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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Class A Common Stock, par value $.01 per share American Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES |_| NO |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of June 28, 2002, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $7.8
million based on the closing price ($2.35 per share) on the American Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant, American Biltrite Inc. and
Hillside Capital Incorporated. All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant. As of March 31, 2003, an
aggregate of 3,651,190 shares of Class A Common Stock and an aggregate of
4,608,945 shares of Class B Common Stock of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the Congoleum Corporation's Proxy Statement for
the Annual Meeting of Shareholders to be held on May 7, 2003
Factors That May Affect Future Results
Some of the information presented in or incorporated by reference in this
report constitutes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks,
uncertainties and assumptions. These forward-looking statements are based on the
Company's expectations, as of the date of this report, of future events, and the
Company undertakes no obligation to update any of these forward-looking
statements. Although the Company believes that these expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements. Factors that could cause or
contribute to the Company's actual results differing from its expectations
include those factors discussed elsewhere in this report, including in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," and in the Company's other filings with the Securities and
Exchange Commission.
PART I
Item 1. BUSINESS
Congoleum Corporation (the "Company" or "Congoleum") was incorporated in
Delaware in 1986, but traces its history in the flooring business back to Nairn
Linoleum Co. which began in 1886.
Congoleum produces both sheet and tile floor covering products with a wide
variety of product features, designs and colors. Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible
felt, printing a design on the gel, applying a wear layer, heating the gel layer
sufficiently to cause it to expand into a cushioned foam and, in some products,
adding a urethane coating. The Company also produces through-chip inlaid
products for both residential and commercial markets. These products are
produced by applying an adhesive coat and solid vinyl colored chips to a felt
backing and laminating the sheet under pressure with a heated drum. Tile
flooring is manufactured by creating a base stock (consisting primarily of
limestone and vinyl resin) which is less flexible than the backings for sheet
flooring, and transferring or laminating to it preprinted colors and designs
followed by a wear layer and, in some cases, a urethane coating. Commercial tile
is manufactured by including colored vinyl chips in the pigmented base stock.
For do-it-yourself tile, an adhesive is applied to the back of the tile. The
differences between products within each of the two product lines consist
primarily of content and thickness of wear layers and coatings, the use of
chemical embossing to impart a texture, the complexity of designs and the number
of colors. Congoleum also purchases sundries and accessory products for resale.
Congoleum's products serve both the residential and commercial
hard-surface flooring markets, and are used in remodeling, manufactured housing,
new construction and commercial applications.
The Company is a defendant in a large number of asbestos-related lawsuits
and has announced its intent to file a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. See Notes 1 and 17 of the Notes to Consolidated
Financial Statements, which are incorporated herein by reference.
Raw Materials
The principal raw materials used in the manufacture of sheet and tile
flooring are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print paper. Most of these raw
materials are purchased 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 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 certain products. 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.
3
Patents and Trademarks
The Company believes that the Congoleum brand name, as well as the other
trademarks it holds, are important to maintaining competitive position.
The Company also believes that patents and know-how play an important role
in furthering and maintaining competitive position. In particular, the Company
utilizes a proprietary transfer printing process for certain tile products that
it believes produces visual effects that only one competitor is presently able
to duplicate.
Distribution
The Company currently sells its products through approximately 19
distributors providing approximately 56 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Net sales to customers in the United States for the years ended December 31,
2002, 2001 and 2000 totaled $228.5 million, $210.7 million and $212.6 million,
respectively, with net sales to customers outside the United States for the
years ended December 31, 2002, 2001, and 2000 totaling $8.7 million, $8.1
million, and $7.0 million, respectively.
The sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October. Orders are generally
shipped as soon as a truckload quantity has been accumulated, and backorders can
be canceled without penalty. At December 31, 2002, the backlog of unshipped
orders was $5.5 million, compared to $8.4 million at December 31, 2001.
The Company considers its distribution network very important to
maintaining competitive position. Although the Company has more than one
distributor in some of its distribution territories and actively manages its
credit exposure to its customers, the loss of a major customer could have a
materially adverse impact on the Company's sales, at least until a suitable
replacement was in place. For the year ended December 31, 2002, two customers
each accounted for over 10% of the Company's sales. These customers were its
distributor to the manufactured housing market, LaSalle-Bristol Corporation, and
its retail market distributor, Mohawk Industries, Inc. Together, they accounted
for 59% of the Company's net sales in 2002.
Working Capital
The Company produces goods for inventory and sells on credit to customers.
Generally, the Company's distributors carry inventory as needed to meet local or
rapid delivery requirements. The Company's credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
Product Warranties
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of 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 increase with the price points of such
products.
4
Competition
The market for the Company's products is highly competitive. Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. The Company believes, based upon its market research, that
purchase decisions are influenced primarily by fashion elements such as design,
color and style, durability, ease of maintenance, price and ease of
installation. Both tile and sheet resilient flooring are easy to replace for
repair and redecoration and, in the Company's view, have advantages over other
floor covering products in terms of both price and ease of installation and
maintenance.
The Company encounters competition from three other manufacturers in North
America and, to a much lesser extent, foreign manufacturers. Certain of the
Company's competitors, including Armstrong World Industries, Inc. in the
resilient category, have substantially greater financial and other resources
than the Company.
Research and Development
The Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise in
the manufacturing process. Expenditures for research and development for the
year ended December 31, 2002 were $3.5 million, compared to $3.5 million and
$4.3 million for the years ended December 31, 2001 and 2000, respectively.
Environmental Regulation
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, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility under New Jersey's Environmental Clean-up
Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act.
The Company does not anticipate that the additional costs of these measures will
be significant. The Company also agreed to be financially responsible for any
cleanup measures required at its Trenton tile facility when that facility was
acquired in 1993. In 2002, the Company incurred capital expenditures of
approximately $55 thousand for environmental compliance and control facilities.
The Company has historically expended substantial amounts for compliance
with existing environmental laws and regulations, including those matters
described above. The Company will continue to be required to expend amounts in
the future for costs related to prior activities at its facilities and third
party sites and for ongoing costs to comply with existing environmental laws,
5
and those amounts may be substantial. Because environmental requirements have
grown increasingly strict, the Company is unable to determine the ultimate cost
of compliance with environmental laws and enforcement policies.
Employees
At December 31, 2002, the Company employed a total of 1,064 personnel
compared to 1,036 employees at December 31, 2001.
The Company has entered into collective bargaining agreements with hourly
employees at three of its plants and with the drivers of the trucks that provide
interplant transportation. These agreements cover approximately 650 of the
Company's employees. The Trenton tile plant has a five-year collective
bargaining agreement which expires in May 2003. The Marcus Hook plant has a
five-year collective bargaining agreement which expires in November 2003. The
Trenton sheet plant has a five-year collective bargaining agreement which
expires in February 2006. The Finksburg plant has no union affiliation. In the
past five years, there have been no significant strikes by employees at the
Company and the Company believes that its employee relations are satisfactory.
Executive Officers of the Registrant
The following information is furnished with respect to each of the
executive officers of the Company, each of whom is elected by and serves at the
pleasure of the Board of Directors. The business experience shown for each
officer has been his principal occupation for at least the past five years. Ages
are shown as of February 1, 2003.
Roger S. Marcus (Age 57)
Roger S. Marcus has been a Director and President and Chief Executive Officer of
the Company since 1993, and Chairman since 1994. Mr. Marcus is also a Director
(since 1981), Chairman of the Board (since 1992) and Chief Executive Officer
(since 1983) of American Biltrite. American Biltrite is the controlling
shareholder of Congoleum and owns and operates other businesses selling tape and
film, rubber, jewelry, and wood products. From 1983 to 1992, Mr. Marcus served
as Vice Chairman of the Board of American Biltrite.
Richard G. Marcus (Age 55)
Richard G. Marcus has been Vice Chairman of the Company since 1994 and a
Director since 1993. Mr. Marcus is also a Director (since 1982) and President
(since 1983) and Chief Operating Officer (since 1992) of American Biltrite.
John L. Russ III (Age 62)
John L. Russ III has been Sr. Vice President - Operations since 2002. Prior
thereto, he served as Executive Vice President for Borden Chemicals, Inc.
(Forest Products Division), a supplier of resins and adhesives, since 1997.
Prior to that he was Executive Vice President of Borden Chemicals and Plastics,
a specialty resins manufacturer, (since 1987).
6
Howard N. Feist III (Age 46)
Howard N. Feist III has been Chief Financial Officer and Secretary of the
Company since 1988. Mr. Feist is also Vice President - Finance and Chief
Financial Officer of American Biltrite (since 2000).
Dennis P. Jarosz (Age 57)
Dennis P. Jarosz has been Senior Vice President - Sales & Marketing since 2002.
Previously, he was Senior Vice President - Marketing since 1995. Prior thereto,
he had served as Vice President - Marketing since 1993 and Vice President -
Sales & Marketing of the tile division of American Biltrite (since 1986).
Sidharth Nayar (Age 42)
Sidharth Nayar has been Senior Vice President - Finance of the Company since
1999. Prior thereto, he had served as Vice President - Controller since 1994 and
prior to that he was Controller since 1990.
Thomas A. Sciortino (Age 56)
Thomas A. Sciortino has been Senior Vice President - Administration of the
Company since 1993. Prior thereto, he was Vice President - Finance of the tile
division of American Biltrite (since 1982).
Roger S. Marcus and Richard G. Marcus are brothers.
7
Item 2. PROPERTIES
The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, as well as storage space in Trenton, New Jersey, which
are described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Trenton, NJ Leased Warehousing 111,314
Mercerville, NJ Leased Corporate Offices 47,082
The Finksburg facility consists primarily of a 16-foot wide felt
production line.
The Marcus Hook facility is capable of manufacturing rotogravure printed
sheet flooring in widths of up to 16 feet. Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.
The Trenton sheet facility is capable of manufacturing rotogravure printed
and through-chip inlaid sheet products in widths up to 6 feet. Major production
lines, all six-foot wide, include an oven, a rotary laminating line and a press.
The examination, packing and warehousing of all sheet products (except products
for the manufactured housing segment) occur at the Trenton plant distribution
center.
The Trenton tile facility consists of three major production lines, a
four-foot wide commercial tile line, a two-foot wide residential tile line and a
one-foot wide residential tile line.
Productive capacity and extent of utilization of the Company's facilities
are dependent on a number of factors, including the size, construction, and
quantity of product being manufactured, some of which also dictate which
production line(s) must be utilized to make a given product. The Company's major
production lines were operated an average of 96% of the hours available on a
five-day, three-shift basis in 2002, with the corresponding figure for
individual production lines ranging from 36% to 142%.
Although many of the Company's manufacturing facilities have been
substantially depreciated, the Company has generally maintained and improved the
productive capacity of these facilities over time through a program of regular
capital expenditures. The Company considers its manufacturing facilities to be
adequate for its present and anticipated near-term production needs.
8
Item 3. LEGAL PROCEEDINGS
Asbestos-Related Liabilities: The Company is a defendant in a large number
of asbestos-related lawsuits and has announced its intent to file a pre-packaged
plan of reorganization under Chapter 11 of the United States Bankruptcy Code as
part of its strategy to resolve this liability. See Notes 1 and 17 of the Notes
to Consolidated Financial Statements, which are incorporated herein by
reference.
Environmental Liabilities: 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 ("CERCLA"), as amended,
and similar state laws. In three instances, although not named as a PRP, the
Company has received a request for information. These pending proceedings
currently relate to four disposal sites in New Jersey, Pennsylvania, Maryland
and Connecticut 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 and funding exposure in connection with those sites depends
on many factors, including the volume of material contributed to the site, the
number of other PRPs 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 81 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, is estimated to be approximately 5.8%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities for clean-up and removal activities arising from
operating manufacturing plants in New Jersey. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.
The Company anticipates that these matters will be resolved over a period
of years and that after application of expected insurance recoveries, the
Company will have sufficient resources to fund the costs.
Other: 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.
9
The total balances of environmental, asbestos-related, and other
liabilities and the related insurance receivables deemed probable of recovery at
December 31 are as follows:
2002 2001
-----------------------------------------------------------------------------
(in millions) Liability Receivable Liability Receivable
-----------------------------------------------------------------------------
Environmental liabilities $5.2 $2.0 $ 5.0 $ 2.0
Asbestos product liability(1) 21.3 -- 53.3 45.2
Other 1.0 .2 1.2 .2
-----------------------------------------------------------------------------
Total $27.5 $2.2 $59.5 $47.4
-----------------------------------------------------------------------------
(1) No amount is shown for insurance receivables at December 31, 2002
because, while the Company believes recoveries are probable, the coverage is in
litigation and the amount is uncertain. The asbestos product liability at
December 31, 2002 reflects the estimated cost to settle asbestos liabilities
through a pre-packaged plan of reorganization under Chapter 11.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A common stock is listed on the American Stock
Exchange. The following table reflects the high and low prices (rounded to the
nearest one-hundredth) based on American and New York Stock Exchange trading
over the past two years.
2002 High Low
----------------------------------------------------------
First Quarter $2.40 $1.80
Second Quarter 3.30 2.08
Third Quarter 2.25 1.42
Fourth Quarter 1.50 0.35
2001 High Low
----------------------------------------------------------
First Quarter $3.13 $1.75
Second Quarter 3.85 1.75
Third Quarter 3.28 1.75
Fourth Quarter 2.25 1.55
The Company does not anticipate paying any cash dividends in the
foreseeable future. Any future change in the Company's dividend policy is within
the discretion of the Board of Directors and will depend, among other things, on
the Company's solvency, earnings, debt service and capital requirements,
restrictions in financing agreements, business conditions and other factors that
the Board of Directors deem relevant. The payment of cash dividends is limited
under the terms of the Indenture relating to the Company's 8 5/8% Senior Notes
Due 2008 and the terms of the Company's existing revolving credit facility,
subject to the Company's cumulative earnings and other factors.
The number of registered and beneficial holders of the Company's Class A
common stock on February 10, 2003 was approximately 1,000.
11
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2002:
Weighted
Number of Average Number of Securities
Securities to Exercise Remaining
be Issued Upon Price Available For
Exercise of of Future Issuance
Outstanding Outstanding Under Equity
Options, Options, Compensation Plans
Warrants Warrants (excluding securities
Plan Category and Rights and Rights reflected in column A)
------------- ---------- ---------- ----------------------
(A) (B) (C)
Equity compensation plans
approved by security holders 678,500 $2.09 119,500
Equity compensation plans
not approved by security
holders 13,000 $2.44 37,000
------ ----- ------
Total 691,500 $2.10 156,500
======= ===== =======
On July 1, 1999 the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase up to
50,000 shares of the Company's Class A common stock. The 1999 Plan did not
require or receive stockholder approval. The Options granted under the 1999 Plan
have ten-year terms and vest six months from the grant date. The exercise price
for each Option is the fair market value on the date of the grant. As of
December 31, 2002 an aggregate of 13,000 shares of common stock were issuable
upon the exercise of outstanding Options.
12
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
For the years ended
December 31,
- ------------------------------------------------------------------------------------------------------
2002 2001(1) 2000(1) 1999(1) 1998(1)(2)
- ------------------------------------------------------------------------------------------------------
Income Statement Data:
Net sales ............................ $ 237,206 $ 218,760 $ 219,575 $ 242,654 $ 256,553
Cost of sales ........................ 179,699 165,683 170,373 176,559 181,997
Selling, general and administrative
expenses .......................... 70,119 48,952 49,326 54,076 54,266
Distributor transition expenses ...... -- -- 7,717 -- --
- ------------------------------------------------------------------------------------------------------
Income (loss) from operations ........ (12,612) 4,125 (7,841) 12,019 20,290
Interest expense, net ................ (8,112) (7,591) (5,714) (6,101) (9,558)
Other income, net .................... 1,543 1,320 1,450 1,729 984
- ------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting
change ............................. (19,181) (2,146) (12,105) 7,647 11,716
Provision (benefit) for income
taxes .............................. 92 (506) (3,976) 2,719 4,276
- ------------------------------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change ........ (19,273) (1,640) (8,129) 4,928 7,440
Cumulative effect of accounting
change ............................. (10,523) -- -- -- --
- ------------------------------------------------------------------------------------------------------
Net income (loss) .................... $ (29,796) $ (1,640) $ (8,129) $ 4,928 $ 7,440
- ------------------------------------------------------------------------------------------------------
Income (loss) per common share
before cumulative effect of
accounting change .................. $ (2.33) $ (0.20) $ (0.98) $ 0.57 $ 0.82
Cumulative effect of accounting
change ............................. (1.27) -- -- -- --
Net income (loss) per common share,
basic and diluted .................. $ (3.60) $ (0.20) $ (0.98) $ 0.57 $ 0.82
- ------------------------------------------------------------------------------------------------------
Average shares outstanding ........... 8,260 8,260 8,267 8,699 9,038
- ------------------------------------------------------------------------------------------------------
Balance Sheet Data (at end of period):
Total assets ......................... $ 203,991 $ 265,413 $ 238,662 $ 231,817 $ 231,865
Total long-term debt ................. 99,724 99,674 99,625 99,575 99,526
Stockholders' equity (deficit) ....... (16,078) 25,054 29,310 40,130 37,853
Note 1: The impact of the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") on the
Company's financial statements resulted in the elimination of $0.4 million of
goodwill amortization expense, or $0.05 per share, for the twelve months ended
December 31, 2002.
13
Had SFAS 142 been adopted in 2001, 2000, 1999 and 1998, the impact would have
been the elimination of $0.4 million of goodwill amortization expense, or $0.05
per share, for each of the years.
Note 2: In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13,
and Technical Corrections," which is effective for transactions occurring after
May 15, 2002. SFAS 145 rescinds SFAS 4 and SFAS 64, which addressed the
accounting for gains and losses from extinguishment of debt. The adoption of
SFAS 145 resulted in the reclassification of an extraordinary item in 1998 of
$3.8 million to interest expense.
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and notes thereto contained herein.
Results of Operations
The Company's business is cyclical and is affected by the same economic
factors that affect the remodeling and housing industries in general, including
the availability of credit, consumer confidence, changes in interest rates,
market demand and general economic conditions.
In addition to external economic factors, the Company's results are
sensitive to sales and manufacturing volume, competitors' pricing, consumer
preferences for flooring products, raw material costs and the mix of products
sold. The manufacturing process is capital intensive and requires substantial
investment in facilities and equipment. The cost of operating these facilities
generally does not vary in direct proportion to production volume and,
consequently, operating results fluctuate disproportionately with changes in
sales volume.
During 2002, Congoleum experienced a significant increase in the number of
asbestos claims against it and exhausted its primary insurance coverage. While
the Company had previously purchased over $1 billion in insurance coverage in
excess of the primary coverage, approximately 25% - 30% of that coverage was
placed with carriers that are now insolvent. Furthermore, the solvent carriers
that underwrote the balance of the coverage have disputed their coverage
obligations for the Company's asbestos claims liability. The Company's dispute
with its excess insurance carriers is the subject of ongoing coverage
litigation. As such, the Company was forced to fund all costs for defense and
indemnity related to asbestos claims after its primary coverage had been
exhausted. In light of this situation, the Company began exploring various
strategic alternatives to deal with the asbestos situation.
On January 13, 2003 the Company announced that it had begun preliminary
settlement negotiations with attorneys it believes represent the majority of
plaintiffs with asbestos claims pending against it, and that upon successful
completion of these negotiations, it intends to seek confirmation of a
pre-packaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code. On March 31, 2003, the Company reached an agreement in
principle with attorneys representing more than 75% of the known present
claimants with asbestos claims pending against Congoleum.
The agreement in principle contemplates a Chapter 11 reorganization
seeking confirmation of a pre-packaged plan that would leave non-asbestos
creditors unimpaired and would resolve all pending and future asbestos claims
against the Company, its affiliates and its distributors. Approval of such a
plan would require the supporting votes of at least 75% of the asbestos
claimants with claims against the Company who vote on the plan. Resolution of
Congoleum's asbestos liability through a pre-packaged reorganization plan is
subject to various other conditions as well, including approval by the
Bankruptcy Court.
15
The Company expects that the plan of reorganization would provide for an
assignment of or grant a security interest in certain rights in and proceeds of
Congoleum's applicable insurance to a trust that would fund the settlement of
all pending and future asbestos claims and protect the Company from future
asbestos-related litigation by channeling all asbestos claims to the trust under
Section 524(g) of the Bankruptcy Code. Congoleum expects its other creditors
would be unimpaired under the plan and would be paid in the ordinary course of
business. The Company expects that several months will be needed to negotiate a
pre-packaged plan of reorganization, at which time it would file for bankruptcy
and request court approval of the plan. Congoleum expects it would take another
two to six months to confirm the plan and emerge from the process. In
furtherance of the agreement in principle, on April 10, 2003, the Company
entered into a settlement agreement with various asbestos claimants (the
"Claimant Agreement"), which will result in a global settlement of more than 75%
of the known asbestos personal injury claims pending against the Company. As
contemplated by the Claimant Agreement, the Company also entered into agreements
establishing a pre-petition trust (the "Collateral Trust") to distribute funds
in accordance with the terms of the Claimant Agreement, and granting the
Collateral Trust a security interest in its rights under applicable insurance
coverage and payments from insurers for asbestos claims.
Based on its pre-packaged bankruptcy strategy, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded a charge of $17.3 million in the fourth
quarter of 2002 to increase its recorded liability to the estimated minimum of
$21.3 million. Actual amounts that will be contributed to the plan trust and
costs for pursuing and implementing the plan of reorganization could be
materially higher.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Notes 1 and 17 of the Notes to
Consolidated Financial Statements. In addition, please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors that May Affect Future Results - The Company has significant asbestos
personal injury liability and funding exposure, and its strategy for resolving
this exposure may not be successful" for factors that could cause actual results
to differ from the Company's goals for resolving its asbestos liability.
Year ended December 31, 2002 as compared to year ended December 31, 2001
Net sales for the year ended December 31, 2002 were $237.2 million as
compared to $218.8 million for the year ended December 31, 2001, an increase of
$18.4 million or 8.4%. The increase resulted primarily from strong sales of the
DuraStone product line, which was introduced in August 2001, and improved
resilient sheet sales in both the base-grade and trade-up builder segment,
partially offset by lower luxury and contract tile sales.
Gross profit for the year ended December 31, 2002 was $57.5 million, or
24.2% of sales, compared to $53.1 million in 2001, or 24.3% of sales, an
increase of $4.4 million. Gross profit margins declined slightly as costs of
expanding sales and the product mix impact of increased base-grade builder
product sales offset improved manufacturing efficiencies and cost reduction
programs.
In the fourth quarter of 2002, the Company recorded a charge of $17.3
million, included in selling, general and administrative expenses, to adjust its
recorded liability for resolving asbestos-related claims against it. The
recorded liability at December 31, 2002 represents the minimum estimated cost
that the Company will incur to resolve its asbestos-related liability through
the execution of the Company's anticipated plan of reorganization. Actual costs
could be significantly higher, and the Company will adjust its recorded
liability should its estimates change.
16
Selling, general and administrative expenses were $70.1 million for the
year ended December 31, 2002, which includes asbestos-related costs of $17.3
million, as compared to $49.0 million for the year ended December 31, 2001, an
increase of $21.2 million or 43.2%. As a percent of net sales, selling, general
and administrative expenses were 29.6% and 22.4% for the years ended December
31, 2002 and 2001, respectively. In addition to the asbestos-related charge,
significant investments in additional displays and samples to support the
DuraStone product line and higher promotional support contributed to the
increase.
Loss from operations was $12.6 million for the year ended December 31,
2002, compared to income of $4.1 million for the year ended December 31, 2001, a
decrease of $16.7 million. This change was primarily due to the asbestos charge.
Interest income declined from $0.7 million in 2001 to $0.3 million in 2002
due to a combination of lower average cash equivalent and short-term investment
balances and lower interest rates. Interest expense increased from $8.3 million
in 2001 to $8.4 million in 2002, due to lower capitalized interest in 2002
compared to 2001.
The Company recorded a tax provision of $92 thousand on a loss before
income taxes and the cumulative effect of accounting change of $19.2 million in
2002. The tax provision includes a benefit from the reduction of $529 thousand
for a tax valuation allowance as a result of utilizing certain loss carry
forwards that had previously been fully reserved. This benefit was offset by an
additional provision for valuation allowance. For 2001, the effective tax rate
was 23.6% resulting in a tax benefit of $506 thousand which includes a reduction
for a tax valuation allowance of $273 thousand.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). 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. 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 in accordance with SFAS No.
142 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 the cumulative effect of a change in accounting principle as of January 1,
2002.
During the fourth quarter of 2002, the Company recorded other
comprehensive expense of $11.3 million relating to the recognition of a minimum
pension liability. The Company reduced its assumed long-term rate of return on
pension plan assets from 9% to 7% and its discount rate from 7.25% to 6.75%.
These changes in assumptions will increase reported pension expense in 2003 by
$0.8 million when compared to 2002.
17
Year ended December 31, 2001 as compared to year ended December 31, 2000
Net sales for the year ended December 31, 2001 were $218.8 million as
compared to $219.6 million for the year ended December 31, 2000, a decrease of
$0.8 million or 0.4%. The decrease resulted primarily from lower sales of
products for the manufactured housing industry and lower sales to the southwest
and west coast regions as a result of a distributor transition in that area.
These declines were largely offset by improved sales in the balance of the U.S.
and Canada resulting primarily from sales of the Company's Ultima and new
DuraStone product lines.
Gross profit for the year ended December 31, 2001 was $53.1 million, or
24.3% of sales, compared to $49.2 million in 2000, or 22.4% of sales, an
increase of $3.9 million or 7.9%. Gross profit increased primarily due to
improved manufacturing efficiencies, reductions in manufacturing overhead costs,
and a more profitable mix of sales.
Selling, general and administrative expenses were $49.0 million for the
year ended December 31, 2001 as compared to $49.3 million for the year ended
December 31, 2000, a decrease of $0.3 million or 0.8%. As a percent of net
sales, selling, general and administrative expenses remained at approximately
22%. Cost reduction initiatives instituted in the first quarter, including a 13%
reduction in the workforce, were partly offset by product launch costs for the
new DuraStone product line.
Income from operations was $4.1 million for the year ended December 31,
2001, compared to a loss of $7.8 million for the year ended December 31, 2000,
an increase of $11.9 million. Of this $11.9 million improvement, $7.7 million is
attributable to the impact of costs incurred for a distributor transition in
2000. The remainder of the improvement is primarily due to the improvements in
margins and reductions in selling, general and administrative costs previously
discussed.
Interest income declined from $1.8 million in 2000 to $0.7 million in 2001
due to a combination of lower average cash equivalent and short-term investment
balances and lower interest rates. Interest expense increased from $7.5 million
in 2000 to $8.3 million in 2001, primarily due to lower capitalized interest in
2001 compared to 2000.
The effective tax rate for 2001 was 23.6% resulting in a tax benefit of
$506 thousand. The tax benefit includes a reduction of $273 thousand for a tax
valuation allowance. For 2000, the effective tax rate was 32.9% resulting in a
tax benefit of $4.0 million which includes a reduction for a tax valuation
allowance of $1.1 million.
Liquidity and Capital Resources
The Company is a defendant in a large number of asbestos-related lawsuits
and has announced its intent to file a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. See Notes 1 and 17 of the Notes to Consolidated
Financial Statements, which are incorporated herein by reference. These matters
will have a material adverse impact on liquidity and capital resources. During
2002, the Company paid $4.1 million in defense and indemnity costs related to
asbestos-related claims. In 2003, the Company anticipates spending $21.3 million
in fees, expenses, and indemnity contributions to effect its planned
reorganization under Chapter 11.
18
Cash and equivalents, including short-term investments at December 31,
2002, were $18.3 million, an increase of $1.6 million from December 31, 2001.
Working capital was $28.8 million at December 31, 2002, down from $51.7 million
one year earlier. The ratio of current assets to current liabilities at December
31, 2002 was 1.4 to one, compared to 2.0 to one a year earlier. The ratio of
debt to total capital at December 31, 2002 was .49 compared to .38 in 2001. Net
cash provided by operations during the year ended December 31, 2002 was $10.0
million, up from cash used by operations of $0.2 million in 2001. Cash from
operations increased from 2001 to 2002 due to lower inventories, the
non-recurrence of significant marketing expenditures related to new product
introduction and the one-time impact of payments made in 2001 related to the
settlement of distributor termination costs. Capital expenditures in 2002
totaled $8.4 million. The Company is currently planning capital expenditures of
approximately $8.0 million in 2003 and $7.0 million in 2004. Required
contributions to the Company's defined benefit pension plans in 2002 were $4.7
million and are expected to be $5.2 million in 2003.
In December 2001, the Company entered into a new three-year revolving
credit facility which provides for borrowings up to $30.0 million. Interest is
based on .75% above prime, or 3.25% over LIBOR, as applicable depending on
meeting the required covenants. This financial agreement contains certain
covenants which include the maintenance of a minimum tangible net worth and
EBITDA if borrowing availability falls below a certain level. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financial agreement must
be met in order for the Company to borrow from the facility. Borrowings under
this facility are collateralized by inventory and receivables. At December 31,
2002, based on the level of receivables and inventory, the Company had borrowing
availability of $19.5 million, of which $1.8 million was utilized for
outstanding letters of credit. In September 2002, the Company and its lender
under the revolving credit facility established pursuant to a Loan and Security
Agreement (the "Credit Agreement") amended the Credit Agreement to revise
certain financial and other covenants.
In February 2003, the Company and its lender under the Credit Agreement
further amended the Credit Agreement to revise certain financial and other
covenants on terms negotiated to reflect the transactions contemplated by the
Company's intended global settlement of its asbestos claims liability. In March
2003, the Company and the trustee of the indenture governing the Company's 8
5/8% Senior Notes Due 2008 amended the indenture to expressly provide the
Company, under the terms of that indenture, with greater flexibility to pursue
possible resolutions of its current and future asbestos claims liability,
including negotiating a global settlement with current asbestos plaintiffs, and
soliciting acceptances of and filing a prepackaged plan of reorganization under
Chapter 11 of the Bankruptcy Code. Holders of a majority in aggregate principle
amount of the Senior Notes as of the record date for determining the holders
entitled to vote on the proposed amendment consented to the amendment.
..
Collective bargaining agreements with hourly employees at the Company's
facilities expire in 2003 and 2006. In the past five years, there have been no
strikes by employees at the Company, and the Company believes that its employee
relations are satisfactory. The Company does not anticipate contract expirations
in 2003 will result in work stoppages, but should work stoppages occur, they
could have a material adverse impact on cash flow and results of operations.
In addition to the provision for asbestos litigation discussed previously,
the Company has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. The Company is subject to
federal, state and local environmental laws and regulations and certain legal
19
and administrative claims are pending or have been asserted against the Company.
Among these claims, the Company is a named party in several actions associated
with waste disposal sites (more fully discussed in "Legal Proceedings" in Part
I, Item 3 and "Environmental Regulation" in Part I, Item 1). 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 cost and timing of payments are indeterminable
due to such unknown factors as the magnitude of cleanup costs, the timing and
extent of the remedial actions that may be required, the determination of the
Company's liability in proportion to other potentially responsible parties, and
the extent to which costs may be recoverable from insurance. The Company has
recorded provisions in its financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While the
Company believes its estimate of the future amount of these liabilities is
reasonable, and that they will be paid over a period of five to ten years, the
timing and amount of such payments may differ significantly from 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 would reasonably have such an effect. There can be no
assurances that the costs of any future government regulations could be passed
along to its customers. Estimated insurance recoveries related to these
liabilities are reflected in other noncurrent assets.
The outcome of these environmental matters could result in significant
expenses incurred by or judgments assessed against the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. The Company
believes these sources will be adequate to fund working capital requirements,
debt service payments, planned capital expenditures, and its current estimates
for costs to settle and resolve its asbestos liabilities through its planned
pre-packaged Chapter 11 plan of reorganization. The Company's inability to get
such a plan confirmed in a timely manner would have a material adverse effect on
the Company's ability to fund its operating and investing requirements.
The following table summarizes the Company's obligation for future
principal payments on its debt and future minimum rental payments on its
noncancelable operating leases at December 31, 2002.
Payments Due by Period
(amounts in thousands)
- ------------------------------------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- ------------------------------------------------------------------------------------------------------
Long-term debt $100,000 $100,000
Operating leases 13,492 2,921 4,219 2,463 3,889
- ------------------------------------------------------------------------------------------------------
Total $113,492 $2,921 $4,219 $2,463 $103,889
======================================================================================================
20
Critical Accounting Policies
The Company has identified a number of its accounting policies that it has
determined to be critical. These critical accounting policies primarily relate
to financial statement assertions that are based on the estimates and
assumptions of management where the impact of changing those estimates and
assumptions could have a material effect on the Company's financial statements.
Following is a summary of our critical accounting policies.
Asbestos Liabilities - As discussed in Notes 1 and 17 of the Notes to Financial
Statements, the Company is a party to a significant number of lawsuits stemming
from its manufacture of asbestos-containing products and has announced its
intent to seek confirmation of a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. The Company's estimated minimum gross liability to cover
judgments and/or settlements of known asbestos claims is $310 million, not
including the cost to defend and litigate these cases, which is substantially in
excess of both the total assets of the Company as well as the Company's previous
estimates made in prior periods of the maximum liability for both known and
unasserted claims. While the Company purchased insurance coverage it believes
applies to these claims, some of the insurance carriers are presently insolvent
and the remaining solvent insurance carriers have disputed their coverage
obligations. The Company believes the ultimate amount of its liability, and the
amount of recoverable insurance, will be determined through some combination of
negotiation, litigation, and bankruptcy court order, but that these amounts can
no longer be reasonably estimated given all the uncertainties that presently
exist.
The Company expects that insurance will provide the vast majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of the Company
itself. The Company believes that it does not have the necessary financial
resources to litigate and/or settle asbestos claims in the ordinary course of
business.
As such, the Company believes the most meaningful measure of its probable
loss due to asbestos litigation is the amount it will have to contribute to the
plan trust plus the costs to effect the reorganization. The Company estimates
the minimum costs to affect this plan to be $21.3 million, which it has recorded
as a current liability. The maximum amount of asbestos losses is limited to the
going concern or liquidation value of the Company, an amount which the Company
believes is substantially less than the minimum estimated liability for the
known claims against it.
The Company will update its estimates as additional information becomes
available during the reorganization process, resulting in potentially material
adjustments to the Company's earnings in future periods.
Valuation of Deferred Tax Assets - The Company provides for valuation reserves
against its deferred tax assets in accordance with the requirements of SFAS 109.
In evaluating the recovery of deferred tax assets, the Company makes certain
assumptions as to future events such as the ability to generate future taxable
income. At December 31, 2002, the Company has provided a 100% valuation
allowance for its net deferred tax assets.
21
Environmental Contingencies - As discussed previously, the Company has incurred
liabilities related to environmental remediation costs at both third-party sites
and Company-owned sites. Management has recorded both liabilities and insurance
receivables in its financial statements for its estimate of costs and insurance
recoveries for future remediation activities. These estimates are based on
certain assumptions such as the extent of cleanup activities to be performed,
the methods employed in the cleanup activities, the Company's relative share in
costs at sites where other parties are involved, and the ultimate insurance
coverage available. These projects tend to be long-term in nature, and these
assumptions are subject to refinement as facts change. As such, it is possible
that the Company may need to revise its recorded liabilities and receivables for
environmental costs in future periods resulting in potentially material
adjustments to the Company's earnings in future periods.
Pension Plans and Postretirement Benefits - The Company accounts for its defined
benefit pension plans in accordance with SFAS No. 87, "Employers' Accounting for
Pensions," which requires that amounts recognized in financial statements be
determined on an actuarial basis. As permitted by SFAS No. 87, the Company uses
a calculated value of the expected return on plan assets (which is further
described below). Under SFAS No. 87, the effects of the actual performance of
the pension plan's assets and changes in pension liability discount rates on the
Company's computation of pension income or expense are amortized over future
periods.
The most significant element in determining the Company's pension income
or expense in accordance with SFAS No. 87 is the expected return on plan assets.
For 2003, the Company has assumed that the expected long-term rate of return on
plan assets will be 7%. The assumed long-term rate of return on assets is
applied to the value of plan assets. This produces the expected return on plan
assets that is included in determining pension expense. The difference between
this expected return and the actual return on plan assets is deferred. The net
deferral of past asset gains or losses ($24.4 million at 12/31/02) will
ultimately be recognized as future pension expense.
At the end of each year, the Company determines the discount rate to be
used to calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the Company
looks to rates of return on high-quality, fixed-income investments that receive
one of the two highest ratings given by a recognized ratings agency. At December
31, 2002, the Company determined this rate to be 6.75%.
The Company accounts for its postretirement benefits other than pensions
in accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions," which requires that amounts recognized in
financial statements be determined on a actuarial basis. These amounts are
projected based on the January 1, 2001 SFAS No. 106 valuation and the 2002
year-end disclosure assumptions, including a discount rate of 6.75% and health
care cost trend rates of 9% in 2003 reducing to an ultimate rate of 5% in 2009.
22
Pending Adoption of Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards No. 143
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") was issued. SFAS
No. 143 provides new guidance on the recognition and measurement of an asset
retirement obligation and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. This standard will be effective for the Company as
of January 1, 2003. The Company is currently evaluating what impact, if any,
adoption will have on the Company's consolidated financial statements.
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs associated with Exit or Disposal Activities" ("SFAS No.
146") was issued. This standard addresses the recognition, measurement, and
reporting of costs associated with exit and disposal activities, including
restructuring activities, and is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
FAS No. 146 to have a material impact on its financial condition or results of
operations.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FASB Interpretation No. 45") was issued. The
accounting recognition provisions of FASB Interpretation No. 45 are effective
January 1, 2003 on a prospective basis. They require that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Under prior accounting
principles, a guarantee would not have been recognized as a liability until a
loss was probable and reasonably estimable. The Company is currently evaluating
what impact, if any, adoption will have on its future financial position or
results of operations.
Risk Factors That May Affect Future Results
The Company has significant asbestos liability and funding exposure, and its
strategy for resolving this exposure may not be successful.
As more fully set forth in Notes 1 and 17 of the Notes to the Consolidated
Financial Statements, which are included in this report, the Company has
significant liability and funding exposure for asbestos claims. The Company has
reached an agreement in principle with attorneys representing more than 75% of
the known present claimants with asbestos claims pending against the Company. In
furtherance of the agreement in principle, the Company entered into a settlement
agreement with various asbestos claimants, which will result in a global
settlement of more than 75% of the known asbestos personal injury claims pending
against the Company. The agreement in principle also contemplates a Chapter 11
reorganization seeking confirmation of a pre-packaged plan that would leave
non-asbestos creditors unimpaired and would resolve all pending and future
personal injury asbestos claims against the Company, its affiliates and its
distributors. Confirmation of such a plan will require, among other things, the
supporting votes of at least 75% of the Company's asbestos claimants who vote on
the plan, as well as a determination by the Bankruptcy Court that the plan has
satisfied certain criteria under the Bankruptcy Code.
23
There can be no assurance that the Company will be successful in realizing
its goals in this regard or in obtaining the necessary votes, consents and
approvals or in implementing its desired plan terms. As a result, any settlement
reached by the Company with its asbestos plaintiffs or plan of reorganization
pursued by the Company or confirmed by a bankruptcy court could vary
significantly from the description in this report (including descriptions
incorporated by reference in this report), including the estimated costs and
contributions to effect the contemplated plan of reorganization could be
significantly greater than currently estimated. Any plan of reorganization
pursued by the Company will be subject to numerous conditions, approvals and
other requirements, including bankruptcy court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained.
Some additional factors that could cause actual results to differ from the
Company's goals for resolving its asbestos liability by pursuing a global
settlement of its pending asbestos claims and soliciting consents for and filing
a prepackaged plan of reorganization bankruptcy filing include: (i) the future
cost and timing of estimated asbestos liabilities and payments and availability
of insurance coverage and reimbursement from insurance companies, which
underwrote the applicable insurance policies for the Company and its controlling
shareholder, American Biltrite Inc., for asbestos-related claims and other costs
relating to the execution and implementation of any plan of reorganization
pursued by the Company, (ii) timely negotiating and entering into settlement
agreements on terms it considers satisfactory with a sufficient majority of
asbestos claimants (iii) timely reaching agreement with other creditors, or
classes of creditors, that exist or may emerge, (iv) the Company's and its
controlling shareholder's, American Biltrite Inc.'s, satisfaction of the
conditions and obligations under their respective outstanding debt instruments,
and amendment of those outstanding debt instruments, as necessary, to permit the
contemplated note contribution(s) in connection with the Company's plan of
reorganization and to make certain financial covenants in those debt instruments
less restrictive, including covenants applicable to the first quarter of 2003,
(v) the response from time-to-time of the Company's and its controlling
shareholder's, American Biltrite Inc.'s, lenders, customers, suppliers and other
constituencies to the ongoing process arising from the Company's strategy to
settle its asbestos liability, (vi) timely obtaining sufficient creditor and
court approval of any reorganization plan pursued by it and (vii) compliance
with the United States Bankruptcy Code, including section 524(g).
As a result of the Company's significant liability and funding exposure
for asbestos claims, there can be no assurance that if it were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company.
For further information regarding the Company's asbestos liability,
insurance coverage and strategy to resolve its asbestos liability, please see
Notes 1 and 17 of Notes to Consolidated Financial Statements, which are included
in this report.
The Company may incur substantial liability for environmental, product and
general liability claims in addition to asbestos-related 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.
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
24
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
for costs related to prior activities at its facilities and third party sites,
and for ongoing costs to comply with existing environmental laws; such amounts
may be substantial. There is no certainty that these amounts will not have a
material adverse effect on its business, results of operations and financial
condition 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 (in addition to asbestos-related 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; its insurance coverage is
insufficient to satisfy unfavorable judgments or settlements relating to these
matters; or the Company is unable to collect insurance proceeds relating to
these matters.
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,
25
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 United 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 competitive cost advantage over the Company as a
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 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.
26
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.
The Company currently sells its products through approximately 19
distributors providing approximately 56 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 market distributor of the Company. These two distributors
accounted for 59% of the Company's net sales for the twelve months ended
December 31, 2002 and 48% of the Company's net sales for the year ended December
31, 2001.
27
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 December 31,
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 and does not hold any instruments for trading
purposes.
28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
December 31, December 31,
2002 2001
- ------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 18,277 $ 15,257
Short-term investments ..................................... -- 1,416
Accounts receivable, less allowance for doubtful
accounts and cash discounts of $1,204 and $1,859
as of December 31, 2002 and 2001, respectively ........... 17,034 17,932
Inventories ................................................ 50,725 55,782
Prepaid expenses and other current assets .................. 7,868 6,403
Deferred income taxes ...................................... 7,901 6,375
- ------------------------------------------------------------------------------------------
Total current assets ................................... 101,805 103,165
Property, plant, and equipment, net ............................ 93,556 95,904
Insurance for asbestos-related liabilities ..................... -- 45,253
Goodwill, net .................................................. -- 10,523
Deferred income taxes .......................................... -- 1,334
Other assets ................................................... 8,630 9,234
- ------------------------------------------------------------------------------------------
Total assets ........................................... $ 203,991 $ 265,413
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................... $ 14,647 $ 17,909
Accrued liabilities ........................................ 33,021 29,285
Asbestos-related liabilities ............................... 21,295 300
Accrued taxes .............................................. 59 353
Deferred income taxes ...................................... 3,954 3,597
- ------------------------------------------------------------------------------------------
Total current liabilities .............................. 72,976 51,444
Long-term debt ................................................. 99,724 99,674
Asbestos-related liabilities ................................... -- 53,003
Accrued pension liability ...................................... 22,932 14,659
Other liabilities .............................................. 11,782 12,607
Deferred income taxes .......................................... 3,947 --
Accrued postretirement benefit obligation ...................... 8,708 8,972
- ------------------------------------------------------------------------------------------
Total liabilities ...................................... 220,069 240,359
- ------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01; 20,000,000 shares
authorized; 4,736,950 shares issued as of December 31, 2002
and 2001 ..................................................... 47 47
Class B common stock, par value $0.01; 4,608,945 shares
authorized, issued and outstanding at December 31, 2002
and 2001 ..................................................... 46 46
Additional paid-in capital ..................................... 49,105 49,105
Retained deficit ............................................... (40,016) (10,220)
Accumulated minimum pension liability adjustment ............... (17,447) (6,111)
-------- -------
(8,265) 32,867
Less Class A common stock held in treasury, at cost;
1,085,760 shares at December 31, 2002 and 2001 ............... 7,813 7,813
- ------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ................... (16,078) 25,054
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) ... $ 203,991 $ 265,413
==========================================================================================
The accompanying notes are an integral part of the financial statements.
29
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the years ended
December 31,
2002 2001 2000
- -------------------------------------------------------------------------------------------
Net sales ........................................... $ 237,206 $ 218,760 $ 219,575
Cost of sales ....................................... 179,699 165,683 170,373
Selling, general and administrative expenses ........ 70,119 48,952 49,326
Distributor transition expenses ..................... -- -- 7,717
- -------------------------------------------------------------------------------------------
(Loss) income from operations ................. (12,612) 4,125 (7,841)
Other income (expense):
Interest income .................................. 263 708 1,797
Interest expense ................................. (8,375) (8,299) (7,511)
Other income ..................................... 1,647 1,350 1,459
Other expense .................................... (104) (30) (9)
- -------------------------------------------------------------------------------------------
Loss before income taxes and cumulative
effect of accounting change ................. (19,181) (2,146) (12,105)
Provision (benefit) for income taxes ................ 92 (506) (3,976)
- -------------------------------------------------------------------------------------------
Net loss before accounting change ............. (19,273) (1,640) (8,129)
Cumulative effect of accounting change ..... (10,523) -- --
- -------------------------------------------------------------------------------------------
Net loss ................................... $ (29,796) $ (1,640) $ (8,129)
- -------------------------------------------------------------------------------------------
Net loss per common share, before cumulative
effect of accounting change, basic and
diluted .................................... $ (2.33) $ (0.20) $ (0.98)
Cumulative effect of accounting change ..... (1.27) -- --
- -------------------------------------------------------------------------------------------
Net loss per common share, basic and diluted .. $ (3.60) $ (0.20) $ (0.98)
- -------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding ................................. 8,260 8,260 8,267
===========================================================================================
The accompanying notes are an integral part of the financial statements.
30
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
Accumulated
Minimum
Common Stock Additional Pension
par value $0.01 Paid-in Retained Liability Treasury Comprehensive
Class A Class B Capital Deficit Adjustment Stock Total Income (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999..... $47 $46 $49,105 $(451) $(1,000) $(7,616) $40,131
Purchase of treasury stock..... (197) (197)
Minimum pension liability
adjustment, net of tax
benefit of $1,434 ........... (2,494) (2,494) $ (2,494)
Net loss....................... (8,129) (8,129) (8,129)
--------
Net comprehensive loss......... $(10,623)
========
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000..... 47 46 49,105 (8,580) (3,494) (7,813) 29,311
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 (10,220) (6,111) (7,813) 25,054
Minimum pension liability
adjustment .................. (11,336) (11,336) (11,336)
Net loss....................... (29,796) (29,796) (29,796)
--------
Net comprehensive loss......... $(41,132)
========
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002..... $47 $46 $49,105 $(40,016) $(17,447) $(7,813) $(16,078)
=============================================================================================================
The accompanying notes are an integral part of the financial statements.
31
Consolidated Statements of Cash Flows
(dollars in thousands)
For the years ended
December 31,
2002 2001 2000
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ............................................... $(29,796) $ (1,640) $ (8,129)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation ..................................... 10,714 11,363 10,919
Amortization ..................................... 559 818 818
Deferred income taxes ............................ 4,112 (652) (1,769)
Cumulative effect of account change .............. 10,523 -- --
Changes in certain assets and liabilities:
Accounts and notes receivable .............. 898 7,595 (11,782)
Inventories ................................ 5,057 (2,875) 1,692
Prepaid expenses and other current assets .. 602 (4,870) 93
Accounts payable ........................... (4,047) (1,706) 457
Accrued and asbestos-related liabilities ... 15,373 (8,802) 8,364
Other liabilities .......................... (4,025) 566 193
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities ....................... 9,970 (203) 856
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net .............................. (8,366) (7,858) (13,925)
Purchase of short-term investments ..................... -- (4,175) (23,392)
Maturities of short-term investments ................... 1,416 14,856 30,527
- ----------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities ....................... (6,950) 2,823 (6,790)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of treasury stock ............................. -- -- (197)
- ----------------------------------------------------------------------------------------------
Net cash used by financing activities ...... -- -- (197)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ...... 3,020 2,620 (6,131)
Cash and cash equivalents:
Beginning of year ...................................... 15,257 12,637 18,768
- ----------------------------------------------------------------------------------------------
End of year ............................................ $ 18,277 $ 15,257 $ 12,637
==============================================================================================
The accompanying notes are an integral part of the financial statements.
32
Notes to Consolidated Financial Statements
1. Basis of Presentation
The financial statements of Congoleum Corporation (the "Company" or
"Congoleum") have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. Accordingly, the financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern. As described more fully below, there is substantial doubt about
the Company's ability to continue as a going concern unless it obtains relief
from its substantial asbestos liabilities through a successful reorganization
under Chapter 11 of the Bankruptcy Code.
During 2002, Congoleum experienced a significant increase in the number of
asbestos claims against it and exhausted its primary insurance coverage. While
the Company had previously purchased over $1 billion in insurance coverage in
excess of the primary coverage, approximately 25% - 30% of that coverage was
placed with carriers that are now insolvent. Furthermore, the solvent carriers
that underwrote the balance of the coverage have disputed their coverage
obligations for the Company's asbestos claims liability. The Company's dispute
with its excess insurance carriers is the subject of ongoing coverage
litigation. As such, the Company was forced to fund all costs for defense and
indemnity related to asbestos claims after its primary coverage had been
exhausted. In light of this situation, the Company began exploring various
strategic alternatives to deal with the asbestos situation.
On January 13, 2003 the Company announced that it had begun preliminary
settlement negotiations with attorneys it believes represent the majority of
plaintiffs with asbestos claims pending against it, and that upon successful
completion of these negotiations, it intends to seek confirmation of a
pre-packaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code. On March 31, 2003, the Company reached an agreement in
principle with attorneys representing more than 75% of the known present
claimants with asbestos claims pending against Congoleum.
The agreement in principle contemplates a Chapter 11 reorganization
seeking confirmation of a pre-packaged plan that would leave non-asbestos
creditors unimpaired and would resolve all pending and future asbestos claims
against the Company, its affiliates and its distributors. Approval of such a
plan would require the supporting votes of at least 75% of the asbestos
claimants with claims against the Company who vote on the plan. Resolution of
Congoleum's asbestos liability through a pre-packaged reorganization plan is
subject to various other conditions as well, including approval by the
Bankruptcy Court.
The Company expects that the plan of reorganization would provide for an
assignment of or grant a security interest in certain rights in and proceeds of
the Company's applicable insurance to a trust that would fund the settlement of
all pending and future asbestos claims and protect the Company from future
asbestos-related litigation by channeling all asbestos claims to the trust under
Section 524(g) of the Bankruptcy Code. Congoleum expects its other creditors
would be unimpaired under the plan and would be paid in the ordinary course of
business. The Company expects that several months will be needed to negotiate a
pre-packaged plan of reorganization, at which time it would file for bankruptcy
and request court approval of the plan. Congoleum expects it would take another
two to six months to confirm the plan and emerge from the process.
33
In furtherance of the agreement in principle, on April 10, 2003, the
Company entered into a settlement agreement with various asbestos claimants (the
"Claimant Agreement"). As contemplated by the Claimant Agreement, the Company
also entered into agreements establishing a pre-petition trust (the "Collateral
Trust") to distribute funds in accordance with the terms of the Claimant
Agreement, and granting the Collateral Trust a security interest in its rights
under applicable insurance coverage and payments from insurers for asbestos
claims.
Based on its pre-packaged bankruptcy strategy, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded a charge of $17.3 million in the fourth
quarter of 2002 to increase its recorded liability to the estimated minimum of
$21.3 million. Actual amounts that will be contributed to the plan trust and
costs for pursuing and implementing the plan of reorganization could be
materially higher.
There can be no assurance that the Company will be successful in realizing
its goals in this regard or in obtaining the necessary votes, consents and
approvals or in implementing its desired plan terms. As a result, any settlement
reached by the Company with its asbestos plaintiffs or plan of reorganization
pursued by the Company or confirmed by a bankruptcy court could vary
significantly from the description in this report (including descriptions
incorporated by reference in this report), including the estimated costs and
contributions to effect the contemplated plan of reorganization could be
significantly greater than currently estimated. Any plan of reorganization
pursued by the Company will be subject to numerous conditions, approvals and
other requirements, including bankruptcy court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained. Delays in obtaining the necessary supporting votes in
favor of the Company's plan of reorganization, as well as any other delays in
getting the Company's plan of reorganization approved by the Bankruptcy Court,
could result in a proceeding that takes longer, and is more costly, than the
Company has estimated. For more information regarding the Company's asbestos
liability and plan for resolving that liability, please refer to Note 17 of the
Notes to Consolidated Financial Statements.
2. Summary of Significant Accounting Policies:
Nature of Business - Congoleum manufactures resilient sheet and tile flooring
products. These products, together with a limited quantity of related products
purchased for resale, are sold primarily to wholesale distributors and major
retailers in the United States and Canada.
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.
Basis of Consolidation - The accompanying consolidated financial statements
reflect the operations, financial position and cash flows of Congoleum
Corporation and include the accounts of the Company and its subsidiaries after
elimination of all significant intercompany transactions.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
34
Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the estimated
sales value of goods returned, trade discounts and customers' allowances.
Cash and Cash Equivalents - All highly liquid debt instruments with a maturity
of three months or less at the time of purchase are considered to be cash
equivalents.
Short-Term Investments - The Company invests in highly liquid debt instruments
with strong credit ratings. Commercial paper investments with a maturity greater
than three months, but less than one year at the time of purchase, are
considered to be short-term investments. The Company maintains cash and cash
equivalents and short-term investments with certain financial institutions. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment strategy.
Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories.
Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings, 15 years for building improvements, production equipment and
heavy-duty vehicles, 3 to 10 years for light-duty vehicles and office
furnishings and equipment) on the straight-line method for financial reporting
and accelerated methods for income tax purposes. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the asset
and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is reflected in operations.
Debt Issue Costs - Costs incurred in connection with the issuance of long-term
debt have been capitalized and are being amortized over the life of the related
debt. Such costs at December 31, 2002 and 2001 amounted to $1.8 million and $2.2
million, net of accumulated amortization of $1.5 million and $1.1 million,
respectively, and are included in other noncurrent assets.
Environmental Remediation - The Company is subject to federal, state and local
environmental laws and regulations. The Company records a liability for
environmental remediation claims when a cleanup program or claim payment becomes
probable and the costs can be reasonably estimated. The recorded liabilities are
not discounted for delays in future payments (see Notes 5, 7, and 16).
Asbestos Liabilities And Plan of Reorganization - The Company is a defendant in
a large number of asbestos-related lawsuits and has announced its intent to file
a pre-packaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code as part of its strategy to resolve this liability (See Note 17).
Accounting for asbestos-related costs includes significant assumptions and
estimates, and actual results could differ materially from those estimates.
35
Income Taxes - The provision for income taxes is based on earnings reported in
the financial statements under an asset and liability approach in accordance
with SFAS No. 109, "Accounting for Income Taxes," which requires the recognition
of deferred tax assets and liabilities for the difference between the tax basis
of assets and liabilities and their reported amounts for financial statement
purposes.
Allowance for Doubtful Accounts - The Company provides an allowance for doubtful
accounts based on estimates of historical collection experience and a review of
the current status of trade accounts receivable. It is reasonably possible that
the Company's estimate of the allowance for doubtful accounts will change.
Product Warranties - The Company provides product warranties for specific
product lines and accrues for estimated future warranty cost in the period in
which the revenue for the related products is recognized. The following table
sets forth activity in the Company's warranty reserves (in millions):
December 31,
2002 2001 2000
Beginning balance $2.5 $2.9 $3.2
Accruals 5.1 4.3 5.1
Charges (5.0) (4.7) (5.4)
------ ------ ------
Ending balance $2.6 $2.5 $2.9
====== ====== ======
Shipping and Handling Costs - Shipping costs for the years ended December 31,
2002, 2001 and 2000 were $2.1 million, $3.5 million and $4.2 million,
respectively, and are included in selling, general and administrative expenses.
Earnings Per Share - The calculation of basic earnings per share is based on the
average number of common shares outstanding during the period. Diluted earnings
per share reflect the effect of all potentially diluted securities which consist
of outstanding common stock options. For all periods presented, basic and
diluted shares outstanding are the same.
Recently Issued Financial Accounting Standards - In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). 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.
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 in accordance with SFAS No. 142 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 the cumulative effect of a
change in accounting principle as of January 1, 2002.
The impact of the adoption of SFAS 142 on the Company's financial
statements also resulted in the elimination of $0.4 million of goodwill
amortization expense, or $.05 per share, for the twelve months ended December
31, 2002.
36
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of January 1, 2000:
(In thousands, except per share amounts)
For the Years Ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Net loss before cumulative effect
of accounting change:
As reported $ (19,273) $ (1,640) $ (8,129)
Goodwill amortization -- 432 432
--------- --------- --------
As adjusted $ (19,273) $ (1,208) $ (7,697)
========= ========= ========
Income (loss) per share before
cumulative effect of accounting
change:
As reported $ (2.33) $ (0.20) $ (0.98)
Goodwill amortization -- .05 .05
--------- --------- --------
As adjusted $ (2.33) $ (0.15) $ (0.93)
========= ========= ========
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.
The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on report
results. The Company continues to account for its stock option plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Had the Company accounted for its stock
option plans in accordance with FAS 123, the pro forma compensation expense from
stock options would have increased the reported net loss per share in 2002, 2001
and 2000 by $0.02, $0.04, and $0.05, respectively.
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 twelve months ending
December 31, 2002, 2001 and 2000 was a reduction of net sales and of selling,
general and administrative expenses of $4.1 million, $4.5 million, and $5.1
million, respectively.
37
In June 2001, Statement of Financial Accounting Standards No. 143
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") was issued. SFAS
No. 143 provides new guidance on the recognition and mesurement of an asset
retirement obligation and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. This standard will be effective for the Company as
of January 1, 2003. The Company is currently evaluating what impact, if any,
adoption will have on the Company's consolidated financial statements.
In July 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Costs associated with Exit or Disposal Activities" ("SFAS No.
146") was issued. This standard addresses the recognition, measurement, and
reporting of costs associated with exit and disposal activities, including
restructuring activities' and is effective for exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
FAS No. 146 to have a material impact on its financial condition or results of
operations.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FASB Interpretation No. 45") was issued. The
accounting recognition provisions of FASB Interpretation No. 45 are effective
January 1, 2003 on a prospective basis. They require that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Under prior accounting
principles, a guarantee would not have been recognized as a liability until a
loss was probable and reasonably estimable. The Company is currently evaluating
what impact, if any, adoption will have on its future financial position or
results of operations.
Reclassifications - Certain amounts appearing in the prior years' financial
statements have been reclassified to conform to the current year's presentation.
3. Inventories:
A summary of the major components of inventories is as follows (in
thousands):
December 31, December 31,
2002 2001
----------------------------------------------------------------
Finished goods $ 38,702 $ 43,680
Work-in-process 3,467 4,425
Raw materials and supplies 8,556 7,677
----------------------------------------------------------------
Total inventories $ 50,725 $ 55,782
================================================================
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $2.1 million lower and $0.7 million lower than reported at
December 31, 2002 and 2001, respectively.
38
4. Property, Plant, and Equipment:
A summary of the major components of property, plant, and equipment is as
follows (in thousands):
December 31, December 31,
2002 2001
-----------------------------------------------------------------
Land $ 2,930 $ 2,930
Buildings and improvements 45,542 44,335
Machinery and equipment 172,415 166,002
Construction-in-progress 5,265 6,594
-----------------------------------------------------------------
226,152 219,861
Less accumulated
depreciation 132,596 123,957
-----------------------------------------------------------------
Total property, plant,
and equipment, net $ 93,556 $ 95,904
=================================================================
Interest is capitalized in connection with the construction of major
facilities and equipment. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest cost was $0.3 million, $0.3 million, and $1.1 million
for 2002, 2001, and 2000, respectively.
The amount of approved but unexpended capital appropriations at December
31, 2002 was $1.0 million, substantially all of which is planned to be expended
during 2003.
39
5. Accrued Liabilities:
Accrued liabilities consists of the following (in thousands):
December 31, December 31,
2002 2001
-------------------------------------------------------------
Accrued warranty,
marketing and sales
promotion $24,113 $19,449
Employee
compensation and
related benefits 3,518 3,678
Interest 3,601 3,595
Environmental
remediation and product-
related liabilities 834 840
Other 955 1,723
-------------------------------------------------------------
Total accrued liabilities $33,021 $29,285
=============================================================
6. Long-Term Debt:
Long-term debt consists of the following (in thousands):
December 31, December 31,
2002 2001
------------------------------------------------------
8 5/8% Senior Notes
due 2008 $99,724 $99,674
======================================================
In December 2001, the Company entered into a revolving credit facility
which expires in 2004 that provides for borrowings up to $30.0 million depending
on levels of the Company's inventory and receivables. This agreement provides
for a monthly commitment fee based on the average daily unused portion of the
commitment equal to three-eighths of one percent and a monthly servicing fee of
$2,500. This financing agreement contains certain covenants which include the
maintenance of a minimum tangible net worth and EBITDA if borrowing availability
falls below a certain level. It also includes restrictions on the incurrence of
additional debt and limitations on capital expenditures. Borrowings under this
facility are collateralized by inventory and receivables. There were no
borrowings outstanding under this facility at December 31, 2002 or 2001;
however, the facility provides for standby letters of credit, the outstanding
amount of which was $1.8 million at December 31, 2002. In February 2003, the
Company and its lender under the revolving credit facility established pursuant
to a Loan and Security Agreement (the "Credit Agreement") further amended the
Credit Agreement to revise certain financial and other covenants on terms
negotiated to reflect the transactions contemplated by the Company's intended
global settlement of its asbestos claims liability. The Company was in
compliance with the terms of the Credit Agreement at December 31, 2002.
40
On August 3, 1998, the Company issued $100 million of 8 5/8% Senior Notes
maturing August 1, 2008 priced at 99.505 to yield 8.70%. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after August 1, 2003 at predetermined redemption prices (ranging from 104% to
100%), plus accrued and unpaid interest to date of redemption. The Indenture
under which the notes were issued includes certain restrictions on additional
indebtedness and uses of cash, including dividend payments. In March 2003, the
Company and the trustee of the indenture governing the Company's 8 5/8% Senior
Notes Due 2008 amended the indenture to expressly provide the Company, under the
terms of that indenture, with greater flexibility to pursue possible resolutions
of its current and future asbestos claims liability, including negotiating a
global settlement with current asbestos plaintiffs, and soliciting acceptances
of and filing a prepackaged plan of reorganization under Chapter 11 of the
Bankruptcy Code. Holders of a majority in aggregate principle amount of the
Senior Notes as of the record date for determining the holders entitled to vote
on the proposed amendment consented to the amendment.
7. Other Liabilities:
Other liabilities consists of the following (in thousands):
December 31, December 31,
2002 2001
-----------------------------------------------------------------
Environmental remediation
and product-related
liabilities $ 5,396 $ 5,391
Accrued workers'
compensation claims 5,499 5,971
Other 887 1,245
-----------------------------------------------------------------
Total other liabilities $11,782 $12,607
=================================================================
8. Research and Development Costs:
Total research and development costs charged to operations amounted to
$3.5 million, $3.5 million and $4.3 million for the years ended December 31,
2002, 2001, and 2000, respectively.
9. Operating Lease Commitments and Rent Expense:
The Company leases certain office facilities and equipment under leases
with varying terms.
41
Future minimum lease payments of noncancelable operating leases having
initial or remaining lease terms in excess of one year as of December 31, 2002
are as follows (in thousands):
Years Ending
-------------------------------------------------------------
2003 $ 2,921
2004 2,318
2005 1,901
2006 1,219
2007 1,244
Thereafter 3,889
-------------------------------------------------------------
Total minimum lease payments $13,492
=============================================================
Rent expense was $3.7 million, $3.6 million and $2.8 million for the years
ended December 31, 2002, 2001, and 2000, respectively.
10. Retirement Plans:
Retirement benefits are provided for substantially all employees under
Company-sponsored defined benefit pension plans. The plans are noncontributory
and generally provide monthly lifetime payments, normally commencing at age 65.
Benefits under the plans are based upon the provisions of negotiated labor
contracts and years of service. It is the Company's policy to make contributions
to these plans sufficient to meet the minimum funding requirements of applicable
laws and regulations plus such additional amounts, if any, the Company's
actuarial consultants advise to be appropriate.
Net periodic pension cost includes the following components (in
thousands):
For the years ended December 31,
-----------------------------------
2002 2001 2000
---------------------------------------------------------------------
Service cost $1,057 $1,089 $1,079
Interest cost 4,217 4,140 4,063
Expected return on
plan assets (3,948) (4,068) (4,329)
Amortization of
transition amount (22) 76 76
Amortization of prior
service benefit (241) (242) (242)
Recognized actuarial
loss (gain) 686 363 (44)
---------------------------------------------------------------------
Net periodic
pension cost $1,749 $1,358 $ 603
=====================================================================
42
Weighted-average assumptions as of December 31 were as follows:
2002 2001 2000
---------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.25%
Rate of compensation increase 5.00% 5.00% 5.00%
Expected long-term rate of return
on assets 7.00% 9.00% 9.00%
The following table sets forth the components of the change in projected
benefit obligation and fair value of plan assets during 2002 and 2001 as well as
funded status of the plans at December 31, 2002 and 2001 (in thousands):
December 31, December 31,
2002 2001
-----------------------------------------------------------------
Accumulated benefit
obligation at end of year $ 62,415 $ 58,662
-----------------------------------------------------------------
Change in projected benefit
obligation:
Projected benefit obligation
at beginning of year $ 59,939 $ 58,799
Service cost 1,057 1,089
Interest cost 4,217 4,140
Amendments 14 --
Actuarial loss 3,457 512
Benefits paid (4,496) (4,601)
-----------------------------------------------------------------
Projected benefit obligation
at the end of the year $ 64,188 $ 59,939
=================================================================
Change in plan assets:
Fair value of plan assets
at beginning of year $ 44,003 $ 46,346
Actual return on assets (4,713) (345)
Employer contributions 4,689 2,603
Benefit paid (4,496) (4,601)
-----------------------------------------------------------------
Fair value of plan assets
at end of year $ 39,483 $ 44,003
-----------------------------------------------------------------
Funded status $(24,705) $(15,936)
Unrecognized transition
amount (197) (219)
Unrecognized prior
service benefit (996) (1,251)
Unrecognized net
actuarial loss 24,363 12,932
-----------------------------------------------------------------
Net amount recognized $ (1,534) $ (4,474)
=================================================================
43
Amounts recognized in the
financial statements consist of:
Accrued benefit liability $(22,932) $(14,659)
Intangible asset 436 560
Deferred tax asset 3,515 3,514
-----------------------------------------------------------------
Accumulated other
comprehensive
income 17,447 6,111
-----------------------------------------------------------------
Net amount recognized $ (1,534) $ (4,474)
=================================================================
The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 20%
of compensation, with partially matching Company contributions (which were
suspended in 2003). The charge to income relating to the Company match was $1.2
million, $1.4 million and $1.1 million for the years ended December 31, 2002,
2001, and 2000, respectively.
11. Postretirement Benefits Other Than Pensions:
Net periodic postretirement benefits cost is as follows (in thousands):
For the years ended December 31,
-------------------------------------
2002 2001 2000
------------------------------------------------------------------
Service cost $157 $142 $134
Interest cost 522 474 461
Amortization of
prior service benefit (462) (462) (417)
Amortization of
net loss (gain) 14 (9) (3)
------------------------------------------------------------------
Net periodic benefits cost $231 $145 $175
==================================================================
Weighted average
discount rate 6.75% 7.25% 7.25%
==================================================================
44
The change in benefit obligation and the actuarial and recorded
liabilities for these postretirement benefits, none of which have been funded in
2002 and 2001, were as follows (in thousands):
December 31, December 31,
2002 2001
------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at end
of prior year $ 7,033 $ 6,800
Service cost 157 142
Interest cost 522 474
Actuarial loss 1,115 121
Benefits paid (486) (504)
------------------------------------------------------------------
Benefit obligation at end
of year $ 8,341 $ 7,033
==================================================================
Funded status $(8,341) $(7,033)
Unrecognized net loss (gain) 272 (829)
Unrecognized prior
service benefit (1,065) (1,527)
------------------------------------------------------------------
Accrued postretirement
benefit cost $(9,134) $(9,389)
Less current portion 426 417
------------------------------------------------------------------
Noncurrent
postretirement
benefit obligations $(8,708) $(8,972)
==================================================================
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 9.0% in 2002; the rate was assumed to decrease
gradually to 5.0% over the next 5 years and remain level thereafter. An increase
of one percentage point in the assumed health care cost trend rates for each
future year would increase the aggregate of the service and interest cost
components of net periodic postretirement benefits cost by $59 thousand for the
year ended December 31, 2002, and would increase the accumulated postretirement
benefit obligations by $605 thousand at December 31, 2002.
45
12. Income Taxes:
Income taxes are comprised of the following (in thousands):
For the years ended December 31,
-----------------------------------
2002 2001 2000
-----------------------------------------------------------------
Current:
Federal $(4,057) $ 40 $(2,297)
State 38 106 88
Deferred:
Federal 4,111 (652) (1,633)
State (54) (273) (1,220)
Valuation allowance 54 273 1,086
-----------------------------------------------------------------
Provision (benefit) for
income taxes $ 92 $ (506) $(3,976)
=================================================================
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate expressed as a percentage of income before
income taxes:
For the years ended December 31,
--------------------------------------
2002 2001 2000
----------------------------------------------------------------
Statutory federal
income tax rate 34.0% 34.0% 34.0%
State income taxes,
net of federal
benefit (1.9) 7.5 5.5
Reorganization costs (21.2) -- --
Goodwill (12.0) (6.8) (1.2)
Other 0.8 (11.1) (5.4)
----------------------------------------------------------------
Effective tax rate (0.3)% 23.6% 32.9%
================================================================
Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences (in thousands):
46
December 31, December 31,
2002 2001
-------------------------------------------------------------------
Deferred tax asset:
Accounts receivable $ 104 $ 195
Unfunded pension liability 3,808 4,810
Environmental remediation
and product-related
reserves 5,575 10,034
Postretirement benefit
obligations 3,911 4,138
Tax credit and other
carryovers 6,551 5,739
Other accruals 1,777 2,380
-------------------------------------------------------------------
Deferred tax asset 21,726 27,296
Valuation allowance (1,884) (1,828)
-------------------------------------------------------------------
Net deferred tax asset 19,842 25,468
-------------------------------------------------------------------
Deferred tax liability:
Depreciation and
amortization (13,554) (12,659)
Inventory (3,954) (3,363)
Other (2,334) (5,334)
-------------------------------------------------------------------
Total deferred tax liability (19,842) (21,356)
-------------------------------------------------------------------
Net deferred tax asset -- $ 4,112
===================================================================
At December 31, 2002 and 2001, the Company had federal available net
operating loss carryforwards of approximately $7.1 million and $8.7 million
respectively, to offset future taxable income. The federal loss carry-forwards
will begin to expire in 2020.
13. Supplemental Cash Flow Information:
Cash payments for interest were $8.6 million for each of the years ended
December 31, 2002, 2001 and 2000, respectively. Net cash refunds for income
taxes were $3.9 million, $145 thousand and $3.5 million for the years ended
December 31, 2002, 2001, and 2000, respectively.
47
14. Related Party Transactions:
The Company and its controlling shareholder, American Biltrite Inc.
("ABI") provide certain goods and services to each other pursuant to negotiated
agreements. The Company had the following transactions with ABI (in thousands):
For the years ended December 31,
-------------------------------------
2002 2001 2000
-------------------------------------------------------------------------
Sales made to ABI $ 198 $ 214 $ 361
Sales commissions earned by ABI 141 71 --
Raw material transfers to ABI 1,869 3,413 3,384
Computer service income
earned from ABI 32 22 20
Material purchases from ABI 10,092 8,330 6,762
Management fees paid to ABI 590 580 562
=========================================================================
Amounts as of December 31, 2002 and 2001 due from ABI totaled $94 thousand
and $301 thousand, respectively, and are included in accounts receivable.
Amounts as of December 31, 2002 and 2001 due to ABI totaled $1.2 million and
$464 thousand, respectively, and are included in accounts payable.
15. Major Customers:
Substantially all the Company's sales are to select flooring distributors
and retailers located in the United States and Canada. Economic and market
conditions, as well as the individual financial condition of each customer, are
considered when establishing allowances for losses from doubtful accounts. The
Company obtains guaranties, liens, or other collateral when warranted to manage
risk associated with its receivables.
Two customers, LaSalle-Bristol Corporation and Mohawk Industries, Inc.,
accounted for 23% and 36%, respectively, of the Company's net sales for the year
ended December 31, 2002, 25% and 23%, respectively, for the year ended December
31, 2001, and 26% and 18%, respectively, for the year ended December 31, 2000.
Mohawk Industries accounted for 45% and 31% of accounts receivable at December
31, 2002 and 2001, respectively, while Lowe's and Home Depot accounted for 12%
and 14%, respectively, of accounts receivable at December 31, 2002 and 2001.
16. Environmental and Other Liabilities:
The Company records a liability for environmental remediation claims when
a cleanup program or claim payment becomes probable and the costs can be
reasonably estimated. As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries are reflected in other noncurrent assets and are
considered probable of recovery.
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 three other instances, although not named as a PRP, the Company
has received a request for information. These pending proceedings currently
relate to four disposal sites in New Jersey, Pennsylvania, Maryland and
48
Connecticut 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, the Company, as a PRP, 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 81 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, is estimated to be approximately 5.8%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities. Estimated total cleanup costs, including capital
outlays and future maintenance costs for soil and groundwater remediation are
primarily based on engineering studies.
The outcome of these matters could result in significant expenses or
judgments that could have a material adverse effect on the financial position of
the Company.
17. Asbestos Liabilities:
Planned Settlement and Reorganization
On January 13, 2003 the Company announced that it had begun preliminary
settlement negotiations with attorneys it believes represent the majority of
plaintiffs with asbestos claims pending against it, and that upon successful
completion of these negotiations, it intends to seek confirmation of a
pre-packaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code. On March 31, 2003, the Company reached an agreement in
principle with attorneys representing more than 75% of the known present
claimants with asbestos claims pending against Congoleum.
The agreement in principle contemplates a Chapter 11 reorganization
seeking confirmation of a pre-packaged plan that would leave non-asbestos
creditors unimpaired and would resolve all pending and future asbestos claims
against the Company, its affiliates, including ABI, and its distributors.
Approval of such a plan would require the supporting votes of at least 75% of
the asbestos claimants with claims against the Company. Resolution of
Congoleum's asbestos liability through a pre-packaged reorganization plan is
subject to various other conditions as well, including approval by the
Bankruptcy Court.
The Company expects that the plan of reorganization would provide for an
assignment of or grant a security interest in certain rights in and proceeds of
the Company's applicable insurance to a trust that would be established after a
bankruptcy filing by the Company as part of the Company's plan of reorganization
(the "Plan Trust"), which would fund the settlement of all pending and future
asbestos claims and protect the Company from future asbestos-related litigation
by channeling all asbestos claims to the Plan Trust under Section 524(g) of the
49
Bankruptcy Code. Congoleum expects that its other creditors would be unimpaired
under the plan and would be paid in the ordinary course of business. The Company
expects that several months will be needed to negotiate a pre-packaged plan of
reorganization, at which time it would file for bankruptcy and request court
approval of the plan. Congoleum expects it would take another two to six months
to confirm the plan and emerge from the process.
In furtherance of the agreement in principle, the Company entered into a
settlement agreement with various asbestos claimants (the "Claimant Agreement").
As contemplated by the Claimant Agreement, the Company also entered into
agreements establishing a pre-petition trust (the "Collateral Trust") to
distribute funds in accordance with the terms of the Claimant Agreement, and
granting the Collateral Trust a security interest in its rights under applicable
insurance coverage and payments from insurers for asbestos claims.
The Claimant Agreement establishes a compensable disease valuation matrix
(the "Matrix") and allows claimants who qualify and participate in the Claimant
Agreement to settle their claim for the Matrix value secured in part (75%) by
the security interest in the collateral granted to the Collateral Trust. The
Collateral Trust provides for distribution of trust assets according to various
requirements that give priority (subject to aggregate distribution limits) to
participating claimants who had pre-existing unfunded settlement agreements
("pre-existing settlement agreements") with the Company and participating
claimants who qualify for payment under unfunded settlement agreements entered
into by the Company with plaintiffs that have asbestos claims pending against
the Company and which claims are scheduled for trial after the effective date of
the Claimant Agreement but prior to the commencement of the Company's
anticipated Chapter 11 reorganization case ("trial-listed settlement
agreements") .
The Claimant Agreement will settle claims pertaining to a pre-existing
settlement agreement or trial-listed settlement agreement for a fully secured
claim against the Collateral Trust, and it will settle all other claims for a
secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim against Congoleum for the remaining 25%. Under the plan,
after the establishment of the Plan Trust, the assets in the Collateral Trust
would be transferred to the Plan Trust. The Company expects that any claims
contemplated by the Claimant Agreement that are unsatisfied as of the
confirmation of the plan of reorganization by the Bankruptcy Court would be
channeled to be paid in accordance with the Plan Trust.
As part of the Company's plan of reorganization, the Company expects that
ABI's current and future asbestos claims related to ABI's former U.S. tile
flooring operations that it contributed to the Company in 1993 in exchange for
cash and an equity interest in the Company, will be channeled to the Plan Trust,
resolving ABI's present and future asbestos liability relating to those former
operations. In return for receiving this relief, ABI expects to contribute to
the Plan Trust certain insurance rights that ABI has relating to insurance
policies that cover asbestos liabilities and under which ABI is a named insured,
and a note in an aggregate principal amount equal to at least 51% of the equity
value of Congoleum, with payment of the note secured by a pledge by ABI of 51%
of common stock of Congoleum. While the Company believes its plan is feasible
and in the best interest of all the Company's constituents, there are sufficient
risks and uncertainties such that no assurances of the outcome can be given. In
addition, the costs to effect this plan, consisting principally of legal and
advisory fees and contributions to the Plan Trust, including one or more notes
to be contributed to the Plan Trust by the Company and/or its affiliate,
American Biltrite Inc., are expected to be approximately $21.3 million at a
minimum.
50
Pending Asbestos Claims
The Company has been served notice that it is one of many defendants in
approximately 16,156 pending lawsuits (including workers' compensation cases)
involving approximately 56,567 individuals as of December 31, 2002, alleging
personal injury or death from exposure to asbestos or asbestos-containing
products. There were approximately 6,563 lawsuits at December 31, 2001 that
involved approximately 23,139 individuals. Activity related to asbestos claims
was as follows:
Year ended Year ended
December 31, December 31,
2002 2001
-----------------------------------------------------------------------
Beginning claims.................. 6,563 1,405
New claims........................ 10,472 5,404
Settlements....................... (69) (40)
Dismissals........................ (810) (206)
-----------------------------------------------------------------------
Ending claims..................... 16,156 6,563
====== =====
In addition, the Company has been advised by a number of attorneys
representing plaintiffs that they have filed claims against the Company for
which notice has not yet been served or which have been added by amendments to
existing complaints. While the Company cannot presently determine how many
additional such claimants there may be, the Company has been advised by
plaintiff's counsel of over 30,000 additional filed claimants, for which the
Company has not yet been served.
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 resilient sheet vinyl and 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 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.
Status of Insurance Coverage
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 general and product liability claims. Through August
2002, substantially all asbestos-related 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 exhaustion of limits by
one of the primary insurance companies was based on its contention that limits
in successive policies were not cumulative for asbestos claims and that
Congoleum was limited to only one policy limit for multiple years of coverage.
Certain excess insurance carriers claimed that the non-cumulation provisions of
the primary policies were not binding on them and that there remained an
additional $13 million in indemnity coverage plus related defense costs before
their policies were implicated. On April 10, 2003, the New Jersey Supreme Court
ruled in another case involving the same non-cumulation provisions as in the
Congoleum primary policies (the "Spaulding Case") that the non-cumulation
51
provisions are invalid under New Jersey law and that the primary policies
provide coverage for the full amount of their annual limits for all successive
policies. Although Congoleum is not a party to this case, the decision in the
Spaulding Case is likely binding on Congoleum and its primary insurance
companies. Thus, based on the Spaulding Case decision, the primary insurance
companies are obligated to provide the additional $13 million of coverage
previously disputed by the excess carriers. As of December 31, 2002, the Company
had entered into additional settlement agreements with asbestos claimants
exceeding the $13 million amount of previously disputed coverage. While the
excess carriers have objected to the reasonableness of these settlements, we
believe that the primary insurance company will now cover these settlements.
Notwithstanding that the primary insurance company will likely pay these
settlements, we also believe that the excess carriers will continue to dispute
the reasonableness of the settlements and contend that their policies still are
not implicated and will dispute their coverage for that and other various
reasons in ongoing coverage litigation and have also raised various objections
to the Company's planned reorganization strategy and negotiations.
Given the actions of its excess insurance carriers, the Company believes
it likely that, after primary policies cover $13 million in settlements, it will
have to continue funding asbestos-related expenses for defense expense and
indemnity itself until it files for Chapter 11 protection, which it expects will
occur in mid-2003.
Payments Related to Asbestos Claims
The following table sets forth amounts paid in 2002 and 2001 to defend and
settle claims:
(in millions) Year Ended December 31,
2002 2001
---- ----
Indemnity costs paid by the Company's
insurance carriers $1.3 $2.1
Indemnity costs paid by the Company 2.7 --
Defense costs paid by the Company 1.4 --
Indemnity settled with insurance proceeds
assignment 14.4 --
The Company's primary insurance carriers paid defense costs in addition to
the above amounts through August 2002. Such amounts were not reported to the
Company by year of payment, and have not been included in the table.
At December 31, 2002, there were $0.5 million in additional settlements
outstanding that the Company had agreed to fund.
The Company is seeking recovery from its insurance carriers of the amounts
it has paid for defense and indemnity, and intends to seek recovery for any
future payments of defense and indemnity. In light of the planned assignment of
or grant of a security interest in certain rights in and proceeds of its
applicable insurance to the Collateral Trust and the planned reorganization, the
Company does not anticipate recovering these costs from the insurance companies.
52
Accounting for Asbestos-Related Claims
Costs per claim vary widely 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 December 31, 2002, the Company has incurred
defense and indemnity costs aggregating $47 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 or by assignments of future
insurance recoveries.
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. The Company has historically estimated its
liability to defend and resolve current and reasonably anticipated future
asbestos-related claims, based upon a strategy to actively defend or seek
settlement for those claims in the normal course of business. Factors such as
recent and historical settlement and trial results, the incidence of past and
recent claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. 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 based on its strategy and factors noted previously. As a
result of the Company's analysis, the Company determined that its range of
probable and estimable undiscounted losses for asbestos-related claims through
the year 2049 was $53.3 million to $195.6 million before considering the effects
of insurance recoveries. Given the inherent difficulty in forecasting a
liability for the Company's ultimate exposure for asbestos-related claims 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 current liabilities as of December 31, 2001.
During the fourth quarter of 2002, an outside actuary was engaged to
conduct an updated analysis of the Company's asbestos-related liabilities.
Developments during the latter part of 2002 included a significant increase in
claims filed against the Company and higher settlement requirements, and the
exhaustion of primary insurance coverage combined with a dispute of coverage by
its excess insurance carriers. These developments in turn lead to the Company's
announced plan to file for bankruptcy. In light of these changed circumstances,
the Company and the outside actuary engaged to conduct the updated analysis do
not believe a reasonable or meaningful estimate of these liabilities for future
claims can be developed. However, the study did conclude that the minimum gross
liability for the 56,567 known claimants at December 31, 2002, using historical
settlement payments, was $310 million. This amount does not include defense
costs, liability for the 30,000 additional claimants purportedly existing at
December 31, 2002, or for future claims, which the study concluded could not be
reasonably estimated in light of the available data and uncertainty arising from
an announced bankruptcy filing. The Company's estimated minimum gross liability
is substantially in excess of both the total assets of the Company as well as
the Company's previous estimates made in prior periods of the maximum liability
for both known and unasserted claims. The Company believes that it does not have
the necessary financial resources to litigate and/or fund judgments and/or
settlements of the asbestos claims in the ordinary course of business. As such,
53
the Company believes the most meaningful measure of its probable loss due to
asbestos litigation is the amount it will have to contribute to the Plan Trust
plus the costs to effect the reorganization. The Company estimates the minimum
amount of the contributions and costs to be $21.3 million, which it has recorded
as a current liability. During the fourth quarter of 2002, the Company recorded
a charge of $17.3 million to increase its recorded liability to the $21.3
million minimum estimated. The maximum amount of asbestos-related losses is
limited to the going concern or liquidation value of the Company, an amount
which the Company believes is substantially less than the minimum gross
liability for the known claims against it.
The Company has not attempted to make an estimate of its probable
insurance recoveries given the accounting it has elected for its estimate of
future asbestos-related costs.
Amounts Recorded in Financial Statements
The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2001 to December 31, 2002:
Spending Recoveries
Balance at Additions Against from Balance at
(in thousands) 12/31/01 Reclassifications (Deletions) Reserve Insurance 12/31/02
---------------------------------------------------------------------------------
Reserves
Current $ 300 $ 7,219 19,241 $(5,465) -- $21,295
Long-term 53,003 (7,219) (45,784) -- -- --
---------------------------------------------------------------------------------
53,303 -- (26,543) (5,465) -- 21,295
------- ------- -------- ------- ------ -------
Receivables
Long-term 45,163 -- (43,884) -- (1,279) --
---------------------------------------------------------------------------------
45,163 -- (43,884) -- (1,279) --
------- ------- -------- ------- ------ -------
Net Asbestos Liability $ 8,140 $ 17,341 $(5,465) $1,279 $21,295
======= ======== ======= ====== =======
18. Stock Option Plans:
Under the Company's 1995 Stock Option Plan, as amended, (the "1995 Plan")
options to purchase up to 800,000 shares of the Company's Class A common stock
may be issued to officers and key employees. Such options may be either
incentive stock options or nonqualified stock options, and the options' exercise
price must be at least equal to the fair value of the Company's Class A common
stock on the date of grant. All options granted under the 1995 Plan have
ten-year terms and vest over five years at the rate of 20% per year beginning on
the first anniversary of the date of grant.
On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted options to purchase up to 50,000 shares of the
Company's Class A common stock. Options granted under the 1999 Plan have
ten-year terms and vest six months from the grant date.
54
In December 2001, the Company offered its eligible option holders an
exchange of all options then outstanding and granted to them under the 1995 Plan
or 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 vest six months from the date of grant.
Pro forma disclosure regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2002, and 2000 respectively:
option forfeiture of 10% and 15%; risk-free interest rates of 3.52% and 5.08%;
no dividends; volatility factors of the expected market price of the Company's
common stock of .920 for 2002 and .597 for 2000; and a weighted-average expected
life of the options of 7 years. There were no options granted in 2001. The
exercise prices of options outstanding at December 31, 2002 are as follows:
670,000 shares @ $2.05; 6,000 shares @ $3.50 to $3.63 and 2,500 shares @ $9.00.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The table below details the pro forma compensation expense from stock
options and impact on net income.
For the years ended
December 31,
(dollars in thousands, except per share amounts) 2002 2001 2000
-------- -------- --------
Net loss:
As reported $(29,796) $ (1,640) $ (8,129)
Pro forma compensation expense (113) (381) (388)
-------- -------- --------
As adjusted $(29,909) $ (2,021) $ (8,517)
======== ======== ========
Net loss per share:
As reported $ (3.60) $ (0.20) $ (0.98)
Pro forma compensation expense (0.02) (0.04) (0.05)
-------- -------- --------
As adjusted $ (3.62) $ (0.24) $ (1.03)
======== ======== ========
55
A summary of the Company's 1995 Stock Option Plan activity, and related
information, is as follows:
=====================================================================
December 31, 2002:
---------------------------------------------------------------------
Weighted average
Shares exercise price
---------------------------------------------------------------------
Options outstanding
beginning of year 676,000 $9.98
Options granted 670,000 2.05
Options canceled (667,500) 10.04
Options forfeited -- --
--------- -------
Options outstanding
end of year 678,500 $2.09
=====================================================================
Exercisable at end of year 4,400 $6.06
Weighted average remaining
contractual life 9.5 years --
Stock options available
for future issuance 119,500 --
=====================================================================
December 31, 2001:
---------------------------------------------------------------------
Weighted average
Shares exercise price
---------------------------------------------------------------------
Options outstanding
beginning of year 693,000 $ 9.93
Options granted -- --
Options exercised -- --
Options forfeited (17,000) 7.87
---------
Options outstanding
end of year 676,000 $ 9.98
=====================================================================
Exercisable at end of year 486,200 $11.27
Weighted average remaining
contractual life 5 years --
Stock options available
for future issuance 122,000 --
=====================================================================
56
=====================================================================
December 31, 2000:
---------------------------------------------------------------------
Weighted average
Shares exercise price
Options outstanding
beginning of year 617,000 $10.93
Options granted 99,500 3.54
Options exercised -- --
Options forfeited (23,500) 9.00
---------
Options outstanding
end of year 693,000 $ 9.93
=====================================================================
Exercisable at end of year 416,400 $11.87
Weighted average remaining
contractual life 6 years --
Stock options available
for future issuance 105,000 --
=====================================================================
The weighted average grant date fair value of options granted under the
1995 Plan in 2002 and 2000 was $1.65 and $2.28, respectively. There were no
options granted in 2001.
The exercise price of options granted under the 1999 Plan and outstanding
at December 31, 2002 range from $2.05 to $7.19 per share.
A summary of the 1999 Plan activity, and related information, is as
follows:
=========================================================================
December 31, 2002:
-------------------------------------------------------------------------
Weighted average
Shares exercise price
-------------------------------------------------------------------------
Options outstanding
beginning of year 10,500 $5.30
Options granted 12,000 2.05
Options canceled (9,500) 5.11
Options forfeited -- --
------- -----
Options outstanding
end of year 13,000 $2.44
=========================================================================
December 31, 2001:
-------------------------------------------------------------------------
Weighted average
Shares exercise price
-------------------------------------------------------------------------
Options outstanding
beginning of year 8,000 $6.02
Options granted 2,500 3.00
Options exercised -- --
Options forfeited -- --
------ ------
Options outstanding
end of year 10,500 $5.30
=========================================================================
57
=========================================================================
December 31, 2000:
-------------------------------------------------------------------------
Weighted average
Shares exercise price
-------------------------------------------------------------------------
Options outstanding
beginning of year 5,000 $7.19
Options granted 3,000 4.08
Options exercised -- --
Options forfeited -- --
------ ------
Options outstanding
end of year 8,000 $6.02
=========================================================================
The weighted average grant date fair value of options granted under the
1999 Plan in 2002, 2001, and 2000 was $1.20, $1.67, and $1.79, respectively.
19. Stockholders' Equity:
Holders of shares of the Company's Class B common stock are entitled to
two votes per share on all matters submitted to a vote of stockholders other
than certain extraordinary matters. The holders of shares of the Company's Class
A common stock are entitled to one vote per share on all matters submitted to a
vote of stockholders.
In November 1998, the Board of Directors authorized the Company to
repurchase an additional $5.0 million of the Company's common stock (Class A and
Class B shares) through the open market or through privately negotiated
transactions, bringing the total authorized common share repurchases to $15.0
million. Under the total plan, Congoleum has repurchased shares of its common
stock at an aggregate cost of $14.0 million through December 31, 2002. Shares of
Class B stock repurchased (totaling 741,055 shares) have been retired. As of
December 31, 2002, American Biltrite Inc. owned 151,100 Class A shares and
4,395,605 Class B shares that represented an aggregate 69.5% of the voting
interest of the Company.
20. Distributor Transition Costs:
During the third quarter of 2000, the Company announced the appointment of
Mohawk Industries, Inc. as a national distributor. At the same time, the Company
announced it was terminating its distribution arrangements with LDBrinkman &
Co., who had been its exclusive distributor in much of the southwestern United
States. LDBrinkman & Co. contested the Company's right to terminate its
distributor agreement and the matter went to arbitration in the fourth quarter
of 2000. The parties signed a final settlement agreement in February 2001.
The Company recorded a charge of $7.7 million in the fourth quarter of
2000 to provide for the nonrecurring costs associated with the transition.
Included in this charge were certain costs incurred by the Company for
establishing Mohawk as a distributor, which included training, meetings, and
legal costs. The Company also agreed to subsidize a portion of the costs of
merchandising materials for Mohawk such as samples and displays. Also included
in the charge were certain termination payments to be made to LDBrinkman
pursuant to the terms of the settlement agreement.
58
The Company also re-evaluated its allowance for doubtful accounts in light
of the settlement agreement and concluded it should be reduced by $1.8 million,
which was recorded as a credit to bad debt expense in the fourth quarter of
2000.
A summary of the distributor transition costs appears below (in
thousands):
---------------------------------------------------------
Costs of establishing Mohawk
as a distributor $3,076
LDBrinkman termination costs 4,641
---------------------------------------------------------
7,717
---------------------------------------------------------
21. Fair Value of Financial Instruments
The Company's cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt are financial instruments. With
the exception of the Company's long-term debt, the carrying value of these
financial instruments approximates their fair value at December 31, 2002. The
Company's long-term debt had a book value of $99.7 million and the fair market
value of $45.0 million at December 31, 2002. The Company's long-term debt had a
book value of $99.7 million and a fair market value of $65.0 million at December
31, 2001.
The fair value of the Company's long-term debt is determined based on
quoted market values. The fair value of the Company's other financial
instruments is determined based on discounted cash flows. Due to the short
period over which the cash flows are expected to be realized, the carrying value
of the financial instruments approximates the net present value of cash flows
and changes in interest rate assumptions would not have a material effect on the
calculation.
22. Quarterly Financial Data (Unaudited):
The following table summarizes unaudited quarterly financial information
(in thousands):
Year ended December 31, 2002
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $57,926 $67,976 $57,736 $53,568
Gross profit 13,861 16,367 15,548 11,731
Net income (loss) (11,170)(1) 842 552 (20,020)(2)
Net income (loss) per
common share $ (1.35) $ 0.10 $ 0.07 $ (2.42)
================================================================================
59
Year ended December 31, 2001
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $51,583 $54,393 $56,719 $56,065
Gross profit 8,973 13,730 15,088 15,286
Net income (loss) (3,677) 155 1,170 712
Net income (loss) per
common share(3) $ (.45) $ .02 $ .14 $ .09
================================================================================
(1) The loss in the first quarter of 2002 includes $10.5 million or $1.27 per
share for the cumulative effect of an accounting change referred to in
Note 2 of the Financial Statements.
(2) The loss in the fourth quarter of 2002 includes $17.3 million or $(2.10)
per share for the effect of the asbestos-related charge described in Note
1 and Note 17.
(3) 2001 included goodwill amortization of $432 thousand, or $(0.05) per
share.
60
Report of Independent Auditors
To the Board of Directors
and Stockholders of
Congoleum Corporation:
We have audited the accompanying consolidated balance sheets of Congoleum
Corporation as of December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in the index at Item 15(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Congoleum
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 2002
Congoleum Corporation changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
The accompanying financial statements have been prepared assuming that Congoleum
Corporation will continue as a going concern. As more fully described in Note 1,
"Basis of Presentation," to the consolidated financial statements, the Company
has been and continues to be named in a growing number of lawsuits stemming
primarily from the Company's manufacture of asbestos-containing products. The
Company has recorded a significant charge to earnings in the current year to
reflect its estimate of future costs associated with this litigation. The
Company is in the process of exploring certain options to mitigate the impact of
this issue, including filing for bankruptcy protection. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1,
"Basis of Presentation," to the consolidated financial statements. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
April 10, 2003
61
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item (except for the information
regarding executive officers called for by Item 401 of Regulation S-K which is
included in Part I hereof in accordance with General Instruction G(3)), is
hereby incorporated by reference to the Registrant's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on May 7, 2003.
Item 11. EXECUTIVE COMPENSATION
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 7, 2003.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item (except the Equity Compensation
Plan Information called for by Item 201(d) of Regulation S-K which is included
in Part II hereof), is hereby incorporated by reference to the Registrant's
definitive Proxy Statement for its Annual Meeting of Shareholders to be held on
May 7, 2003.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 7, 2003.
Item 14. 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) as of a date
within 90 days prior to the filing date of this annual report (the
"Evaluation Date"). Based on this 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 required to be
included in the Company's reports filed or submitted under the
Exchange Act.
62
(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 these controls.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) The following financial statements of the Company are included in
this report on Form 10-K: Page Number
Report of Independent Auditors 61
Balance Sheets at December 31, 2002 and December 31, 2001 29
Statements of Operations for each of the three years ended
December 31, 2002, 2001 and 2000 30
Statements of Changes in Stockholders Equity for each of the
three years ended December 31, 2002, 2001 and 2000 31
Statements of Cash Flows for each of the three years ended
December 31, 2002, 2001 and 2000 32
Notes to Consolidated Financial Statements 33
Supplementary Data
Quarterly Financial Data (Unaudited) 59
(2) The following financial statement schedule is included in this
report on Form10-K:
Schedule II - Valuation and Qualifying Accounts 72
All other schedules are omitted because they are not
required, inapplicable, or the information is otherwise
shown in the financial statements or notes thereto.
(3) Exhibits
These exhibits, required to be filed by Item 601 of Regulation S-K,
are listed in the Exhibit Index included in this report at pages 69
through 71.
Number Exhibit
------ -------
2.1 Plan of Repurchase dated as of February 1, 1995 by and among American
Biltrite Inc., Hillside Industries Incorporated ("Hillside"),
Congoleum Holdings Incorporated ("Congoleum Holdings"), Resilient
Holdings Incorporated ("Resilient Holdings") and the Company.
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Amended and Restated Bylaws of the Company.
4.4 Registration Rights Agreement, dated as of February 8, 1995 by and
between the Company and Hillside.
4.5 Indenture, dated as of August 3, 1998 (the "1998 Indenture"), by and
between the Company and First Union National Bank, as trustee.
63
Number Exhibit
------ -------
4.5.1 First Supplemental Indenture, dated as of March 28, 2003, between the
Company and Wachovia Bank, National Association (as successor to First
Union National Bank), as trustee.
4.6 Loan and Security Agreement, dated December 18, 1998 (the "First Union
Loan Agreement"), by and between First Union National Bank (the
"Lender") and the Company.
4.6.1 Joinder Agreement, dated December 21, 1998 (the "Joinder Agreement"),
by and among the Company, Congoleum Intellectual Properties, Inc.,
Congoleum Financial Corporation and the Lender.
4.7 Loan and Security Agreement, dated December 10, 2001 (the "Congress
Financial Loan Agreement") by and between Congress Financial Corp.
(the "Lender") and the Company.
4.7.1 Amendment No. 1 to Loan and Security Agreement, dated September 24,
2002, by and between Congress Financial Corporation and Congoleum
Corporation.
4.7.2 Amendment No. 2 to Loan and Security Agreement, dated as of February
27, 2003, by and between Congress Financial Corporation and Congoleum
Corporation.
10.8 Joint Venture Agreement, dated as of December 16, 1992, by and among
Resilient Holdings, Hillside, the Company (collectively, the
"Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital")
and American Biltrite.
10.9 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite.
10.12 Stockholders Agreement, dated as of March 11, 1993 (the "Stockholders
Agreement"), by and among the Congoleum Group, American Biltrite and
Congoleum Holdings.
10.12.1 First Amendment, dated February 8, 1995, to the Stockholders
Agreement, by and among Hillside, American Biltrite and the Company.
10.13 Personal Services Agreement, dated as of March 11, 1993 (the "Personal
Services Agreement"), by and between American Biltrite and the Company.
10.13.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.3 Third Amendment, dated as of March 15, 1998, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.4 Fourth Amendment, dated as of November 7, 2002, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.14 Business Relations Agreement, dated as of March 11, 1993, by and
between American Biltrite and the Company.
10.14.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company.
10.15 Tax Sharing and Indemnification Agreement, dated as of March 11, 1993,
by and among Congoleum Holdings, Resilient Holdings, Hillside Capital
and the Company.
10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between American
Biltrite and the Company.
10.20 Trademark Purchase Agreement, dated November 29, 1993, by and between
the Company and The Amtico Company LTD ("Amtico Company").
10.21 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company.
10.22 Undertaking Concerning Amtico Trademark, dated November 29, 1993, by
and between American Biltrite and Amtico Company.
10.23 Form of 1995 Stock Option Plan.
10.23.1 Form of Amendment to 1995 Stock Option Plan.
10.25 Registration Rights Agreement, dated as of August 3, 1998, by and
among the Company, Goldman, Sachs & Co., Credit Suisse First Boston
Corporation and ING Barings Furman Selz LLC.
64
Number Exhibit
------ -------
10.26.1 The Joinder Agreement (see Exhibit 4.6.1).
10.27 Form of Congoleum Corporation 1999 Stock Option Plan for Non-Employee
Directors.
10.27.1 Form of Amendment to Congoleum Corporation 1999 Stock Option Plan for
Non-Employee Directors.
10.28 The Congress Financial Loan Agreement (see Exhibit 4.7).
10.28.1 Amendment No. 1 to Loan and Security Agreement, dated September 24,
2002, by and between Congress Financial Corporation and Congoleum
Corporation.
10.28.2 Amendment No. 2 to Loan and Security Agreement, dated as of February
27, 2003, by and between Congress Financial Corporation and Congoleum
Corporation.
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Ernst & Young LLP.
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of the Chief Financial Officer 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.
During the quarter ended December 31, 2002 the Company filed no
current reports on Form 8-K.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
11th day of April, 2003.
CONGOLEUM CORPORATION
By: /s/ Roger S. Marcus
---------------------------------------
Roger S. Marcus
President, Chairman & Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Roger S. Marcus President, Chairman, April 15, 2003
- ------------------------ Chief Executive Officer
Roger S. Marcus and Director
(Principal Executive Officer)
/s/ Howard N. Feist III Chief Financial Officer April 15, 2003
- ------------------------ (Principal Financial and
Howard N. Feist III Accounting Officer)
/s/ Richard G. Marcus Vice Chairman and Director April 15, 2003
- ------------------------
Richard G. Marcus
/s/ William M. Marcus Director April 15, 2003
- ------------------------
William M. Marcus
/s/ John N. Irwin III Director April 15, 2003
- ------------------------
John N. Irwin III
/s/ Cyril C. Baldwin, Jr. Director April 15, 2003
- -------------------------
Cyril C. Baldwin, Jr.
/s/ Mark S. Newman Director April 15, 2003
- ------------------------
Mark S. Newman
/s/ Mark N. Kaplan Director April 15, 2003
- ------------------------
Mark N. Kaplan
/s/ C. Barnwell Straut Director April 15, 2003
- ------------------------
C. Barnwell Straut
66
CERTIFICATION
I, Roger S. Marcus, certify that:
1. I have reviewed this annual report on Form 10-K of Congoleum Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
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
annual report whether 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: April 15, 2003
/s/ Roger S. Marcus
Rogers S. Marcus
Chief Executive Officer
67
CERTIFICATION
I, Howard N. Feist III, certify that:
1. I have reviewed this annual report on Form 10-K of Congoleum Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
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
annual report whether 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: April 15, 2003
/s/ Howard N. Feist III
Howard N. Feist III
Chief Financial Officer
68
INDEX TO EXHIBITS
Exhibit
Number Exhibits
***2.1 Plan of Repurchase dated as of February 1, 1995 by and
among American Biltrite Inc., Hillside Industries
Incorporated ("Hillside Industries"), Congoleum Holdings
Incorporated ("Congoleum Holdings"), Resilient Holdings
Incorporated ("Resilient Holdings") and the Company.
*****3.1 Certificate of Incorporation of the Company, as amended.
*****3.2 Amended and Restated Bylaws of the Company.
***4.4 Registration Rights Agreement, dated as of February 8,
1995 by and between the Company and Hillside.
******4.5 Indenture, dated as of August 3, 1998 (the "1998
Indenture"), by and between the Company and First Union
National Bank, as trustee.
4.5.1 First Supplemental Indenture, dated as of March 28, 2003,
between the Company and Wachovia Bank, National
Association (as successor to First Union National Bank),
as trustee.
*********4.6 Loan and Security Agreement, dated December 18, 1998 (the
"First Union Loan Agreement"), by and between First Union
National Bank (the "Lender") and the Company.
*********4.6.1 Joinder Agreement, dated December 21, 1998 (the "Joinder
Agreement"), by and among the Company, Congoleum
Intellectual Properties, Inc., Congoleum Financial
Corporation and the Lender.
***********4.7 Loan and Security Agreement, dated December 10, 2001 (the
"Congress Financial Loan Agreement") by and between
Congress Financial Corp. (the "Lender") and the Company.
************4.7.1 Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial
Corporation and Congoleum Corporation.
4.7.2 Amendment No. 2 to Loan and Security Agreement, dated as
of February 27, 2003, by and between Congress Financial
Corporation and Congoleum Corporation.
**10.8 Joint Venture Agreement, dated as of December 16, 1992,
by and among Resilient Holdings, Hillside, the Company
(collectively, the "Congoleum Group"), Hillside Capital
Incorporated ("Hillside Capital") and American Biltrite.
**10.9 Closing Agreement, dated as of March 11, 1993, by and
among the Congoleum Group, Hillside Capital and American
Biltrite.
**10.12 Stockholders Agreement, dated as of March 11, 1993 (the
"Stockholders Agreement"), by and among the Congoleum
Group, American Biltrite and Congoleum Holdings.
***10.12.1 First Amendment, dated February 8, 1995, to the
Stockholders Agreement, by and among Hillside, American
Biltrite and the Company.
**10.13 Personal Services Agreement, dated as of March 11, 1993
(the "Personal Services Agreement"), by and between
American Biltrite and the Company.
***10.13.1 First Amendment, dated February 8, 1995, to Personal
Services Agreement, by and between American Biltrite and
the Company.
*******10.13.2 Second Amendment, dated November 15, 1996, to Personal
Services Agreement, by and between American Biltrite and
the Company.
69
*******10.13.3 Third Amendment, dated as of March 10, 1998, to Personal
Services Agreement, by and between American Biltrite and
the Company.
10.13.4 Fourth Amendment, dated as of November 7, 2002, to
Personal Services Agreement, by and between American
Biltrite and the Company.
**10.14 Business Relations Agreement, dated as of March 11, 1993,
by and between American Biltrite and the Company.
*******10.14.1 First Amendment, dated August 19, 1997, to Business
Relations Agreement, by and between American Biltrite and
the Company.
**10.15 Tax Sharing and Indemnification Agreement, dated as of
March 11, 1993, by and among Congoleum Holdings,
Resilient Holdings, Hillside Capital and the Company.
*******10.15.1 Tax Sharing Agreement, dated as of November 1, 1996,
between American Biltrite and the Company.
***10.20 Trademark Purchase Agreement, dated November 29, 1993, by
and between the Company and The Amtico Company LTD
("Amtico Company").
***10.21 First Right of Refusal, dated November 29, 1993, by and
between American Biltrite (Canada) Limited and Amtico
Company.
***10.22 Undertaking Concerning Amtico Trademark, dated November
29, 1993, by and between American Biltrite and Amtico
Company.
***10.23 Form of 1995 Stock Option Plan.
********10.23.1 Form of Amendment to 1995 Stock Option Plan.
****10.24 License Agreement, dated as of September 20, 1995 between
Congoleum Intellectual Properties, Inc. and the Company.
******10.25 Registration Rights Agreement, dated as of August 3,
1998, by and among the Company, Goldman, Sachs & Co.,
Credit Suisse First Boston and ING Barings Furman Selz
LLC.
*********10.26 The First Union Loan Agreement (see Exhibit 4.6).
*********10.26.1 The Joinder Agreement (see Exhibit 4.6.1).
**********10.27 Form of Congoleum Corporation 1999 Stock Option Plan for
Non-Employee Directors.
***********10.27.1 Form of Amendment to Congoleum Corporation 1999 Stock
Option Plan for Non-Employee Directors.
***********10.28 The Congress Financial Loan Agreement (see Exhibit 4.7).
************10.28.1 Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial
Corporation and Congoleum Corporation.
10.28.2 Amendment No. 2 to Loan and Security Agreement, dated as
of February 27, 2003, by and between Congress Financial
Corporation and Congoleum Corporation.
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
*********21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Ernst & Young LLP.
99.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
70
-------------
** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Registration Statement on Form S-1 (File
No. 33-71836) declared effective by the Securities and Exchange
Commission on January 25, 1994.
*** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Registration Statement on Form S-1 (File
No. 33-87282) declared effective by the Securities and Exchange
Commission on February 1, 1995.
**** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
***** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996.
****** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
******* Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the fiscal
period ended December 31, 1997.
******** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the fiscal
period ended December 31, 1996.
********* Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the fiscal
period ended December 31, 1998.
********** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Registration Statement on Form S-8 (File
No. 33-84387) declared effective by the Securities and Exchange
Commission on August 3, 1999.
*********** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the fiscal
period ended December 31, 2001.
************ Incorporated by reference to the exhibit bearing the same number
filed with the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 2002.
71
SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Reversed to Balance
Beginning Income Other at end
of Period Statement Changes Deductions (a) of Period
--------- --------- ------- -------------- ---------
Year ended December 31, 2002: $(1,859) $ 232 $ 423(b) $(1,204)
Allowance for doubtful
accounts and cash
discounts
Year ended December 31, 2001: $(1,934) $ -- $ 67(b) $ 8 $(1,859)
Allowance for doubtful
accounts and cash
discounts
Year ended December 31, 2000: $(3,283) $1,785 $(562)(b) $126 $(1,934)
Allowance for doubtful
accounts and cash
discounts
(a) Balances written off, net of recoveries.
(b) Represents net provision (utilization) of the allowance for doubtful
accounts and cash discounts.
72