FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2003 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate 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 covered by this report.
Title of Each Class Outstanding at November 7, 2003
- ------------------- -------------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
September 30, 2003 (unaudited) and December 31, 2002......... 3
Consolidated Condensed Statements of Operations for
the three and nine months ended September 30, 2003
and 2002 (unaudited)......................................... 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended September 30, 2003 and
2002 (unaudited)............................................. 5
Notes to Unaudited Consolidated Condensed Financial
Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 35
Item 4. Controls and Procedures..................................... 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 37
Item 2. Changes in Securities and Use of Proceeds................... 37
Item 6. Exhibits and Reports on Form 8-K............................ 37
Signature........................................................... 40
Index of Exhibits................................................... 41
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of dollars)
September 30, December 31,
2003 2002
----------------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 9,325 $ 20,160
Restricted cash 4,117
Accounts receivable, net 45,921 41,050
Inventories 85,062 89,428
Assets of discontinued operation 4,833 13,942
Prepaid expenses and other current assets 16,672 20,696
--------- ---------
TOTAL CURRENT ASSETS 165,930 185,276
Goodwill, net 11,300 11,300
Other assets 23,410 23,777
Property, plant and equipment, net 136,598 141,517
--------- ---------
TOTAL ASSETS $ 337,238 $ 361,870
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,022 $ 24,657
Accrued expenses 58,597 77,401
Liabilities of discontinued operation 1,173 1,298
Notes payable 25,320 15,276
Current portion of long-term debt 21,231 21,061
--------- ---------
TOTAL CURRENT LIABILITIES 129,343 139,693
Long-term debt 103,826 104,210
Other liabilities 68,939 69,621
Noncontrolling interests 622 808
STOCKHOLDERS' EQUITY
Common stock, par value $0.01-authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,548 19,548
Retained earnings 47,146 62,376
Accumulated other comprehensive loss (17,100) (19,300)
Less cost of shares in treasury (15,132) (15,132)
--------- ---------
34,508 47,538
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 337,238 $ 361,870
========= =========
See accompanying notes to consolidated condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands of dollars, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------------------------------------------
Net sales $ 107,810 $ 109,556 $ 313,213 $ 330,278
Interest and other income 463 650 2,200 2,374
--------- --------- --------- ---------
108,273 110,206 315,413 332,652
--------- --------- --------- ---------
Costs and expenses:
Cost of products sold 76,979 76,167 226,132 234,738
Selling, general and administrative
expenses 28,620 27,616 85,180 83,481
Interest expense 2,835 2,665 8,386 7,995
--------- --------- --------- ---------
108,434 106,448 319,698 326,214
--------- --------- --------- ---------
EARNINGS (LOSS) BEFORE
INCOME TAXES AND OTHER ITEMS (161) 3,758 (4,285) 6,438
Income tax (benefit) (1,562) 1,418 (1,381) 2,359
Noncontrolling interests (53) (382) (143) (570)
--------- --------- --------- ---------
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 1,348 1,958 (3,047) 3,509
Discontinued operation (922) (516) (11,538) (1,197)
Cumulative effect of accounting change (7,742)
--------- --------- --------- ---------
Net earnings (loss) $ 426 $ 1,442 $ (14,585) $ (5,430)
========= ========= ========= =========
Earnings (loss) per common
share from continuing operations,
basic and diluted $ 0.39 $ 0.57 $ (0.89) $ 1.02
Discontinued operation (0.27) (0.15) (3.35) (0.35)
Cumulative effect of accounting change (2.25)
--------- --------- --------- ---------
Net earnings (loss) per common
share, basic and diluted $ 0.12 $ 0.42 $ (4.24) $ (1.58)
========= ========= ========= =========
Weighted average number of common
and equivalent shares outstanding 3,442 3,442 3,442 3,442
========= ========= ========= =========
Dividends declared per common share $ -- $ .125 $ .1875 $ .375
See accompanying notes to consolidated condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands of dollars)
Nine Months Ended
September 30,
2003 2002
--------------------
OPERATING ACTIVITIES
Net loss $(14,585) $ (5,430)
Net loss from discontinued operation 11,538 1,197
-------- --------
Net loss from continuing operations (3,047) (4,233)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 13,498 12,863
Deferred income taxes 2,569
Cumulative effect of accounting change 7,742
Changes in operating assets and liabilities:
Accounts receivable (4,142) (14,935)
Inventories 6,402 1,087
Prepaid expenses and other assets 4,282 3,875
Accounts payable and accrued expenses (21,116) 11,364
Noncontrolling interests 143 570
Other (1,193) (11,047)
-------- --------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (5,173) 9,855
INVESTING ACTIVITIES
Investments in property, plant and equipment (6,062) (9,303)
Proceeds from sales of short-term investments 1,416
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (6,062) (7,887)
FINANCING ACTIVITIES
Net short-term borrowings 10,044 3,369
Payments on long-term debt (865) (775)
Net change in restricted cash (4,117)
Dividends paid (645) (1,291)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,417 1,303
Effect of foreign exchange rate changes on cash (1,463) (739)
-------- --------
Net cash (used in) provided by continuing operations (8,281) 2,532
Net cash used in discontinued operations (2,554) (4,185)
Cash and cash equivalents at beginning of period 20,160 16,803
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,325 $ 15,150
======== ========
See accompanying notes to consolidated condensed financial statements
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, and in 2003 the
impairment charge related to the Company's wholly owned subsidiary Janus
Flooring Corporation ("Janus"), and in 2002 the cumulative effect of the change
in accounting for goodwill) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Historical financial results have been restated to reflect the classification of
Janus as a discontinued operation in accordance with the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-lived Assets" (Note F).
As more fully discussed in Note H of Notes to Unaudited Consolidated Condensed
Financial Statements, the Company's majority-owned subsidiary Congoleum
Corporation ("Congoleum") is a party to a significant number of lawsuits
stemming from its manufacture of asbestos-containing products and has announced
its intention to seek confirmation of a pre-packaged plan of reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") as
part of its strategy to resolve this liability. The plan contemplated by
Congoleum would permit shareholders, including ABI, to retain their existing
equity interests in Congoleum. American Biltrite expects it would receive
certain relief as may be afforded under section 524(g)(4) of the Bankruptcy Code
from asbestos claims that derive from claims made against Congoleum, which
claims are expected to be channeled to the Plan Trust. American Biltrite also
expects it would make certain contributions and incur certain other obligations
as part of Congoleum's plan. Because it maintains a controlling interest in
Congoleum, ABI has continued to consolidate Congoleum's results, which included
losses of $19.4 million and $16.1 million in excess of the carrying value of its
investment in Congoleum at September 30, 2003 and December 31, 2002,
respectively. For more information regarding Congoleum's and ABI's asbestos
liabilities and plans for resolving those liabilities, please refer to Notes G
and H of Notes to Unaudited Consolidated Condensed 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 and its majority-owned subsidiary have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful" for factors that
could cause actual results to differ from Congoleum's and ABI's goals for
resolving their asbestos liabilities.
6
Note A - Basis of Presentation (continued)
The consolidated balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidated condensed financial
statements have been reclassified to conform to the current period's
presentations.
Note B - Accounting Principles
Changes in Accounting Principles
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 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 an
impairment test of goodwill and concluded that there was impairment of goodwill
related to both Janus and Congoleum. The Company compared the implied fair value
of their goodwill to the carrying value of goodwill and determined that based on
the fair value of both Congoleum and Janus Flooring, there should be no goodwill
recorded. Congoleum recorded an impairment loss of $10.5 million during the
first quarter of 2002 based on this change in accounting principle. American
Biltrite's share, 55%, in this impairment loss resulted in a charge of $5.8
million plus a charge of $1.9 million for an impairment loss related to Janus
Flooring goodwill for a total charge of $7.7 million during the first quarter of
2002.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation of Financial Standards (FIN)
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, (the "Interpretation"),
which expands on the accounting guidance of SFAS Nos. 5, 57 and 107 and
incorporates without change the provisions of FIN No. 34, which is being
superseded. The Interpretation will significantly change current practice in the
accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in the Interpretation are to be recognized at fair
value and significant disclosure rules have been implemented even if the
likelihood of the guarantor making payments is remote. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002, while the initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have an effect on ABI's
consolidated results of operations and financial position
7
Note B - Accounting Principles (continued)
During 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123, "Accounting for
Stock-based Compensation," which provides a fair-value-based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 148 and
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. No stock-based employee compensation
cost related to stock option awards is reflected in net income, as all options
granted under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had compensation cost for awards
granted under the Company's stock-based compensation plans been determined based
on the fair value at the grant dates consistent with the method set forth under
SFAS No. 123, there would have been no change to the Company's financial
results.
Note C - Inventories
Inventories at September 30, 2003 and December 31, 2002 consisted of the
following (in thousands):
September 30, December 31,
2003 2002
------- -------
Finished goods $62,114 $64,741
Work-in-process 10,485 9,857
Raw materials and supplies 12,463 14,830
------- -------
$85,062 $89,428
======= =======
Note D - Accrued Expenses
Accrued Expenses at September 30, 2003 and December 31, 2002 consisted of the
following (in thousands):
September 30, December 31,
2003 2002
------- -------
Accrued advertising
and sales promotions $23,640 $31,289
Asbestos-related matters 10,150 21,295
Employee compensation
and related benefits 9,053 7,329
Interest 1,718 3,803
Environmental matters 1,986 1,434
Royalties 1,214 1,292
Deferred income taxes 3,954 3,954
Income taxes 1,535 1,632
Other 5,347 5,373
------- -------
$58,597 $77,401
======= =======
8
Note E - Other Liabilities
Other Liabilities at September 30, 2003 and December 31, 2002 consisted of the
following (in thousands):
September 30, December 31,
2003 2002
------- -------
Pension benefits $23,898 $24,812
Asbestos-related liabilities 8,500 8,500
Environmental remediation
and product related
liabilities 8,498 8,517
Other postretirement benefits 8,774 8,708
Deferred income taxes 10,885 10,703
Accrued workers'
compensation claims 5,822 5,499
Accrued compensation 318 318
Other 2,244 2,564
------- -------
$68,939 $69,621
======= =======
Note F - Discontinued Operation
During the second quarter of 2003, the Company reassessed operations at its
Toronto, Canada subsidiary, Janus Flooring Corporation, a manufacturer of
prefinished hardwood flooring, and decided to exit and dispose of this business
before the end of 2003 due to its history of operating losses. The Company
acquired Janus in 2000 intending it to serve as a strategic addition to the
flooring product business. In connection with this decision, the Company
recorded a charge of $8.5 million in second quarter 2003 consisting primarily of
$3.0 million to reduce inventories to net realizable value, $0.5 million in
accounts receivable allowances, a $2.5 million asset impairment charge related
to machinery and equipment and a $1.9 million income tax provision to write off
deferred tax assets deemed not probable of recovery. Results of Janus Flooring,
including this charge, are being reported as a discontinued operation. Assets of
discontinued operation at September 30, 2003 include property, plant and
equipment, inventory and trade receivables. Liabilities of discontinued
operation consist primarily of accrued expenses and accounts payable.
Note G - Commitments and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described below. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts, and the matters may remain
unresolved for several years.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company will incur costs relating to a clean-up
program or will have to make claim payments and the costs or payments can be
reasonably estimated. As assessments are revised and clean-up programs progress,
these liabilities are adjusted to reflect such revisions and progress.
9
Note G - Commitments and Contingencies (continued)
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's balance sheet. Due to the
relative magnitude and wide range of estimates of these liabilities and the fact
that recourse related to these liabilities is generally limited to Congoleum,
these matters are discussed separately following matters for which ABI has
actual or potential liability. However, since ABI includes Congoleum in ABI's
consolidated financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidated financial
statements. In addition, Congoleum has announced its intent to file a
pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code as
part of a plan to resolve its asbestos related liabilities.
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,462 pending claims involving
approximately 3,028 individuals as of September 30, 2003. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to asbestos claims is as follows:
Nine Months Ended Year Ended
September 30, 2003 December 31, 2002
--------------------------------------
Beginning claims 884 464
New claims 760 528
Settlements (5) (11)
Dismissals (177) (97)
--------------------------------------
Ending claims 1,462 884
======================================
The total indemnity costs incurred to settle claims during the nine months end
September 30, 2003 and twelve months ended December 31, 2002 were $224,000 and
$409,000, respectively, all of which were paid by ABI's insurance carriers, as
were the related defense costs. The average indemnity cost per resolved claim
was approximately $1,228 for the nine months ended September 30, 2003 and $3,800
for the year ended December 31, 2002.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable. The Company estimates its liability to
defend and resolve current and reasonably anticipated future asbestos-related
claims (not including claims asserted against Congoleum), 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
10
Note G - Commitments and Contingencies (continued)
these estimates. In 2002, the Company engaged an outside actuary to assist it in
developing estimates of the Company's liability for resolving asbestos claims at
December 31, 2002. The actuary estimated the range of liability for settlement
of current claims pending and claims anticipated to be filed through 2008 was
$8.5 million to $14.9 million. The Company believes no amount within this range
is more likely than any other, and accordingly has recorded the minimum
liability estimate of $8.5 million in other liabilities. The Company also
believes that based on this minimum liability estimate, the corresponding amount
of insurance probable of recovery is $8.5 million at December 31, 2002 and
September 30, 2003, which has been included in other assets.
Due to the numerous variables and uncertainties, the Company does not believe
that reasonable estimates can be developed of liabilities for claims beyond a
five year horizon. The Company will continue to evaluate its range of future
exposure, and the related insurance coverage available, and when appropriate,
record future adjustments to those estimates, which could be material.
The Company reported in its December 31, 2002 Form 10-K that its goal was to
resolve all of its pending and future asbestos related liabilities as part of
Congoleum's anticipated plan of reorganization under Chapter 11 of the United
States Bankruptcy Code. The Company now anticipates that resolution of its
asbestos related liabilities resulting from Congoleum's anticipated plan will be
limited to liabilities derivative of claims asserted against Congoleum as may be
afforded under Section 524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2002 Form 10-K that it has been named as a
Potentially Responsible Party ("PRP") within the meaning of the Federal
Comprehensive Environmental Response Compensation and Liability Act, as amended
("CERCLA"), with respect to three sites located in three separate states. ABI
also reported that it is potentially responsible for response and remediation
costs with respect to three state-supervised sites. There have been no material
developments relating to these sites during the nine month period ended
September 30, 2003.
A lawsuit was brought by Olin Corporation ("Olin"), the present owner of a
former chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three defendants were liable for a portion of the site's
soil and groundwater response and remediation costs at the site. A wholly-owned
subsidiary of ABI owned and operated the Wilmington plant from 1959 to 1964 and
for approximately one month during 1964, ABI held title to the property
directly.
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus an annual reimbursement of $0.1 million for Olin's
internal costs. Under an agreement between ABI and TBC, TBC is liable for 37.5%
of the costs that may be incurred by ABI in connection with this lawsuit and
37.5% of the amounts due under the settlement agreement with Olin.
11
Note G - Commitments and Contingencies (continued)
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2003 will be approximately $2.5 million. For costs
beyond 2003, ABI has estimated the range to be from $10.9 million to $23.6
million. As of September 30, 2003, ABI has estimated its potential liability to
Olin to be in the range of $1.7 million to $3.4 million before any recoveries
from insurance and net of its right of reimbursement from TBC.
The State of Maine Department of Environmental Protection has put the present
owner of a former ABI plant on notice to clean up a dumpsite where there is
exposed asbestos from sheet vinyl waste along with other hazardous substances.
ABI is reviewing the condition of the site and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
approximately $1 million. ABI has not yet entered a final cost sharing agreement
with the current owner. Under an agreement between ABI and TBC, TBC is liable
for 37.5% of the remediation costs, incurred by ABI at this site.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the Maine Site, the Olin
Site and the state supervised sites. An agreement was executed by ABI and its
carriers regarding the payment of the defense costs for the Olin Site. ABI and
its carriers continue to discuss ABI's remaining demands for insurance coverage
for these sites.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order whereby the Company has
provided a self-guarantee in the amount of $750 thousand to the New Jersey
Department of Environmental Protection to assure the funding for any
environmental remediation the state may require at that location. Pursuant to
the merger of the tile division with Congoleum, Congoleum assumed liability for
the cost of cleaning up the site. The Company remains contingently liable in the
event that Congoleum fails to perform or fund any required remediation.
As of September 30, 2003, the Company has accrued $4.3 million for ABI's
estimable and probable amounts for environmental-related contingencies described
above. Additionally, the Company has recorded an asset related to insurance
recoveries relating to those contingencies, net of reimbursements to certain
PRP's, for approximately $0.9 million.
Congoleum
Congoleum 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. See Note H - "Congoleum Asbestos Liabilities and
Planned Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA, and similar state
laws. In addition, in three other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to four disposal sites in
12
Note G - Commitments and Contingencies (continued)
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. Congoleum's ultimate liability in connection with
those other sites depends on many factors, including the volume of material
contributed to the site, the number of other PRP's and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA, and
certain other laws, as a PRP, Congoleum can be held jointly and severally liable
for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 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%.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum 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 clean-up 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
Congoleum.
Other
In addition to the matters referenced above and in Note H, in the ordinary
course of their businesses, ABI and Congoleum become involved in lawsuits,
administrative proceedings, product liability 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.
Note H - Congoleum Asbestos Liabilities and Planned Reorganization
On January 13, 2003, ABI's majority-owned subsidiary Congoleum 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, Congoleum reached an agreement in principle
with attorneys it believes represent more than 75% of the known present
claimants with asbestos claims pending against Congoleum.
13
Note H - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
The agreement in principle contemplates a Chapter 11 reorganization seeking
confirmation of a pre-packaged plan that would leave trade and other unsecured
nonasbestos creditors unimpaired and would resolve all pending and future
asbestos claims against Congoleum, including any derivative liability of ABI and
Congoleum's distributors that derive from claims asserted against Congoleum as
may be afforded under Section 524(g)(4) of the Bankruptcy Code. Approval of an
asbestos channeling injunction pursuant to section 524(g) of the Bankruptcy Code
would require the supporting votes of at least 75% of the asbestos claimants
with claims against Congoleum 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.
In furtherance of the agreement in principle, on April 10, 2003, Congoleum
entered into a settlement agreement with various asbestos claimants (the
"Claimant Agreement"). As contemplated by the Claimant Agreement, Congoleum 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 Congoleum granted the Collateral Trust a security
interest in Congoleum'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 Congoleum and participating claimants who qualify for payment
under unfunded settlement agreements entered into by Congoleum with plaintiffs
that have asbestos claims pending against Congoleum and which claims are
scheduled for trial after the effective date of the Claimant Agreement but prior
to the commencement of Congoleum's anticipated pre-packaged Chapter 11
reorganization case ("trial-listed settlement agreements").
Pursuant to the terms and conditions of the Claimant Agreement, Congoleum 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. Congoleum
expects that, under its pre-packaged Chapter 11 plan, a trust will be
established upon consummation of Congoleum's confirmed pre-packaged Chapter 11
plan of reorganization (the "Plan Trust"). As contemplated by the Claimant
Agreement and the Collateral Trust Agreement, upon consummation of the Plan of
Reorganization, and establishment of the Plan Trust, the assets in the
Collateral Trust would be transferred to the Plan Trust. It is expected 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
14
Note H - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
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.
It is expected that Congoleum's trade and other unsecured nonasbestos 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. On October 27, 2003,
Congoleum began soliciting acceptances for its pre-packaged plan of
reorganization. The voting deadline to accept or reject the plan is December 19,
2003, unless extended by Congoleum. The Company understands that Congoleum
expects to commence its pre-packaged Chapter 11 case in late December 2003 and
hopes to obtain confirmation of its plan during the third quarter of 2004.
Congoleum expects that its costs to effect this plan, consisting principally of
legal and advisory fees and contributions to the Plan Trust will be
approximately $21.3 million at a minimum, of which Congoleum spent $11.1 million
during the first nine months of 2003.
It is expected that pursuant to Congoleum's anticipated pre-packaged Chapter 11
plan of reorganization, the Company would receive certain relief as may be
afforded under section 524(g)(4) of the United States Bankruptcy Code of 1978,
as amended, from asbestos claims that derive from claims made against Congoleum,
which claims are expected to be channeled to the trust established upon
consummation of Congoleum's confirmed pre-packaged Chapter 11 plan of
reorganization (the "Plan Trust"). The Company and Congoleum do not expect that
any other asbestos claims that may be asserted against the Company would be
channeled to the Plan Trust.
Pursuant to the terms of Congoleum's anticipated pre-packaged Chapter 11 plan of
reorganization, the Company expects to pledge all of the shares of Congoleum
stock that it owns, together with any other equity interests and rights the
Company may own or hold in Congoleum, as of the later of June 30, 2005 and the
last trading day of the 90 consecutive trading day period commencing on the
first anniversary of the effective date of Congoleum's confirmed pre-packaged
Chapter 11 plan of reorganization (the "Principal Adjustment Date") pursuant to
the terms of a pledge agreement (the "Pledge Agreement"), which pledge will
serve as collateral securing Congoleum's obligations under a promissory note
that Congoleum is expected to contribute to the Plan Trust (the "Congoleum
Note").
The Company expects that the original principal amount of the Congoleum Note
will be $2,738,234.75 (the "Original Principal Amount") and will be subject to
increase as of the Principal Adjustment Date in an amount equal to the excess,
if any, of the amount by which 51% of Congoleum's market capitalization as of
the Principal Adjustment Date, based upon (subject to certain exceptions) the
total number of shares of Congoleum's common stock outstanding as of such date
multiplied by the average of the closing trading prices of Congoleum's Class A
common stock for the 90 consecutive trading days ending on the Principal
Adjustment Date, exceeds the Original Principal Amount (the "Additional
Principal Amount"), plus any accrued but unpaid interest or other amounts that
may be added to such principal amount pursuant to the terms of the Congoleum
Note. The Company expects that interest on
15
Note H - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
outstanding principal of the Congoleum Note will accrue at a rate of 9% per
annum. The Company expects that interest on the Original Principal Amount will
accrue and be payable quarterly and that interest on the Additional Principal
Amount will accrue quarterly and be added to the Additional Principal Amount as
additional principal. The Company expects that upon the earlier of August 1,
2008 and the date that all of Congoleum's 8 5/8% Senior Notes Due 2008 (the
"Congoleum Senior Notes") are repaid in full, interest on the then outstanding
Additional Principal Amount will then accrue and be payable quarterly.
The Company further expects that all principal on the Congoleum Note then
outstanding together with any accrued but unpaid interest will be payable in
full by Congoleum on the tenth anniversary of the date of the Congoleum Note,
subject to the right of the Plan Trust to accelerate all amounts then owed on
the Congoleum Note following an uncured event of default under the Congoleum
Note. The Company expects that events of default under the Congoleum Note would
include the failure to pay interest and principal prior to the expiration of a
10-day grace period following the applicable due date, the occurrence of an
event of default under the Indenture governing the Congoleum Senior Notes (the
"Indenture"), the breach by Congoleum of any covenant or agreement contained in
the Congoleum Note which remains uncured 30 days following notice by the Plan
Trust to Congoleum and the Company of the breach and a material breach of the
Pledge Agreement by the Company which remains uncured 30 days following notice
by the Plan Trust to the Company and Congoleum of the breach. The Company
expects that the terms of the Congoleum Note would provide that, upon the
occurrence of an event of default under the Congoleum Note, Congoleum and the
Company would have 10 days from the date they receive notice that an event of
default has occurred to cure the event of default. The Company further expects
that the Congoleum Note would provide that, if the event of default remains
uncured after the 10-day cure period, the aggregate outstanding principal amount
of the Congoleum Note together with any accrued but unpaid interest thereon
would become immediately due and payable by Congoleum if the event of default
relates to an uncured event of default of the Indenture, and with regard to
other events of default of the Congoleum Note, the Plan Trust may, upon notice
to Congoleum and the Company, declare the aggregate outstanding principal amount
of the Congoleum Note together with any accrued but unpaid interest thereon to
be immediately due and payable by Congoleum. The Company further expects that
the Plan Trust's rights to payment under the Congoleum Note will be subordinate
and subject in right of payment to the prior payment in full of all amounts
owing and payable pursuant to the Congoleum Senior Notes and Congoleum's credit
facility, except that regularly scheduled interest payments under the Congoleum
Note are expected to be payable by Congoleum so long as no default or event of
default has occurred or is continuing under the Indenture or Congoleum's credit
facility.
The Company further expects that, in addition to the pledge of Congoleum stock
and equity rights, as additional security under the Congoleum Note, the
Congoleum Note, the Pledge Agreement and the anticipated terms of Congoleum's
pre-packaged Chapter 11 plan of reorganization would also provide that the Plan
Trust would not be obligated to pay the Company pursuant to any rights of
indemnity that the Company may have against the Plan Trust for asbestos-related
claims pursuant to Congoleum's pre-packaged Chapter 11 plan of reorganization or
a certain Joint Venture Agreement entered into in 1992, as to which both the
Company and
16
Note H - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
Congoleum are parties to (as amended, the "Joint Venture Agreement") until after
any amounts due and payable to the Plan Trust under the Congoleum Note have been
paid in full to the Plan Trust. Until such time, any such payments that would
otherwise have been payable to the Company pursuant to that right of indemnity,
would be set aside by the Plan Trust and held in escrow by the Plan Trust for
the Company's benefit and pledged by the Company as additional collateral
securing Congoleum's obligations under the Congoleum Note until released from
such escrow and paid to the Company, as further provided under Congoleum's
anticipated pre-packaged Chapter 11 plan of reorganization, the Congoleum Note
and the Pledge Agreement.
The Company further expects that the Congoleum Note, the Pledge Agreement and
Congoleum's pre-packaged Chapter 11 plan of reorganization would also provide
that Congoleum would be prohibited from making any payments to the Company
pursuant to any rights of indemnity that the Company may have against Congoleum
for claims pursuant to the Joint Venture Agreement until after any amounts due
and payable to the Plan Trust under the Congoleum Note have been paid in full to
the Plan Trust. Until such time, any such payments that would otherwise have
been payable to the Company pursuant to that right of indemnity, would be paid
by Congoleum to the Plan Trust and the Plan Trust would set aside and hold in
escrow such amounts for the Company's benefit and the Company will pledge such
amounts as additional collateral securing Congoleum's obligations under the
Congoleum Note until released from such escrow and paid to the Company, as
further provided under Congoleum's anticipated pre-packaged Chapter 11 plan of
reorganization, the Congoleum Note and the Pledge Agreement.
The Company expects that it would be allowed to prepay the principal amount of
the Congoleum Note, in whole but not in part, without any penalty or premium at
any time following the Principal Adjustment Date and that any interest that may
have accrued but not yet been paid at the time of any principal repayment would
be due and payable at the time of the principal repayment. The Company expects
that Congoleum would be obligated to repay the Company for any amounts paid by
the Company pursuant to the Congoleum Note, which repayment obligation would be
evidenced by a promissory note or notes to be issued by Congoleum to the
Company. It is expected that any such note would have similar payment terms as
those expected to be afforded to the Plan Trust with regard to the Congoleum
Note, which rights of repayment are expected to be subordinate and subject in
right of payment to the prior payment in full of all amounts owing and payable
to the Plan Trust with regard to the Congoleum Note and with regard to amounts
owing and payable pursuant to the Congoleum Senior Notes and Congoleum's credit
facility, except that the right of full subordination with regard to the
Congoleum Senior Notes and Congoleum's credit facility would contain an
exception that would allow Congoleum to make regularly scheduled interest
payments to the Company pursuant to any such note so long as no default or event
of default has occurred or is continuing under the Indenture or Congoleum's
credit facility.
It is further expected that if the Company prepaid the Congoleum Note and the
Company sold all or substantially all of the shares of Congoleum's stock held by
the Company as of the Principal Adjustment Date during the three-year period
following such date, the Company would be obligated to make a contribution to
the Plan Trust if the equity value of Congoleum implied by the price paid to the
Company for the shares of Congoleum's stock exceeded the greater of the
17
Note H - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
Original Principal Amount or 51% of Congoleum's market capitalization as of the
Principal Adjustment Date, based upon (subject to certain exceptions) the total
number of shares of Congoleum's common stock outstanding as of such date
multiplied by the average of the closing trading prices of Congoleum's Class A
common stock for the 90 consecutive trading days ending on the Principal
Adjustment Date. In such instance, it is expected that the Company would be
obligated to pay to the Plan Trust an amount equal to 50% of such excess amount.
Under the expected terms of Congoleum's pre-packaged Chapter 11 plan of
reorganization, Congoleum would be obligated to repay the Company for any
amounts paid by the Company to the Plan Trust pursuant to this obligation. In
satisfaction of Congoleum's repayment obligation it would owe to the Company, it
is expected that Congoleum would issue a promissory note to the Company in a
principal amount equal to the amount of any such payments made by the Company
plus any accrued but unpaid interest or other amounts that may be added to such
principal amount pursuant to the terms of the promissory note which would be
subordinate and subject in right of payment to the prior payment in full of all
amounts owing and payable pursuant to the Congoleum Senior Notes and Congoleum's
credit facility, except that regularly scheduled interest payments could be paid
on such note so long as no default or event of default has occurred or is
continuing under the Indenture or Congoleum's credit facility.
The Company further expects that it will make a cash contribution in the amount
of $250,000 to the Plan Trust upon formation of the Plan Trust.
The Company has previously disclosed that its goal was to have all current and
future asbestos claims that may be asserted against it channeled to the Plan
Trust. At the present time, Congoleum's pre-packaged Chapter 11 plan of
reorganization does not provide relief to the Company for all asbestos claims
that may be asserted against it and does not include an assignment of the
Company's insurance policies to the Plan Trust. The Company has not abandoned
its goal of obtaining that relief at a future time if circumstances change so
that the Company and Congoleum believe that the Company could attain the
Company's desired channeling relief without posing significant risks to the
success of Congoleum's plan of reorganization or the Company, its insurance
coverage and its business. Both the Company and Congoleum, however, presently
believe that it is unlikely that the Company will be successful in realizing its
goal in this regard. The Company is not actively pursuing this goal at this
time, and the plan of reorganization that Congoleum began soliciting acceptances
of on October 27, 2003 makes no provision in this regard.
As previously discussed, under the terms of Congoleum's plan of reorganization,
if confirmed, the Company would receive certain relief as may be afforded under
section 524(g)(4) of the Bankruptcy Code from asbestos claims that derive from
claims made against Congoleum, which claims are expected to be channeled to the
Plan Trust. However, Congoleum and the Company do not expect that any other
asbestos claims that may be asserted against the Company would be channeled to
the Plan Trust. The Company and Congoleum also expect that the contributions the
Company would make to the Plan Trust will differ from the contributions
previously publicly disclosed that might be made by the Company if it were to
receive its desired relief and are expected to consist of those items referred
to above in this Note H.
18
Note I - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three and
nine month periods ended September 30, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net earnings (loss) $ 426 $ 1,442 $(14,585) $(5,430)
Foreign currency translation adjustments (223) (680) 2,200 (6)
----- ------- -------- -------
Total comprehensive income (loss) $ 203 $ 762 $(12,385) $(5,436)
===== ======= ======== =======
Note J - Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding.
Note K - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape products
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of K&M Associates L.P., a national costume jewelry
supplier to mass merchandisers and department stores. The Company's Canadian
division produces flooring, rubber products, and other industrial products.
19
Note K - Industry Segments (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------------------- ----------------------
Net Sales
Net sales to external customers:
Flooring products $ 61,123 $ 57,702 $ 169,679 $ 183,465
Tape products 20,677 20,306 60,902 62,023
Jewelry 16,259 21,603 53,531 55,681
Canadian division 9,751 9,945 29,101 29,109
--------- --------- --------- ---------
Total net sales to external
customers 107,810 109,556 313,213 330,278
--------- --------- --------- ---------
Intersegment net sales:
Flooring products 12 34 37 173
Tape products 2 25 74 101
Jewelry
Canadian division 1,193 2,030 5,056 7,976
--------- --------- --------- ---------
Total intersegment net sales 1,207 2,089 5,167 8,250
--------- --------- --------- ---------
109,017 111,645 318,380 338,528
Reconciling items
Intersegment net sales (1,207) (2,089) (5,167) (8,250)
--------- --------- --------- ---------
Total consolidated net sales $ 107,810 $ 109,556 $ 313,213 $ 330,278
========= ========= ========= =========
20
Note K - Industry Segments (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------- --------------------
Segment (loss) profit
Flooring products $ (307) $ 969 $(4,882) $ 1,297
Tape products 321 (74) 121 1,059
Jewelry 1,004 3,309 2,584 5,152
Canadian division (684) 130 (818) 648
------- ------- ------- -------
Total segment (loss) profit 334 4,334 (2,995) 8,156
Reconciling items
Corporate items (496) (577) (1,244) (1,677)
Intercompany profit change l l (46) (41)
------- ------- ------- -------
Total consolidated (loss) profit
from continuing operations
before income taxes and
other items $ (161) $ 3,758 $(4,285) $ 6,438
======= ======= ======= =======
Sept. 30, December 31,
2003 2002
----------------------
Segment assets
Flooring products $ 195,540 $ 212,397
Tape products 57,051 56,543
Jewelry 39,927 43,123
Canadian division 34,354 30,467
--------- ---------
Total segment assets 326,872 342,530
Reconciling items
Corporate items 24,679 20,428
Discontinued operation 4,833 13,942
Intersegment accounts receivable (18,938) (14,868)
Intersegment profit in inventory (208) (162)
--------- ---------
Total consolidated assets $ 337,238 $ 361,870
========= =========
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 (and
its majority-owned subsidiary Congoleum's) expectations, as of the date of this
report, of future events and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
expectations are
21
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 on Form 10-K for the year ended
December 31, 2002 and in the Company's other filings with the Securities and
Exchange Commission.
The Company's majority-owned subsidiary, Congoleum, 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. In addition, the Company is a
defendant in a number of asbestos-related lawsuits as well. See Notes G and H of
the Notes to Unaudited Consolidated Condensed Financial Statements, which are
incorporated herein by reference. These matters may have a material adverse
impact on the Company's or Congoleum's financial position and results of
operations.
Based on its pre-packaged bankruptcy strategy for resolving its asbestos
liabilities, ABI's consolidated subsidiary Congoleum has made provisions in its
financial statements for its estimated contribution and costs to effect its plan
to settle asbestos liabilities through a plan trust established pursuant to
Section 524(g) of the Bankruptcy Code. Congoleum recorded a charge of $17.3
million in the fourth quarter of 2002 to increase its estimated liability to
$21.3 million, of which Congoleum spent $11.1 million during the first nine
months of 2003. Actual amounts that will be contributed to the plan trust and
costs for pursuing and implementing the plan of reorganization could be
materially higher, which could have a material adverse effect on ABI's
consolidated results of operations and would have a material adverse effect on
Congoleum's financial position.
In 2000, the Company acquired Janus, a manufacturer of prefinished hardwood
flooring, intending it to serve as a strategic addition to the Company's
flooring product business. During the second quarter of 2003, the Company
reassessed Janus' operations and decided to exit this business due to its
history of operating losses. In connection with this decision, the Company
recorded a charge of $8.5 million in second quarter 2003 consisting primarily of
$3.0 million to reduce inventories to net realizable value, $0.5 million in
accounts receivable allowances, a $2.5 million asset impairment charge related
to machinery and equipment and a $1.9 million income tax provision to write off
deferred tax assets deemed not probable of recovery. The Company is presently
executing its plan to dispose of the assets of Janus, which, for financial
reporting purposes, is reported as a discontinued operation, with all
significant remaining disposition activities expected to be completed during the
next six to nine months. Future losses at this discontinued operation are not
expected to be material, and the Company expects to realize $3 million to $5
million in future cash proceeds from sale of Janus' assets. Pursuant to a debt
agreement the Company has with one of its lenders, the net sales proceeds from
any sale or disposition of Janus' building must be first applied to repay
amounts owed by the Company's wholly owned subsidiary American Biltrite (Canada)
Ltd. under its credit agreement with any remaining net sales proceeds to be
applied to repaying amounts outstanding under the Company's credit facilities.
If the Company is unable to timely sell or otherwise dispose of the assets of
Janus on terms acceptable to American Biltrite and in accordance
22
with applicable regulatory or other legal requirements, including Canadian
regulations and laws, such inability could have a material adverse effect on the
Company's business, results of operations and financial condition.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Our actual results may differ from these estimates under
different assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. We believe that
our most critical accounting policies, upon which our financial condition
depends and which involve the most complex or subjective decisions or
assessments, are those described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, filed with the Securities and Exchange
Commission. There have been no material changes since year-end 2002 that warrant
further disclosure.
Results of Operations
Net sales for the third quarter of 2003 were $107.8 million compared to $109.5
million in the third quarter of 2002, a decrease of $1.7 million or 1.6%. The
decrease in sales from the third quarter of 2002 to the third quarter of 2003
was due to lower sales at K&M Associates and the Canadian division, which offset
higher sales at Congoleum and the Tape division. Net sales for the first nine
months of 2003 were $313.2 million, down $17.1 million or 5.2% from the first
nine months of 2002. The decrease in sales for the first nine months of 2003
from 2002 was due to lower sales in all segments.
Cost of products sold as a percentage of net sales was 71.4% in the third
quarter of 2003 versus 69.5% in the third quarter of 2002. For the nine months
ended September 30, 2003, cost of products sold as a percentage of net sales was
72.2% compared with 71.1% during the same period one year earlier. Gross margins
in the third quarter of 2003 were below year earlier levels at Congoleum and the
Canadian division, due to lower production volumes to absorb factory overhead.
Gross margins improved in the third quarter of 2003 over year earlier levels at
the jewelry business (due to better retail sell-through rates) and the Tape
business (due to reduced manufacturing costs). Year-to-date gross margins are
higher than year earlier levels for the jewelry business (due to better
sell-through) but lower at the other operations (due to lower volumes over which
to absorb fixed overhead).
Selling, general and administrative expenses as a percentage of net sales were
26.5% in the third quarter of 2003 compared to 25.2% in the third quarter of
2002. For the nine months ended September 30, 2003, selling general and
administrative expenses as a percentage of net sales were 27.2%, up from 25.3%
for the first nine months of 2002. Expenses have increased primarily as a
23
result of higher medical, pension and insurance costs, and spending on new
products, which has more than offset cost reduction initiatives in other areas.
The provision for tax benefit of $1.6 million in the third quarter of 2003 is
primarily due to an income tax refund received by Congoleum. Congoleum recorded
a valuation allowance against its net deferred tax assets in 2002, but was able
to realize a portion of this benefit as a result of tax changes permitting its
2002 net operating loss to be carried back to a longer period than had been
anticipated.
Earnings from continuing operations for the three months ended September 30,
2003 were $1.3 million, down $0.6 million from year earlier levels, as the tax
benefit offset the impact of lower pre-tax results. The year-to-date loss from
continuing operations of $3.0 million, versus income from continuing operations
of $3.5 million in the year earlier period, reflects lower pre-tax results at
all segments.
The loss from discontinued operations reflects results of Janus, which ceased
operations at the end of the third quarter of 2003. The year-to-date loss from
discontinued operations includes $8.8 million in charges to write assets down to
net realizable values as well as provisions for severance. Future losses from
this operation, if any, are not expected to be material.
Liquidity and Capital Resources
Cash and cash equivalents, including restricted cash and short term investments,
declined $6.7 million in the first nine months of 2003 to $13.4 million,
primarily due to settlement of accrued liabilities and accounts payable related
to Congoleum's planned reorganization. Under the terms of its Revolving Credit
Agreement, Congoleum's accounts receivable payments are deposited in an account
assigned to its lender and the funds are 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 September 30, 2003
was $36.6 million, down from $45.6 million at December 31, 2002. The ratio of
current assets to current liabilities at September 30, 2003 was 1.28, down from
1.33 at December 31, 2002.
Capital expenditures in the first nine months of 2003 were $6.1 million compared
to $9.3 million for the first nine months of 2002. It is anticipated that
capital spending for the full year 2003 will be approximately $10 million.
ABI's consolidated cash flow statement includes cash flow activity of Congoleum.
Congoleum is separately financed and American Biltrite neither guarantees nor is
otherwise obligated for any of Congoleum's debt. Other than a $250 thousand
contribution to a trust to be established upon confirmation of Congoleum's
reorganization plan, ABI expects cash requirements in connection with
Congoleum's reorganization will be funded by Congoleum. The Company believes it
is useful to provide the following consolidating condensed cash flow statement
that shows the cash flows of American Biltrite and Congoleum separately:
24
American Biltrite Inc.
Consolidating Condensed Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2003
($000)
American
Biltrite Inc. Congoleum Consolidated
------------- --------- ------------
Operating activities
Net loss $(11,286) $ (3,299) $(14,585)
Net loss from discontinued operations 11,538 -- 11,538
-------- -------- --------
Net earnings (loss) from continuing operations 252 (3,299) (3,047)
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 4,727 8,771 13,498
Change in operating assets and liabilities:
Accounts and notes receivable (1,390) (2,752) (4,142)
Inventories 1,332 5,070 6,402
Prepaid expenses and other current assets 667 3,615 4,282
Accounts payable and accrued expenses 134 (21,250) (21,116)
Noncontrolling interests 143 -- 143
Other liabilities (343) (850) (1,193)
-------- -------- --------
Net cash provided (used) by operating activities 5,522 (10,695) (5,173)
Investing activities
Investments in property, plant and equipment (2,093) (3,969) (6,062)
-------- -------- --------
Net cash (used) by investing activities (2,093) (3,969) (6,062)
Financing activities
Net short-term borrowings 1,547 8,497 10,044
Payments on long-term debt (865) -- (865)
Net change in restricted cash (4,117) (4,117)
Dividends paid (645) -- (645)
-------- -------- --------
Net cash provided by financing activities 37 4,380 4,417
Effect of foreign exchange rate changes on cash (1,463) -- (1,463)
-------- -------- --------
Net cash provided (used) by continuing operations 2,003 (10,284) (8,281)
Net cash used in discontinued operations (2,554) -- (2,554)
Cash and cash equivalents at beginning of year 1,883 18,277 20,160
-------- -------- --------
Cash and cash equivalents at end of period $ 1,332 $ 7,993 $ 9,325
======== ======== ========
25
The Company has recorded provisions which it believes are adequate for
environmental remediation and non-asbestos product-related liabilities,
including provisions for testing for potential remediation of conditions at its
own facilities. While the Company believes its estimate of the future amount of
these liabilities is reasonable, that such amounts will be paid over a period of
three to ten years and that the Company expects to have sufficient resources to
fund such amounts, the actual timing and amount of such payments may differ
significantly from the Company's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's costs,
the Company is not aware of any pending legislation which would have a material
adverse effect on its consolidated results of operations or financial position.
There can be no assurances that such costs could be passed along to its
customers.
Cash requirements for capital expenditures, working capital, debt service and
any share repurchases are expected to be financed from operating activities and
borrowings under existing bank lines of credit, which are presently up to $62.8
million in the aggregate (subject to the amount of underlying collateral). At
September 30, 2003, $22.0 million was outstanding under revolving credit lines
and $5.6 million was outstanding under letters of credit. An additional $14.8
million was available for borrowing as of that date under the Company's
revolving credit lines, as amended on October 14, 2003. Of this amount, $7.7
million is available to Congoleum under its line and $7.1 million is available
to ABI and its other subsidiaries under their lines. The Company believes that
its cash flow from operations, sale of Janus assets, and borrowings available
will be adequate for capital expenditures, working capital, and debt service
needs.
On October 14, 2003, the Company and its majority-owned subsidiary K&M
Associates L.P. ("K&M") entered into a new credit agreement (the "New Credit
Agreement") with Fleet National Bank and Citizens Bank of Massachusetts
(collectively, the "Lenders"). The New Credit Agreement replaces the preexisting
credit agreement the Company and K&M had with the Lenders (the "Prior Credit
Agreement"). In connection with the New Credit Agreement, the Company and
certain of its domestic subsidiaries granted the Lenders a security interest in
most of the Company's and its domestic subsidiaries' assets. The security
interest granted to the Lenders does not include the shares of capital stock of
Congoleum or the assets of Congoleum. Under the New Credit Agreement, the
Company and K&M are subject to various financial and other covenants. The amount
of borrowings that may be outstanding at any time under the New Credit Agreement
are determined by a borrowing base formula applied to inventory, receivables and
fixed assets of the Company and certain of its subsidiaries, reduced by amounts
outstanding under the Prudential Note, subject to a maximum of $25 million.
Interest is payable on amounts borrowed under the New Credit Agreement at rates
which generally range from a LIBOR based rate plus 1.0% to a LIBOR based rate
plus 2.5% depending on the Company's leverage ratio, as determined under the New
Credit Agreement. Certain domestic subsidiaries of the Company have agreed to
guaranty the Company's obligations under the New Credit Agreement. The New
Credit Agreement expires on March 1, 2004.
Also on October 14, 2003, the Company and Prudential entered into an amendment
to the Note Purchase Agreement. The amendment revised certain financial
covenants under the Note Purchase Agreement to afford the Company with greater
flexibility to comply with those covenants and requires the Company to comply
with additional covenants consistent with those included in the New Credit
Agreement. In connection with the amendment, the Company and
26
certain of its domestic subsidiaries granted Prudential a security interest in
most of the Company's and its domestic subsidiaries' assets. The security
interest granted to Prudential does not include the shares of capital stock of
Congoleum or the assets of Congoleum. Certain domestic subsidiaries of Company
have agreed to guaranty the Company's obligations under the amended Note
Purchase Agreement.
The security interests granted to Prudential pursuant to the amendment to the
Note Purchase Agreement and to the Lenders pursuant to the New Credit Agreement
are on parity with each other. With regard to the collateral subject to the
granted security interests, Fleet National Bank is acting as collateral agent
for itself, Citizens Bank of Massachusetts and any other Lenders that may from
time to time be parties to the New Credit Agreement, and Prudential and any
other persons or entities that may from time to time hold notes issued by the
Company pursuant to the Note Purchase Agreement. The Lenders and Prudential are
parties to an intercreditor agreement which governs certain matters regarding
their rights with respect to the collateral that is subject to the security
interest granted to them by the Company and certain of its domestic
subsidiaries.
Under the Note Purchase Agreement, the Company previously issued notes in an
aggregate principal amount of $20 million (the "Series A Notes"). The Series A
Notes generally bear interest at a rate of 7.91% per annum, and the Company is
obligated to pay Prudential an additional fee on each interest payment date if
the Company's and certain of its subsidiaries' ratio of debt to EBITDA, as
defined under the amended Note Purchase Agreement, exceeds certain levels. The
amount of those fees that may be payable by the Company varies depending on the
extent the Company's and certain of its subsidiaries' debt exceeds EBITDA and is
capped at 2% of the outstanding principal amount of the Series A Notes. The
Company expects these fees will result in an increase in interest expense paid
on these notes of approximately $350 thousand per year, until the applicable
ratios improve. Principal on the Series A Notes is repayable in five annual
installments of $4.0 million beginning on August 28, 2006. In addition, the
amended Note Purchase Agreement provides for possible issuances of additional
notes by the Company for up to an aggregate principal amount of $15 million,
which additional notes will mature not later than 10 years after the date of
issuance and will bear interest at rates to be determined on or about the time
of issuance. Because the Note Purchase Agreement, as amended, requires the New
Credit Agreement to be replaced or refinanced by no later than March 1, 2003,
amounts outstanding under the Note Purchase Agreement are classified as current
liabilities.
Under Congoleum's anticipated plan of reorganization, it is expected that
certain rights that the Company may have to receive indemnification for claims
under the plan of reorganization or the Joint Venture Agreement, subject to
certain exceptions, will not be paid to the Company for so long as any
obligations owed to the Plan Trust by Congoleum under the Congoleum Note remain
outstanding. Instead, those amounts will be held in escrow by the Plan Trust and
be pledged by the Company as collateral securing Congoleum's obligations under
the Congoleum Note until released from such escrow and paid to the Company
pursuant to the terms of Congoleum's plan of reorganization, the Congoleum Note
and the Pledge Agreement. To the extent the amounts that are subject to that
escrow are material, that could have a material adverse affect on the Company's
liquidity and capital resources since those escrowed amounts represent amounts
that would have already been paid by the Company but not yet reimbursed to the
Company to the extent they remain in escrow.
27
In addition, the terms of the Congoleum plan of reorganization are expected to
provide that the Company will no longer have certain other rights to receive
indemnification under the Joint Venture Agreement or Congoleum's plan of
reorganization for asbestos-related property damage claims. To the extent that
the Company pays material amounts for asbestos-related property damage claims
that the Company would have been entitled to be reimbursed for by Congoleum
absent the provisions of Congoleum's plan of reorganization, that could have a
material adverse effect on the Company's liquidity and capital resources.
Furthermore, to the extent that the amount of any of the Company's indemnity
claims against the Plan Trust are reduced to an amount less than the
corresponding amount paid by the Company pursuant to the distribution procedures
under the Company's plan of reorganization, that could have a material adverse
effect on the Company's liquidity and capital resources.
The Company did not declare a dividend for the third quarter of 2003. Future
dividends, if any, will be determined by the Board of Directors based upon the
financial performance and capital requirements of the Company, among other
considerations. Under the New Credit Agreement, aggregate dividend payments are
generally limited to 50% of a cumulative consolidated net income (accounting for
Congoleum under the equity method of accounting), as determined under the new
Credit Agreement, earned after June 30, 2003. Under the Note Purchase Agreement,
aggregate dividend payments generally may not exceed the sum of $6 million plus
50% of a cumulative consolidated net income (accounting for Congoleum under the
equity method of accounting), as determined under the Note Purchase Agreement,
earned after December 31, 2000.
As previously discussed, ABI and Congoleum have significant liability exposure
regarding asbestos-related claims. ABI expects that, based on its current claims
experience, its insurance recoveries will fully cover its asbestos-related
liability in the foreseeable future. To the extent ABI incurs liability for
asbestos-related claims which turn out not to be recoverable from its insurance
carriers (whether because the insurance carriers become insolvent or otherwise)
or other persons, ABI's funding obligations with respect to those liabilities
would increase. This increased funding obligation could have a material adverse
effect upon ABI's liquidity and capital resources. In addition, Congoleum's
pursuit of its anticipated pre-packaged Chapter 11 plan of reorganization will
have a material adverse impact on Congoleum's liquidity and capital resources.
Risk Factors That May Affect Future Results
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, G and H of the Notes to Unaudited
Consolidated Condensed Financial Statements, which are included in this report,
the Company and its majority-owned subsidiary Congoleum have significant
liability and funding exposure for asbestos-related personal injury claims.
Congoleum has reached an agreement in principle with attorneys representing more
than 75% of the known present claimants with asbestos claims pending against
Congoleum. In furtherance of the agreement in principle, Congoleum entered into
a settlement
28
agreement with various asbestos claimants, which provides for a global
settlement of more than 75% of the known asbestos personal injury claims pending
against Congoleum. The agreement in principle also contemplates Congoleum
pursuing a Chapter 11 reorganization seeking confirmation of a pre-packaged plan
that would leave trade and other unsecured nonasbestos creditors unimpaired and
would resolve all pending and future asbestos claims against Congoleum,
including any derivative liability of the Company and Congoleum's distributors
from claims asserted against Congoleum. Confirmation of an asbestos channeling
injunction pursuant to section 524(g) of the Bankruptcy Code would require the
supporting votes of at least 75% of the asbestos claimants with claims against
Congoleum 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.
There can be no assurance that the Company or Congoleum will be successful in
realizing these goals in this regard or in obtaining the necessary votes,
consents and approvals, or in implementing the desired plan terms. As a result,
any settlement reached by Congoleum or the Company with their 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 Congoleum 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 Congoleum's plan of reorganization, as well as any
other delays in getting Congoleum's plan of reorganization approved by the
bankruptcy court, could result in a proceeding that takes longer, and is more
costly, than Congoleum has estimated. Furthermore, any such delay could result
in Congoleum's pre-packaged plan of reorganization not being confirmed by the
bankruptcy court or in the abandonment of the pre-packaged plan of
reorganization in favor of a non-prepackaged plan of reorganization. If a
pre-packaged plan of reorganization is abandoned in favor of a non-prepackaged
plan of reorganization, Congoleum would likely incur significantly more costs
due to the likely greater difficulty of negotiating a plan of reorganization
with more impaired classes of creditors. Also, obtaining confirmation of a plan
under those circumstances would likely take a considerable amount of time and
effort in order for the various parties involved to negotiate a plan in light of
their potentially conflicting interests. There can be no assurance that the
terms of any non-prepackaged plan of reorganization would be as favorable to
Congoleum, Congoleum's shareholders, including ABI, holders of Congoleum's
Senior Notes and other nonasbestos related constituents as the expected terms of
Congoleum's anticipated pre-packaged plan of reorganization.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's goals for resolving asbestos liability by
Congoleum pursuing a pre-packaged 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 Congoleum and
the Company, for asbestos-related claims, (ii) costs relating to the execution
and implementation of any plan of reorganization pursued by Congoleum, (iii)
timely reaching an agreement with other creditors, or classes of creditors, that
exist or may emerge, (iv) the Company's and Congoleum's
29
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 and
pledge in connection with Congoleum'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 Congoleum's lenders,
customers, suppliers and other constituencies to the ongoing process arising
from the strategy to settle asbestos liability, (vi) Congoleum's ability to
obtain debtor-in-possession financing to provide it with sufficient funding
during the pendency of its Chapter 11 case and exit financing to provide it with
sufficient funding for its operations after emerging from the bankruptcy
process, (vii) timely obtaining sufficient creditor and court approval of any
reorganization plan and (viii) compliance with the Bankruptcy Code, including
section 524(g). In addition, in view of American Biltrite's relationships with
Congoleum, American Biltrite could be affected by Congoleum's negotiations, and
there can be no assurance as to what that impact, positive or negative, might
be. In any event, the failure of Congoleum to obtain confirmation of its
anticipated pre-packaged plan of reorganization would have a material adverse
effect on Congoleum's business, results of operations or financial condition and
could have a material adverse effect on American Biltrite's business, results of
operations or financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan of reorganization Congoleum
may decide to pursue. To date, Congoleum has expended significant amounts
pursuant to resolving its asbestos liability relating to its proposed
prepackaged Chapter 11 plan of reorganization. To the extent any federal
legislation is enacted which does not credit Congoleum for amounts paid by
Congoleum pursuant to its plan of reorganization or requires the Company or
Congoleum to pay significant amounts to any national trust or otherwise, such
legislation could have a material adverse effect on the Company or Congoleum's
businesses, results of operations and financial conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum 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. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A, G and H of the Notes to Unaudited Consolidated Condensed
Financial Statements, which are included in this report.
The Company relies on debt financing to help fund its operations and other
general corporate purposes and any default by it under its credit facilities or
inability to obtain any
30
necessary debt financing would likely have a material adverse effect on its
business, operations and financial condition.
The Company relies on borrowings under its existing credit facilities to help
finance, among other things, its operations, working capital and capital
expenditures. The Company and most of its domestic subsidiaries have granted a
security interest to the lenders under the Company's primary credit facilities
in most of the Company's and its domestic subsidiaries' assets. The collateral
that is subject to this security interest does not include the shares of capital
stock of Congoleum or assets of Congoleum.
The Company's credit facility (the "Credit Facility") with Fleet National Bank
("Fleet") and Citizens Bank of Massachusetts (together with Fleet and such other
lenders from time to time a party to the Credit Facility, the "Fleet Group") has
a final maturity date of March 1, 2004. In addition, under the Company's debt
agreement (the "Note Agreement) with The Prudential Insurance Company of America
("Prudential"), the Company is obligated to enter into a definitive commitment
by January 31, 2004 to replace or refinance not less than $15 million of the
amounts under the Credit Facility on substantially similar terms and with a
maturity of not less than one year. Failure to do so would constitute an event
of default under the Note Agreement.
If the Company defaults under the Credit Facility or Note Agreement
(collectively, the "Facilities"), the respective lenders under those Facilities
have certain rights and remedies under those Facilities, and Fleet, in its
capacity as collateral agent, has obligations to such lenders and associated
rights with respect to the collateral, including certain rights to
administration, assembly and sale of collateral in connection with certain
defaults. Any default by the Company under the Facilities would likely have a
material adverse effect on its business, operations and financial condition.
Under the terms of the Facilities, the Company's ability to obtain additional
debt financing is limited. Moreover, since the Company and most of its domestic
subsidiaries have already granted security interests in most of their assets,
the Company's ability to obtain any additional debt financing may be limited.
The inability of the Company to obtain any necessary additional debt financing
would likely have a material adverse effect on its business, operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for
31
compliance with existing environmental laws or regulations, including
environmental remediation costs at both third-party sites and Company and
Congoleum-owned sites. The Company and Congoleum will continue to be required to
expend amounts in the future because of the nature of their prior activities at
their facilities, to comply with existing environmental laws, and those amounts
may be substantial. Although the Company and Congoleum expect that they would
have sufficient resources to fund any such liabilities, there is no certainty
that these amounts will not have a material adverse effect on their respective
financial positions because, as a result of environmental requirements becoming
increasingly strict, neither the Company nor Congoleum is able to determine the
ultimate cost of compliance with environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims (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 or
Congoleum, as applicable, is unable to successfully defend against or settle
these matters and its insurance coverage is insufficient to satisfy any
judgments against it or settlements relating to these matters or the Company or
Congoleum, as applicable, is unable to collect insurance proceeds relating to
these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third-party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition.
32
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum'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 their pre-filing liabilities,
those competitors could have a cost competitive advantage over the Company or
Congoleum. In addition, in order to maintain their competitive positions, the
Company and Congoleum may need to make substantial investments in their
businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the
33
end users of their products. If the Company or Congoleum were to realize an
unexpected, significant and prolonged disruption of its operations at any of its
facilities, including disruptions in its manufacturing operations, it could
result in shipment delays of its products, depletion of its inventory as a
result of reduced production and increased production costs as a result of
taking actions in an attempt to cure the disruption or carry on its business
while the disruption remains. Any resulting delay, depletion or increased
production cost could result in increased costs, lower revenues and damaged
customer and product end user relations, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape and flooring divisions principally sell their products
through distributors. Sales to five unaffiliated customers accounted for
approximately 25% of the Company's tape division's net sales for the year ended
December 31, 2002 and 27% of its net sales for the year ended December 31, 2001.
The loss of two or more of those customers could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. While most of Congoleum's distributors have marketed
Congoleum's products for many years, replacements are necessary periodically to
maintain the strength of Congoleum's distribution network. Although Congoleum
has more than one distributor in some of its distribution territories and
actively manages its credit exposure to its distributors, the loss of a major
distributor could have a materially adverse impact on the Company's business,
results of operations, and financial condition. Congoleum derives a significant
percentage of its sales from two of its distributors. These two distributors
accounted for approximately 59% of Congoleum's net sales for the year ended
December 31, 2002 and 48% of Congoleum's net sales for the year ended December
31, 2001.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 75% of its
34
net sales for the year ended December 31, 2002 and 74% of its net sales for the
year ended December 31, 2001. The loss of K&M Associates L.P.'s largest customer
would likely have a material adverse effect on the Company's business, results
of operations and financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, the same persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, none of whom have an employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Item 3. Quantitative and Qualitative 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 interest rate market
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. The substantial majority of the Company's outstanding
consolidated long-term debt as of September 30, 2003 consisted of indebtedness
with a fixed rate of interest, which is not subject to change based upon changes
in prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe and the Far
East, giving rise to exposure to market risks from changes in foreign exchange
rates. Foreign currency exchange rate movements also affect the Company's
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors. For foreign currency
exposures existing at September 30, 2003, a 10% unfavorable movement in currency
exchange rates in the near term would not materially affect ABI's consolidated
operating results, financial position or cash flows.
The Company does not currently use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in interest rates, foreign currency exchange rates, commodity prices or
equity prices and does not hold any instruments for trading purposes.
Item 4: Controls and Procedures
a) Evaluation of disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
35
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, our disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to our Chief Executive Officer
and Chief Financial Officer by others within those entities, particularly
during the period in which this report was being prepared, and (2)
effective, in that they provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or were reasonably likely to materially affect, the
Company's internal control over financial reporting.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note G "Commitments and Contingencies" and Note H
"Congoleum Asbestos Liabilities and Planned Reorganization" of the Notes to
Unaudited Consolidated Condensed Financial Statements are incorporated herein by
reference.
Item 2. Changes in Securities and Use of Proceeds
Under the Company's credit agreements, the Company is subject to certain
financial covenants, including financial covenants relating to working capital,
which require the Company to meet certain financial measurements. In addition,
the Company's credit agreements contain restrictions on the payment of cash
dividends by the Company on its capital stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
3.1 Restated Certificate of Incorporation (2)
3.2 By-Laws, amended and restated as of March 13, 1991
(1)
4.1 Note Purchase and Private Shelf Agreement and
Facility Guarantee, dated as of August 28, 2001,
among American Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance Company of America (3)
4.2 Amendment No. 1 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
December 31, 2002, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America (3)
4.3 Amendment No. 2 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of March
31, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America (3)
4.4 Amendment No. 3 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of June
30, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America (3)
37
4.5 Amendment No. 4 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
October 14, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America (3)
4.6 Security Agreement, dated as of October 14, 2003,
among American Biltrite Inc., K&M Associates L.P.,
Fleet National Bank and the subsidiaries of
American Biltrite Inc. from time to time party
thereto (3)
4.7 Intercreditor and Collateral Agency Agreement,
dated as of October 14, 2003, by and among Fleet
National Bank, Citizens Bank of Massachusetts, The
Prudential Insurance Company of America and the
other banks from time to time party thereto and the
Acknowledgment of and Consent and Agreement to
Intercreditor and Collateral Agency Agreement by
American Biltrite Inc., K&M Associates L.P. and the
other American Biltrite Inc. guarantor subsidiaries
(3)
4.8 Guarantor Joinder Agreement, dated as of October
14, 2003, made by ABTRE, Inc., AIMPAR, Inc.,
American Biltrite Intellectual Properties, Inc.,
Ideal Tape Co., Inc., Majestic Jewelry, Inc., Ocean
State Jewelry, Inc. and 425 Dexter Associates, L.P.
in favor of The Prudential Insurance Company of
America (3)
10.1 Credit Agreement, dated as of October 14, 2003,
among American Biltrite Inc., K&M Associates L.P.,
Fleet National Bank and the other lenders party
thereto (3)
10.2 Security Agreement, dated as of October 14, 2003,
among American Biltrite Inc., K&M Associates L.P.,
Fleet National Bank and the subsidiaries of
American Biltrite Inc. from time to time party
thereto (3)
10.3 Intercreditor and Collateral Agency Agreement,
dated as of October 14, 2003, by and among Fleet
National Bank, Citizens Bank of Massachusetts, The
Prudential Insurance Company of America and the
other banks from time to time party thereto and the
Acknowledgment of and Consent and Agreement to
Intercreditor and Collateral Agency Agreement by
American Biltrite Inc., K&M Associates L.P. and the
other American Biltrite Inc. guarantor subsidiaries
(3)
38
10.4 Guarantee Agreement dated as of October 14, 2003,
among ABTRE, Inc., AIMPAR, Inc., American Biltrite
Intellectual Properties, Inc., Ideal Tape Co.,
Inc., Majestic Jewelry, Inc., Ocean State Jewelry,
Inc., 425 Dexter Associates, L.P. and Fleet
National Bank (3)
31.1 Certification of the Chief Executive Officer of the
Registrant Pursuant to Rule 13a-14(a)\Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 301 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer of the
Registrant Pursuant to Rule 13a-14(a)\Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 301 of the Sarbanes-Oxley Act of 2002.
32.1 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.
(1) Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
(2) Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(3) Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 17, 2003
(b) Reports on Form 8-K
On August 1, 2003, the Company filed a Current Report on Form 8-K dated
July 30, 2003 reporting under Item 5 that its majority-owned subsidiary
Congoleum Corporation had issued a press release on July 31, 2003
announcing that, as part of its strategy to resolve its asbestos
liabilities, it was seeking its bondholders' approval of certain
amendments to the indenture governing Congoleum Corporation's 8 5/8%
Senior Notes due 2008, and disclosing some of the expected terms of the
anticipated Congoleum Corporation pre-packaged Chapter 11 plan of
reorganization directly relating to the Company.
On August 14, 2003, the Registrant furnished a Current Form 8-K dated
August 12, 2003 reporting under Item 12 that the Company had issued a
press release dated August 12, 2003 announcing its financial results for
the fiscal quarter ended June 30, 2003.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: November 13, 2003 BY: /s/ Howard N. Feist III
------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
40
INDEX OF EXHIBITS
Exhibit No. Description
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation (2)
3.2 By-Laws, amended and restated as of
March 13, 1991(1)
4.1 Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated
as of August 28, 2001, among American
Biltrite Inc., K&M Associates L.P. and
The Prudential Insurance Company of
America (3)
4.2 Amendment No. 1 to Note Purchase and
Private Shelf Agreement and Facility
Guarantee, dated as of December 31,
2002, among American Biltrite Inc., K&M
Associates L.P. and The Prudential
Insurance Company of America (3)
4.3 Amendment No. 2 to Note Purchase and
Private Shelf Agreement and Facility
Guarantee, dated as of March 31, 2003,
among American Biltrite Inc., K&M
Associates L.P. and The Prudential
Insurance Company of America (3)
4.4 Amendment No. 3 to Note Purchase and
Private Shelf Agreement and Facility
Guarantee, dated as of June 30, 2003,
among American Biltrite Inc., K&M
Associates L.P. and The Prudential
Insurance Company of America (3)
4.5 Amendment No. 4 to Note Purchase and
Private Shelf Agreement and Facility
Guarantee, dated as of October 14, 2003,
among American Biltrite Inc., K&M
Associates L.P. and The Prudential
Insurance Company of America (3)
4.6 Security Agreement, dated as of October
14, 2003, among American Biltrite Inc.,
K&M Associates L.P., Fleet National Bank
and the subsidiaries of American
Biltrite Inc. from time to time party
thereto (3)
41
4.7 Intercreditor and Collateral Agency
Agreement, dated as of October 14, 2003,
by and among Fleet National Bank,
Citizens Bank of Massachusetts, The
Prudential Insurance Company of America
and the other banks from time to time
party thereto and the Acknowledgment of
and Consent and Agreement to
Intercreditor and Collateral Agency
Agreement by American Biltrite Inc., K&M
Associates L.P. and the other American
Biltrite Inc. guarantor subsidiaries (3)
4.8 Guarantor Joinder Agreement, dated as of
October 14, 2003, made by ABTRE, Inc.,
AIMPAR, Inc., American Biltrite
Intellectual Properties, Inc., Ideal
Tape Co., Inc., Majestic Jewelry, Inc.,
Ocean State Jewelry, Inc. and 425 Dexter
Associates, L.P. in favor of The
Prudential Insurance Company of America
(3)
10.1 Credit Agreement, dated as of October
14, 2003, among American Biltrite Inc.,
K&M Associates L.P., Fleet National Bank
and the other lenders party thereto (3)
10.2 Security Agreement, dated as of October
14, 2003, among American Biltrite Inc.,
K&M Associates L.P., Fleet National Bank
and the subsidiaries of American
Biltrite Inc. from time to time party
thereto (3)
10.3 Intercreditor and Collateral Agency
Agreement, dated as of October 14, 2003,
by and among Fleet National Bank,
Citizens Bank of Massachusetts, The
Prudential Insurance Company of America
and the other banks from time to time
party thereto and the Acknowledgment of
and Consent and Agreement to
Intercreditor and Collateral Agency
Agreement by American Biltrite Inc., K&M
Associates L.P. and the other American
Biltrite Inc. guarantor subsidiaries (3)
42
10.4 Guarantee Agreement dated as of October
14, 2003, among ABTRE, Inc., AIMPAR,
Inc., American Biltrite Intellectual
Properties, Inc., Ideal Tape Co., Inc.,
Majestic Jewelry, Inc., Ocean State
Jewelry, Inc., 425 Dexter Associates,
L.P. and Fleet National Bank (3)
31.1 Certification of Chief Executive Officer
of the Registrant Pursuant to Rule
13a-14(a)\Rule 15d-14(a) of the
Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section
301 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer
of the Registrant Pursuant to Rule
13a-14(a)\Rule 15d-14(a) of the
Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section
301 of the Sarbanes-Oxley Act of 2002.
32.1 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.
(1) Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
(2) Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(3) Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 17, 2003
43