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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, 1997 Commission File Number 1-4773
- ------------------------ -------------------
AMERICAN BILTRITE INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
57 River Street, Wellesley Hills, Massachusetts 02181
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 237-6655
----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 Par Value American Stock Exchange
- ---------------------------- ------------------------
Securities registered pursuant to Section 12(g) of the Act: NONE
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 (229.405 of this chapter) 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. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates as of March 17, 1998 was $53,255,000.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 17, 1998 was 3,637,308 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be
held on May 14, 1998 are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
(a) General Development of Business. American Biltrite Inc. ("ABI") was
organized in 1908 and is a Delaware corporation. ABI operates domestically
directly through two businesses: the Tape Division and K&M Associates L.P., a
Rhode Island limited partnership ("K&M"), and conducts operations indirectly
through Congoleum Corporation ("Congoleum"), a company in which ABI owns a
controlling interest.
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 Division also produces pressure
sensitive tapes and adhesive products used for applications in the footwear,
heating, ventilating and air conditioning (HVAC), automotive and electrical and
electronic industries.
In 1995, ABI acquired a controlling interest in K&M, a national supplier,
distributor and servicer of a wide variety of adult, children's and specialty
items of fashion jewelry and related accessories. ABI, through wholly owned
subsidiaries, currently owns an aggregate 82.25% interest (7% as sole general
partner and 75.25% in limited partner interests) in K&M. K&M wholesales its
products to mass merchandisers and other major retailers. It also services
certain retail merchandisers' in-store operations in fashion jewelry and related
accessories departments by assisting retailers in managing inventory and
maintaining displays.
At the beginning of 1995, ABI indirectly held an 8% limited partner interest in
K&M. During 1995 and in January of 1996, the Company acquired, through a series
of transactions by its wholly owned subsidiaries, an additional 67.25% in
limited partner interests and a 7% sole general partner interest in K&M for an
aggregate consideration of $15.5 million in cash, notes and ABI common stock. In
conjunction with these K&M transactions, a wholly owned subsidiary of ABI also
entered into agreements with the remaining limited partners of K&M which provide
the ABI subsidiary with the option to buy, and the limited partners the option
to sell, the limited partners' respective remaining interests in K&M for an
aggregate consideration based upon a predetermined formula which is based in
part on such limited partner's capital account balance at the time of sale. As
of the date hereof, based on K&M capital account balances as of December 31,
1997, the aggregate purchase price under the option agreements for the remaining
limited partner interests in K&M would be $2.9 million. See Note 4 of Notes to
the Consolidated Financial Statements.
ABI owns a 49% equity interest in Congoleum Corporation ("Congoleum"), a
manufacturer and producer of resilient floor tile and sheet vinyl flooring.
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On February 8, 1995, Congoleum completed a public offering of 4,650,000 shares
of Class A Common Stock at $13 per share. The net proceeds of the offering,
together with certain other funds of Congoleum, were used to acquire a portion
of Congoleum's outstanding Class B Common Stock held by Hillside Industries
Incorporated. In conjunction with the transaction, ABI exchanged its then
existing shares of Class B Common Stock for 4,395,605 shares of a new series of
Class B Common Stock. The exchange of stock did not change the Company's 44%
equity ownership interest; however, the new shares represented 57% of the voting
power of the outstanding shares of Congoleum, giving ABI majority voting
control. The accounts of Congoleum have been consolidated with the financial
statements of ABI in 1995, 1996 and 1997. During 1997, Congoleum's Board of
Directors approved a plan to repurchase up to $10,000,000 of Congoleum's common
stock (Class A and Class B shares). During 1997, Congoleum repurchased
$9,524,000 of common stock at fair market value under the program. The effect of
the repurchase of shares was to increase ABI's ownership interest from 44% to
49%. In addition, as of December 31, 1997, ABI's ownership of 4,395,605 shares
of Congoleum's Class B common stock represented 64% of the voting control of
Congoleum.
Outside the United States, in addition to international sales of Tape Division
products, the Division operates facilities in Belgium and Singapore where bulk
tape products are converted into various sizes to quickly respond to customer
demands in the European and Asian markets. Other international operations
include: a wholly owned Canadian subsidiary ("ABI-Canada") which produces
resilient floor tile, rubber tiles and Uni-Turf (a vinyl-based floor covering
for use in indoor sports facilities) under license from ABI and industrial
products (including conveyor belting, truck and trailer splash guards and sheet
rubber material); a 50% direct equity interest in a Honduran producer of
footwear components; and, through the Honduran corporation, an indirect interest
in a Guatemalan foam product manufacturer.
For financial reporting purposes, as a result of the consolidation of the
accounts of Congoleum and K&M into the financial statements of ABI, ABI operates
in three industry segments: flooring products, industrial products and jewelry.
See Note 14 of Notes to the Consolidated Financial Statements, set forth in Item
8 below.
(b) Financial Information about Industry Segments. Business segment
information is set forth in Item 8 below in Note 14 of Notes to the Consolidated
Financial Statements.
(c) 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 division's own sales force and by sales representatives
and distributors throughout the world. ABI's Belgian and Singapore facilities
sell these products throughout Europe and the Far East.
3
The business and operations of the Tape Division do not experience seasonal
variations, and neither this division nor the industry in which it operates has
any material practices with respect to working capital.
The products of K&M are sold domestically and throughout the world through its
own direct sales force and, indirectly, through a wholly owned subsidiary 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, 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.
ABI-Canada's floor tile and rubber tile products are marketed in Canada and the
United States, principally through distributors and to commercial installers.
Uni-Turf is marketed in Canada and internationally through distributors.
ABI-Canada's industrial products are marketed in Canada and the United States
through distributors and also directly to certain large end-users and original
equipment manufacturers.
Congoleum currently sells its products through distributors in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Congoleum considers its distribution network very important to maintaining
competitive position. While most of its distributors have marketed Congoleum's
products for many years, replacements are necessary periodically to maintain the
strength of the distribution network. Although Congoleum has more than one
distributor in many 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 sales, at least until a suitable
replacement is in place. 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. Credit sales are typically
subject to a discount if paid within terms. 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.
ABI owns 50% of Compania Hulera Sula, S.A. de C.V. ("Hulera Sula"), a Honduran
corporation, which produces soles, heels, molded soles and heels, sandals and
other footwear products under license from ABI and markets such products in
certain Central American countries. Hulera Sula owns 100% of Hulera
Sacatepequez, S.A., a Guatemalan corporation which manufactures and markets
products in Guatemala similar to those of Hulera Sula. Fomtex, S.A., a
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Guatemalan corporation 60% owned by Hulera Sula, manufactures and markets foam
mattresses, beds and other foam products for sale in the Central American
market.
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.
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. Credit sales are typically subject to a discount if
paid within terms.
Raw Materials. Basically, all of ABI's products are internally designed and
engineered. Generally, the raw materials required by ABI for its manufacturing
operations are available from multiple sources and, as such, ABI has not been
dependent on any particular source of supply for raw materials essential to its
businesses. ABI's 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 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 will provide continuity of supply
for its raw material requirements.
Competition. All businesses in which ABI is engaged are highly competitive.
ABI's industrial products (including tape products) compete with those of some
of the largest fully integrated rubber and plastic companies, as well as smaller
producers. In the floor covering field, ABI-Canada's products compete with those
of other manufacturers of rubber and vinyl floor tiles and with all other types
of floor covering.
ABI competes with other companies making similar products principally on the
basis of price, service and product performance. In the industrial products
category, there are at least 30 competitors, principal among them being Goodyear
Canada, Inc., Minnesota Mining & Manufacturing Company, Permacel and Shuford
Mills, Inc. In floor covering products, ABI competes with Armstrong World
Industries, Inc., Domco Industries, Ltd., Mondo Rubber International, Inc. and
others as well as with other manufacturers of alternate floor covering products
such as carpeting, wood flooring and sheet vinyl flooring. ABI competes broadly
in all markets for its products.
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
5
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 domestic and, to a much lesser extent,
foreign manufacturers. Certain of Congoleum's competitors, including Armstrong
in the resilient category, have substantially greater financial and other
resources than Congoleum.
K&M competes with other companies making similar products on the basis of
product pricing and the effectiveness of merchandising services offered. In
assessing the effectiveness of K&M 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
suppliers, among them are Accessory Associates Inc., Monet Inc., Victoria
Creations Inc. 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.
Research and Development. ABI and Congoleum's research and development efforts
concentrate on new product development and expanding technical expertise in the
manufacturing process. ABI also concentrates on improving existing products
while Congoleum also concentrates on trying to increase product durability.
Expenditures for research and development were $5,388,000, $5,513,000 and
$4,441,000 on a consolidated basis for the years ended December 31, 1997, 1996
and 1995, respectively.
Key Customers. For the year ended December 31, 1997, two customers of Congoleum
each accounted for over 10% of ABI's consolidated sales revenue. These customers
were its distributor to the manufactured housing market, LaSalle-Bristol, and
its distributor in the Southwest and on the West Coast, LD Brinkman & Co. K&M
sales during 1997 included sales to large customers which accounted for less
than 10% of ABI's consolidated sales revenue. K&M's top three customers in terms
of net sales in 1997 together account for approximately 93% of K&M's aggregate
net sales, and the loss of any such customer would have a material adverse
effect on K&M. See
6
Note 14 of Notes to Consolidated Financial Statements set forth in Item 8 below.
Backlog. The dollar amount of backlog of orders believed to be firm as of
December 31, 1997 and 1996 was $15,600,000 and $20,100,000, respectively. It is
anticipated that all of the backlog as of December 31, 1997 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, ABI'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 ABI facilities
and off-site disposal locations. ABI believes that compliance with these
federal, state, local and foreign provisions will not have a material effect
upon its capital expenditures, earnings and competitive position. See Item 3
below for certain additional information regarding environmental matters.
Employees. As of December 31, 1997, ABI employed approximately
3,030 people.
(d) Financial information about foreign and domestic operations and export
sales. Financial information concerning foreign and domestic operations is set
forth in Item 8 below in Note 14 of Notes to the Consolidated Financial
Statements. Export sales from the United States were $23,008,000 in 1997,
$17,931,000 in 1996 and $18,057,000 in 1995.
ITEM 2. PROPERTIES
At December 31, 1997, ABI and Congoleum operated a total of nine manufacturing
plants, and ABI operated a jewelry product distribution warehouse, 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
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Sherbrooke, 330,000 Owned Industrial and
Quebec flooring products
Moorestown, NJ 226,000 Owned Industrial products
Lowell, MA 57,000 Owned Industrial products
Renaix, Belgium 36,000 Owned Industrial products
Singapore 14,000 Leased Industrial products
Providence, RI 103,000 Owned Jewelry products
ABI knows of no material defect in the titles to any such properties or material
encumbrances thereon. ABI considers that all of its properties are in good
condition and have been well maintained.
It is estimated that during 1997, ABI's plants for the manufacture of floor
covering products operated at approximately 73% of aggregate capacity and its
plants for the manufacture of industrial products operated at approximately 94%
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 is a co-defendant with other manufacturers and distributors of
asbestos-containing products in approximately eighty-two lawsuits. Under certain
circumstances, third parties are contractually liable for up to the full amount
of any liabilities suffered by ABI in connection with these actions. ABI
believes that these suits are without merit and that, in any event, the damages
sought are substantially within the coverages of its applicable liability
insurance policies.
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"), as to two sites in two separate states. At one of
the two sites located in Southington, Connecticut, ("Southington Site"), ABI's
subsidiary ("Ideal") is also named as a PRP. At the Southington Site, the
currently estimated aggregate future cost of remediation and monitoring is $29
million. ABI's and Ideal's share of the assessments to the PRPs to date is
approximately $105,000. Subject to a final allocation among the PRPs, ABI's and
Ideal's share of the future remediation costs is currently estimated to be about
$318,000. 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 the other site ABI,
together with 19 other PRPs, signed a consent decree and site remediation
8
agreement (the "Agreements") in September, 1996 which, without an admission of
liability, requires remediation at the ILCO Superfund site located in Leeds,
Alabama (the "ILCO Site"). (Seven new PRPs have subsequently joined the consent
decree.) On April 22, 1997, the United States District Court for the Northern
District of Alabama approved the consent decree. The currently estimated
aggregate future cost of remediation at the ILCO Site is $37.3 million. Pursuant
to a final allocation among consent decree participants, ABI's share of the
currently estimated remediation cost is about $1.83 million after considering
commitments from de minimus settlors and the City of Leeds. ABI has paid about
$136,000 of this amount with the rest payable over the next three to six years.
Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
remediation cost incurred by ABI with respect to the ILCO Site. Moreover, ABI
has asserted a claim for a substantial portion of the allocation share
attributable to ABI against a third party who the Company believes arranged for
the shipment of the alleged hazardous substances generated by ABI to the ILCO
site. ABI and the other settling PRPs also have claims against PRPs who used the
ILCO Site and have not settled. In addition, because of a recent Alabama Supreme
Court decision which resolves in favor of policyholders several important
insurance coverage issues regarding CERCLA liability, ABI has renewed its demand
that its insurance carriers provide defense and indemnity for ABI's liabilities
at the ILCO Site. ABI also is potentially responsible for response and
remediation costs as to two state-supervised sites.
At these four sites, ABI's liability will be based upon disposal of allegedly
hazardous waste material from its current and former plants. Except as discussed
above regarding the Southington and ILCO Sites, the exact amount of the future
costs to ABI resulting from its liability, if any, is indeterminable due to such
unknown factors as the magnitude of clean-up costs, the timing and extent of the
remedial actions that may be required, determination of ABI's liability in
proportion to other responsible parties and the extent to which costs may be
recoverable from insurance.
In addition, ABI has been named as a defendant in two environmental lawsuits. In
one case, an action is pending in the United States District Court for the
District of Massachusetts captioned Olin Corporation v. Fisons, plc, et al,
commenced on May 26, 1993. In 1964, ABI sold a former chemical manufacturing
facility. There have been three other owners between ABI and the present owner.
It has been alleged that ABI, along with the three other former owners (who are
also defendants), is responsible for a portion of the site's soil and
groundwater response and remediation costs. Plaintiff claims to have incurred
over $22 million dollars in response and other costs to date. While there is
insufficient information to determine what the total costs will be or the extent
of ABI's responsibility, if any, management believes that it has legal and
equitable defenses to this suit. In another suit, ABI is alleged to have sent
hazardous waste to a municipal landfill. In order to avoid the cost of
litigation, ABI has offered to
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contribute $172,620 as part of $2.8 million being raised by 14 third-party
defendants to reach a global settlement of the case.
The past and future costs to clean up the site are expected to be approximately
$24 million.
ABI is involved in other routine legal proceedings relating to its business and
operations. ABI does not believe that these proceedings, in the aggregate, will
have a material adverse effect on ABI's results of operations or financial
condition.
ABI's subsidiary, Congoleum, is also involved in the following legal
proceedings, as reported in Congoleum Corporation's Annual Report on Form 10-K,
as filed with the Commission on March 24, 1998:
As of December 31, 1997, Congoleum was named as defendant, together in most
cases with numerous other companies, in approximately 654 currently pending
lawsuits (including workers' compensation cases) involving approximately 6,455
individuals alleging personal injury from exposure to asbestos or
asbestos-containing products. The plaintiffs in these cases, as well as similar
cases in the past which have been settled or dismissed, allege that they or the
individuals they represent have contracted asbestosis, pleural thickening,
mesothelioma, cancer or other lung disease as a result of exposure to asbestos
in the course of their activities as plumbers, carpenters, floor installers,
machinists, or in other capacities, either as independent contractors or as
employees of shipyards or other industries utilizing asbestos-containing
products (or, in the workers' compensation cases, as employees of Congoleum or
the former tile division of ABI, now part of Congoleum) and that included among
such products which caused their diseases were sheet products provided by
Congoleum or resilient tile provided by ABI's former tile division or both.
Congoleum discontinued the manufacture of asbestos-containing sheet vinyl
products in 1983, and ABI's former tile division ceased manufacturing
asbestos-containing tile products in 1984. In general, asbestos-containing
products have not been found to pose a health risk unless the asbestos becomes
airborne. All of the asbestos in asbestos-containing sheet vinyl and tile
products sold by Congoleum or ABI's former tile division was fully bonded or
encapsulated during the manufacturing process. Congoleum has issued warnings not
to remove asbestos-containing flooring by sanding or other methods that allow
the asbestos fibers to become airborne. Although there can be no assurance,
Congoleum believes, based upon the nature of its asbestos-containing products
and its experience with cases to date, that any potential liability from pending
personal injury claims relating to Congoleum's asbestos-containing resilient
vinyl products will not have a material adverse effect in the aggregate on the
financial position of Congoleum. In one of these cases tried before a jury in
the Superior Court of California in Los Angeles held in May and June 1997, the
Company and another defendant were found liable for $3.2 million in damages,
subject to proportional liability under
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California law. The jury found that the Company was liable for only 25% of the
plaintiff's non-economic damages but as a result of post-verdict motions the
trial judge purportedly granted plaintiffs' motion for judgment notwithstanding
the verdict and held that California Proposition 51 (establishing proportionate
liability for non-economic damages) did not apply in this case. The Company and
the other defendant have appealed this decision. The Company's insurance carrier
has paid for the defense costs incurred and has indicated that it would be
responsible for paying the ultimate judgment in the case, subject to certain
limitations.
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. In four instances, although not named as a PRP, Congoleum has
received a "Request for Information." These pending proceedings currently relate
to ten waste disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut
and Delaware in which recovery from generators of hazardous substances is sought
for the cost of cleaning up the contaminated waste disposal sites. Although
there can be no assurances, Congoleum anticipates that these proceedings will be
resolved over a period of years for amounts (including legal fees and other
defense costs) which Congoleum believes, based on current estimates of liability
and, in part, on insurance coverage agreements, will not have a material adverse
effect in the aggregate on the Company's results of operations or financial
position.
On July 15, 1994, Kentile Floors, Inc. ("Kentile"), a debtor-in-possession
pursuant to Chapter 11 of the United States Bankruptcy Code, commenced an
adversary proceeding against Congoleum in the Bankruptcy Court for the Southern
District of New York. The complaint asserts that Congoleum tortiously interfered
with certain of Kentile's contracts with its distributors when those
distributors terminated their agreements with Kentile to become distributors of
Congoleum's floor tile. Kentile seeks $15.0 million in damages on account of the
alleged interference. Although Congoleum's motion to have the proceeding
dismissed on the pleadings was denied, Congoleum believes that Kentile's claim
is without merit and intends to vigorously contest the lawsuit. In connection
with the Chapter 11 cases of Color Tile, Inc. and certain affiliated companies
which were commenced on January 24, 1996 and remain pending in the United States
Bankruptcy Court for the District of Delaware, the unsecured creditors'
committee of Color Tile commenced an adversary proceeding against the Company in
January, 1998 seeking the avoidance and recovery of certain payments aggregating
$2.6 million made to the Company as allegedly voidable preferential and
postpetition transfers under the Bankruptcy Code and the turnover of $150,000
constituting an alleged deposit of Color Tile with the Company. The Company has
not yet answered the complaint but disputes the allegations made and intends to
vigorously defend its position.
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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 is traded on the American Stock Exchange (ticker
symbol: ABL). The approximate number of record holders of ABI's Common Stock at
March 12, 1998 was 500.
High and low stock prices and dividends for the last two years were:
Sales Price of Common Shares
----------------------------
1997 1996
Quarter ---- ----
Ended High Low High Low
-------- ---- --- ---- ---
March 31 26 21 1/8 22 5/8 18 7/8
June 30 25 5/8 20 1/2 21 18 1/2
September 30 24 3/8 17 7/8 20 3/4 18 1/2
December 31 26 7/8 19 1/2 23 1/8 19 7/8
Cash Dividends Per Common Share
-------------------------------
Quarter
Ended 1997 1996
------- ---- ----
March 31 $ .10 $ .10
June 30 .10 .10
September 30 .10 .10
December 31 .10 .10
---- -----
$ .40 $ .40
==== =====
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ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $417,512 $417,961 $404,473 $106,145 $103,851
Earnings before
other items 11,922 13,103 10,811 4,900 3,022
Non-controlling
interests (3,777) (6,804) (4,706)
Equity in earnings of
joint venture 7,361 2,349
Net earnings 8,145 6,299 6,105 12,261 5,371
Total assets 299,686 324,966 303,487 82,804 71,697
Long-term debt 94,409 106,721 110,919 4,188 6,249
Number of shares used
in computing basic
earnings per share 3,633,076 3,645,089 3,619,198 3,560,471 3,617,022
Basic earnings per
share 2.24 1.73 1.69 3.44 1.48
Cash dividends per
common share .40 .40 .35 .14375 .075
Data for 1993 reflects the effect of the formation of a joint venture involving
Congoleum. Data for 1995, 1996 and 1997 reflect the consolidation of the
financial condition and results of operations of Congoleum and K&M with and into
those of ABI. See Note 4 of Notes to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 were $417.5 million as compared
to $418.0 million for the year ended December 31, 1996. Although consolidated
net sales between years were relatively flat, there were significant swings
between the various operations of ABI. The largest positive swing was increased
sales volume at K&M Associates L.P. ("K&M") where shipments were made to more
than 1900 additional stores for a major customer who previously had been
serviced by K&M at approximately 200 of its stores. K&M currently is servicing
the entire 2100 stores for this customer under a long-term contractual
arrangement. At Congoleum, sales decreased from lower average selling prices due
to competitive pressures, loss of sales to a major retail customer who ceased
operations in mid 1997, and an inventory reduction by Congoleum's largest
distributor. Sales at ABI's Tape and Canadian divisions reflect increases over
last year.
Other revenues decreased by $1.3 million in 1997 to $1.1 million from $2.4
million last year. The factors that caused the decrease included a decrease in
commission income at K&M, foreign exchange losses at our ABI Belgian operation
and reduced Royalty income at Congoleum. ABI's foreign operations are limited
and conducted in countries that historically have had stable currencies. The
strong U.S. dollar in relation to the Belgian franc in 1997 did penalize our
operation in Belgium by approximately $.5 million. ABI continues to believe that
future movements of foreign currency exchange rates would not significantly
affect its consolidated results of operations.
Cost of product sold in 1997 increased to 69.4% of net sales from 68.5% last
year. This increase in cost is attributable to the results at Congoleum where
margins decreased as a result of higher raw material costs, a less profitable
mix of products sold, and manufacturing inefficiencies experienced preparing for
the overhaul of a major production line. At both ABI and K&M, cost improvements
were experienced, but were not sufficient to cover the cost increases at
Congoleum.
Selling, general and administrative expenses decreased slightly to 24.4% of net
sales compared to 24.7% last year. Decreases in sales-related costs and
incentive compensation at Congoleum more than offset increased spending for
merchandising displays. At K&M, the increased sales volume experienced in 1997
had the effect of reducing the sales percentage relationship to expenses in this
area.
14
Interest expense decreased $1.4 million in 1997 to $9.3 million from $10.7 in
1996. This decrease occurred at Congoleum as a result of lower average debt
outstanding and a greater amount of interest capitalized in connection with
capital expenditures in 1997.
The provision for income taxes declined to 38% of pretax income in 1997 from 40%
in 1996 as a result of the lower income level at Congoleum, which reduced the
average effective statutory rate and lower effective state income tax rates.
Net income for the year ended December 31, 1997 was $8.1 million, up by $1.8
million over last year's net income of $6.3 million. ABI, Congoleum and K&M were
all profitable in 1997. K&M operated at a loss in 1996 and Congoleum's
contribution to net earnings was greater in 1996. Basic net earnings per share
was $2.24 in 1997, up from $1.73 in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 were $418.0 million as compared
to $404.5 million for the year ended December 31, 1995, an increase of $13.5
million or 3.3%. Sales increases were reflected at ABI's Tape and Canadian
divisions due to an improvement in the economies in the areas serviced by these
operations. Sales increases at Congoleum were generated due to new customers,
increased demand from the manufactured housing industry and a 2-3% price
increase. Partially offsetting this at Congoleum was a decline in purchases by a
major retail customer currently operating under bankruptcy protection. 1996 K&M
sales remained level with 1995, even though 1995 included only 9 months of K&M's
operations. Direct sales at K&M were reduced as the Company focused on the
higher margin service sales, and sales were adversely affected by a higher level
of credits and returns.
The slight decrease in other revenues to $2.4 million in 1996 from $3.0 million
in 1995 is due to a small foreign exchange loss in 1996 and the receipt of a
small pre-acquisition profit distribution from K&M in 1995. Because ABI's
foreign operations are limited and conducted in countries that historically have
had stable currencies and low inflation, ABI believes movements of foreign
currency exchange rates in the future would not significantly affect its results
of operations.
Cost of products sold in 1996 decreased to 68.5% of net sales from 71.4% last
year. This improvement was generated at both Congoleum and ABI's Canadian
division where margins improved due to lower raw material costs, increased sales
and pricing and improved manufacturing productivity. Margin improvement also
occurred at K&M due to an increase in service sales and a decrease in non-
service sales.
15
Selling, general and administrative expenses increased in 1996 to 24.7% of net
sales compared to 22.5% in 1995. At both ABI and Congoleum, higher spending on
marketing and new product development programs were the primary reason for
spending increases. At Congoleum, costs associated with establishing new
distribution in Canada increased costs. At K&M, field service and warehouse
costs relating to the high level of credits and allowances issued during the
year, together with costs associated with opening new service stores, were the
principal cause of cost increases in this area.
The provision for income taxes declined to 40% of pretax income in 1996 from 42%
in 1995 as a result of lower state taxes.
Net income for the year ended December 31, 1996 was $6.3 million, up slightly
from net income of $6.1 million for 1995. ABI and Congoleum were profitable in
1996, while K&M operations continue to reflect losses; however, at a lower rate
than that experienced in 1995.
Liquidity and Capital Resources
At December 31, 1997, consolidated working capital was $67.5 million, the ratio
of current assets to current liabilities was 1.9 to 1, and the debt to equity
ratio was 1.53 to 1. Influencing the debt to equity ratio is $76.6 million of
Congoleum debt which has no recourse to ABI. Net cash provided by operations
during 1997 was $25.4 million, generated mainly from net earnings and
depreciation. Capital expenditures for 1998 are estimated to be in the range of
$22 to $26 million. At ABI, capital expenditures cover normal replacement of
machinery and equipment and process improvement purposes. At Congoleum, they are
proceeding with a major program to modernize and improve their plant and
equipment. Because of these programs at Congoleum, capital expenditures are
expected to continue at this level for the next two years. Depreciation and
amortization expense is forecast at $15.0 million.
During 1997, Congoleum repurchased 959,700 shares of its Common Stock for an
aggregate cost of $9.5 million. Congoleum also purchased $11.2 million par value
of its 9% Senior Notes. Congoleum may repurchase an additional $6.6 million par
value of its 9% Senior Notes pursuant to an existing authorization. The
Company's Board of Directors may change this authorization or authorize
additional purchases of the Company's Common Stock in the future.
The Company has completed an assessment of the steps it believes will be
necessary for its existing and planned data processing systems to operate
properly when confronted with dates beginning in the year 2000. A plan has been
developed which identifies the systems affected and the steps that will be
required to assure year 2000 compliance. The Company's existing plans to improve
operations by replacing or upgrading systems in the ordinary course
16
of business during 1998 and 1999 will have the additional benefit of providing
year 2000 compliance in many instances. The resources required to make the
remaining systems compliant have been estimated and are being provided by a
combination of existing employees and outside contractors. The Company has
retained or believes it will be able to retain the necessary employees and
outside resources to accomplish this, and that the cost to achieve compliance
will not be material to the Company's financial position or results of
operations. However, if any governmental agencies, key customers or key
suppliers are unable to make the necessary computer system changes on a timely
basis, such inability could negatively impact the Company's results of
operations.
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 over a period of three 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 to its customers.
Certain legal and administrative claims are pending or have been asserted
against ABI, which are considered incidental to its business. 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 clean-up
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 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.
ABI records a liability for environmental remediation and asbestos-related
claim costs when a clean-up program or claim payment becomes probable and the
costs can be reasonably estimated. As assessments and clean-ups progress, these
liabilities are adjusted based upon progress in determining the timing and
extent of remedial actions and the related costs and damages. The extent and
amounts of the liabilities can change substantially due to factors such as the
nature or extent of contamination, changes in remedial requirements and
technological improvements. Estimated insurance
17
recoveries related to these liabilities are reflected in other noncurrent
assets.
ABI has recorded its estimate of loss associated with the foregoing claims;
however, the ultimate outcome of these matters cannot presently be determined
and, because of the amount and timing of any actual loss suffered by ABI, could
possibly be material to the results of operations or cash flows for a particular
quarterly or annual reporting period.
Cash requirements for capital expenditures, working capital, debt service,
equity investments in K&M and the current authorizations of $4.7 million to
repurchase ABI common stock and $6.6 million to repurchase Congoleum senior
notes, are expected to be financed from operating activities and borrowings
under existing lines of credit which at ABI are presently $24.0 million and at
Congoleum are presently $30.0 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required under this item are incorporated
herein by reference to pages 21 through 53 of this Form 10-K. The consolidated
financial statement schedule required under this item is incorporated herein
by reference to page 54 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 14, 1998 filed with the
Securities and Exchange Commission within 120 days after December 31, 1997 and
is incorporated herein by reference.
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 14, 1998 filed with the
Securities and Exchange Commission within 120 days after December 31, 1997 and
is incorporated herein by reference.
18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 14, 1998 filed with the
Securities and Exchange Commission within 120 days after December 31, 1997 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 14, 1998 filed with the
Securities and Exchange Commission within 120 days after December 31, 1997 and
is incorporated herein by reference.
PART IV
ITEM 14. 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 subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated balance sheets - December 31, 1997 and 1996
Consolidated statements of earnings -
Years ended December 31, 1997, 1996 and 1995
Consolidated statements of stockholders' equity -
Years ended December 31, 1997, 1996 and 1995
Consolidated statements of cash flows -
Years ended December 31, 1997, 1996 and 1995
Notes to consolidated financial statements
(2) The following financial statement schedule is included in Item 14 (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.
19
(3) Listing of Exhibits
The listing of exhibits required under this item is incorporated herein
by reference to pages 56 through 59 of this Form 10-K.
(b) Reports on Form 8-K. None.
(c) Exhibits: The required exhibits are filed herewith following the required
Exhibit Index.
(d) Financial Statement Schedules: The required consolidated financial
statement schedule is included on page 54 of this Form 10-K.
20
Report of Ernst & Young LLP, Independent Auditors
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, 1997 and 1996,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the Index at
Item 14(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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Biltrite
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with 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.
ERNST & YOUNG LLP
Boston, Massachusetts
March 4, 1998
21
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands of dollars)
December 31
1997 1996
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 19,306 $ 33,658
Short-term investments 7,900 17,500
Accounts and notes receivable, less
allowances of $5,052 in 1997 and $4,935 in
1996 for doubtful accounts and discounts 30,254 34,849
Inventories 74,355 81,058
Prepaid expenses and other current assets 9,187 8,660
-----------------------------
Total current assets 141,002 175,725
Other assets:
Goodwill, net 23,421 24,510
Deferred income taxes 2,636 3,068
Other assets 12,171 9,779
-----------------------------
38,228 37,357
Property, plant and equipment, net 120,456 111,884
-----------------------------
Total assets $299,686 $324,966
=============================
December 31
1997 1996
-----------------------------
Liabilities and stockholders' equity
Current liabilities:
Notes payable to banks $ 5,500 $ 10,250
Accounts payable 19,060 27,342
Accrued expenses 47,769 49,859
Current portion of long-term debt 1,156 1,156
-----------------------------
Total current liabilities 73,485 88,607
Long-term debt, less current portion 93,253 105,565
Other liabilities 51,271 50,135
Noncontrolling interests 16,332 18,898
Stockholders' equity:
Common stock, par value $.01--authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,423 19,423
Retained earnings 60,924 56,920
Equity adjustment from foreign currency
translation (2,759) (1,921)
Minimum pension liability (546) (877)
-----------------------------
77,088 73,591
Less cost of shares of common stock in treasury
(971,394 shares in 1997 and 977,854 shares
in 1996) 11,743 11,830
-----------------------------
Total stockholders' equity 65,345 61,761
-----------------------------
Total liabilities and stockholders' equity $299,686 $324,966
=============================
See accompanying notes.
22
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Earnings
(In thousands of dollars, except per share data)
Years ended December 31
1997 1996 1995
-------------------------------------
Revenues:
Net sales $ 417,512 $ 417,961 $ 404,473
Interest 1,626 1,807 1,765
Other 1,078 2,422 3,026
-------------------------------------
420,216 422,190 409,264
Costs and expenses:
Cost of products sold 289,739 286,370 288,938
Selling, general and
administrative expenses 101,838 103,099 91,204
Interest 9,344 10,747 10,402
-------------------------------------
400,921 400,216 390,544
-------------------------------------
Earnings before income taxes and
other items 19,295 21,974 18,720
Provision for income taxes 7,373 8,871 7,909
-------------------------------------
11,922 13,103 10,811
Noncontrolling interests (3,777) (6,804) (4,706)
-------------------------------------
Net earnings $ 8,145 $ 6,299 $ 6,105
=====================================
Earnings per share:
Basic $ 2.24 $ 1.73 $ 1.69
=====================================
Diluted $ 2.18 $ 1.69 $ 1.61
=====================================
See accompanying notes.
23
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands of dollars)
Foreign
Additional Currency Minimum
Common Paid-in- Retained Translation Pension Treasury
Stock Capital Earnings Adjustment Liability Stock
-------------------------------------------------------------------
Balance at January 1, 1995 $18,997 $49,644 $(2,437) $12,083
Net earnings 6,105
Dividends declared ($.35 per
share) (1,276)
Effects of Congoleum capital
transactions (2,377)
Foreign currency translation
adjustment 103
Exercise of stock options (512)
Tax benefits associated with
the exercise of stock options 472
Purchase of treasury stock 1,593
Issuance of treasury stock in
connection with K&M
transactions (2,174)
Minimum pension liability
adjustment, net of tax
benefit $(445)
-------------------------------------------------------------------
Balance at December 31, 1995 19,469 52,096 (2,334) (445) 10,990
Net earnings 6,299
Dividends declared ($.40 per
share) (1,458)
Effects of Congoleum capital
transactions (17)
Change in par value $46 (46)
Foreign currency translation
adjustment 413
Exercise of stock options (39)
Purchase of treasury stock 879
Minimum pension liability
adjustment, net of tax
benefit (432)
-------------------------------------------------------------------
Balance at December 31, 1996 46 19,423 56,920 (1,921) (877) 11,830
Net earnings 8,145
Dividends declared ($.40 per
share) (1,453)
Effects of Congoleum capital
transactions (2,688)
Foreign currency translation
adjustment (838)
Exercise of stock options (89)
Purchase of treasury stock 2
Minimum pension liability
adjustment, net of tax
benefit 331
-------------------------------------------------------------------
Balance at December 31, 1997 $46 $19,423 $60,924 $(2,759) $(546) $11,743
===================================================================
See accompanying notes.
24
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands of dollars)
Years ended December 31
1997 1996 1995
-----------------------------------------
Operating activities
Net earnings $ 8,145 $ 6,299 $ 6,105
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 14,501 13,874 12,104
Provision for doubtful accounts 2,433 2,885 2,522
Deferred income taxes (470) 1,934 2,393
Accounts and notes receivable 1,718 (7,197) 2,685
Inventories 5,830 1,495 (5,355)
Prepaid expenses and other current assets (816) 1,733 (718)
Accounts payable and accrued expenses (9,623) 2,315 (7,007)
Noncontrolling interests 3,777 6,804 4,706
Other (53) (1,165) (1,631)
-----------------------------------------
Net cash provided by operating activities 25,442 28,977 15,804
Investing activities
Purchases of short-term investments (40,200) (45,000) (22,005)
Proceeds from sales of short-term investments 49,800 27,500 50,300
Investments in property, plant and equipment (22,183) (19,869) (14,121)
Business acquisitions, net of cash acquired (1,680) (5,274)
-----------------------------------------
Net cash (used) provided by investing activities (12,583) (39,049) 8,900
Financing activities
Long-term borrowings 15,000
Payments on long-term debt (12,312) (19,457) (3,436)
Net short-term borrowings (payments) (4,750) 10,250 12,000
Payment of loans from affiliates (5,792)
Net proceeds from Congoleum equity offering 56,219
Purchase and retirement of Congoleum Class B shares (5,630) (60,450)
Purchase of treasury shares (3,896) (879) (1,593)
Other (1,338) (1,419) (1,378)
-----------------------------------------
Net cash (used) provided by financing activities (27,926) 3,495 (4,430)
Effect of foreign exchange rate changes on cash 715 938 (678)
-----------------------------------------
Increase (decrease) in cash and cash equivalents (14,352) (5,639) 19,596
Cash and cash equivalents at beginning of year 33,658 39,297 19,701
-----------------------------------------
Cash and cash equivalents at end of year $ 19,306 $ 33,658 $ 39,297
=========================================
See accompanying notes.
25
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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) as well as entities
over which it has voting control. As described in Note 4, ABI in 1995 gained
voting control over Congoleum Corporation (Congoleum) and K&M Associates L.P.
(K&M). (ABI, Congoleum and K&M are collectively referred to as the Company.)
Intercompany accounts and transactions, including transactions with associated
companies which result in intercompany profit, are eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Some of the information presented in this
report constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
Cash Equivalents
Cash equivalents represent highly-liquid debt instruments with maturities of
three months or less at the date of purchase. The carrying value of cash
equivalents approximates fair value.
Short-Term Investments
Investments in A1/P1 commercial paper with a maturity greater than three months,
but less than six months, at the time of purchase are considered to be
short-term investments. The carrying amount of the commercial paper approximates
fair value due to its short maturity.
26
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
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
and the first-in, first-out (FIFO) method for the Company's foreign inventories.
Property, Plant and Equipment
These assets are stated at cost. Expenditures for maintenance, repairs and
renewals are charged to expense; major improvements are capitalized.
Depreciation, which is determined using the straight-line method, is provided
over the estimated useful lives (30 to 40 years for buildings and building
improvements, 10 to 15 years for production equipment and heavy duty vehicles,
and three to 10 years for light-duty vehicles and office furnishings and
equipment).
Debt Issue Costs
Costs incurred in connection with the issuance of long-term debt have been
capitalized and are being amortized over the life of the related debt
agreements. Such costs, net of accumulated amortization, amounted to $1,547,000
and $2,359,000 at December 31, 1997 and 1996, respectively, and are included in
other noncurrent assets.
Goodwill
The excess of purchase cost over the fair value of the net assets acquired
(goodwill) established in 1993 by Congoleum is being amortized on a
straight-line basis over 40 years. Goodwill associated with the K & M
transactions (see Note 4) is being amortized over 20 years. At each balance
sheet date, the Company evaluates the recoverability of its goodwill using
certain financial indicators, such as historical and future ability to generate
income from operations. Accumulated amortization amounted to $6,483,000 and
$5,394,000 at December 31, 1997 and 1996, respectively.
27
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate the Company's assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to fair market value is required.
Revenue Recognition
The Company records revenue, net of a provision for estimated returns and
allowances, upon shipment.
Income Taxes
The Company provides for income taxes based upon earnings reported for financial
statement purposes. Deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and tax bases of assets
and liabilities.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
requires the recognition of, or disclosure of, compensation expense for grants
of stock options or other equity instruments issued to employees based on their
fair value at the date of grant. As permitted by SFAS No. 123, the Company
elected the disclosure requirements instead of recognition of compensation
expense and therefore will continue to apply existing accounting rules.
Research and Development Costs
Expenditures relating to the development of new products are charged to
operations as incurred and amounted to $5,388,000, $5,513,000 and $4,441,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
28
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Foreign Currency Translation
All 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 a
separate component of 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
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share. Under SFAS No. 128, primary and fully diluted earnings per share are
replaced by basic and diluted 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
determined based upon average market price for the period.
Reclassifications
For comparative purposes certain prior years' amounts have been reclassified to
conform to the current year presentation.
Environmental Remediation Liabilities
Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 96-1,
Environmental Remediation Liabilities. SOP 96-1 provides authoritative guidance
on the recognition, measurement, display, and disclosure of environmental
remediation liabilities. The adoption of SOP 96-1 did not have a material effect
on the Company's financial position, income or liquidity.
29
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Pending Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components. SFAS No. 131
establishes standards for public companies to report information about operating
segments in financial statements, and supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise, but retains the requirements to
report information about major customers. SFAS No. 130 and SFAS No. 131 are
effective for the Company in 1998. The Company does not believe the adoption of
these Statements will have a significant effect on its financial statements.
2. Inventories
Inventory at December 31 consisted of the following:
1997 1996
-----------------------------------
(In thousands)
Finished goods $53,139 $55,356
Work-in-process 9,422 9,315
Raw materials and supplies 11,794 16,387
-----------------------------------
$74,355 $81,058
===================================
At December 31, 1997, domestic inventories determined by the LIFO inventory
method amounted to $54,713,000 ($58,312,000 at December 31, 1996). If the FIFO
inventory method had been used for these inventories, they would have been
$1,224,000 higher at December 31, 1997 and $329,000 lower at December 31, 1996.
30
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:
1997 1996
-----------------------------------
(In thousands)
Land and improvements $ 5,411 $ 5,451
Buildings 50,281 45,294
Machinery and equipment 177,997 158,050
Construction-in-progress 4,643 12,561
-----------------------------------
238,332 221,356
Less accumulated depreciation 117,876 109,472
-----------------------------------
$120,456 $111,884
===================================
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. In 1997, $823,000 of interest
cost was capitalized. Capitalized interest in 1996 and 1995 was not material.
Depreciation expense amounted to $12,600,000, $12,151,000 and $11,274,000 in
1997, 1996 and 1995, respectively.
4. Related-Party Transactions
Included in other assets on the accompanying balance sheets is ABI's investment
in Compania Hulera Sula, S.A., a 50%-owned associate. The investment is
accounted for on the cost method due to the uncertainty of the political climate
and currency restrictions in Honduras. During 1997, the Company wrote down its
investment from $1,100,000 to $850,000 to reflect a reduction in Hulera Sula's
net worth.
31
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Related-Party Transactions (continued)
1997 Transactions
During 1997, Congoleum's Board of Directors approved a plan to repurchase up to
$10,000,000 of Congoleum's common stock (Class A and Class B shares). During
1997, Congoleum repurchased $9,524,000 of common stock at fair market value
under the program. The effect of the repurchase of shares was to increase ABI's
ownership interest from 44% to 49%. In addition, as of December 31, 1997, ABI's
ownership of 4,395,605 shares of Congoleum's Class B common stock represented
64% of the voting control of Congoleum.
The reduction of Congoleum's equity from the repurchase of common stock resulted
in a reduction of ABI's investment in Congoleum of $2,688,000, which was charged
to retained earnings.
1996 and 1995 Transactions
On February 8, 1995, Congoleum completed a public offering of 4,650,000 shares
of Class A Common Stock at $13 per share. The net proceeds of the offering,
together with certain other funds of Congoleum, were used to acquire a portion
of Congoleum's outstanding Class B Common Stock held by Hillside Industries
Incorporated. As a result of these transactions, ABI recorded a charge to
stockholders' equity of $2,377,000 in 1995. In conjunction with these
transactions, the Company exchanged its shares of Class B Common Stock for
4,395,605 shares of a new series of Class B Common Stock (the foregoing
transactions are collectively referred to as the Congoleum transactions). The
exchange of stock did not change the Company's 44% ownership interest, however,
the new shares represented 57% of the voting shares of Congoleum, giving ABI
majority voting control. Accordingly, the accounts of Congoleum were
consolidated into the financial statements of the Company beginning in 1995.
During 1995, the Company purchased an additional 56% limited partnership
interest and 7% sole general partnership interest in K&M, a national jewelry
supplier (the K&M transactions). The K&M transactions were completed in a series
of transactions for aggregate consideration of $13,605,000 and were accounted
for using the purchase method. Goodwill of $10,863,000 was recorded in
connection with these transactions and is being amortized using the
straight-line method over a 20-year life.
32
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Related-Party Transactions (continued)
The first series of transactions, in which ABI acquired 51% limited partnership
interest and 7% sole general partnership interest, were completed effective
April 1, 1995, and provided ABI voting control over K&M. Accordingly, the
accounts of K&M have been consolidated in the financial statements of ABI since
April 1, 1995. A second transaction, in which ABI acquired an additional 5%
limited partnership interest, was completed in August 1995.
In January 1996, ABI acquired an additional limited partnership interest of 12%
for consideration of $1,939,000. No additional partnership interest was acquired
in 1997. At December 31, 1997, ABI owns an 82% partnership interest in K&M.
In conjunction with the K&M transactions, ABI also entered into agreements with
the remaining limited partners of K&M, providing ABI the option to buy, and
providing the limited partners of K&M the option to sell, the remaining
partnership interests in K&M. If all of the remaining limited partnership
interests in K&M were to be purchased by ABI, the purchase price would amount to
approximately $2,929,000 at December 31, 1997.
5. Accrued Expenses
Accrued expenses at December 31 consist of the following:
1997 1996
----------------------------------
(In thousands)
Accrued advertising and sales promotions $21,215 $ 20,666
Employee compensation and related benefits 9,880 12,836
Interest 3,223 3,745
Environmental liabilities 3,535 3,267
Income taxes 5,130 3,046
Other 4,786 6,299
----------------------------------
$47,769 $ 49,859
==================================
33
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements
Long-term debt at December 31 consists of the following:
1997 1996
-----------------------------------
(In thousands)
9.0% Senior Notes, due 2001 $76,594 $ 87,750
Series A Notes 15,000 15,000
Other notes 2,815 3,971
-----------------------------------
94,409 106,721
Less current portion 1,156 1,156
-----------------------------------
$93,253 $105,565
===================================
The 9.0% Senior Notes are obligations of ABI's subsidiary, Congoleum. The Senior
Notes have no recourse to the assets of ABI and K&M, and are redeemable at the
option of Congoleum, in whole or in part, at any time on and after February 1,
1998 at a predetermined redemption price (ranging from 103% to 100%), plus
accrued and unpaid interest to the date of redemption. As a result of
Congoleum's consummation of its initial public stock offering in 1995, it may
use all or a portion of the proceeds of such offering on or before the third
anniversary of the issuance of the Senior Notes to redeem up to 25% of the
aggregate principal amount of the Senior Notes originally issued at a redemption
price of 108%, plus accrued and unpaid interest to the date of redemption.
In 1996, Congoleum's Board of Directors approved a program to repurchase up to
$10,000,000 of its outstanding Senior Notes either in the open market or in
privately negotiated transactions. During 1997, the Board of Directors increased
the repurchase program to $20,000,000. During 1996 and 1997, Congoleum
repurchased $2,250,000 and $11,156,000, respectively, of its Senior Notes. In
connection with the repurchases in 1997, Congoleum recorded an extraordinary
charge of $279,000, net of $160,000 of income tax benefits, to write off the
portion of the debt issuance cost and premiums associated with the repurchased
Senior Notes. Such charges were immaterial to the financial statements for 1996.
34
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
In January 1996, ABI entered into a credit agreement with an insurance company
(the Agreement) providing for the issuance of senior promissory notes
aggregating $30 million. In January 1996, $15 million principal amount of notes
were issued (Series A Notes). The Series A Notes bear interest at 6.7% per annum
and are payable in annual installments of $3 million beginning in 1999. ABI,
with the consent of the lender, may issue through January 1998 the additional
$15 million of promissory notes available under the agreement. All notes issued
under the Agreement are obligations of ABI and have no recourse to the assets of
Congoleum or K&M. The fair value of the Series A Notes approximates their
carrying value at both December 31, 1997 and 1996.
Other notes mainly comprise promissory notes issued in connection with the K&M
transactions (described in Note 4), which bear interest at 1% above the First
National Bank of Boston's base lending rate (8.5% at December 31, 1997), and are
repayable through 1999. The carrying value of the other notes approximates fair
value.
The Company, at December 31, 1997, had revolving and other short-term agreements
providing for secured and unsecured borrowings up to $64 million with interest
accruing at variable rates, which at December 31, 1997 ranged from 7.2% to 7.6%.
At December 31, 1997, the weighted-average interest rate on the $5.5 million
outstanding under these arrangements, which is unsecured, was approximately
7.4%. In January 1998, the Company reduced the unsecured line of credit to $54
million of which $4 million will be available for letters of credit. The
carrying value of amounts outstanding under these agreements at both December
31, 1997 and 1996, approximates fair value. Commitment fees and compensating
balance requirements associated with these agreements are insignificant.
The terms of the Company's loan agreements impose certain restrictions on its
ability to incur additional indebtedness and call for the maintenance of
specific levels of working capital and minimum net worth and restrict the
payment of cash dividends to holders of common stock and other capital
distributions as defined. At December 31, 1997, retained earnings which were
unrestricted as to such distributions amounted to $4,864,000.
Interest paid on all outstanding debt amounted to $10,216,000 in 1997,
$10,825,000 in 1996 and $10,111,000 in 1995.
35
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
Principal payments on the Company's long-term obligations due in each of the
next five years are as follows (in thousands):
1998 $ 1,156
1999 4,156
2000 3,000
2001 79,594
2002 3,000
7. Other Liabilities
Other liabilities at December 31 consist of the following:
1997 1996
-----------------------------------
(In thousands)
Pensions $13,248 $14,282
Postretirement benefits 9,958 10,249
Environmental remediation and product
related liabilities 13,981 10,926
Accrued workers' compensation 4,425 4,871
Deferred income taxes 4,404 4,707
Accrued compensation 961 1,119
Other 4,294 3,981
-----------------------------------
$51,271 $50,135
===================================
8. Pension Plans
The Company sponsors several noncontributory defined benefit pension plans
covering substantially all employees. 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.
Pension fund assets are invested in a variety of equity and fixed-income
securities.
36
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
The components of net periodic pension cost were as follows:
1997 1996 1995
-----------------------------------------------------
(In thousands)
Service cost--benefits earned during the period $ 1,535 $ 1,495 $ 1,268
Interest cost on projected benefit obligation 4,808 4,706 4,767
Actual return on plan assets (9,263) (4,393) (8,558)
Net amortization and deferral 4,592 (158) 4,400
-----------------------------------------------------
Net periodic pension cost $ 1,672 $ 1,650 $ 1,877
=====================================================
The following tables present a reconciliation of the plans' funded status to
amounts recorded in the consolidated balance sheets at December 31, 1997 and
1996:
Plans Whose
Plans Whose Assets Accumulated
Exceed Accumulated Benefits Exceed
Benefits Assets
------------------------------------------
(In thousands)
December 31, 1997:
Actuarial present value of benefit obligations:
Vested benefit obligations $41,596 $ 26,091
==========================================
Accumulated benefit obligations $42,263 $ 27,126
==========================================
Projected benefit obligations $44,830 $ 27,126
Plan assets at fair market value 48,693 15,363
------------------------------------------
Projected benefit obligations less than (in excess of) plan
assets 3,863 (11,763)
Unrecognized net loss (gain) (3,331) 1,317
Unrecognized net obligation (asset) 1,109 (333)
Unrecognized prior service cost (3,414) 1,223
Adjustment required to recognize minimum liability (2,638)
------------------------------------------
Accrued pension liability ($719 included in accrued
expenses) $(1,773) $ (12,194)
==========================================
37
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
Plans Whose
Plans Whose Assets Accumulated
Exceed Accumulated Benefits Exceed
Benefits Assets
------------------------------------------
(In thousands)
December 31, 1996:
Actuarial present value of benefit obligations:
Vested benefit obligations $ 8,575 $ 57,784
==========================================
Accumulated benefit obligations $ 8,641 $ 59,322
==========================================
Projected benefit obligations $ 10,411 $ 59,826
Plan assets at fair market value 13,957 43,402
------------------------------------------
Projected benefit obligations less than (in excess of) plan
assets 3,546 (16,424)
Unrecognized net loss (gain) (4,157) 5,773
Unrecognized net obligation (asset) (227) 1,258
Unrecognized prior service cost (1) (2,446)
Adjustment required to recognize minimum liability (4,331)
------------------------------------------
Accrued pension liability ($3,127 included in accrued
expenses) $ (839) $(16,170)
==========================================
Key assumptions used in developing the actuarial present value of the Company's
benefit obligations are as follows:
1997 1996
------------------------------
Weighted-average discount rate 7% 7%
Rate of increase in future compensation levels 5%-5.5% 5%-5.5%
The expected long-term rate of return on plan assets assumptions used to develop
net periodic pension cost was 9% in 1997 and ranged from 7% to 9% in 1996 and
1995.
38
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
The Company also has three 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to a
range of 12% to 15% of compensation with partially matching Company
contributions. Defined contribution pension expense for the Company was
$1,579,000, $2,043,000 and $1,999,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
9. Postretirement Benefits Other than Pensions
The Company provides certain health care and life insurance benefits for certain
retirees of Congoleum. The determination of benefit cost for post retirement
plans is based on plan provisions. These benefits are provided through insurance
companies whose premiums are based on benefits paid or claims experienced.
Net periodic post retirement benefits cost for the years ended December 31 is as
follows:
1997 1996 1995
----------------------------------------------
(In thousands)
Service cost-benefits earned during the year $ 139 $ 141 $ 137
Interest cost on post retirement benefit obligation 505 484 480
Amortization of prior service cost (409) (447) (524)
Amortization of losses 99 90 47
----------------------------------------------
Total expense $ 334 $ 268 $ 140
==============================================
39
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Postretirement Benefits Other than Pensions (continued)
At December 31, the actuarial and recorded liabilities for these post retirement
benefits, none of which have been funded, are as follows:
1997 1996
-----------------------------------
(In thousands)
Accumulated post retirement benefit obligations:
Retirees and dependents $ (4,106) $ (4,136)
Fully eligible active plan participants (1,191) (999)
Other active employees (2,255) (2,355)
Unrecognized prior service cost (3,224) (3,633)
Unrecognized net loss 220 303
-----------------------------------
Accrued post retirement benefit obligations (10,556) (10,820)
Less current portion 598 571
-----------------------------------
Noncurrent post retirement benefit obligation $ (9,958) $(10,249)
===================================
A weighted-average assumed discount rate of 7% was used to measure the
accumulated post retirement benefit obligation as of December 31, 1997 and 1996.
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 6% in 1997; the rate was assumed to decrease
gradually to 5% over the next 10 years and remain level thereafter. An increase
of one percent in the assumed health care cost trend rates for each future year
would have increased the aggregate of service and interest cost components of
net periodic post retirement benefit cost by $ 70,000 for the year ended
December 31, 1997 and would have increased the post retirement benefit
obligation by $706,000 as of December 31, 1997.
10. 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 2001. 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 $3,428,000 in 1997, $3,179,000 in 1996 and
$3,142,000 in 1995.
40
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
Future minimum payments relating to operating leases are as follows (in
thousands):
1998 $2,351
1999 1,652
2000 1,183
2001 74
2002 5
-----------------
Total future minimum lease payments $5,265
=================
Contingent Liabilities
Certain legal and administrative claims are pending or have been asserted
against the Company, which are considered incidental to its business. Among
these claims, the Company 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, some of which are properties previously owned by the
Company. The amount of such future cost is indeterminable due to such unknown
factors as the magnitude of clean-up costs, the timing and extent of the
remedial actions that may be required, the determination of the Company's
liability in proportion to other potentially responsible parties, the effects of
joint and several liability at Superfund sites, and the extent to which costs
may be recoverable from insurance. The contingencies also include claims for
personal injury and/or property damage.
The Company records a liability for environmental remediation and
asbestos-related claim costs when a clean-up program or claim payments become
probable and the costs can be reasonably estimated. As assessments and clean-ups
progress, these liabilities are adjusted based upon progress in determining the
timing and extent of remedial actions and the related costs and damages. The
extent and amounts of the liabilities can change substantially due to factors
such as the nature or extent of contamination, changes in remedial requirements
and technological improvements. The recorded liabilities are not reduced by the
amount of estimated insurance recoveries. Such estimated insurance recoveries of
$6,918,000 and $3,939,000 are reflected in other noncurrent assets at December
31, 1997 and 1996, respectively, and are considered probable of recovery.
41
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
The Company has recorded its estimate of loss associated with the foregoing
claims, however, the ultimate outcome of these matters cannot presently be
determined.
11. 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 are as
follows:
1997 1996
-----------------------------------
(In thousands)
Deferred tax assets:
Accruals and reserves $18,753 $20,080
Credit carryforwards 1,178 969
-----------------------------------
Total deferred tax assets 19,931 21,049
Deferred tax liabilities:
Depreciation 12,723 13,013
Inventory 1,211 1,861
Undistributed domestic earnings 2,038 1,916
Foreign taxes 991 941
Other 1,560 1,722
-----------------------------------
Total deferred tax liabilities 18,523 19,453
-----------------------------------
Net deferred tax asset $ 1,408 $ 1,596
===================================
Credit carryforwards consist primarily of alternative minimum tax credits and
foreign tax credits.
42
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
The components of earnings before income taxes for the years ended December 31
are as follows:
1997 1996 1995
-----------------------------------------------------
(In thousands)
Domestic $17,128 $20,037 $17,330
Foreign 2,446 1,937 1,390
-----------------------------------------------------
$19,574 $21,974 $18,720
=====================================================
Significant components of the provision for income taxes for the years ended
December 31 are as follows:
1997 1996 1995
-----------------------------------------------------
(In thousands)
Current:
Federal $ 6,346 $ 5,887 $ 4,007
Foreign 931 339 537
State 566 711 972
-----------------------------------------------------
Total current 7,843 6,937 5,516
Deferred (470) 1,934 2,393
-----------------------------------------------------
$ 7,373 $ 8,871 $ 7,909
=====================================================
Deferred income taxes include provisions of $301,000, $532,000 and $414,000
during 1997, 1996 and 1995, respectively, for ABI's share of the undistributed
earnings of Congoleum, which does not file a consolidated tax return with ABI.
43
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense for the years ended December 31 is as follows:
1997 1996 1995
--------------------------------------
U.S. statutory rate 34% 35% 35%
State income taxes, net of federal benefits
3 4 5
Undistributed domestic earnings 1 2 2
Other - (1) -
======================================
Effective tax rate 38% 40% 42%
======================================
Undistributed earnings of foreign subsidiaries aggregated approximately
$17,928,000 at December 31, 1997, which, under existing law, will not be subject
to U.S. tax until distributed as dividends. Because the earnings have been or
are intended to be reinvested in foreign operations, no provision has been made
for U.S. income taxes that may be applicable thereto.
Income taxes paid amounted to approximately $5,727,000 in 1997, $4,526,000 in
1996, and $8,509,000 in 1995.
44
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the years ended December 31:
1997 1996 1995
---------------------------------------------------
(In thousands, except per share amounts)
Numerator:
Net income $8,145 $6,299 $6,105
===================================================
Denominator:
Denominator for basic earnings per share:
Weighted-average shares 3,633 3,645 3,619
Denominator for diluted earnings per share:
Dilutive employee stock options 105 84 173
---------------------------------------------------
Weighted-average shares and assumed conversions 3,738 3,729 3,792
===================================================
Basic earnings per share $2.24 $1.73 $1.69
===================================================
Diluted earnings per share $2.18 $1.69 $1.61
===================================================
45
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans
ABI Stock Plans
During 1993, ABI adopted 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 (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.
Under the terms of the plan, options granted may be either non-qualified 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. During 1993, 294,800 stock
options were granted. No stock options or SARs were granted during 1994, 1995 or
1996. During 1997, 238,500 stock options were granted. In addition, the
Committee may grant restricted stock to participants of the plan at no cost.
Other than the restrictions which limit the sale and transfer of these shares,
participants are entitled to all the rights of a shareholder. No restricted
stock or restricted stock units were granted during the three years ended
December 31, 1997.
During 1985, ABI adopted a stock option plan which permits the issuance of
300,000 shares of common stock to key executives. Under the terms of the plan,
options granted may be either non-qualified or incentive stock options and are
issued at prices ranging from 85% to 100% of fair market value at the date of
grant. Options granted under the plan are exercisable in installments; however,
no options are exercisable within one year or later than ten years from the date
of grant.
46
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
The following tables summarize information about ABI's fixed stock options.
1997 1996 1995
---------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------
Outstanding at beginning of
year 342,640 $15.60 349,440 $15.17 435,460 $13.46
Granted 238,500 23.63 -- -- -- --
Exercised (6,560) 13.56 (5,800) 6.76 (83,180) 6.17
Forfeited -- -- (1,000) 7.00 (2,840) 16.18
------------ ------------ ------------
Outstanding at end of year 574,580 18.79 342,640 15.60 349,440 15.18
============ ============ ============
Options exercisable at end of
year 312,932 227,024 155,004
Available for grant at end of
year 19,340 107,840 107,840
Number Number Weighted-Average
Option Outstanding at Exercisable at Remaining
Grant Date 12/31/97 12/31/97 Contractual Life Exercise Price
- -----------------------------------------------------------------------------------------------
May 1991 51,400 51,400 3.42 years $ 7.00
August 1993 284,680 227,744 5.75 years 16.88
April 1997 238,500 33,788 9.33 years 23.63
Congoleum Stock Option Plan
Effective with its public offering, Congoleum adopted the 1995 stock option plan
(the plan). Under the plan, options to purchase up to 550,000 shares of
Congoleum's Class A common stock may be issued to officers and key employees.
Congoleum has proposed to amend the plan to increase the number of shares to be
issued from 550,000 to 800,000, an increase of 250,000 shares, subject to
shareholder approval. These options may be either incentive stock options or
non-qualified stock options, and the option price must be at least equal to the
fair value of Congoleum's Class A common stock on the date of grant. All options
granted have ten-year terms and vest over five years at the rate of 20% per year
beginning on the first anniversary of the date of grant.
47
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
The following table summarizes information about Congoleum's fixed stock
options.
1997 1996 1995
---------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------
Outstanding at beginning of
year 484,500 $12.89 481,000 $13.00 --
Granted 56,000 14.25 22,000 10.63 498,000 $13.00
Exercised (2,000) 13.00 -- --
Forfeited (26,600) 13.53 (18,500) 13.00 (17,000) 13.00
------------ ------------ ------------
Outstanding at end of year 511,900 13.01 484,500 12.89 481,000 13.00
============ ============ ============
Options exercisable at end of
year 185,200 94,100 --
Available for grant at end of
year 286,100 65,500 69,000
Pro Forma Disclosure
Pro forma disclosure, as required by SFAS No. 123, regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement.
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 1997: risk-free interest rate of 6.69%; expected dividend yield
of 12.70%; volatility factor of the expected market price of the Company's
common stock of .288; and a weighted-average expected life of the options of
seven and a half years.
The fair value for the Congoleum options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: option forfeiture of 15%;
risk-free interest rates of 5.76%, 5.99% and 5.90%; no dividends; volatility
factors of the expected market price of Congoleum's common stock of .356, .388
and .388; and a weighted-average expected life of the options of seven years.
48
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
The weighted-average fair value of options granted under ABI's 1993 Stock Award
and Incentive Plan during 1997 was $1.25. The weighted-average fair value of
options granted under Congoleum's 1995 Stock Option Plan during 1997, 1996 and
1995 was $4.34, $4.68 and $5.69, respectively.
For purposes of pro forma disclosures, the estimated fair value of the ABI and
Congoleum options ($541,000 for the 1997 grants, $103,000 for the 1996 grant and
$2,832,000 for the 1995 grant) is amortized to expense over the options' vesting
period. The initial impact on pro forma net income may not be representative of
compensation expense in future years, when the effect of the amortization of
multiple awards would be reflected in the pro forma disclosures.
The Company's pro forma information for the years ended December 31 is as
follows:
1997 1996 1995
--------------------------------------------------------
(In thousands, except per share amounts)
Net income $8,145 $6,299 $6,105
Estimated pro forma compensation expense
from stock options:
1995 Grant (275) (249) (228)
1996 Grant (9) (8) --
1997 Grants (48) -- --
--------------------------------------------------------
Pro forma net income $7,813 $6,042 $5,877
========================================================
Pro forma earnings per share:
Basic $2.15 $1.66 $1.62
Diluted 2.09 1.62 1.55
49
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments
The Company operates in three principal industries: industrial, flooring and
jewelry products. Vinyl and vinyl composition floor coverings are manufactured
by the flooring group with distribution primarily through floor covering
distributors, retailers and contractors for commercial and residential use. The
industrial products group principally manufactures pressure-sensitive tape,
sheet rubber packing, matting, and footwear heels and soles, and conveyor
belting. These products are marketed through distributors as well as directly to
original equipment manufacturers and end users. The accounts of Congoleum are
included in the flooring products segment. The jewelry segment reflects the
results of K&M Associates L.P. which is a national costume jewelry supplier to
the mass merchandiser markets. The Company considers all revenues and expenses
except interest expense and investment income and all assets except investments
in affiliated companies to be of an operating nature and, accordingly, allocates
them to industry segments regardless of the profit center in which recorded.
Information on Business Segments
1997 1996 1995
-----------------------------------------------------
(In thousands)
Net sales:
Flooring products $270,365 $286,970 $277,528
Industrial products 102,610 96,619 92,208
Jewelry 44,537 34,372 34,737
-----------------------------------------------------
Consolidated $417,512 $417,961 $404,473
=====================================================
Operating profits:
Flooring products $ 16,373 $ 26,265 $ 22,015
Industrial products 6,930 6,927 7,826
Jewelry 3,710 (2,278) (2,484)
Interest expense and investment income (7,718) (8,940) (8,637)
-----------------------------------------------------
Consolidated $ 19,295 $ 21,974 $ 18,720
=====================================================
50
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
1997 1996 1995
-----------------------------------------------------
(In thousands)
Identifiable assets:
Flooring products $208,676 $231,895 $218,232
Industrial products 60,538 60,475 53,625
Jewelry 29,622 31,496 30,530
Investments in affiliated companies 850 1,100 1,100
-----------------------------------------------------
Consolidated $299,686 $324,966 $303,487
=====================================================
Depreciation and Amortization:
Flooring products $ 11,239 $ 10,723 $ 9,466
Industrial products 2,366 2,255 2,053
Jewelry 896 896 585
-----------------------------------------------------
Consolidated $ 14,501 $ 13,874 $ 12,104
=====================================================
Capital expenditures:
Flooring products $ 20,437 $ 13,309 $ 11,126
Industrial products 1,633 6,473 2,820
Jewelry 113 87 175
-----------------------------------------------------
Consolidated $ 22,183 $ 19,869 $ 14,121
=====================================================
In 1997, three customers of K&M accounted for approximately 38%, 35% and 20%,
respectively, of the jewelry segment net sales. Also in 1997, two customers
accounted for 21% and 18%, respectively, of the flooring industry segment net
sales. The loss of any one of these customers could adversely affect the results
of operations of the respective segment.
In 1996, three customers of K&M accounted for approximately 36%, 28% and 17%,
respectively, of the jewelry segment net sales. Also in 1996, two customers
accounted for 21% and 19%, respectively, of the flooring industry segment net
sales.
51
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
In 1995, three customers of K&M accounted for approximately 29%, 26% and 23%,
respectively, of the jewelry segment net sales. Also in 1995, two customers each
accounted for 20%, respectively, of the flooring industry segment net sales.
Amounts included in the above information relating to ABI's foreign operations
are summarized as follows:
Net
Sales and Sales to
Other Unaffiliated Operating Identifiable Depreciation Capital
Income Customers Profit Assets Expense Expenditures
----------------------------------------------------------------------------------------------------
(In thousands)
1997: $63,275 $58,384 $2,498 $30,570 $1,583 $1,208
====================================================================================================
1996: $65,163 $59,655 $1,937 $31,459 $1,691 $1,441
====================================================================================================
1995: $56,303 $56,230 $1,390 $28,684 $1,576 $1,701
====================================================================================================
Intersegment and interarea sales include an element of profit which has been
eliminated in consolidation. Operating profit is total revenue less operating
expenses, excluding interest and general corporate expenses. Identifiable assets
by industry include both assets directly identified with those operations and an
allocable share of jointly used assets.
The vast majority of the Company's sales are to select flooring distributors and
retailers located in the United States. Economic and market conditions, as well
as the individual financial condition of each customer, are considered when
establishing allowances for losses from doubtful accounts.
52
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------
(In thousands of dollars, except per share amounts)
1997
- ----
Net sales $95,513 $101,592 $120,036 $100,371
Gross profit 28,570 31,378 38,420 29,405
Net earnings 47 884 4,820 2,394
Net earnings per share:
Basic .01 .24 1.33 .66
Diluted .01 .24 1.31 .64
1996
- ----
Net sales $89,905 $110,175 $111,263 $106,618
Gross profit 24,736 35,280 35,391 36,184
Net earnings (loss) (210) 1,640 1,744 3,125
Net earnings (loss) per share:
Basic (.06) .45 .48 .86
Diluted (.06) .44 .47 .84
The earnings per share amounts are presented to comply with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. For further
discussion of earnings per share and the impact of SFAS No. 128, see Note 1 to
the consolidated financial statements.
53
American Biltrite Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
Year ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ----
Allowances for doubtful
accounts and
cash discounts $4,935 $ 2,433 $ 2,316(A) $5,052
====================================================================================================
Reserve for returns
and markdowns
$3,880 $ 10,588 $ 11,327 (A) $3,141
====================================================================================================
1996
- ----
Allowances for doubtful
accounts and
cash discounts $6,477 $ 2,885 $ 4,427 (A) $4,935
====================================================================================================
Reserve for returns
and markdowns
$3,301 $ 11,342 $ 10,763 (A) $3,880
====================================================================================================
1995
- ----
Allowances for doubtful
accounts and
cash discounts $1,466 $ 4,097 $5,408 (B) $ 4,494 (A) $6,477
====================================================================================================
Reserve for returns
and markdowns
$ 8,365 $2,521 (C) $ 7,585 (A) $3,301
====================================================================================================
(A) Represents accounts charged off during the year, net of recoveries
(B) Represents allowances for Congoleum as of January 1, 1995 and K&M as of
April 1, 1995
(C) Represents reserve for returns and markdowns for K&M as of April 1, 1995
54
Pursuant to the requirement 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,
AMERICAN BILTRITE INC.
(Registrant)
Date: March 4, 1998 by: /s/ Gilbert K. Gailius
----------------------- ----------------------------------
Gilbert K. Gailius, Vice President
Finance, Chief Financial Officer
and Director
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 4, 1998 by: /s/ Roger S. Marcus
----------------------- ----------------------------------
Roger S. Marcus, Chairman of the
Board, Chief Executive Officer
and Director
Date: March 4, 1998 by: /s/ Richard G. Marcus
----------------------- ----------------------------------
Richard G. Marcus, President, Chief
Operating Officer and Director
Date: March 4, 1998 by: /s/ William M. Marcus
----------------------- ----------------------------------
William M. Marcus, Executive Vice
President, Treasurer, Chairman of
the Executive Committee and Director
Date: March 4, 1998 by: /s/ John C. Garrels, 3rd
----------------------- ----------------------------------
John C. Garrels, 3rd, Director
Date: March 4, 1998 by: /s/ Kenneth I. Watchmaker
----------------------- ----------------------------------
Kenneth I. Watchmaker, Director
Date: March 4, 1998 by: /s/ Edward J. Lapointe
----------------------- ----------------------------------
Edward J. Lapointe, Controller
55
INDEX OF EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
3(1) XI Restated Certificate of Incor- -
poration
3(2) IV By-Laws, amended and restated -
as of March 13, 1991
10(3) I, V 1985 Stock Option Plan -
("the 1985 Plan")
10(4) II, V Form of Agreement pursuant to -
the 1985 Plan providing for
ISO's
10(5) III, V Form of Agreement pursuant to -
the 1985 Plan providing for
NQSO's
10(6) VI 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
10(7) VII 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(8) VIII, V 1993 Stock Award and Incentive -
Plan
10(9) X K&M Associates L.P. Amended and -
Restated Agreement of Limited
Partnership
10(10) IX Purchase Agreement dated as of -
March 31, 1995 by and among
Ocean State and certain limited
partners of K&M
56
Page No.
--------
10(11) IX 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(12) IX Option Agreement dated as of -
April 1, 1995 by and among Ocean
State and certain limited
partners of K&M
10(13) IX 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(14) XI, V Split-Dollar Agreement dated as -
of December 20, 1996 by and
between American Biltrite Inc.
and Michael J. Glazerman, Trustee
of the Marcus Family Insurance
Trust u/t/d March 1, 1990
10(15) XI, V Split-Dollar Agreement dated as -
of December 20, 1996 by and
between American Biltrite Inc.
and the Marcus Family 1990
Insurance Trust
10(16) XI, V 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(17) XI, V 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
57
Page No.
--------
10(18) XI, V Split-Dollar Agreement dated as -
of December 20, 1996 by and
between American Biltrite Inc.
and the Roger S. Marcus
Irrevocable Insurance Trust Dated
Nov. 29, 1996, Richard G. Marcus,
Trustee
10(19) XI, V Split-Dollar Agreement dated as -
of December 20, 1996 by and
between American Biltrite Inc.
and the Roger S. Marcus
Irrevocable Insurance Trust Dated
Nov. 29, 1996
10(20) XI, V Split-Dollar Agreement dated as -
of January 9, 1997 by and between
American Biltrite Inc. and Joseph
D. Burns
10(21) XI, V Description of Supplemental -
Retirement Benefits for
Gilbert K. Gailius
11 XII Statement Re: Computation of -
Per Share Earnings
21 Subsidiaries of the Registrant 60-61
(including each subsidiary's
jurisdiction of incorporation
and the name under which each
subsidiary does business)
23(1) Consent of Ernst & Young LLP, 62
Independent Auditors
27 Financial Data Schedule, -
filed herewith
58
----------------
I Incorporated by reference to exhibit 10(2) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1986. (1-4773)
II Incorporated by reference to exhibit 10(3) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1986. (1-4773)
III Incorporated by reference to exhibit 10(4) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1986. (1-4773)
IV Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
V Compensatory plans required to be filed as exhibits pursuant to
Item 14(c) of Form 10-K.
VI Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K filed December 21, 1992.
VII Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K filed March 25, 1993.
VIII Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
IX 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.
X Incorporated by reference to Item 14 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
XI Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year
ended December 31, 1996
XII Incorporated by reference to Note 12 of the Company's
consolidated financial statements (filed herewith)
59