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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of Registrant as specified in Its Charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices, including Zip Code)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(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.
Class Outstanding at November 1, 2002
----------------------------- --------------------------------
Class A Common Stock 3,651,190
Class B Common Stock 4,608,945
CONGOLEUM CORPORATION
Index
Page
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 of Changes in Stockholders' Equity
for the year ended December 31, 2001 and the nine months ended
September 30, 2002 (unaudited)..........................................5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001 (unaudited)...........................6
Notes to Unaudited Condensed Consolidated Financial Statements..........7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk............22
Item 4. Controls and Procedures...............................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................23
Item 2. Changes in Securities.................................................23
Item 3. Defaults Upon Senior Securities.......................................23
Item 4. Submission of Matters to a Vote of Security Holders...................23
Item 5. Other Information.....................................................23
Item 6. Exhibits and Reports on Form 8-K......................................23
Signatures ...................................................................24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
---- ----
(Unaudited)
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 14,875 $ 15,257
Short-term investments ................................. -- 1,416
Accounts and notes receivable, net ..................... 24,278 17,932
Inventories ............................................ 53,603 55,782
Prepaid expenses and other current assets .............. 6,527 6,403
Deferred income taxes .................................. 4,924 6,375
----------- ---------
Total current assets ................................... 104,207 103,165
Property, plant and equipment, net ........................ 94,666 95,904
Insurance for asbestos-related liabilities ................ 42,050 45,163
Goodwill, net ............................................. -- 10,523
Deferred income taxes ..................................... 31 1,334
Other assets .............................................. 9,434 9,324
----------- ---------
Total assets ........................................... $ 250,388 $ 265,413
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 14,412 $ 17,911
Accrued expenses ....................................... 37,034 29,585
Accrued taxes .......................................... 1,664 353
Deferred income taxes .................................. 3,361 3,597
----------- ---------
Total current liabilities .............................. 56,471 51,446
Long-term debt ............................................ 99,711 99,674
Asbestos-related liabilities .............................. 45,531 53,003
Other liabilities ......................................... 12,301 12,607
Accrued pension liability ................................. 12,287 14,658
Accrued postretirement benefit obligation ................. 8,810 8,972
----------- ---------
Total liabilities ...................................... 235,111 240,360
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01 per share;
20,000,000 shares authorized; 4,736,950 shares issued
as of September 30, 2002 and December 31, 2001 ......... 47 47
Class B common stock, par value $0.01 per share;
4,608,945 shares authorized, issued and outstanding
as of September 30, 2002 and December 31, 2001 ......... 46 46
Additional paid-in capital ................................ 49,105 49,105
Retained deficit .......................................... (19,997) (10,221)
Accumulated minimum pension liability adjustment .......... (6,111) (6,111)
----------- ---------
23,090 32,866
Less Class A common stock held in Treasury, at cost;
1,085,760 shares at September 30, 2002 and
December 31, 2001 ...................................... 7,813 7,813
----------- ---------
Total stockholders' equity ............................. 15,277 25,053
----------- ---------
Total liabilities and stockholders' equity ............. $ 250,388 $ 265,413
=========== =========
The accompanying notes are an integral part
of the condensed financial statements.
3
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2002 2001 2002 2001
(In thousands, except
per share amounts)
Net sales ....................................... $ 57,736 $ 56,719 $ 183,638 $ 162,694
Cost of sales ................................... 42,188 41,631 137,862 124,903
Selling, general and administrative expenses .... 12,921 11,611 39,589 36,631
-------- -------- --------- ---------
Income from operations ....................... 2,627 3,477 6,187 1,160
Other income (expense):
Interest income .............................. 83 181 202 612
Interest expense ............................. (2,091) (2,058) (6,250) (6,215)
Other income ................................. 349 302 1,157 1,130
-------- -------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 968 1,902 1,296 (3,313)
Provision (benefit) for income taxes ......... 416 732 549 (961)
-------- -------- --------- ---------
Net income (loss) before accounting change 552 1,170 747 (2,352)
Cumulative effect of accounting change ....... -- -- (10,523) --
-------- -------- --------- ---------
Net income (loss) ............................ $ 552 $ 1,170 $ (9,776) $ (2,352)
======== ======== ========= =========
Net income (loss) per common share before
cumulative effect of accounting change,
basic & diluted .......................... $ .07 $ .14 $ .09 $ (.28)
Cumulative effect of accounting change ....... -- -- (1.27) --
-------- -------- --------- ---------
Net income (loss) per common share,
basic and diluted ........................ $ .07 $ .14 $ (1.18) $ (.28)
======== ======== ========= =========
Weighted average number of common
shares outstanding ...................... 8,260 8,260 8,260 8,260
======== ======== ========= =========
The accompanying notes are an integral part
of the condensed financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Accumulated
Common Stock Minimum
par value $0.01 Additional Pension
--------------- Paid-in Retained Liability Treasury Comprehensive
Class A Class B Capital Deficit Adjustment Stock Total Loss
------- ------- ------- ------- ---------- ----- ----- ----
Balance, December 31, 2000.... $ 47 $ 46 $49,105 $ (8,581) $(3,494) $(7,813) $29,310
Minimum pension liability
adjustment, net of tax
benefit of $1,504.......... (2,617) (2,617) $(2,617)
Net loss...................... (1,640) (1,640) (1,640)
--------
Net comprehensive loss........ $(4,257)
========
---------------------------------------------------------------------------
Balance, December 31, 2001.... 47 46 49,105 (10,221) (6,111) (7,813) 25,053
Net loss...................... (9,776) (9,776) $(9,776)
--------
Net comprehensive loss........ $(9,776)
========
---------------------------------------------------------------------------
Balance, September 30, 2002... $ 47 $ 46 $49,105 $(19,997) $(6,111) $(7,813) $15,277
====== ====== ======= ========= ======= ======= =======
The accompanying notes are an integral part
of the condensed financial statements.
5
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------
2002 2001
(In thousands)
Cash flows from operating activities:
Net loss ............................................. $ (9,776) $ (2,352)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ...................................... 7,946 8,725
Amortization ...................................... 419 613
Deferred income taxes ............................. 2,518 (986)
Cumulative effect of accounting change ............ 10,523 --
Changes in certain assets and liabilities:
Accounts and notes receivable ................. (6,346) 1,258
Inventories ................................... 2,179 (971)
Prepaid expenses and other assets ............. 2,497 1,980
Accounts payable .............................. (3,499) (3,668)
Accrued expenses .............................. 1,520 (13,457)
Other liabilities ............................. (3,071) (1,512)
-------- --------
Net cash provided by (used in) operating
activities ................................. 4,910 (10,370)
-------- --------
Cash flows from investing activities:
Capital expenditures .............................. (6,708) (6,361)
Purchase of short-term investments ................ -- (4,175)
Maturities of short-term investments .............. 1,416 13,568
-------- --------
Net cash (used in) provided by investing
activities .............................. (5,292) 3,032
-------- --------
Net increase in cash and cash equivalents ............... (382) (7,338)
Cash and cash equivalents:
Beginning of period .................................. 15,257 12,637
-------- --------
End of period ........................................ $ 14,875 $ 5,299
======== ========
The accompanying notes are an integral part
of the condensed financial statements.
6
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with 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 and recurring adjustments) considered
necessary for a fair presentation of the Company's financial position 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 ended December 31, 2002. For further information, refer to the
consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Based upon the nature of the Company's operations, facilities and
management structure, the Company considers its business to constitute a single
segment for financial reporting purposes.
Certain amounts appearing in the prior period's condensed consolidated
financial statements have been reclassified to conform to the current period's
presentation.
2. Changes in Accounting Principles
In July 2001, the Financial Accounting Standards Board issued 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 is effective for fiscal years beginning after December 15, 2001;
however, companies with fiscal years beginning after March 15, 2001 may elect to
adopt the statement early. 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 results of operations or financial position of Congoleum
Corporation. SFAS No. 142 was effective for the Company as of January 1, 2002.
During the first quarter of 2002, the Company performed a transitional
impairment test of goodwill and concluded that there was impairment. The Company
compared the implied fair value of goodwill to the carrying value of goodwill
and it was determined that based on the fair value of the Company's assets and
liabilities, there should be no goodwill recorded. Accordingly, the Company
recorded an impairment loss of $10.5 million during the first quarter of 2002,
which has been recorded as a cumulative effect of a change in accounting
principle.
7
The impact of the adoption of SFAS 142 on the Company's financial
statements also resulted in the elimination of $324 thousand of goodwill
amortization expense or $.04 per share for the nine months ended September 30,
2002.
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of January 1, 2001:
(In thousands, except per share amounts)
For the Nine Months Ended
September 30, September 30,
2002 2001
------------- -------------
Net income (loss) before cumulative effect
of accounting change:
As reported $ 747 $ (2,352)
Goodwill amortization -- 324
--------- --------
As adjusted $ 747 $ (2,028)
========= ========
Income (loss) per share before cumulative
effect of accounting change:
As reported $ .09 $ (0.28)
Goodwill amortization -- .04
--------- --------
As adjusted $ .09 $ (0.24)
========= ========
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") was issued. Congoleum 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 01-9,
"Accounting for Consideration Given by a Vendor to a Customer or Reseller of the
Vendor's Products ("EITF 01-9"), was issued. Congoleum adopted EITF 01-9
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 net sales. The impact for the nine months ending
September 30, 2002 and 2001 was a reduction of net sales and of selling, general
and administrative expenses of $3.2 million and $3.9 million, respectively.
3. Inventories
A summary of the major classifications of inventories stated at the lower
of LIFO cost or market is as follows:
8
September 30, December 31,
(Dollars in thousands) 2002 2001
--------- -----------
Finished goods..................... $40,964 $43,680
Work-in-process.................... 4,009 4,425
Raw materials and supplies......... 8,630 7,677
-------- --------
$53,603 $55,782
4. Income (Loss) Per Share
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding.
In December 2001, the Company offered its eligible option holders to
exchange all options then outstanding and granted to them under the 1995 Plan or
the Company's 1999 Stock Option Plan for Non-Employee Directors, as amended (the
"1999 Plan"), for new stock options to be granted under those plans not earlier
than six months and one day after the date the Company canceled any options
tendered to and accepted by it pursuant to the offer to exchange. On January 4,
2002, the Company accepted and canceled 667,500 options that had been previously
granted under the 1995 Plan and 9,500 options that had been previously granted
under the 1999 Plan that were tendered to and accepted by the Company pursuant
to the offer to exchange.
On July 11, 2002, the Company issued 665,500 options under the 1995 Plan
and 9,500 options under the 1999 Plan at an exercise price of $2.05 per share
pursuant to the exchange. The new options granted under the 1995 Plan will
generally vest annually in equal installments over a five-year period beginning
on the first anniversary of the date of grant, and the new options granted under
the 1999 Plan will generally vest 100% six months from the date of grant.
5. Commitments and Contingencies
The Company is subject to federal, state and local environmental laws and
regulations and certain legal and administrative claims are pending or have been
asserted against the Company. Among these claims, the Company is a named party
in numerous actions associated with waste disposal sites, asbestos-related
claims and general liability claims. These actions include possible obligations
to remove or mitigate the effects on the environment of wastes deposited at
various sites, including Superfund sites and certain of the Company's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future costs and timing
of payments are 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 and the extent to which costs may be recoverable
from insurance.
The Company records a liability for environmental remediation,
asbestos-related claim costs and general liability claims 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
9
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 discounted for delays in future payments and are not reduced
by the amount of estimated insurance recoveries. Such estimated insurance
recoveries are considered probable of recovery and are recorded as an asset.
The Company 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, the Company
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.
The Company's ultimate liability in connection with those sites depends on many
factors, including the volume of material contributed to the site, the number of
other PRP's and their financial viability, the remediation methods and
technology to be used and the extent to which costs may be recoverable from
insurance. However, under CERCLA, and certain other laws, as a PRP, the Company
can be held jointly and severally liable for all environmental costs associated
with a site.
The most significant exposure to which the Company 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%.
The Company also accrues remediation costs for certain of the Company'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 the Company.
The Company 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 were approximately
6,563 claims at December 31, 2001 that involved approximately 23,139
individuals. Activity related to asbestos claims was as follows:
10
Nine months ended Year ended
September 30, December 31,
2002 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, the Company'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, the Company 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, the
Company also agreed to settle two claims for $1.6 million plus an assignment of
insurance proceeds. The Company 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, the Company 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 the Company's insurance carriers. As of September 30, 2002, the Company's
historical average indemnity cost per resolved claimant was approximately $400.
As of September 30, 2002, over 99% of claims incurred by the Company have
settled, on average, for amounts less than $102 per claimant.
Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including sheet vinyl and resilient tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company 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. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
The Company regularly evaluates its estimated liability to defend and
resolve current and reasonably anticipated future asbestos-related claims. It
reviews, among other things, recent and
11
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company. One such development
is the increasing number of declarations of bankruptcy by companies that were
typically lead defendants in asbestos-related cases. The Company 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 the Company'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,
the Company's estimates of its potential asbestos-related liability are highly
uncertain.
It is the Company'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, the
Company 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 $53.3 million to $195.6 million
before considering the effects of insurance recoveries. 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 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, 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 quarter of 2002,
which if the charge were of a sufficient magnitude, would have a material
adverse effect on the Company's business, results of operations, and financial
position.
During the period that Congoleum produced asbestos-containing products,
the Company 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, the Company 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
12
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 the Company'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, the Company believes it
more probable that the Court's ruling will either have the effect that the
primary insurance companies owe additional coverage or that the primary coverage
has fully exhausted and the excess carriers owe the coverage. Furthermore, the
Company believes that recent claims settlements, including one involving an
assignment of insurance proceeds, further support the Company's position that
its excess carriers are currently responsible for providing defense and
indemnity. In the meantime, the Company 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,
the Company may be required to fund the disputed indemnity and defense
obligation.
During the three months ended September 30, 2002, the Company 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, the Company
expects to be reimbursed for some or all of these costs once the Spaulding Case
is decided, and the Company expects future defense and indemnity costs to be
covered by either its primary and/or excess insurance policies. However, it is
likely that the Company 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. The Company 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, the Company 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
13
associations, and the status of negotiations with the Company's carriers. In
addition, in light of the uncertainties regarding the Company's likelihood of
fully recovering insurance proceeds from its excess carriers for
asbestos-related indemnity and defense costs incurred by the Company, any future
increase in the Company's recorded amount for its asbestos-related liabilities
will likely exceed any offsetting increase in its assets relating to insurance
receivables. The Company 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 the Company's business, results of
operations, and financial condition.
The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2001 to September 30, 2002:
Cash
Balance Spending Receipts
at Against from Balance 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, the
Company 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 the Company'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 the Company 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 the Company 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 the Company'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.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three and nine months ended September 30, 2002 as compared to three and nine
months ended September 30, 2001.
Net sales for the third quarter of 2002 were $57.7 million, as compared to
$56.7 million in the third quarter of 2001, an increase of $1.0 million or 1.8%.
This increase in sales was primarily due to the continued success of the
DuraStone product line, partially offset by lower direct tile sales to certain
mass merchandisers coupled with continued weakness in the manufactured housing
industry. Year-to-date net sales for the first nine months of 2002 were $183.6
million, an increase of $20.9 million or 12.9% from the first nine months of
2001. The year-to-date increase is primarily due to the sales performance of the
DuraStone product line (an August 2001 introduction) and improved sales of sheet
products for the remodel and builder markets, partially offset by lower tile
sales.
Gross profit for the third quarter of 2002 was $15.5 million, up $0.4
million from $15.1 million in the third quarter of 2001. Gross profit as a
percent of net sales increased to 26.9% in the third quarter of 2002 from 26.6%
in the third quarter of 2001. The increase in gross profit margins reflects
continuing improvements in manufacturing operating efficiency and the impact of
a price increase instituted in August 2002, offset by a less profitable sales
mix. Gross profit for the first nine months of 2002 was $45.8 million (24.9% of
net sales), as compared to $37.8 million (23.2% of net sales) for the first nine
months of 2001. The improvement in year-to-date gross profit margin was due to
higher production volumes and improved manufacturing efficiency, partially
offset by the costs of expanding sales and a less profitable sales mix.
Selling, general and administrative expenses were $12.9 million in the
third quarter of 2002, up $1.3 million from the third quarter of 2001. As a
percent of net sales, selling, general and administrative expenses were 22.4% in
the third quarter of 2002, as compared to 20.5% in the third quarter of 2001.
For the nine months ended September 30, 2002, selling, general and
administrative expenses were $39.5 million (21.6% of net sales), as compared to
$36.6 million (22.5% of net sales) in the same period one year earlier. Expenses
in 2002 have increased as a result of higher sales volume and demand for
displays and marketing materials, as well as increased insurance and benefits
related costs.
Income from operations for the third quarter of 2002 was $2.6 million, as
compared to $3.5 million in the third quarter of 2001. Operating income for the
first nine months of 2002 was $6.2 million, compared to $1.2 million for the
first nine months of 2001. The improved results for the nine months ended
September 30, 2002 versus 2001 are due to increased sales and improved margins
partly offset by increased selling, general and administrative expenses.
15
The provision for income taxes for the nine months ended September 30,
2002 represents an effective tax rate of 42.4%. This is indicative of the
Company estimate of its full year effective tax rate.
As previously discussed, the Company revises its estimated liability and
insurance receivables for asbestos claims annually based upon industry liability
and trend data, the Company's own experience, the latest available information
on the Company's insurance coverage, and other factors. The Company has noted a
trend of increased asbestos-related 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. While the Company
cannot yet determine what effect, if any, the latest available data will have on
its estimated liability and insurance receivables for asbestos-related claims
when it revises its estimate in the fourth quarter of 2002, it is reasonably
likely that the Company will have to incur a charge against income as a result
of updating its estimates, and if so, that such a charge could be material to
earnings for the year. Furthermore, future analyses conducted by the Company of
its asbestos-related liability may cause it to make further increases in its
recorded liability amount. These increases would likely result in the Company
having to incur additional charges against its income, which could have a
material adverse effect upon its future results of operations.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased $1.8 million
for the nine months ended September 30, 2002 to $14.9 million. Working capital
at September 30, 2002 was $47.7 million, down from $51.7 million at December 31,
2001. The ratio of current assets to current liabilities at September 30, 2002
and December 31, 2001 was 1.8 and 2.0 respectively. Cash provided by operations
was $4.9 million for the first nine months of 2002, compared to cash used by
operations of $10.4 million in the first nine months of 2001. The increase in
cash provided by operations in the first nine months of 2002 versus the first
nine months of 2001 was primarily due to higher net income (before non-cash
charges for an accounting change), refunds of taxes paid in previous periods,
lower inventories and the timing of payments of accrued expenses partly offset
by higher receivables.
Capital expenditures were $6.7 million for the first nine months of 2002.
Total 2002 capital spending is expected to be approximately $9.5 million.
The Company has recorded what it believes are adequate provisions for
environmental remediation 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 financial
position of the Company and that such amounts to will be paid over a period of
five to ten years, the 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 results of operations or financial position. There can be
no assurances that such costs could be passed along to its customers.
16
The Company's principal sources of liquidity are net cash provided by
operating activities and borrowings under its existing credit facility. The
Company's existing credit facility contains certain covenants and conditions
that the Company must meet in order for it to borrow from the facility. The
Company believes that these sources will be adequate to fund working capital
requirements, debt service payments and planned capital expenditures through the
foreseeable future.
The Company maintains defined benefit pension plans for its employees.
Recent rates of return on the investments achieved by these plans have been
below both actual longer term and future assumed rates of returns. Due to the
funding status of these plans, the Company expects these lower rates of returns
and other changes to the pension assumption will result in increased reported
pension expense and increased funding requirements in fiscal 2003. The Company's
accounting policy is to revise the recorded amount of its pension assets and
liabilities at year end, in accordance with accounting principles generally
accepted in the United States. Although year end information for 2002 is not yet
available, the Company has been advised by its actuary that if year end asset
values are the same as at September 30, 2002, the Company can anticipate having
to record a charge to other comprehensive income of $7.3 million in 2002 to
adjust its minimum pension liability.
As previously discussed, the Company has significant liability exposure
regarding asbestos-related claims. Until recently, substantially all indemnity
and defense costs incurred by the Company for asbestos-related claims had been
paid through its primary insurance coverage. However, the Company's primary
insurance coverage is now exhausted. While the Company purchased excess
liability insurance to provide coverage once its primary insurance was
exhausted, the excess insurance carriers have raised various objections to
providing coverage. While the Company is negotiating with these carriers and
expects to resolve these matters and secure coverage in the near future, defense
and indemnity costs are currently being funded by the Company, which must then
seek to recover the majority of such outlays from the excess carriers once
coverage matters are resolved. Payments by the Company for defense and indemnity
during the third quarter of 2002 were $1.1 million, and the Company recently
agreed to pay $1.6 million pursuant to its recent agreement to settle two
claims.
Although the Company purchased significant amounts (over $1 billion) of
excess insurance that should cover its asbestos liabilities, approximately 30%
of that coverage was underwritten by carriers that are presently insolvent.
Moreover, additional insurance carriers that underwrote the Company's insurance
policies may become insolvent which, if this occurred, would increase the
Company's funding obligations for asbestos-related claims. The Company
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 the Company must pay for these costs
and the extent to which it is unable to recover these payments, these payments
could have a material adverse effect upon the Company'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 expectations, as of the date of this report, of future events, and the
17
Company undertakes no obligation to update any of these forward looking
statements. Although the Company believes that these expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements. Factors that could cause or
contribute to the Company's actual results differing from its expectations
include those factors discussed elsewhere in this report and in the Company's
other filings with the Securities and Exchange Commission and the factors listed
below.
THE COMPANY MAY INCUR SUBSTANTIAL LIABILITY FOR ASBESTOS-RELATED PERSONAL INJURY
CLAIMS, AS WELL AS OTHER ENVIRONMENTAL, PRODUCT AND GENERAL LIABILITY CLAIMS,
AND ITS INSURANCE COVERAGE AND ITS LIKELY RECOVERABLE INSURANCE PROCEEDS MAY BE
SUBSTANTIALLY LESS THAN THE LIABILITY INCURRED BY THE COMPANY FOR THESE CLAIMS.
Asbestos Liability. The Company is one of 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 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 the Company's
ultimate exposure for asbestos-related claims since there are multiple variables
that can affect the timing, severity, and quantity of claims. 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 $53.3 million in accordance with accounting
principles generally accepted in the United States. It is reasonably likely
that the Company's total liability for asbestos-related claims will be greater
than the recorded liability. Additionally, since the Company has recorded an
amount representing the low end of the range of exposure for asbestos-related
claims, it is possible that over time another amount within the range, or above
that range, possibly by a substantial amount, will be a better estimate of the
Company's liability for asbestos-related claims. If later the Company 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 business, results of
operations and financial condition.
Until recently, all indemnity and defense costs incurred by the Company
for asbestos-related claims had been paid through its primary insurance
coverage. However, the Company's primary insurance coverage is now exhausted.
Although the Company also has excess insurance coverage that would apply to the
Company's asbestos-related liabilities, much of that coverage was underwritten
by carriers that are presently insolvent. Moreover, additional insurance
carriers that underwrote the Company's insurance policies may become insolvent
which, if this occurred, would increase the Company's funding obligations for
asbestos-related claims. The Company 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 the Company must pay for these costs and the extent to which it is
18
unable to recover these payments, these payments may have a material adverse
effect upon the Company's liquidity and capital resources.
In addition, many 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 has noticed a trend in its industry 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 claim experience.
This would result in increased exposure to the Company for asbestos-related
liability, which to the extent liabilities are incurred in amounts in excess of
the Company's current recorded liability, would likely have a material adverse
effect on the Company's business, results of operations and financial condition.
In any event, the successful management by the Company of its asbestos-related
liability will be critical to Company's business, results of operations and
financial condition.
Environmental Liabilities. Due to the nature of the Company's business and
certain of the substances which are or have been used, produced or discharged by
the Company, the Company's operations are subject to extensive federal, state
and local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws or regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites. The Company will continue to be required to expend amounts in the future
because of the nature of its prior activities at its facilities, to comply with
existing environmental laws, and those amounts may be substantial. Although the
Company believes that those amounts should not have a material adverse effect on
its financial position, there is no certainty that these amounts will not have a
material adverse effect on its financial position because, as a result of
environmental requirements becoming increasingly strict, the Company is unable
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 to modify or curtail its operations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Product and General Liabilities. In the ordinary course of its business,
the Company becomes 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 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 is unable to collect
insurance proceeds relating to these matters.
19
THE COMPANY IS 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's business is dependent upon a continuous supply of raw
materials from third party suppliers. The principal raw materials used by the
Company in its manufacture of sheet and tile flooring are vinyl resins,
plasticizers, latex, limestone, stabilizers, cellulose paper fibers, urethane
and transfer print paper. The Company purchases most of these raw materials from
multiple sources. Although the Company has generally not had difficulty in
obtaining its requirements for these materials, it has occasionally experienced
significant price increases for some of these materials.
The Company believes that suitable alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products. In an attempt to protect against
this risk of loss of supply, the Company 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. However, there is no certainty that
the Company's maintenance of its raw material inventory or its ongoing program
to develop new sources of supply would be successful in avoiding a material
adverse affect on its business, results of operations and financial condition if
it were to realize an extended interruption in the supply of its raw materials.
In addition, the Company could incur significant increases in the costs of
its raw materials. Although the Company generally attempts to pass on increases
in the costs of its raw materials to its customers, the Company's ability to do
so is, to a large extent, dependent upon the rate and magnitude of any increase,
competitive pressures and market conditions for its products. There have been in
the past, and may be in the future, periods of time during which increases in
these costs cannot be recovered. During those periods of time, there could be a
material adverse effect on the Company's business, results of operations and
financial condition.
THE COMPANY OPERATES IN A HIGHLY COMPETITIVE FLOORING INDUSTRY AND SOME OF ITS
COMPETITORS HAVE GREATER RESOURCES AND BROADER DISTRIBUTION CHANNELS THAN THE
COMPANY.
The market for the Company's products is highly competitive. The Company
encounters competition from three other manufacturers in North America as well
as foreign manufacturers. Some of the Company's competitors have greater
financial and other resources and access to capital than the Company.
Furthermore, to the extent any of the Company's competitors make a filing under
Chapter 11 of the Untied States Bankruptcy Code and emerge from bankruptcy as a
continuing operating company that has shed much of its pre-filing liabilities,
those competitors may have a cost competitive advantage over the Company as
result of having shed those liabilities. In addition, in order to maintain its
competitive position, the Company may need to make substantial investments in
its business, including its product development, manufacturing facilities,
distribution network and sales and marketing activities. Competitive pressures
may also result in
20
decreased demand for the Company's products and in the loss of the Company's
market share for its products. Moreover, due to the competitive nature of the
Company's industry, the Company may be commercially restricted from raising or
even maintaining the sales prices of its products, which could result in the
Company incurring significant operating losses if its expenses were to increase
or otherwise represent an increased percentage of the Company's sales.
THE COMPANY IS SUBJECT TO GENERAL ECONOMIC CONDITIONS AND CONDITIONS SPECIFIC TO
THE REMODELING AND HOUSING INDUSTRIES.
The Company is 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,
the Company's business is cyclical and is affected by the economic factors that
affect the remodeling and housing industries in general and the manufactured
housing industry specifically, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.
THE COMPANY COULD REALIZE SHIPMENT DELAYS, DEPLETION OF INVENTORY AND INCREASED
PRODUCTION COSTS RESULTING FROM UNEXPECTED DISRUPTIONS OF OPERATIONS AT ANY OF
THE COMPANY'S FACILITIES.
The Company's business depends upon its ability to timely manufacture and
deliver products that meet the needs of its customers and the end users of the
Company's products. If the Company 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 OFFERS LIMITED WARRANTIES ON ITS PRODUCTS WHICH COULD RESULT IN THE
COMPANY INCURRING SIGNIFICANT COSTS AS A RESULT OF WARRANTY CLAIMS.
The Company offers a limited warranty on all of its 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, the
Company 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 were to incur a significant number of warranty
claims, the resulting warranty costs could be substantial.
THE COMPANY IS HEAVILY DEPENDENT UPON ITS DISTRIBUTORS TO SELL THE COMPANY'S
PRODUCTS AND THE LOSS OF A MAJOR DISTRIBUTOR OF THE COMPANY COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
21
The Company currently sells its products through approximately 19
distributors providing approximately 51 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
The Company considers its distribution network very important to maintaining its
competitive position. While most of its distributors have marketed the Company's
products for many years, replacements are necessary periodically to maintain the
strength of the Company's distribution network. Although the Company 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. The Company derives a significant percentage
of its sales from two of its distributors, LaSalle-Bristol Corporation and
Mohawk Industries, Inc. LaSalle-Bristol Corporation serves as the Company's
distributor in the manufactured housing market, and Mohawk Industries, Inc.
serves as a retail distributor of the Company. These two distributors accounted
for 52% of the Company's net sales for the nine months ended September 30, 2002
and 48% of the Company's net sales for the year ended December 31, 2001.
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 risk exposure
to be material to its 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.
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. Under
its current policies, the company does not use derivative financial instruments,
derivative commodity instruments or other financial instruments to manage its
exposure to changes in interest rates, foreign currency exchange rates,
commodity prices or equity prices.
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.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: The information contained in Note 5
"Commitments and Contingencies" of the Notes to Unaudited
Condensed Consolidated Financial Statements is incorporated
herein by reference.
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Number Exhibit
------ -------
Exhibit 4.7.1 Amendment No. 1 to Loan and Security Agreement,
dated September 24, 2002, by and between
Congress Financial Corporation and Congoleum
Corporation.
Exhibit 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
The registrant did not file any reports on Form
8-K during the quarterly period ended September
30, 2002.
23
CONGOLEUM CORPORATION
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.
CONGOLEUM CORPORATION
(Registrant)
Date: November 14, 2002 By: /s/ H.N. Feist III
--------------------------------------------
(Signature)
Howard N. Feist III
Chief Financial Officer
(Principal Financial & Accounting Officer)
24
CERTIFICATION
I, Roger S. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Congoleum
Corporation;
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
25
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
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CERTIFICATION
I, Howard N. Feist III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Congoleum
Corporation;
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
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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
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Howard N. Feist III
Chief Financial Officer