, XI Split-Dollar Agreement dated as of November 20, 2000 by
and between American Biltrite Inc. and Howard N. Feist III
120
Exhibit No. Description
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10 (18) XII Personal Services Agreement, dated as of March 11, 1993,
by and between Congoleum Corporation and the Company;
First Amendment dated as of February 8, 1995; Second
Amendment dated as of November 15, 1996; Third Amendment
dated as of March 10, 1998; Fourth Amendment dated as of
November 7, 2002
10 (19) XV Amended and Restated Credit Agreement, dated as of May
20, 2005, among American Biltrite Inc, K&M Associates
L.P., and American Biltrite (Canada) Ltd., Fleet National
Bank, a Bank of America company, both in its capacity as
a domestic lender and as a domestic administrative agent,
Bank of America, National Association, acting through its
Canada branch, both in its capacity as a Canadian lender
and as Canadian administrative agent, and the other
lenders from time to time party thereto
10 (20) XIV Security Agreement, dated as of October 14, 2003, among
American Biltrite Inc., K&M Associates L.P., Fleet
National Bank and the subsidiaries of American Biltrite
Inc. from time to time party thereto
10 (21) XV Intercreditor and Collateral Agency Agreement, dated as
of May 20, 2005, by and among Fleet National Bank, a Bank
of America company, The Prudential Insurance Company of
America, and the other banks from time to time party
thereto, and Fleet National Bank, a Bank of America
company, as administrative agent, and the Acknowledgment
of and Consent and Agreement to Intercreditor and
Collateral Agency Agreement by American Biltrite Inc. and
certain of its domestic guarantor subsidiaries
10 (22) XIV Guarantee Agreement dated as of October 14, 2003, among
Abtre, Inc., Aimpar, Inc., American Biltrite Intellectual
Properties, Inc., Ideal Tape Co., Inc., Majestic Jewelry,
Inc., Ocean State Jewelry, Inc., 425 Dexter Associates,
L.P. and Fleet National Bank
10 (23) XV Joinder Agreement, dated as of May 20, 2005, between
Abimex, LLC and Fleet National Bank, a Bank of America
company, as domestic agent
10 (24) XV Joinder Agreement, dated as of May 20, 2005, between
ABItalia, Inc. and Fleet National Bank, a Bank of America
company, as domestic agent
10 (25) XV Joinder Agreement, dated as of May 20, 2005, between
American Biltrite Far East, Inc. and Fleet National Bank,
a Bank of America company, as domestic agent
10 (26) XV Joinder Agreement, dated as of May 20, 2005, between K&M
Legendary Services, Inc and Fleet National Bank, a Bank
of America company, as domestic agent
10 (27) XV Deed of Hypothec and Issue of Mortgage Bonds, dated May
20, 2005, by American Biltrite (Canada) Ltd. in favor of
Bank of America, National Association
10 (28) XV Hypothec and Pledge of Bonds, dated May 20, 2005, between
American Biltrite (Canada) Ltd. and Bank of America,
National Association
121
Exhibit No. Description
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10 (29) XVI 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 (30) XVI Form of Stock Option Agreement for American Biltrite
Inc.'s 1999 Stock Option Plan for Non-Employee Directors
10 (31) XIII Settlement Agreement Between Congoleum Corporation and
Various Asbestos Claimants dated April 10, 2003
10 (32) XIII First Amendment to Settlement Agreement Between Congoleum
Corporation and Various Asbestos Claimants dated June 6,
2003
10 (33) XIII Collateral Trust Agreement, dated April 16, 2003, by and
between Congoleum Corporation, Arthur J. Pergament,
solely in his capacity as the Collateral Trustee of the
Collateral Trust, and Wilmington Trust Company, solely in
its capacity as Delaware Trustee of the Collateral Trust
10 (34) XIII First Amendment to Collateral Trust Agreement, dated June
6, 2003, by and between Congoleum Corporation, Arthur J.
Pergament, solely in his capacity as the Collateral
Trustee of the Collateral Trust, and Wilmington Trust
Company, solely in its capacity as Delaware Trustee of
the Collateral Trust
10 (35) XIII Security Agreement, dated April 16, 2003, by and between
Congoleum Corporation and Arthur J. Pergament, solely in
his capacity as the Collateral Trustee of the Collateral
Trust
10 (36) XIII Second Security Agreement, dated April 17, 2003, by and
between Congoleum Corporation and Arthur J. Pergament,
solely in his capacity as the Collateral Trustee of the
Collateral Trust
10 (37) XIII Termination Agreement, dated June 6, 2003, by and between
Congoleum Corporation and Arthur J. Pergament, solely in
his capacity as the Collateral Trustee of the Collateral
Trust
10 (38) XIII Superseding Security Agreement, dated June 11, 2003, by
and between Congoleum Corporation and Arthur J.
Pergament, solely in his capacity as the Collateral
Trustee of the Collateral Trust
10 (39) I Loan and Security Agreement, dated December 10, 2001 by
and between Congress Financial Corporation and Congoleum
Corporation
10 (40) I Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial
Corporation and Congoleum Corporation
10 (41) I Amendment No. 2 to Loan and Security Agreement, dated as
of February 27, 2003, by and between Congress Financial
Corporation and Congoleum Corporation
122
Exhibit No. Description
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10 (42) I Ratification and Amendment Agreement dated January 7,
2004, by and between Congoleum Corporation and Congress
Financial Corporation
10 (43) I Ratification and Amendment Agreement dated December 14,
2004, by and between Congoleum Corporation and Congress
Financial Corporation
10 (44) Amendment No. 4 to Ratification and Amendment Agreement
and Amendment No. 6 to Loan and Security Agreement
21 (1) Subsidiaries of the Registrant (including each
subsidiary's jurisdiction of incorporation or
organization and the name under which each subsidiary
does business)
23 (1) Consent of Independent Registered Public Accounting Firm
31.1 Certification of the Chief 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 Chief 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 the
Chief Financial Officer of the Registrant pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99 (1) XVII Eighth Modified Joint Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code of Congoleum
Corporation, et al., dated as of March 17, 2006
99 (2) XVII Proposed Disclosure Statement with respect to the Eighth
Modified Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code of Congoleum Corporation, et al.,
dated as of March 17, 2006
99 (3) XV Settlement Agreement and Release, dated June 18, 2004, by
and between Congoleum Corporation and Liberty Mutual
Insurance Company
99 (4) XV Settlement Agreement and Release, dated May 12, 2005, by,
between and among Congoleum Corporation, Congoleum Sales,
Inc., Congoleum Fiscal, Inc. and AIG Domestic Claims,
Inc., as authorized agent for the applicable AIG
companies, and the Plan Trust
99 (5) XV Confidential Settlement Agreement and Release, dated June
22, 2005, by and between Congoleum Corporation, the Plan
Trust and certain underwriters at Lloyd's, London
99 (6) XV 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
123
Exhibit No. Description
--------------------------------------------------------------------------------
99 (7) XVI Settlement Agreement and Release dated August 3, 2005 by,
between and among Congoleum Corporation and Federal
Insurance Company
99 (8) XVI 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 Exhibits filed with the current Company's Annual Report on Form 10-K for
the year ended December 31, 2004.
II Compensatory plans required to be filed as exhibits pursuant to Item 15(a)
of Form 10-K.
III Incorporated by reference to the exhibits filed with the Company's Current
Report on Form 8-K filed on December 21, 1992. (1-4773)
IV Incorporated by reference to the exhibits filed with the Company's Current
Report on Form 8-K filed on March 25, 1993. (1-4773)
V Incorporated by reference to the exhibits to the Company's Current Report
on Form 8-K as amended by the Form 8-K/A filed respectively on May 17,
1995 and July 17, 1995. (1-4773)
VI Incorporated by reference to Item 14 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995. (1-4773)
VII Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. (1-4773)
VIII Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on August 8, 1997. (1-4773)
IX Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on August 12, 1999.
X Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
XI Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
XII Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
XIII Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on August 14, 2003.
124
XIV Incorporated by reference to the exhibits to the Company's Current Report
on Form 8-K filed on October 17, 2003.
XV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on August 15, 2005.
XVI Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on November 14, 2005
XVII Incorporated by reference to the exhibits to the Company's Current Report
on Form 8-K filed on March 22, 2006
125