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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2002 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date covered by this report.
Title of Each Class Outstanding at November 12, 2002
- ------------------- --------------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 2002 (unaudited) and December 31, 2001 ..... 3
Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2002
and 2001 (unaudited) ..................................... 4
Condensed Consolidated Statements and Cash Flows for
the nine months ended September 30, 2002 and 2001
(unaudited) .............................................. 5
Notes to Unaudited Condensed Consolidated Financial
Statements ............................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .............................................. 25
Item 4. Controls and Procedures .................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 27
Item 6. Exhibits and Reports on Form 8-K ......................... 27
Signatures ....................................................... 27
2
FORM 10-Q
PART I. Item 1. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of dollars)
September 30, December 31,
2002 2001
--------- ---------
ASSETS Unaudited (Note A)
CURRENT ASSETS
Cash and cash equivalents $ 15,151 $ 16,804
Short-term investments 1,416
Accounts receivable, net 54,948 39,768
Inventories 95,036 93,923
Prepaid expenses & other current assets 16,070 19,368
--------- ---------
TOTAL CURRENT ASSETS 181,205 171,279
Insurance for asbestos-related liabilities 57,674 60,787
Goodwill, net 11,300 23,773
Other assets 17,549 17,420
Property, plant and equipment, net 148,395 150,659
--------- ---------
TOTAL ASSETS $ 416,123 $ 423,918
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,833 $ 28,501
Accrued expenses 61,271 48,253
Notes payable 15,042 11,646
Current portion of long-term debt 1,054 1,038
--------- ---------
TOTAL CURRENT LIABILITIES 104,200 89,438
Long-term debt, less current portion 124,449 125,123
Asbestos-related liabilities 61,155 68,627
Other liabilities 48,217 51,530
Noncontrolling interests 7,581 11,952
STOCKHOLDERS' EQUITY
Common stock, par value $0.01-authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,548 19,548
Retained earnings 74,031 80,752
Accumulated other comprehensive loss (7,972) (7,966)
Less cost of shares in treasury (15,132) (15,132)
--------- ---------
70,521 77,248
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 416,123 $ 423,918
========= =========
See accompanying notes to consolidated condensed financial statements.
3
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 111,771 $ 109,891 $ 336,486 $ 305,155
Interest and other income 652 1,026 2,379 2,046
--------- --------- --------- ---------
112,423 110,917 338,865 307,201
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold 78,604 76,471 241,307 219,435
Selling, general and administrative expenses 27,933 26,339 84,407 81,027
Interest expense 2,869 2,831 8,427 8,075
--------- --------- --------- ---------
109,406 105,641 334,141 308,537
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME
TAXES AND OTHER ITEMS 3,017 5,276 4,724 (1,336)
Income tax (benefit) 1,193 1,894 1,842 (487)
Noncontrolling interests (382) (680) (570) 880
--------- --------- --------- ---------
EARNINGS BEFORE
ACCOUNTING CHANGE 1,442 2,702 2,312 31
Cumulative effect of accounting change (7,742)
--------- --------- --------- ---------
Net earnings (loss) $ 1,442 $ 2,702 $ (5,430) $ 31
========= ========= ========= =========
Net earnings per common share before
cumulative effect of accounting
change, basic and diluted $ .42 $ .79 $ .67 $ .01
Cumulative effect of accounting change (2.25)
--------- --------- --------- ---------
Net earnings (loss) per common
share, basic and diluted $ .42 $ .79 $ (1.58) $ .01
========= ========= ========= =========
Weighted average number of common
and equivalent shares outstanding 3,442 3,442 3,442 3,460
========= ========= ========= =========
Dividends declared per common share $ .125 $ .125 $ .375 $ .375
See accompanying notes to consolidated condensed financial statements.
4
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands of dollars)
Nine Months Ended
September 30,
2002 2001
-------- --------
OPERATING ACTIVITIES
Net earnings (loss) $ (5,430) $ 31
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 13,199 14,433
Deferred income taxes 2,569 (1,166)
Cumulative effect of accounting change 7,742
Changes in operating assets and liabilities:
Accounts receivable (14,939) (9,866)
Inventories (705) (3,851)
Prepaid expenses and other assets 3,278 1,397
Accounts payable and accrued expenses 11,449 (11,528)
Noncontrolling interests 570 (880)
Other liabilities (11,047) (1,540)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 6,686 (12,970)
INVESTING ACTIVITIES
Purchase of short-term investments (4,175)
Proceeds from sales of short-term investments 1,416 13,568
Investments in property, plant and equipment (10,289) (20,412)
Proceeds from sale of property, plant and equipment 648
Purchase of assets from Swank, Inc. (4,646)
Purchase of additional partnership interests in K&M (2,066)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (8,873) (17,083)
FINANCING ACTIVITIES
Net short-term borrowings 3,369 9,027
Long-term borrowing 24,749
Payments on long-term debt (775) (10,676)
Purchase of treasury shares (1,066)
Dividends paid (1,291) (1,296)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,303 20,738
Effect of foreign exchange rate changes on cash (769) 554
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,653) (8,761)
Cash and cash equivalents at beginning of period 16,804 16,859
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,151 $ 8,098
======== ========
See accompanying notes to consolidated condensed financial statements.
5
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
September 30, 2002
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly-owned subsidiaries
(and including K&M Associates L.P., referred to herein as "ABI", "American
Biltrite" or the "Company") as well as entities over which it has voting control
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments and
the cumulative effect of the change in accounting for goodwill) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
The consolidated balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidated condensed financial
statements have been reclassified to conform to the current period's
presentations.
Note B - Changes in Accounting Principles
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS
No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 141 applies to all business combinations completed after June
30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141
also establishes new criteria for determining whether intangible assets should
be recognized separately from goodwill. SFAS No. 142 provides that goodwill and
intangible assets with indefinite lives will not be amortized, but rather will
be tested for impairment on an annual basis. Adoption of SFAS No. 141 did not
have an impact on the consolidated results of operations or financial position
of the Company. SFAS No. 142 was effective for the Company as of January 1,
2002. During the first quarter of 2002, the Company performed an impairment test
of goodwill and concluded that there was impairment of goodwill related to both
its wholly owned subsidiary Janus Flooring Corporation ("Janus Flooring") and
its majority-owned subsidiary Congoleum Corporation ("Congoleum"). The Company
compared the implied fair value of their goodwill to the carrying value of
goodwill. It was determined that based on the fair value of both Congoleum and
Janus Flooring, there should be no goodwill recorded.
6
Congoleum recorded an impairment loss of $10.5 million during the first quarter
of 2002 based on this change in accounting principle. American Biltrite's share,
55%, in this impairment loss resulted in a charge of $5.8 million plus a charge
of $1.9 million for an impairment loss related to Janus Flooring goodwill for a
total charge of $7.7 million during the first quarter of 2002.
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS No. 142 occurred as of January 1, 2001 (in thousands,
except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net earnings before cumulative
effect of accounting change:
As reported $ 1,442 $ 2,702 $ 2,312 $ 31
Goodwill amortization 340 1,068
--------- --------- --------- ---------
As adjusted $ 1,442 $ 3,042 $ 2,312 $ 1,099
========= ========= ========= =========
Basic earnings per share before
cumulative effect of accounting change:
As reported $ .42 $ .79 $ .67 $ .01
Goodwill amortization .10 .31
--------- --------- --------- ---------
As adjusted $ .42 $ .89 $ .67 $ .32
========= ========= ========= =========
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144") was issued. The Company adopted SFAS No. 144
effective January 1, 2002. Among other things, SFAS No. 144 significantly
changes the criteria that would have to be met to classify an asset as
held-for-sale. Adoption of this pronouncement did not have an effect on the
Company's consolidated financial position or results of operations.
In November 2001, Emerging Issues Task Force (EITF) issue 01-09, "Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendor's
Products" ("EITF 01-09"), was issued. The Company adopted EITF 01-09 effective
January 1, 2002 as required. This issue addresses the manner in which companies
account for sales incentives to their customers. The Company's current
accounting policies for the recognition of costs related to these programs,
which is to accrue for costs as benefits are earned by the Company's customers,
are in accordance with the consensus reached in this issue. The Company has
reclassified amounts previously recorded in selling, general and administrative
expense as a reduction in sales. The impact for the nine months ended September
30, 2002 and 2001 was a reduction of sales and selling, general and
administrative expenses of $3.2 million and $3.9 million, respectively.
7
Note C - Inventories
Inventories at September 30, 2002 and December 31, 2001 consisted of the
following (in thousands):
September 30, December 31,
2002 2001
------- -------
Finished goods $66,263 $69,527
Work-in-process 12,258 11,382
Raw materials and supplies 16,515 13,014
------- -------
$95,036 $93,923
======= =======
Note D - Commitments and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described below. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts, and the matters may remain
unresolved for several years.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company will incur costs relating to a clean-up
program or will have to make claim payments and the costs or payments can be
reasonably estimated. As assessments are revised and clean-up programs progress,
these liabilities are adjusted to reflect such revisions and progress.
Liabilities of Congoleum comprise the majority of the environmental and other
liabilities reported on the Company's balance sheet. Due to the relative
magnitude and wide range of estimates of these liabilities and our belief that
recourse related to these liabilities is limited to Congoleum, these matters are
discussed separately following matters for which we believe American Biltrite
has actual or potential direct liability. However, since ABI includes Congoleum
in ABI's consolidated financial statements, to the extent Congoleum incurs a
liability or expense, it will impact upon ABI's financial statements.
ABI is a co-defendant with many other manufacturers and distributors of
asbestos-containing products in approximately 808 pending claims involving
approximately 2,233 individuals as of September 30, 2002. The claimants allege
personal injury from exposure to asbestos or asbestos-containing products.
Activity related to asbestos claims was as follows:
Nine Months Ended Year Ended
September 30, 2002 December 31, 2001
------------------ -----------------
Beginning claims 464 330
New claims 373 189
Settlements (4) (15)
Dismissals (25) (40)
---- ----
Ending claims 808 464
==== ====
The total indemnity costs incurred by ABI to settle claims during the nine
months ended September 30, 2002 and twelve months ended December 31, 2001 were
$0.2 million and $0.4 million, respectively, all of which was paid by ABI's
insurance carriers.
8
ABI's costs per claim vary depending on a number of factors, including the
nature of the alleged exposure, the injury alleged and the jurisdiction where
the claim was litigated. As of September 30, 2002, ABI has incurred indemnity
costs aggregating $3.0 million, all of which was paid by ABI's insurance
carriers.
Nearly all asbestos-related claims that have been brought against ABI to date
allege that various diseases were caused by exposure to asbestos-containing
resilient tile manufactured by ABI (or, in the workers' compensation cases,
exposure to asbestos in the course of employment with ABI). ABI discontinued the
manufacture of asbestos-containing tile products in 1985. In general,
governmental authorities have determined that asbestos-containing tile products
are nonfriable (i.e., cannot be crumbled by hand pressure) because the asbestos
was encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. ABI has issued warnings not to remove asbestos-containing
flooring by sanding or other methods that may cause the product to become
friable.
ABI regularly evaluates its estimated liability to defend and resolve current
and reasonably anticipated future asbestos-related claims. It reviews, among
other things, recent and historical settlement and trial results, the incidence
of past and pending claims, the number of cases pending against it and asbestos
litigation developments that may impact the exposure of ABI. One such
development is the increasing number of declarations of bankruptcy by companies
that were typically lead defendants in asbestos-related cases. ABI has noticed a
trend of increased asbestos-related liability exposure as a result of this
development since plaintiffs are seeking additional defendants and, with respect
to those claims in which there are solvent and insolvent defendants, courts,
under the legal theory of joint and several liability, are requiring solvent
defendants to fund the liabilities assessed on the insolvent co-defendants even
though the solvent defendants may have been found only partly responsible for
the plaintiffs' injuries. There has also been a significant increase over the
recent years in the number of claims and amount of damages sought involving
asbestos-related claims. These trends, if they continue, will have a negative
impact on ABI's claim experience. However, due to the limitations of the
available data and the difficulty of forecasting the numerous variables that can
affect the range of the liability, ABI's estimates of its potential
asbestos-related liability are highly uncertain. During the fourth quarter of
fiscal 2001, ABI updated its evaluation of the range of potential defense and
indemnity costs for asbestos-related liabilities and the insurance coverage in
place to cover these costs. As a result of the Company's analysis, the Company
has determined that its range of probable and estimable undiscounted losses for
asbestos-related claims through the year 2049 is $15.6 million to $27.8 million
before considering insurance recoveries, which ABI expects will fully cover its
liability based on its current claims experience. As discussed previously, it is
very difficult to forecast a liability for the Company's ultimate exposure for
asbestos-related claims as there are multiple variables that can affect the
timing, severity, and quantity of claims. As a result, the Company has concluded
that no amount within that range is more likely than any other, and therefore,
has determined that the amount of the gross liability it should record for
asbestos-related claims is $15.6 million in accordance with accounting
principles generally accepted in the United States. The amounts recorded by the
Company for its asbestos-related liability are reflected in its consolidated
balance sheet as a long-term liability.
In accordance with its accounting policy, the Company will conduct a detailed
analysis of its asbestos-related liabilities and related insurance coverage in
the fourth quarter of fiscal 2002. The results of this analysis may cause the
Company to increase the range of its probable and estimable undiscounted losses
for asbestos-related claims and the recorded amount of its gross liability for
asbestos-related claims. If these changes are realized, the Company may incur
charges against its income in the fourth
9
quarter of 2002, which if the charge were of a sufficient magnitude would have a
material adverse effect upon the Company's business, results of operations, and
financial position.
The same factors that affect developing forecasts of potential defense and
indemnity costs for asbestos-related liabilities also affect estimates of the
total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships.
ABI has determined, based on its review of its insurance policies and the advice
of legal counsel, that the entire amount of its estimated gross asbestos-related
liability at December 31, 2001 and September 30, 2002 is probable of recovery.
This determination was made after considering the terms of the available
insurance coverage, the financial viability of the insurance companies and the
terms of the coverage agreement with its carriers.
Since many uncertainties exist surrounding asbestos litigation, ABI will
continue to evaluate its asbestos-related estimated liability and corresponding
estimated insurance assets as well as the underlying assumptions used to derive
these amounts. It is possible that ABI's total liability for asbestos-related
claims may be greater than the recorded liability and that insurance recoveries
may be less than the recorded asset, and that if the actual liabilities exceed
the recorded liability, insurance coverage and recoveries available for the
additional liability will be less than the additional liability amount. These
uncertainties may result in ABI incurring future charges to income if it has to
adjust the carrying value of its recorded liabilities by an amount in excess of
any offsetting increase in its assets pertaining to asbestos-related claims.
Additionally, since ABI has recorded an amount representing the low end of the
range of exposure for asbestos-related claims, it is probable that over time
another amount within the range, or above that range, possibly by a substantial
amount, will be a better estimate of ABI's liability for asbestos-related
claims. Although the resolution of these claims will take place over time,
amounts recorded for the liability are not discounted, and the effect on results
of operations in any given year from a revision to these estimates could be
material.
ABI reported in its December 31, 2001 Form 10-K that it has been named as a
Potentially Responsible Party ("PRP") within the meaning of the federal
Comprehensive Environmental Response Compensation and Liability Act, as amended,
("CERCLA"), with respect to two sites in two states. There have been no material
developments relating to these sites during the nine month period ended
September 30, 2002. ABI also received notice from the present owner of a former
ABI plant with regard to notice that owner received from the Maine Department of
Environmental Protection ("MDEP") to clean up a dumpsite. The present owner has
submitted a Site Investigation Work Plan to the MDEP, which has been approved.
While the exact amount of the future costs to ABI resulting from its liability
at this site is indeterminable at this time, ABI believes, based upon current
information available, that its liability will not be material.
With regard to the Olin Corporation ("Olin") site in Wilmington, MA, including
the nine month period ended September 30, 2002, ABI has made periodic payments
of $2.0 million for reimbursement of response costs incurred by Olin with regard
to the site and reimbursement for Olin's internal costs since January 1, 1999,
each as provided under the settlement agreement. These periodic payments are in
addition to the $2.5 million payment made by ABI that was due at the time ABI
entered into the settlement agreement and related to ABI's share of alleged past
response costs
10
incurred by Olin through December 31, 1998 with regard to the site. Olin has
estimated that the response cost for all of 2002 will be approximately $2.5
million with ABI's allocated share being $0.3 million. ABI has estimated that
beyond 2002 the total response costs will be in the range of $16.3 million to
$28.5 million. As of September 30, 2002, ABI has estimated its share of
potential further liability for the Olin site to be in the range of $2.3 million
to $4 million before any recoveries from insurance. ABI expects that it will
recover from its insurance carriers a portion of any future amounts paid by ABI
for response costs incurred by Olin with respect to the Olin site.
ABI has been named by the United States Environmental Protection Agency ("EPA")
as a PRP along with seven other PRPs with respect to three neighborhood sites
("Sites") in Atlanta, Georgia where properties within the boundaries of the
Sites contain lead in the surface soil in concentrations that exceed EPA's
residential lead screening level. The EPA has requested that ABI sign an
administrative consent order. ABI has reviewed the EPA notification letter and
the administrative consent order and is now assessing its responsibility with
respect to the Sites and whether it is in its interest to sign the consent
order.
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended, ("CERCLA"), and similar state laws. In addition,
in two other instances, although not named as a PRP, Congoleum has received a
request for information. These pending proceedings currently relate to seven
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 sites. Congoleum's ultimate liability in
connection with those sites depends on many factors, including the volume of
material contributed to the site, the number of other PRP's and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA, and
certain other laws, as a PRP, Congoleum can be held jointly and severally liable
for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 51 companies, substantially all of which are large financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater remediation phase has not begun and the
remedial investigation/feasibility study related to the groundwater remediation
has not been approved. The PRP group estimated that future costs of groundwater
remediation, based on engineering and consultant studies conducted, would be
approximately $26 million. Congoleum's proportionate share, based on waste
disposed at the site, was estimated to be approximately 6.1%.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Estimated total cleanup costs, including
capital outlays and future maintenance costs for soil and groundwater
remediation are primarily based on engineering studies.
Although the outcome of these matters could result in significant expenses or
judgments, management does not believe based on present facts and circumstances
that their disposition will have a material adverse effect on the financial
position of Congoleum.
Congoleum is one of many defendants in approximately 13,075 pending claims
(including workers' compensation cases) involving approximately 39,626
individuals as of September 30, 2002, alleging personal injury or death from
exposure to asbestos or asbestos-containing products. There
11
were approximately 6,563 claims at December 31, 2001 that involved approximately
23,139 individuals. Activity related to asbestos claims was as follows:
Nine Months Ended Year Ended
September 30, 2002 December 31, 2001
------------------ -----------------
Beginning claims 6,563 1,754
New claims 7,156 5,048
Settlements (55) (40)
Dismissals (589) (199)
------- ------
Ending claims 13,075 6,563
======= ======
The total indemnity costs incurred to settle claims during the nine months
ending September 30, 2002 and twelve months ending December 31, 2001 were $2.1
million and $1.1 million, respectively. During the nine months ended September
30, 2002 and the twelve months ended December 31, 2001, Congoleum's insurance
carriers paid $1.3 and $1.1 million respectively in indemnity costs to settle
claims, plus related defense costs. In addition, during the quarter ended
September 30, 2002, Congoleum paid an additional $1.1 million in defense and
indemnity costs to settle claims, for which it expects to be partially
reimbursed by its excess insurance carriers once certain coverage terms are
clarified with those carriers. During the quarter ended September 30, 2002,
Congoleum also agreed to settle two claims for $1.6 million plus an assignment
of insurance proceeds. Congoleum paid this $1.6 million during the fourth
quarter of 2002, and does not anticipate being reimbursed for this amount by its
excess carriers or otherwise.
Costs per claim vary depending on a number of factors, including the nature of
the alleged exposure, the injury alleged, and the jurisdiction where the claim
was litigated. As of September 30, 2002, Congoleum has incurred indemnity costs
aggregating $13.5 million, to resolve asbestos-related claims involving over
33,700 claimants, substantially all of which amount has been paid by Congoleum's
insurance carriers. As of September 30, 2002, Congoleum's historical average
indemnity cost per resolved claimant was approximately $400. As of September 30,
2002, over 99% of claims incurred by Congoleum have settled, on average, for
amounts less than $102 per claimant.
Nearly all asbestos-related claims that have been brought against Congoleum to
date allege that various diseases were caused by exposure to asbestos-containing
products, including sheet vinyl and resilient tile manufactured by Congoleum
(or, in the workers' compensation cases, exposure to asbestos in the course of
employment with Congoleum). Congoleum discontinued the manufacture of
asbestos-containing sheet vinyl products in 1983 and asbestos-containing tile
products in 1974. In general, governmental authorities have determined that
asbestos-containing sheet and tile products are nonfriable (i.e., cannot be
crumbled by hand pressure) because the asbestos was encapsulated in the products
during the manufacturing process. Thus, governmental authorities have concluded
that these products do not pose a health risk when they are properly maintained
in place or properly removed so that they remain nonfriable. Congoleum has
issued warnings not to remove asbestos-containing flooring by sanding or other
methods that may cause the product to become friable.
Congoleum regularly evaluates its estimated liability to defend and resolve
current and reasonably anticipated future asbestos-related claims. It reviews,
among other things, recent and historical settlement and trial results, the
incidence of past and recent claims, the number of cases pending against it and
asbestos litigation developments that may impact the exposure of Congoleum. One
12
such development is the increasing number of declarations of bankruptcy by
companies that were typically lead defendants in asbestos-related cases.
Congoleum has noticed a trend of increased asbestos-related liability exposure
for many companies including itself as a result of this development since
plaintiffs are seeking additional defendants and, with respect to those claims
in which there are solvent and insolvent defendants, courts, under the legal
theory of joint and several liability, are requiring solvent defendants to fund
the liabilities assessed on the insolvent co-defendants even though the solvent
defendants may have been found only partly responsible for the plaintiffs'
injuries. There has also been a significant increase over the recent years in
the number of claims and amount of damages sought involving asbestos-related
claims. These trends, if they continue, will have a negative impact on
Congoleum's claim experience. However, due to the limitations of the available
data and the difficulty of forecasting the numerous variables that can affect
the range of the liability, Congoleum's estimates of its potential
asbestos-related liability are highly uncertain.
It is Congoleum's accounting policy to conduct a detailed analysis of its
asbestos-related liabilities and the insurance coverage applicable to those
liabilities when appropriate. During the fourth quarter of fiscal 2001,
Congoleum updated its evaluation of the range of potential defense and indemnity
costs for asbestos-related liabilities and the insurance coverage in place to
cover these costs. As a result of Congoleum's analysis, Congoleum has determined
that its range of probable and estimable undiscounted losses for
asbestos-related claims through the year 2049 is $52.4 million to $195.6 million
before considering the effects of insurance recoveries. As discussed previously,
it is very difficult to forecast a liability for Congoleum's ultimate exposure
for asbestos-related claims as there are multiple variables that can affect the
timing, severity, and quantity of claims. As a result, Congoleum concluded that
no amount within that range was more likely than any other, and therefore,
determined that the amount of the gross liability it should record for
asbestos-related claims was $53.3 million in accordance with accounting
principles generally accepted in the United States. Of this amount, $53.0
million was reflected in the balance sheet as a long-term liability and $0.3
million was included in accrued expenses as of December 31, 2001.
In accordance with its accounting policy, Congoleum will conduct a detailed
analysis of its asbestos-related liabilities and related insurance coverage in
the fourth quarter of fiscal 2002. The results of this analysis may cause
Congoleum to increase the range of its probable and estimable undiscounted
losses for asbestos-related claims and the recorded amount of its gross
liability for asbestos-related claims. If these changes are realized, Congoleum
may incur charges against its income in the fourth quarter of 2002, which if the
charge were of a sufficient magnitude, would have a material adverse effect upon
Congoleum's business, results of operations, and financial position.
During the period that Congoleum produced asbestos-containing products,
Congoleum purchased primary and excess insurance policies providing in excess of
$1 billion coverage for bodily injury asbestos claims. Through August 2002,
substantially all claims and defense costs were paid through primary insurance
coverage. In August 2002, Congoleum received notice that its primary insurance
coverage was exhausted. The excess insurance carriers are disputing that
exhaustion, claiming that the primary carriers owe an additional $13 million in
indemnity coverage plus related defense. A case was heard before the NJ Supreme
Court in September 2002 (the "Spaulding Case") in which excess carriers claimed
another company's primary coverage had not been exhausted for the same reasons
that Congoleum's excess carriers contend that Congoleum's primary coverage has
not been exhausted. Although Congoleum is not a party to this case, it expects
the decision in the Spaulding Case will probably resolve Congoleum's dispute
with its excess carriers. While there is a possibility that the Court's ruling
will have the effect of making Congoleum responsible for this $13 million in
insurance or remand the case for further proceedings without ruling, Congoleum
believes it more
13
probable that the Court's ruling will either have the effect that that primary
insurance companies owe additional coverage or that the primary coverage has
fully exhausted and the excess carriers owe the coverage. Furthermore, Congoleum
believes that recent claims settlements, including one involving an assignment
of insurance proceeds, further support Congoleum's position that its excess
carriers are currently responsible for providing defense and indemnity. In the
meantime, Congoleum is negotiating with its excess carriers to provide interim
funding for defense and indemnity pending resolution of this matter. Until such
an agreement is reached, or the matter otherwise resolved, Congoleum may be
required to fund the disputed indemnity and defense obligation.
During the three months ended September 30, 2002, Congoleum paid $1.1 million in
indemnity and defense costs denied by the carriers due to this dispute. While
there is a possibility that the decision in the Spaulding Case could be to
remand the case for further proceedings without ruling or establish that
Congoleum is responsible for this $13 million in insurance, Congoleum expects to
be reimbursed for some or all of these costs once the Spaulding Case is decided,
and Congoleum expects future defense and indemnity costs to be covered by either
its primary and/or excess insurance policies. However, it is likely that
Congoleum will share in these costs. The first layer of excess insurance
policies provides for $135 million in coverage. Of this layer, approximately 25%
to 33% (depending on the method used to allocate losses) was underwritten by
carriers who are presently insolvent. Congoleum anticipates that it will have to
pay some or all of the portion of costs for resolving asbestos-related claims
that are allocable to such insolvent carriers, and that it may, in turn, be able
to recover a portion of such payments from the estates or insurance guaranty
funds responsible for the obligations of these carriers.
The same factors that affect developing forecasts of potential defense and
indemnity costs for asbestos-related liabilities also affect estimates of the
total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. Congoleum has filed suit regarding insurance
coverage issues against its excess insurance carriers, the state guaranty funds
representing insolvent carriers, and its insurance brokers and has begun
settlement negotiations with several of these parties.
In connection with its evaluation of asbestos-related liabilities performed in
the fourth quarter of 2001, Congoleum determined, based on its review of its
insurance policies and the advice of legal counsel, that approximately $45.2
million of the estimated $53.3 million gross liability was probable of recovery.
This determination was made after considering the terms of the available
insurance coverage, the financial viability of the insurance companies, the
claims against state guaranty associations, and the status of negotiations with
Congoleum's carriers. In addition, in light of the uncertainties regarding
Congoleum's likelihood of fully recovering insurance proceeds from its excess
carriers for asbestos-related indemnity and defense costs incurred by Congoleum,
any future increase in Congoleum's recorded amount for its asbestos-related
liabilities will likely exceed any offsetting increase in its assets relating to
insurance receivables. Congoleum would likely incur a charge against its income
for this excess amount, which if the charge were of a sufficient magnitude,
would likely have a material adverse effect upon Congoleum's business, results
of operations, and financial condition.
The table below provides an analysis of changes in Congoleum's asbestos reserves
and insurance receivables from December 31, 2001 to September 30, 2002:
14
Cash
Balance Spending Receipts Balance
at Against from at
(in thousands) 12/31/01 Reclasses Additions Reserve Insurance 9/30/02
-------- --------- --------- ------- --------- -------
Reserves
Current $ 300 $ 7,472 $ -- $(1,050) $ -- $ 6,722
Long-term 53,003 (7,472) -- -- -- 45,531
------- ------- ------- ------- -------- -------
53,303 -- (1,050) 52,253
------- ------- ------- ------- -------- -------
Receivables
Current -- 1,834 -- -- -- 1,834
Long-term 45,163 (1,834) -- -- (1,279) 42,050
------- ------- ------- ------- -------- -------
45,163 -- -- -- (1,279) 43,884
------- ------- ------- ------- -------- -------
Net Asbestos Liability $ 8,140 $ -- $ -- $(1,050) $ (1,279) $ 8,369
======= ======= ======= ======= ======== =======
Since many uncertainties exist surrounding asbestos litigation, Congoleum will
continue to evaluate its asbestos-related estimated liability and corresponding
estimated insurance assets as well as the underlying assumptions used to derive
these amounts. It is reasonably possible that Congoleum's total liability for
asbestos-related claims may be greater than the recorded liability and that
insurance recoveries may be less than the recorded asset, and that if the actual
liabilities exceed the recorded liability, insurance coverage and recoveries
available for the additional liability amount will be less than the additional
liability. These uncertainties may result in Congoleum incurring future charges
to income if it has to adjust the carrying value of its recorded liabilities by
an amount in excess of any offsetting increase in its assets pertaining to
asbestos-related claims. Additionally, since Congoleum has recorded an amount
representing the low end of the range of exposure for asbestos-related claims,
it is probable that over time another amount within the range, or above that
range, possibly by a substantial amount, will be a better estimate of
Congoleum's liability for asbestos-related claims. Although the resolution of
these claims will take place over time, amounts recorded for the liability are
not discounted, and the effect on results of operations in any given year from a
revision to these estimates could be material.
Note E - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three and
nine month periods ended September 30, 2002 and 2001 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------- ------- ------- -----
Net earnings (loss) $ 1,442 $ 2,702 $(5,430) $ 31
Foreign currency translation adjustments (680) (732) (6) (901)
------- ------- ------- -----
Total comprehensive income (loss) $ 762 $ 1,970 $(5,436) $(870)
======= ======= ======= =====
15
Note F - Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding.
Note G - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division. Congoleum, which manufactures vinyl and vinyl
composition floor coverings with distribution primarily through floor covering
distributors, retailers and contractors for commercial and residential use,
represents the majority of the Company's flooring products segment, with the
balance represented by Janus Flooring, a manufacturer of prefinished solid
hardwood flooring. The tape products segment consists of two production
facilities in the United States and finishing and sales facilities in Belgium,
Singapore and Italy. The tape products segment manufactures paper, film, HVAC,
electrical, shoe and other tape products for use in industrial and automotive
markets. The jewelry segment reflects the results of K&M Associates L.P., a
national costume jewelry supplier to mass merchandisers and department stores.
The Company's Canadian division produces flooring, rubber products, including
materials used by footwear manufacturers, and other industrial products.
Segment Profit and Assets Three Months Ended Nine Months Ended
(In thousands) September 30, September 30,
2002 2001 2002 2001
-------- --------- --------- ---------
Revenues
Revenues from external customers:
Flooring products $ 59,917 $ 58,011 $ 189,673 $ 167,260
Tape products 20,306 20,508 62,023 64,634
Jewelry 21,603 21,937 55,681 41,877
Canadian division 9,945 9,435 29,109 31,384
-------- --------- --------- ---------
Total revenues from external customers 111,771 109,891 336,486 305,155
-------- --------- --------- ---------
Intersegment revenues:
Flooring products 45 70 205 259
Tape products 25 24 101 94
Jewelry
Canadian division 2,030 1,662 7,976 5,772
-------- --------- --------- ---------
Total intersegment revenues 2,100 1,756 8,282 6,125
-------- --------- --------- ---------
113,871 111,647 344,768 311,280
Reconciling items
Intersegment revenues (2,100) (1,756) (8,282) (6,125)
-------- --------- --------- ---------
Total consolidated revenues $111,771 $ 109,891 $ 336,486 $ 305,155
======== ========= ========= =========
16
Note G - Industry Segments (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------- ------- ------- -------
Segment profit (loss)
Flooring products $ 228 $ 1,452 $ (417) $(4,584)
Tape products (74) 542 1,059 1,093
Jewelry 3,309 3,750 5,152 3,534
Canadian division 130 (97) 648 383
------- ------- ------- -------
Total segment profit 3,593 5,647 6,442 426
Reconciling items
Corporate items (577) (394) (1,677) (1,674)
Intercompany profit 1 23 (41) (88)
------- ------- ------- -------
Total consolidated profit (loss) before
income taxes and other items $ 3,017 $ 5,276 $ 4,724 $(1,336)
======= ======= ======= =======
Sept. 30, Dec. 31,
(In thousands) 2002 2001
--------- ---------
Segment assets
Flooring products $ 276,987 $ 290,978
Tape products 57,899 55,853
Jewelry 43,268 39,109
Canadian division 32,141 31,822
--------- ---------
Total segment assets 410,295 417,762
Reconciling items
Corporate items 21,396 16,793
Intersegment accounts receivable (15,336) (10,446)
Intersegment profit in inventory (232) (191)
--------- ---------
Total consolidated assets $ 416,123 $ 423,918
========= =========
Certain amounts at December 31, 2001 have been reclassified to conform to the
current year's presentation.
17
FORM 10-Q
PART I. FINANCIAL INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2002
Results of Operations
Net sales for the third quarter of 2002 were $111.8 million compared to $109.9
million in the third quarter of 2001, an increase of $1.9 million or 1.7%. Net
sales for the first nine months of 2002 were $336.5 million, up $31.3 million or
10.3% from the first nine months of 2001. The improvement in third quarter sales
over year earlier levels was primarily due to the flooring segment, with both
Congoleum and Janus Flooring reporting sales increases. Jewelry segment sales in
the third quarter were slightly below the third quarter of 2001 due to an
earlier (second quarter) shipment of the back-to-school program this year. The
back-to-school program shipped in the third quarter last year, as did a large
final shipment to Kmart, and the lack of comparable shipments in the third
quarter of this year offset increased sales with other programs. Sales of the
Canadian segment in the third quarter improved over prior year levels due to
increased sales into the US, while sales of the Tape segment were slightly below
year earlier levels reflecting weak economic conditions in several of its end
user markets. Year to date sales are above the same period one year earlier due
to higher flooring segment sales resulting primarily from new products at
Congoleum and higher Jewelry sales arising from the addition of licensed product
lines and success of programs with a leading mass merchandiser. These increases
have more than offset lower sales in the Tape and Canadian segments, which have
been negatively affected by weak business spending.
Cost of products sold as a percentage of net sales was 70.3% in the third
quarter of 2002 versus 69.6% in the third quarter of 2001. For the nine months
ended September 30, 2002, cost of products sold as a percentage of net sales was
71.7% compared with 71.9% during the same period one year earlier. The increase
in cost of products sold as a percentage of sales in the third quarter of 2002
over the third quarter of 2001 was primarily due to increased costs in the
flooring segment relating to the start-up of a relocated wood flooring plant
coupled with a lower margin sales mix of resilient products. The improvement in
margins for the first nine months of 2002 over 2001 is due primarily to a
greater proportion of higher margin Jewelry sales in the overall mix.
Selling, general and administrative expenses as a percentage of sales were 25.0%
in the third quarter of 2002 compared to 24.0% in the third quarter of 2001. For
the nine months ended September 30, 2002, selling, general and administrative
expenses as a percentage of sales were 25.1%, down from 26.6% in the first nine
months of 2001. Selling, general and administrative expenses have increased as a
result of higher spending on product development and marketing, as well as
higher expenses for insurance and medical benefits. These increases have been
partly offset by the elimination of amortization expense in 2002. Selling,
general and administrative costs were a slightly higher percentage of net sales
in the third quarter of 2002 than the third quarter of 2001, but are a lower
percentage for the nine months to date.
Interest and other income in the third quarter of 2002 declined from the third
quarter of 2001 due primarily to lower interest income on temporary investments.
For the nine months ended
18
September 30, 2002, interest and other income was above the same period one year
earlier as a result of gains on foreign exchange, which more than offset lower
interest income.
For the three months ended September 30, 2002, the Company had net earnings of
$1.4 million versus $2.7 million in the same period one year earlier, reflecting
lower earnings in all segments other than the Canadian business. For the first
nine months of 2002, net income (before a required accounting change) was $2.3
million versus essentially break even results in the year earlier period. This
reflects improved results in flooring and jewelry.
As previously discussed, ABI and its majority-owned subsidiary Congoleum have
noted a trend of increased asbestos liability exposure as a result of the
increase in the number of asbestos claims being brought and the damage amounts
sought in those claims as well as the increasing number of insolvencies among
traditional target defendants in asbestos litigation and insurance companies
that underwrote insurance policies covering asbestos matters. ABI believes that
its range of probable and estimable undiscounted direct losses (i.e., excluding
losses incurred by Congoleum) for asbestos-related claims through the year 2049
is $15.6 million to $27.8 million before considering insurance recoveries.
Congoleum believes that its range of probable and estimable undiscounted losses
for asbestos-related claims through the year 2049 is $52.4 million to $195.6
million, before considering the effects of insurance recoveries. It is very
difficult to forecast a liability for ABI's and Congoleum's ultimate exposure
for asbestos-related claims since there are multiple variables that can affect
the timing, severity, and quantity of claims. Both ABI and Congoleum have
concluded that no amount within their respective liability ranges is more likely
than any other and therefore each has determined that the amount of the gross
liability it should record for asbestos-related claims is at the low point of
their respective ranges (i.e., $15.6 million for ABI and $52.4 million for
Congoleum) in accordance with accounting principles generally accepted in the
United States. It is reasonably possible that ABI's and/or Congoleum's total
liability for asbestos-related claims will be greater than their recorded
liabilities. Additionally, since ABI and Congoleum have recorded an amount
representing the low end of their respective ranges of exposure for
asbestos-related claims, it is possible that over time another amount within
those ranges, or even above those ranges, possibly by a substantial amount, will
be a better estimate of ABI's and Congoleum's liability for asbestos-related
claims. If later ABI or Congoleum were to adjust the carrying value of its
recorded liabilities by an amount in excess of any offsetting increase in its
assets pertaining to asbestos-related claims, it would incur charges against its
income to effect that adjustment, which charges could have a material adverse
effect upon ABI's or Congoleum's result of operations.
Liquidity and Capital Resources
Cash and cash equivalents, including short term investments, decreased $3.1
million in the first nine months of 2002 to $15.2 million, compared with a
decline of $18.2 million in the first nine months of 2001. The lower cash
utilization versus one year earlier was primarily due to prior year acquisitions
in the Jewelry business, reduced inventory requirements, lower capital spending,
slower settlement of accrued liabilities, and improved operating results, partly
offset by higher receivables. Working capital at September 30, 2002 was $77.0
million, down slightly from $81.8 million at December 31, 2001. The ratio of
current assets to current liabilities at September 30, 2002 was 1.7, down from
1.9 at December 31, 2001.
Capital expenditures in the first nine months of 2002 were $10.3 million. It is
anticipated that capital spending for the full year 2002 will be in the range of
$13 to $14 million.
19
The Company has recorded provisions which it believes are adequate for
environmental remediation and non-asbestos-related product-related liabilities,
including provisions for testing for potential remediation of conditions at its
own facilities. While the Company believes its estimate of the future amount of
these liabilities is reasonable, that such amounts will not have a material
adverse effect on the consolidated financial position of the Company and that
amounts to be paid for environmental remediation will be paid over a period of
three to ten years, the actual timing and amount of such payments may differ
significantly from the Company's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's costs,
the Company is not aware of any pending legislation which could have a material
adverse effect on its consolidated results of operations or financial position.
There can be no assurances that such costs could be passed along to its
customers.
Cash requirements for capital expenditures, working capital and debt service are
expected to be financed from operating activities and borrowings under existing
bank lines of credit, which at ABI are presently $41.6 million and at Congoleum
are $30.0 million. These lines of credit contain certain covenants and
conditions that must be met by ABI or Congoleum, as applicable to borrow from
the applicable line of credit.
As previously discussed, ABI and Congoleum have significant liability exposure
regarding asbestos-related claims. ABI expects that its insurance recoveries
will fully cover its asbestos-related liability based on its current claims
experience. To the extent ABI incurs liability for asbestos-related claims which
turn out not to be recoverable from its insurance carriers (whether because the
insurance carriers become insolvent or otherwise) or other persons, ABI's
funding obligations with respect to those liabilities would increase. This
increased funding obligation could have a material adverse effect upon ABI's
liquidity and capital resources.
With respect to Congoleum's asbestos-related liability, until recently, all
indemnity and defense costs incurred by Congoleum for asbestos-related claims
had been paid through its primary insurance coverage. However, Congoleum's
primary insurance coverage is now exhausted. Although Congoleum also has excess
insurance coverage that would apply to its asbestos-related liabilities, much of
that coverage was underwritten by carriers that are presently insolvent.
Moreover, additional insurance carriers that underwrote Congoleum's insurance
policies may become insolvent which, if this occurred, would increase
Congoleum's funding obligations for asbestos-related claims. Congoleum
anticipates that it will have to pay some or all of the portion of costs for
resolving asbestos-related claims that are allocable to insolvent carriers and
that it may in turn be able to recover a portion of those payments from the
estates or insurance guaranty funds responsible for the obligations of these
carriers. Depending on the extent to which Congoleum must pay for these costs
and the extent to which it is unable to recover these payments, these payments
may have a material adverse effect upon Congoleum's liquidity and capital
resources.
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's and its
majority-owned subsidiary Congoleum's expectations, as of the date of this
report, of future events, and the Company undertakes no obligation to update any
of these forward looking statements. Although the Company believes that these
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are
20
cautioned not to place undue reliance on any forward-looking statements. Factors
that could cause or contribute to the Company's actual results differing from
its expectations include those factors discussed elsewhere in this report and in
the Company's other filings with the Securities and Exchange Commission and the
factors listed below.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for asbestos-related personal injury claims, and their insurance
coverage and their likely recoverable insurance proceeds may be substantially
less than the liability incurred by them for these claims.
The Company and its majority-owned subsidiary Congoleum are among many named
defendants in thousands of pending claims (including workers' compensation
cases) alleging personal injury or death from exposure to asbestos or
asbestos-containing products. The Company believes that its range of probable
and estimable undiscounted direct losses (i.e., excluding losses incurred by
Congoleum) for asbestos-related claims through 2049 is $15.6 million to $27.8
million before considering insurance recoveries. Congoleum believes that its
range of probable and estimable undiscounted losses for asbestos-related claims
through the year 2049 is $52.4 million to $195.6 million, before considering the
effects of insurance recoveries. It is very difficult to forecast a liability
for ABI's and Congoleum's ultimate exposure for asbestos-related claims since
there are multiple variables that can affect the timing, severity, and quantity
of claims. Both the Company and Congoleum have concluded that no amount within
their respective liability ranges is more likely than any other, and therefore
each has determined that the amount of the gross liability it should record for
asbestos-related claims is at the low point of their respective ranges (i.e.,
$15.6 million for the Company and $52.4 million for Congoleum) in accordance
with accounting principles generally accepted in the United States. It is
reasonably possible that ABI's and/or Congoleum's total liability for
asbestos-related claims will be greater than their recorded liabilities.
Additionally, since the Company and Congoleum have recorded an amount
representing the low end of their respective ranges of exposure for
asbestos-related claims, it is reasonably likely that over time another amount
within those ranges, or even above those ranges, possibly by a substantial
amount, will be a better estimate of ABI's and Congoleum's liability for
asbestos-related claims. If later the Company or Congoleum were to adjust the
carrying value of its recorded liabilities by an amount in excess of any
offsetting increase in its assets pertaining to asbestos-related claims, it
would incur charges against its income to effect that adjustment, which charges
could have a material adverse effect upon the Company's results of operations.
The Company expects that its insurance recoveries will fully cover its
asbestos-related liability based on its current claims experience. To the extent
the Company incurs liability for asbestos-related claims which turn out not to
be recoverable from its insurance carriers (whether because the insurance
carriers become insolvent or otherwise) or other persons, ABI's funding
obligations with respect to those liabilities would increase. This increased
funding obligation could have a material adverse effect upon the Company's
liquidity and capital resources.
With respect to Congoleum's asbestos-related liability, until recently, all
indemnity and defense costs incurred by Congoleum for asbestos-related claims
had been paid through its primary insurance coverage. However, Congoleum's
primary insurance coverage is now exhausted. Although Congoleum also has excess
insurance coverage that would apply to its asbestos-related liabilities, much of
that coverage was underwritten by carriers that are presently insolvent.
Moreover, additional insurance carriers that underwrote Congoleum's insurance
policies may become insolvent which, if this occurred, would increase
Congoleum's funding obligations for
21
asbestos-related claims. Congoleum anticipates that it will have to pay some or
all of the portion of costs for resolving asbestos-related claims that are
allocable to insolvent carriers and that it may in turn be able to recover a
portion of those payments from the estates or insurance guaranty funds
responsible for the obligations of these carriers. Depending on the extent to
which Congoleum must pay for these costs and the extent to which it is unable to
recover these payments, these payments may have a material adverse effect upon
Congoleum's liquidity and capital resources.
In addition, several companies that were typically lead defendants in
asbestos-related cases have declared bankruptcy over the recent years. As a
result of this development, the Company and Congoleum have noticed a trend of
increased asbestos-related liability exposure since plaintiffs are seeking
additional defendants and, with respect to those claims in which there are
solvent and insolvent defendants, courts, under the legal theory of joint and
several liability, are requiring solvent defendants to fund the liabilities
assessed on the insolvent co-defendants even though the solvent defendants may
have been found only partly responsible for the plaintiffs' injuries. There has
also been a significant increase over the recent years in the number of claims
and amount of damages sought involving asbestos-related claims. These trends, if
they continue, will have a negative impact on the Company's and Congoleum's
claim experiences. This would result in increased exposure to the Company and
Congoleum for asbestos-related liability, which to the extent liabilities are
incurred in amounts in excess of the Company's or Congoleum's current recorded
liabilities, as applicable, would likely have a material adverse effect on the
Company's business, results of operations and financial condition. The
successful management by the Company and Congoleum of their asbestos-related
liability will be critical to Company's business, results of operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company- and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their facilities, to comply with
existing environmental laws, and those amounts may be substantial. Although the
Company and Congoleum believe that those amounts should not have a material
adverse effect on their respective financial position, there is no certainty
that these amounts will not have a material adverse effect on their respective
financial positions because, as a result of environmental requirements becoming
increasingly strict, neither the Company nor Congoleum is able to determine the
ultimate cost of compliance with environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
22
The Company and its majority-owned subsidiary may incur substantial liability
for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company 's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition.
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services are highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of Congoleum's competitors make a filing under
Chapter 11 of the United States Bankruptcy Code and emerge from bankruptcy as a
continuing operating company that has shed much of their pre-filing liabilities,
those competitors could have a cost competitive advantage over Congoleum. In
addition, in order to maintain their competitive positions, the Company and
Congoleum may need to make substantial investments in their businesses,
including, as applicable, product development, manufacturing facilities,
distribution network and sales and marketing activities. Competitive pressures
may also result in decreased demand for their products and in the loss of market
share for their products. Moreover, due to the competitive nature of their
industries, they may be commercially restricted from raising or even maintaining
the sales prices of their products, which could result in the
23
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are and are
affected by the economic factors that affect their respective industries.
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
24
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape and flooring divisions principally sell their products
through distributors. Sales to four unaffiliated customers accounted for
approximately 21% of the Company's tape division's net sales for the nine months
ended September 30, 2002 and 23% of its net sales for the year ended December
31, 2001. The loss of two or more of those customers could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. While most of Congoleum's distributors have marketed the
Congoleum's products for many years, replacements are necessary periodically to
maintain the strength of Congoleum's distribution network. Although Congoleum
has more than one distributor in some of its distribution territories and
actively manages its credit exposure to its distributors, the loss of a major
distributor could have a materially adverse impact on the Company's business,
results of operations, and financial condition. Congoleum derives a significant
percentage of its sales from two of its distributors. These two distributors
accounted for approximately 52% of Congoleum's net sales for the nine months
ended September 30, 2002 and 48% of Congoleum's net sales for the year ended
December 31, 2001.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 67% of its net sales for the nine months
ended September 30, 2002 and 74% of its net sales for the year ended December
31, 2001. The loss of K&M Associates L.P.'s largest customer could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, the same persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments but does not consider this interest rate market
risk exposure to be material to its consolidated financial condition or results
of operations. The Company invests primarily in highly liquid debt instruments
with strong credit ratings and short-term (less than one year) maturities. The
carrying amount of these investments approximates fair value due to the
short-term maturities.
25
Substantially all of the Company's outstanding long-term debt as of September
30, 2002 consisted of indebtedness with a fixed rate of interest, which is not
subject to change based upon changes in prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe and the Far
East, giving rise to exposure to market risks from changes in foreign exchange
rates. Foreign currency exchange rate movements may also affect the Company's
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors. For foreign currency
exposures existing at September 30, 2002, a 10% unfavorable movement in currency
exchange rates in the near term would not materially affect ABI's consolidated
operating results, financial position or cash flow.
The Company does not currently use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in interest rates, foreign currency exchange rates, commodity prices or
equity prices.
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's reports filed or submitted under the
Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
26
FORM 10-Q
PART II. OTHER INFORMATION
AMERICAN BILTRITE INC. AND SUBSIDIARIES
September 30, 2002
Item 1. Legal Proceedings
The information contained in Note D "Commitments and Contingencies" of the Notes
to the Consolidated Condensed Financial Statements is incorporated by reference
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99) Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
(Registrant)
Date: November 14, 2002 BY: /s/ Howard N. Feist III
---------------------------
Howard N. Feist III
Chief Financial Officer
27
CERTIFICATION
I, Roger S. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Biltrite
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
28
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Roger S. Marcus
-----------------------
Rogers S. Marcus
Chief Executive Officer
29
CERTIFICATION
I, Howard N. Feist III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Biltrite
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
30
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Howard N. Feist III
-----------------------
Howard N. Feist III
Chief Financial Officer