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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of Registrant as specified in Its Charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices, including Zip Code)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 7, 2003
-------------------------- ---------------------------------
Class A Common Stock 3,651,190
Class B Common Stock 4,608,945
CONGOLEUM CORPORATION
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
March 31, 2003 (unaudited) and December 31, 2002...................3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2003 and 2002
(unaudited)........................................................4
Condensed Consolidated Statements of Changes in
Stockholders' Equity (deficit) for the year ended
December 31, 2002 and the three months ended
March 31, 2003 (unaudited).........................................5
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2003 and 2002
(unaudited)........................................................6
Notes to Unaudited Condensed Consolidated Financial
Statements (unaudited).............................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............28
Item 4. Controls and Procedures...............................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................29
Item 2. Changes in Securities and Use of Proceeds.............................29
Item 3. Defaults Upon Senior Securities.......................................29
Item 4. Submission of Matters to a Vote of Security Holders...................29
Item 5. Other Information.....................................................29
Item 6. Exhibits and Reports on Form 8-K......................................29
Signatures....................................................................30
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
--------- ---------
(Unaudited)
(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 6,747 $ 18,277
Restricted cash ............................................... 3,024 --
Accounts and notes receivable, net ............................ 18,763 17,034
Inventories ................................................... 53,856 50,725
Prepaid expenses and other current assets ..................... 5,564 7,868
Deferred income taxes ......................................... 7,901 7,901
--------- ---------
Total current assets ....................................... 95,855 101,805
Property, plant and equipment, net ................................ 91,792 93,556
Other assets ...................................................... 8,503 8,630
--------- ---------
Total assets ............................................... 196,150 203,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 12,150 $ 14,647
Accrued expenses .............................................. 20,059 33,021
Revolving credit loan ......................................... 14,751 --
Asbestos-related expenses ..................................... 17,118 21,295
Accrued taxes ................................................. 61 59
Deferred income taxes ......................................... 3,954 3,954
--------- ---------
Total current liabilities .................................. 68,093 72,976
Long-term debt .................................................... 99,736 99,724
Other liabilities ................................................. 11,595 11,782
Deferred income taxes ............................................. 3,947 3,947
Accrued pension liability ......................................... 22,706 22,932
Accrued postretirement benefit obligation ......................... 8,739 8,708
--------- ---------
Total liabilities .......................................... 214,816 220,069
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01 per share; 20,000,000
shares authorized; 4,736,950 shares issued as of March 31, 2003
and December 31, 2002 ......................................... 47 47
Class B common stock, par value $0.01 per share; 4,608,945 shares
authorized, issued and outstanding as of March 31, 2003
and December 31, 2002 ......................................... 46 46
Additional paid-in capital ........................................ 49,105 49,105
Retained deficit .................................................. (42,604) (40,016)
Accumulated minimum pension liability adjustment .................. (17,447) (17,447)
--------- ---------
(10,853) (8,265)
Less Class A common stock held in Treasury, at cost;
1,085,760 shares at March 31, 2003 and December 31, 2002 ...... 7,813 7,813
--------- ---------
Total stockholders' equity (deficit) ....................... (18,666) (16,078)
--------- ---------
Total liabilities and stockholders' equity (deficit) ....... $ 196,150 $ 203,991
========= =========
The accompanying notes are an integral part
of the condensed financial statements.
3
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
(In thousands, except
per share amounts)
Net sales ....................................................... $ 53,581 $ 57,926
Cost of sales ................................................... 40,914 44,065
Selling, general and administrative expenses .................... 13,203 13,152
-------- --------
Income (loss) from operations ............................... (536) 709
Other income (expense):
Interest income ............................................. 39 57
Interest expense ............................................ (2,235) (2,064)
Other income ................................................ 144 352
-------- --------
Loss before income taxes and cumulative effect of
Accounting change ..................................... (2,588) (946)
Benefit for income taxes ........................................ -- (299)
-------- --------
Net loss before cumulative effect of accounting change ... (2,588) (647)
Cumulative effect of accounting change .......................... -- (10,523)
-------- --------
Net loss .................................................... $ (2,588) $(11,170)
======== ========
Net loss per common share before cumulative effect of
accounting change, basic and diluted ................... $ (0.31) $ (0.08)
Cumulative effect of accounting change ................... -- (1.27)
-------- --------
Net loss per common share, basic and diluted ............. $ (0.31) $ (1.35)
======== ========
Weighted average number of common shares outstanding ..... 8,260 8,260
======== ========
The accompanying notes are an integral part
of the condensed financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
(Unaudited)
Accumulated
Common Stock Minimum
par value $0.01 Additional Pension
--------------- Paid-in Retained Liability Treasury Comprehensive
Class A Class B Capital Deficit Adjustment Stock Total Loss
------- ------- ------- ------- ---------- ----- ----- ----
Balance, December 31, 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)
Net loss ............................... (2,588) (2,588) $ (2,588)
---------
Net comprehensive loss ................. $ (2,588)
--------------------------------------------------------------------------- =========
Balance, March 31, 2003 ................ $ 47 $ 46 $ 49,105 $ (42,604) $ (17,447) $ (7,813) $ (18,666)
====== ====== ======== ========= ========= ======== =========
The accompanying notes are an integral part
of the condensed financial statements.
5
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
(In thousands)
Cash flows from operating activities:
Net loss ................................................ $ (2,588) $(11,170)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ......................................... 2,779 2,647
Amortization ......................................... 139 140
Deferred income taxes ................................ -- 2,581
Cumulative effect of accounting change ............... -- 10,523
Changes in certain assets and liabilities:
Accounts and notes receivable ................... (1,729) (5,816)
Inventories ..................................... (3,131) (2,454)
Prepaid expenses and other assets ............... 2,304 379
Accounts payable ................................ (2,497) 808
Accrued expenses ................................ (17,137) (4,733)
Other liabilities ............................... (382) (409)
-------- --------
Net cash used in operating activities ........ (22,242) (7,504)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (1,015) (2,073)
Maturities of short-term investments ................. -- 1,416
-------- --------
Net cash used in investing activities ........ (1,015) (657)
-------- --------
Financing activities
Net short-term borrowings ............................ 14,751 --
Net change in restricted cash ........................ (3,024) --
-------- --------
Net cash provided by financing activities .... 11,727 --
-------- --------
Net decrease in cash and cash equivalents ................... (11,530) (8,161)
Cash and cash equivalents:
Beginning of period ..................................... 18,277 15,257
-------- --------
End of period ........................................... $ 6,747 $ 7,096
======== ========
The accompanying notes are an integral part
of the condensed financial statements.
6
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of Congoleum Corporation's (the "Company" or
"Congoleum") financial position have been included. Operating results for the
three month period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2003. For further
information, refer to the consolidated financial statements and related
footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
Based upon the nature of the Company's operations, facilities and
management structure, the Company considers its business to constitute a single
segment for financial reporting purposes.
Certain amounts appearing in the prior period's condensed consolidated
financial statements have been reclassified to conform to the current period's
presentation.
The financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the 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
and in Note 6, 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
United States Bankruptcy Code (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 a result, 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.
7
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 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 trade and other
unsecured creditors unimpaired and would resolve all pending and future asbestos
claims against the Company, including personal injury asbestos claims against
the Company's affiliates, including American Biltrite Inc., the Company's
controlling shareholder ("ABI"), and distributors that derive from claims made
against the Company. Furthermore, the Company understands that it is ABI's goal
to have its current and future asbestos claims channeled to the trust
established in connection with the Company's expected pre-packaged Chapter 11
plan of reorganization. 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 and ABI's asbestos liability
through a Congoleum pre-packaged reorganization plan is subject to various other
conditions as well, including approval by the Bankruptcy Court.
In furtherance of the agreement in principle, on April 10, 2003, the
Company and various asbestos claimants entered into the Claimant Agreement (as
defined in Note 6 "Asbestos Liabilities"). As contemplated by the Claimant
Agreement, the Company also entered into the Collateral Trust Agreement (as
defined in Note 6 "Asbestos Liabilities") which established the Collateral Trust
(as defined in Note 6 "Asbestos Liabilities") to distribute funds in accordance
with the terms of the Claimant Agreement and the Security Agreement (as defined
in Note 6 "Asbestos Liabilities") pursuant to which the Company granted the
Collateral Trust a security interest in the Collateral (as defined in Note 6
"Asbestos Liabilities"). As contemplated by the Claimant Agreement, the Company
may enter into settlement agreements with asbestos claimants prior to its filing
of its pre-packaged Chapter 11 reorganization case. The value of the settled
claims pursuant to those settlements, and certain existing unfunded settlements
already entered into between the Company and certain asbestos claimants, will be
secured, fully or partially, as further provided by the Claimant Agreement, by
the Collateral. As a result of further negotiations between Congoleum and
counsel representing a majority of plaintiffs with known pending asbestos claims
against Congoleum, the unwillingness of the insurance companies that underwrote
policies covering asbestos liabilities under which ABI is a named insured to
meaningfully participate in, or consent to ABI's participation in, the Company's
proposed pre-packaged Chapter 11 plan of reorganization, and timing concerns
relating to the Company's expected pre-packaged Chapter 11 case, it is
anticipated that the Claimant Agreement, Collateral Trust Agreement and Security
Agreement will be effectively amended or restated and that the terms of those
agreements, as so effectively amended or restated, will be materially similar to
the current versions of those agreements.
8
The Company expects that, under the pre-packaged plan, the Plan Trust (as
defined in Note 6 "Asbestos Liabilities") will be established after the Company
commences its pre-packaged Chapter 11 reorganization case. As contemplated by
the Claimant Agreement and the Collateral Trust Agreement, upon consummation of
the plan and establishment of the Plan Trust, the assets in the Collateral Trust
would be transferred to the Plan Trust. The Company expects that the Plan Trust
would fund the settlement of all pending and future asbestos claims (including
any claims contemplated by the Claimant Agreement that are unsatisfied as of the
confirmation of the plan of reorganization by the Bankruptcy Court) and protect
Congoleum from future asbestos-related litigation by channeling all asbestos
claims (including any claims contemplated by the Claimant Agreement that are
unsatisfied as of the confirmation of the plan of reorganization by the
Bankruptcy Court) to the Plan Trust pursuant to Section 524(g) of the Bankruptcy
Code.
Congoleum expects its trade and other unsecured creditors would be
unimpaired under its pre-packaged Chapter 11 plan and that its trade creditors
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
and solicit acceptances of that plan. If the requisite plan acceptances are
received, the Company intends to commence its pre-packaged Chapter 11 case as
soon as practicable after confirming that those acceptances have been received,
and request court approval of the plan. After it has commenced its pre-packaged
Chapter 11 case, Congoleum expects it would take another two to six months to
confirm the plan and emerge from the process.
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. During the three months ended March 31, 2003, the Company
paid $4.2 million from the asbestos reserve in legal fees, indemnity
settlements, and reorganization costs related to asbestos litigation.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 6 "Asbestos Liabilities."
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, and 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, or that there
may not be delays, which could be significant, in satisfying or obtaining them.
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.
9
2. Changes in Accounting Principles
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("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" ("SFAS No. 123") 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". Had the Company
accounted for its stock option plans in accordance with SFAS 123, the pro forma
compensation expense from stock options would have increased the reported net
loss per share for the three months ended March 31, 2003 and 2002 by $.01 and
$.00, respectively.
For the Three Months Ended
March 31,
(Dollars in thousands except per share amounts) 2003 2002
---- ----
Net loss:
As reported $ (2,588) $ (11,170)
Pro forma compensation (52) (1)
---------- ----------
As adjusted $ (2,640) $ (11,171)
========== ==========
Net loss per share:
As reported $ (0.31) $ (1.35)
Pro forma compensation (0.01) (0.00)
---------- ----------
As adjusted $ (0.32) $ (1.35)
========== ==========
In June 2001, SFAS 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 was effective for the Company as of January 1, 2003. The adoption of
this standard did not have an impact on the Company's consolidated financial
statements.
In July 2002, SFAS 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 the 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.
10
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 were 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 did not initiate such
guarantees during the three months ended March 31, 2003.
3. Inventories
A summary of the major classifications of inventories stated at the lower
of LIFO cost or market is as follows:
March 31, December 31,
(Dollars in thousands) 2003 2002
--------- ------------
Finished goods $42,092 $38,702
Work-in-process 4,708 3,467
Raw materials and supplies 7,056 8,556
------- -------
Total Inventories $53,856 $50,725
======= =======
4. Income (Loss) Per Share
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares of common stock outstanding.
5. Commitments and Contingencies
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
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
11
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.
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 Bankruptcy Code as part of its strategy to resolve this
liability. For more information regarding the Company's asbestos liability and
plan for resolving that liability, please refer to Notes 1 and 6.
6. 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 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 trade and other
unsecured creditors unimpaired and would resolve all pending and future asbestos
claims against the Company, including personal injury asbestos claims against
the Company's affiliates, including ABI, and distributors that derive from
claims made against the Company. Furthermore, the Company understands that it is
ABI's goal to have its current and future asbestos claims channeled to the Plan
Trust established in connection
12
with the Company's expected pre-packaged Chapter 11 plan of reorganization.
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 and ABI's asbestos liability through a Congoleum
pre-packaged reorganization plan is subject to various other conditions as well,
including approval by the Bankruptcy Court.
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 a trust agreement (the "Collateral Trust Agreement") which
established a trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and a security agreement (the "Security
Agreement") pursuant to which the Company granted the Collateral Trust a
security interest in the Company's rights under its applicable insurance
coverage and payments from its insurers for asbestos claims (the "Collateral").
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. The Collateral Trust Agreement 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") .
Pursuant to the terms and conditions of the Claimant Agreement, the
Company will settle claims pertaining to a pre-existing settlement agreement or
trial-listed settlement agreement, which settled claims will be fully secured by
the Collateral, and all other claims with claimants electing to participate on
the terms and conditions of the Claimant Agreement, which settled claims will be
partially secured by the Collateral in an amount equal to 75% of the settled
value, with the remaining 25% of the settled value being unsecured. The Company
expects that, under the plan, a trust will be established after the Company
commences its Chapter 11 reorganization case (the "Plan Trust"). As contemplated
by the Claimant Agreement and the Collateral Trust Agreement, upon consummation
of the plan and establishment of the Plan Trust, the assets in the Collateral
Trust would be transferred to the Plan Trust. The Company expects that the Plan
Trust would fund the settlement of all pending and future asbestos claims
(including any claims contemplated by the Claimant Agreement that are
unsatisfied as of the confirmation of the plan of reorganization by the
Bankruptcy Court) and protect Congoleum from future asbestos-related litigation
by channeling all asbestos claims (including any claims contemplated by the
Claimant Agreement that are unsatisfied as of the confirmation of the plan of
reorganization by the Bankruptcy Court) to the Plan Trust pursuant to Section
524(g) of the Bankruptcy Code.
13
As a result of further negotiations between Congoleum and counsel
representing a majority of plaintiffs with known pending asbestos claims against
Congoleum, the unwillingness of the insurance companies that underwrote policies
covering asbestos liabilities under which ABI is a named insured to meaningfully
participate in, or consent to ABI's participation in, the Company's proposed
pre-packaged Chapter 11 plan of reorganization, and timing concerns relating to
the Company's expected pre-packaged Chapter 11 case, it is anticipated that the
Claimant Agreement, Collateral Trust Agreement and Security Agreement will be
effectively amended or restated and that the terms of those agreements, as so
effectively amended or restated, will be materially similar to the current
versions of those agreements.
The Company expects that its trade and other unsecured creditors would be
unimpaired under its pre-packaged Chapter 11 plan and that its trade creditors
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
and solicit acceptances of that plan. If the requisite plan acceptances are
received, the Company intends to commence its pre-packaged Chapter 11 case as
soon as practicable after confirming that those acceptances have been received,
and request court approval of the plan. After it has commenced its pre-packaged
Chapter 11 case, Congoleum expects it would take another two to six months to
confirm the plan and emerge from the process.
While the Company believes its contemplated pre-packaged Chapter 11 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, ABI, are expected to be approximately $21.3 million at a minimum. Of
this estimated amount, the Company paid, during the three months ended March 31,
2003, $4.2 million for legal fees, indemnity settlements and reorganization
costs related to asbestos litigation.
Pending Asbestos Claims
The Company has been served notice that it is one of many defendants in
approximately 17,037 pending lawsuits (including workers' compensation cases)
involving approximately 69,859 individuals as of March 31, 2003, alleging
personal injury or death from exposure to asbestos or asbestos-containing
products. There were approximately 16,156 lawsuits at December 31, 2002 that
involved approximately 56,567 individuals. Activity related to asbestos claims
was as follows:
Three months ended Year ended
March 31, December 31,
2003 2002
--------------------------------------------------------------------------
Beginning claims................. 16,156 6,563
New claims....................... 1,186 10,472
Settlements...................... (19) (69)
Dismissals....................... (286) (810)
--------------------------------------------------------------------------
Ending claims.................... 17,037 16,156
====== ======
14
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
plaintiffs' 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
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,
Congoleum believes that the primary insurance company will now cover these
settlements. Notwithstanding that the primary insurance company will likely pay
these settlements, Congoleum also believes that the excess carriers will
continue to dispute the reasonableness of the settlements and contend that their
policies still are not implicated and will
15
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 $13 million in settlements, it will
have to continue funding asbestos-related expenses for defense expense and
indemnity itself until it files for Chapter 11 protection, which it expects will
occur in the third quarter of 2003.
Payments Related to Asbestos Claims
The following table sets forth amounts paid in the first quarter of 2003
and the full year 2002 to defend and settle claims:
Three Months Ended Year Ended
($ in millions) March 31, 2003 December 31, 2002
-------------- -----------------
Indemnity costs paid by the Company's
Insurance carriers $0.0 $1.3
Indemnity costs paid by the Company 0.1 2.7
Defense costs paid by the Company 2.0 1.4
Indemnity settled with insurance
proceeds Assignment 4.2 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 March 31, 2003, there were $0.4 million in additional settlements
outstanding that the Company had agreed to fund but which have not yet been
funded.
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 assignment of and
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.
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 March 31, 2003, the Company has incurred
defense and indemnity costs aggregating $53.8 million, to resolve
asbestos-related claims involving over 38,500 claimants, substantially all of
which amount has been paid by the Company's insurance carriers or by assignments
of future insurance recoveries.
16
It is the Company's accounting policy to conduct a detailed analysis of
its asbestos-related liabilities and the insurance coverage applicable to those
liabilities when appropriate. During the fourth quarter of 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 Chapter 11
reorganization 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,
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 from December 31, 2002 to March 31, 2003:
(In Thousands)
Accrued asbestos-related expenses
At December 31, 2002 $ 21,295
Payments (4,177)
--------
Balance at March 31, 2003 $ 17,118
========
During the three months ended March 31, 2003, the Company paid $4.2
million from the asbestos reserve in legal fees, indemnity settlements, and
reorganization costs related to asbestos litigation.
17
7. 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 for the three month period ended March 31,
2003 and March 31, 2002 (in millions):
March 31, March 31,
2003 2002
--------- ---------
Beginning balance $2.6 $2.5
Accruals 1.3 1.1
Charges (1.5) (1.1)
---- ----
Ending balance $2.4 $2.5
==== ====
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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," in the Company's Annual Report or Form 10K for the year ended
December 31, 2002 and in the Company's other filings with the Securities and
Exchange Commission.
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.
18
During May 2003, the Company completed a reorganization, which included
the elimination of approximately 85 salary and hourly positions. The annualized
savings impact of this personnel reduction is estimated at $ 4.8 million and the
Company plans to book a severance charge of $ 0.5 million during the second
quarter of 2003 related to this action.
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 a result, 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 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 trade and other
unsecured creditors unimpaired and would resolve all pending and future asbestos
claims against the Company, including personal injury asbestos claims against
the Company's affiliates, including ABI, and distributors that derive from
claims made against the Company. Furthermore, the Company understands that it is
ABI's goal to have its current and future asbestos claims channeled to the Plan
Trust, thereby resolving ABI's present and future asbestos liability. 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 and ABI's asbestos liability through a Congoleum
pre-packaged reorganization plan is subject to various other conditions as well,
including approval by the Bankruptcy Court.
In furtherance of the agreement in principle, on April 10, 2003, the
Company and various asbestos claimants entered into the Claimant Agreement. As
contemplated by the Claimant Agreement, the Company also entered into the
Collateral Trust Agreement which established the Collateral Trust to distribute
funds in accordance with the terms of the Claimant Agreement and the Security
Agreement pursuant to which the Company granted the Collateral Trust a security
interest in the Collateral. As contemplated by the Claimant Agreement, the
Company may enter into settlement agreements with asbestos claimants prior to
its commencement of its Chapter 11 reorganization case. The value of the settled
claims pursuant to those settlements, and certain existing unfunded settlements
already entered into between the Company and certain asbestos claimants, will be
secured, fully or partially, as further provided by the Claimant Agreement, by
the Collateral. As a result of further negotiations between Congoleum and
counsel representing a majority of plaintiffs
19
with known pending asbestos claims against Congoleum, the unwillingness of the
insurance companies that underwrote policies covering asbestos liabilities under
which ABI is a named insured to meaningfully participate in, or consent to ABI's
participation in, the Company's proposed pre-packaged Chapter 11 plan of
reorganization, and timing concerns relating to the Company's expected
pre-packaged Chapter 11 case, it is anticipated that the Claimant Agreement,
Collateral Trust Agreement and Security Agreement will be effectively amended or
restated and that the terms of those agreements, as so effectively amended or
restated, will be materially similar to the current versions of those
agreements. The Company expects that, under the plan, the Plan Trust will be
established after the Company commences its pre-packaged Chapter 11
reorganization case. As contemplated by the Claimant Agreement and the
Collateral Trust Agreement, upon consummation of the plan and establishment of
the Plan Trust, the assets in the Collateral Trust would be transferred to the
Plan Trust.
The Company expects that the Plan Trust would fund the settlement of all
pending and future asbestos claims (including any claims contemplated by the
Claimant Agreement that are unsatisfied as of the confirmation of the plan of
reorganization by the Bankruptcy Court) and protect Congoleum from future
asbestos-related litigation by channeling all asbestos claims (including any
claims contemplated by the Claimant Agreement that are unsatisfied as of the
confirmation of the plan of reorganization by the Bankruptcy Court) to the Plan
Trust pursuant to Section 524(g) of the Bankruptcy Code.
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. During the three months ended March 31, 2003, the Company
paid $4.2 million from the asbestos reserve in legal fees, indemnity
settlements, and reorganization costs related to asbestos litigation. For more
information regarding the Company's asbestos liability and plan for resolving
that liability, please refer to Notes 1 and 6 of the Notes to Unaudited
Condensed Consolidated Financial Statements.
Results of Operations
Three months ended March 31, 2003 as compared to three months ended March 31,
2002.
Net sales for the first quarter of 2003 were $53.6 million, as compared to
$57.9 million in the first quarter of 2002, a decrease of $4.3 million or 7.4%.
This decrease in sales was primarily due to the continued weakness in the
manufactured housing segment coupled with lower direct tile sales to certain
mass merchandisers, partially offset by increases in sales of builder grade
products and DuraStone tile.
20
Gross profit for the first quarter of 2003 was $12.7 million, down $1.2
million from $13.9 million in the first quarter of 2002. Gross profit as a
percent of net sales decreased to 23.6% in the first quarter of 2003 from 23.9%
in the first quarter of 2002. The decrease in gross profit margins reflects the
impact of a less profitable sales mix, partially offset by improvements in
manufacturing operating efficiency and the impact of a price increase instituted
in August 2002.
Selling, general and administrative expenses were $13.2 million in the
first quarter of 2003, essentially unchanged from the first quarter of 2002. As
a percent of net sales, selling, general and administrative expenses were 24.6%
in the first quarter of 2003, as compared to 22.7% in the first quarter of 2002.
Expenses in the first quarter of 2003 reflect increased insurance and benefits
related costs, partially offset by lower merchandising and sales expenses.
Loss from operations for the first quarter of 2003 was $0.5 million, as
compared to income from operations of $0.7 million in the first quarter of 2002.
The decrease in income for the three months ended March 31, 2003 versus the
first quarter of 2002 is due to decreased sales and margins.
The provision for income taxes for the three months ended March 31, 2003
represents an effective tax rate of 0%. This is the result of a valuation
allowance provided against the net deferred tax assets generated in the first
quarter of 2003.
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 Bankruptcy Code as part of its strategy to resolve this
liability. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial
Statements, which is 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 of the Bankruptcy Code, $4.2 million of which
was spent in the first quarter of 2003.
Unrestricted cash, cash equivalents and short-term investments decreased
$11.5 million for the three months ended March 31, 2003 to $6.7 million and
decreased $8.2 million for the three months ended March 31, 2002 to $7.1
million. Under the terms of its revolving credit agreement, payments of accounts
receivable are deposited in an account assigned to its lender and the funds used
to pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately available for reducing the loan balance. Working
capital at March 31, 2003 was $26.6 million, down from $28.8 million at December
31, 2002. The ratio of current assets to current liabilities at March 31, 2003
and December 31, 2002 was 1.39 to one and 1.4 to one, respectively. Cash used by
operations was $22.2 million for the first three months of 2003, compared to
cash used by operations of $7.5 million in the first three months of 2002. The
increase in cash used by operations in the first three months of 2003 versus the
first three months of 2002 was primarily due to reorganization related payments,
higher inventories, higher receivables and lower accrued expenses for sales
incentive and sample program payouts.
21
Capital expenditures were $1.0 million and $2.1 million for the first
three months of 2003 and 2002, respectively. Total 2003 capital spending is
expected to be approximately $8.0 million. Required contributions to the
Company's defined benefit pension plans in 2003 are expected to be approximately
$5.2 million, of which $1.0 million was paid in the first quarter of 2003.
In December 2001, the Company entered into a new three-year revolving
credit facility (the "Credit Agreement") which provides for borrowings up to
$30.0 million. Interest is based on .75% above a designated prime rate, or 3.25%
over the Adjusted Eurodollar Rate, as applicable and subject to certain
adjustments, depending on meeting the required covenants under the Credit
Agreement. The Credit Agreement contains certain covenants, which include the
maintenance of a minimum tangible net worth and EBITDA (i.e., earnings before
interest, taxes, depreciation and amortization) 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 the Credit 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 March 31, 2003, based on the level of receivables
and inventory, the Company had borrowing availability of $21.4 million, of which
$14.8 million was outstanding under the Credit Agreement and $1.8 million was
utilized for outstanding letters of credit.
In September 2002, the Company and its lender under 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 principal 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.
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
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. See Note 5 of the Notes to Unaudited Condensed
Consolidated Financial Statements. 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
22
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 the Credit 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.
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 6 of the Notes to Unaudited
Condensed 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
provides for 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 trade and other unsecured creditors unimpaired and would
resolve all pending and future personal injury asbestos claims against the
Company, including personal injury asbestos claims against the Company's
affiliates, including ABI and distributors that derive from claims made against
the Company. Confirmation of such a plan will require, among other things, the
supporting votes of at least 75% of the Company's asbestos claimants with claims
against Congoleum who vote on the plan, as well as a
23
determination by the Bankruptcy Court that the plan has satisfied certain
criteria under the Bankruptcy Code.
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, or that there may not be delays, which could be
significant, in satisfying or obtaining them.
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 pre-packaged
plan of reorganization and to make certain financial covenants in those debt
instruments less restrictive, (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 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 6 of the Notes to Unaudited Condensed Consolidated Financial
Statements, which are included in this report.
24
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
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
position because, as a result of environmental requirements becoming
increasingly strict, the Company is unable to determine the ultimate cost of
compliance with environmental laws and enforcement policies. Moreover, in
addition to potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company to modify or
curtail its operations, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Product and General Liabilities. In the ordinary course of its business,
the Company becomes involved in lawsuits, administrative proceedings, product
liability claims (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.
25
The Company believes that suitable alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products. In an attempt to protect against
this risk of loss of supply, the Company maintains a raw material inventory and
has an ongoing program to develop new sources, which will provide continuity of
supply for its raw material requirements. However, there is no certainty that
the Company's maintenance of its raw material inventory or its ongoing program
to develop new sources of supply would be successful in avoiding a material
adverse affect on its business, results of operations and financial condition if
it were to realize an extended interruption in the supply of its raw materials.
In addition, the Company could incur significant increases in the costs of
its raw materials. Although the Company generally attempts to pass on increases
in the costs of its raw materials to its customers, the Company's ability to do
so is, to a large extent, dependent upon the rate and magnitude of any increase,
competitive pressures and market conditions for its products. There have been in
the past, and may be in the future, periods of time during which increases in
these costs cannot be recovered. During those periods of time, there could be a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company operates in a highly competitive flooring industry and some of its
competitors have greater resources and broader distribution channels than the
Company.
The market for the Company's products is highly competitive. The Company
encounters competition from three other manufacturers in North America as well
as foreign manufacturers. Some of the Company's competitors have greater
financial and other resources and access to capital than the Company.
Furthermore, to the extent any of the Company's competitors make a filing under
Chapter 11 of the 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 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
26
affected by the economic factors that affect the remodeling and housing
industries in general and the manufactured housing industry specifically,
including the availability of credit, consumer confidence, changes in interest
rates, market demand and general economic conditions.
The Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.
The Company's business depends upon its ability to timely manufacture and
deliver products that meet the needs of its customers and the end users of the
Company's products. If the Company were to realize an unexpected, significant
and prolonged disruption of its operations at any of its facilities, including
disruptions in its manufacturing operations, it could result in shipment delays
of its products, depletion of its inventory as a result of reduced production
and increased production costs as a result of taking actions in an attempt to
cure the disruption or carry on its business while the disruption remains. Any
resulting delay, depletion or increased production cost could result in
increased costs, lower revenues and damaged customer and product end user
relations, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company offers limited warranties on its products, which could result in the
Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of its efforts to differentiate
mid and high-end products through color, design and other attributes, the
Company offers enhanced warranties with respect to wear, moisture discoloration
and other performance characteristics, which generally increase with the price
of such products. If the Company were to incur a significant number of warranty
claims, the resulting warranty costs could be substantial.
The Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor of the Company's products 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
27
the Company. These two distributors accounted for 59% of the Company's net sales
for the twelve months ended December 31, 2002.
Item 3: 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 March 31,
2003 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.
Item 4: Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on such evaluation,
such officers have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's reports
filed or submitted under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: The information contained in Note 5
"Commitments and Contingencies" and Note 6 "Asbestos
Liabilities" of the Notes to Unaudited Condensed Consolidated
Financial Statements are incorporated herein by reference.
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit
Number Exhibits
------ --------
99.1 Certification of the Chief Executive Officer
and 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
(i) On January 14, 2003, the Company filed a
Current Report on Form 8-K dated the same
date, disclosing that it had, on January 13,
2003, issued a press release relating to its
strategy for resolving its current and
future asbestos claims liability.
(ii) On March 19, 2003, the Company filed a
Current Report on Form 8-K dated March 18,
2003, disclosing that it had issued a press
release on March 17, 2003, announcing that
it was seeking approval from the holders of
the Company's 8 5/8% Senior Notes Due 2008
to certain proposed amendments to the
indenture governing those notes.
29
CONGOLEUM CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: May 15, 2003 By: /s/ Howard N. Feist III
-------------------------------------
(Signature)
Howard N. Feist III
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial & Accounting Officer)
30
CERTIFICATION
I, Roger S. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Congoleum
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
31
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Roger S. Marcus
-------------------
Roger S. Marcus
Chief Executive Officer
32
CERTIFICATION
I, Howard N. Feist III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Congoleum
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
33
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Howard N. Feist III
-----------------------
Howard N. Feist III
Chief Financial Officer
34