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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0398678
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Class A Common Stock, par value $.01 per share American Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
1
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES |_| NO |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of June 30, 2003, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $2.6
million based on the closing price ($0.75 per share) on the American Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant, American Biltrite Inc. and
Hillside Capital Incorporated. All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant. As of March 15, 2004, an
aggregate of 3,651,190 shares of Class A Common Stock and an aggregate of
4,608,945 shares of Class B Common Stock of the Registrant were outstanding.
Part III DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Congoleum Corporation's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 10, 2004, which will be filed with the
Securities and Exchange within 120 days after December 31, 2003, are
incorporated by Reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS Page
----------------- ----
PART 1
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 71
ITEM 9A. CONTROLS AND PROCEDURES 71
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 71
ITEM 11. EXECUTIVE COMPENSATION 71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 72
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 72
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 72
INDEX TO EXHIBITS 77
SIGNATURES 76
3
PART I
Item 1. BUSINESS
Factors That May Affect Future Results
Some of the information presented in or incorporated by reference in this
report constitutes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks,
uncertainties and assumptions. These forward-looking statements are based on the
Company's expectations, as of the date of this report, of future events, and the
Company undertakes no obligation to update any of these forward-looking
statements. Although the Company believes that these expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements. Factors that could cause or
contribute to the Company's actual results differing from its expectations
include those factors discussed elsewhere in this report, including in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," and in the Company's other filings with the Securities and
Exchange Commission.
General
Congoleum Corporation (the "Company" or "Congoleum") was incorporated in
Delaware in 1986, but traces its history in the flooring business back to Nairn
Linoleum Co., which began in 1886.
Congoleum produces both sheet and tile floor covering products with a wide
variety of product features, designs and colors. Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible
felt, printing a design on the gel, applying a wear layer, heating the gel layer
sufficiently to cause it to expand into a cushioned foam and, in some products,
adding a urethane coating. The Company also produces through-chip-inlaid
products for both residential and commercial markets. These products are
produced by applying an adhesive coat and solid vinyl colored chips to a felt
backing and laminating the sheet under pressure with a heated drum. Tile
flooring is manufactured by creating a base stock (consisting primarily of
limestone and vinyl resin) which is less flexible than the backings for sheet
flooring, and transferring or laminating to it preprinted colors and designs
followed by a wear layer and, in some cases, a urethane coating. Commercial tile
is manufactured by including colored vinyl chips in the pigmented base stock.
For do-it-yourself tile, an adhesive is applied to the back of the tile. The
differences between products within each of the two product lines consist
primarily of content and thickness of wear layers and coatings, the use of
chemical embossing to impart a texture, the complexity of designs and the number
of colors. Congoleum also purchases sundries and accessory products for resale.
4
Congoleum's products serve both the residential and commercial
hard-surface flooring markets, and are used in remodeling, manufactured housing,
new construction and commercial applications. These products, together with a
limited quantity of related products purchased for resale, are sold primarily to
wholesale distributors and major retailers in the United States and Canada.
Based upon the nature of the Company's operations, facilities and management
structure, the Company considers its business to constitute a single segment for
financial reporting purposes.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524),
seeking relief under Chapter 11 of the United States Bankruptcy Code, as a means
to resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization and in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court. The
Bankruptcy Court has not yet scheduled a hearing to consider approval of the
proposed plan. See Notes 1 and 16 of the Notes to Consolidated Financial
Statements, which are contained in Item 8 of this Annual Report on Form 10-K.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to these reports filed with or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
free of charge through its Web site (www.congoleum.com), as soon as reasonably
practical after electronically filed with, or otherwise furnished to, the
Securities and Exchange Commission. The Company's code of ethics is also posted
on its website or may be obtained without charge by sending a written request to
Mr. Howard N. Feist III of the Company at its office at 3500 Quakerbridge Road,
P.O. Box 3127, Mercerville, NJ 08619. Amendments to, or waivers of, the code of
ethics, if any, that relate to the Chief Executive Officer, Chief Financial
Officer, Chief Accounting Officer or other persons performing such function,
will also be posted on the website.
As a result of the filing of its Bankruptcy case, the Company is required
to file periodically with the Bankruptcy Court certain financial information on
an unconsolidated basis for itself and two subsidiaries. This information
includes Statements of Financial Affairs, schedules and certain monthly
operating reports (in forms prescribed by the Federal Rules of Bankruptcy
Procedure). The Debtors' informational filings with the Bankruptcy Court,
including the Statements of Financial Affairs, Schedules and monthly operating
reports (collectively, the "Reports"), are available to the public at the office
of the Clerk of the Bankruptcy Court, Clarkson S. Fisher U.S. Courthouse, 402
East State Street, Trenton, NJ, 08608. Certain of the Reports may be viewed at
www.njb.uscourts.gov (Case No. 03-51524).
5
The Company is furnishing the information set forth above for convenience
of reference only. The Company cautions that the information contained in the
Reports is or will be unaudited and subject to change and not prepared in
accordance with generally accepted accounting principles or for the purpose of
providing the basis for an investment decision relating to any of the securities
of the Company. In view of the inherent complexity of the matters that may be
involved in the Bankruptcy case, the Company does not undertake any obligation
to make any further public announcement with respect to any Reports that may be
filed with the Bankruptcy Court or the matters referred to therein.
Raw Materials
The principal raw materials used in the manufacture of sheet and tile
flooring are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print paper. Most of these raw
materials are purchased from multiple sources. Although the Company has
generally not had difficulty in obtaining its requirements for these materials,
it has occasionally experienced significant price increases for some of these
materials.
The Company believes that alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print film, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of certain products. The Company maintains a raw material inventory
and continually looks to develop new sources, to provide continuity of supply
for its raw material requirements.
Patents and Trademarks
The Company believes that the Congoleum brand name, as well as the other
trademarks it holds, are important to maintaining competitive position.
The Company also believes that patents and know-how play an important role
in furthering and maintaining competitive position. In particular, the Company
utilizes a proprietary transfer printing process for certain tile products that
it believes produces visual effects that only one competitor is presently able
to duplicate.
Distribution
The Company currently sells its products through approximately 17
distributors providing approximately 53 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Net sales to customers in the United States for the years ended December 31,
2003, 2002 and 2001 totaled $211.8 million, $228.5 million and $210.7 million,
respectively, with net sales to customers outside the United States for the
years ended December 31, 2003, 2002, and 2001 totaling $8.9 million, $8.7
million, and $8.1 million, respectively.
6
The sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October. See Note 20 of the Notes
to the Consolidated Financial Statements, which are incorporated herein by
reference, for a comparison of quarterly operating results for the years ended
December 31, 2003 and 2002. Orders are generally shipped as soon as a truckload
quantity has been accumulated, and backorders can be canceled without penalty.
At December 31, 2003, the backlog of unshipped orders was $6.3 million, compared
to $5.5 million at December 31, 2002.
The Company considers its distribution network very important to
maintaining competitive position. Although the Company has more than one
distributor in some of its distribution territories and actively manages its
credit exposure to its customers, the loss of a major customer could have a
materially adverse impact on the Company's sales, at least until a suitable
replacement was in place. For the year ended December 31, 2003, two customers
each accounted for over 10% of the Company's sales. These customers were its
distributor to the manufactured housing market, LaSalle-Bristol Corporation, and
its retail market distributor, Mohawk Industries, Inc. Together, they accounted
for approximately 65% of the Company's net sales in 2003.
Working Capital
The Company produces goods for inventory and sells on credit to customers.
Generally, the Company's distributors carry inventory as needed to meet local or
rapid delivery requirements. The Company's credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
Product Warranties
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of efforts to differentiate mid-
and high-end products through color, design and other attributes, the Company
offers enhanced warranties with respect to wear, moisture discoloration and
other performance characteristics, which increase with the selling price of such
products.
Competition
The market for the Company's products is highly competitive. Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. The Company believes, based upon its market research, that
purchase decisions are influenced primarily by fashion elements such as
7
design, color and style, durability, ease of maintenance, price and ease of
installation. Both tile and sheet resilient flooring are easy to replace for
repair and redecoration and, in the Company's view, have advantages over other
floor covering products in terms of both price and ease of installation and
maintenance.
The Company encounters competition from three other manufacturers in North
America and, to a lesser extent, foreign manufacturers. In the resilient
category, Armstrong World Industries, Inc. may be considered to have the largest
market share. Some of the Company's competitors have substantially greater
financial and other resources and access to capital than the Company.
Research and Development
The Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise in
the manufacturing process. Expenditures for research and development for the
year ended December 31, 2003 were $3.1 million, compared to $3.5 million and
$3.5 million for the years ended December 31, 2002 and 2001, respectively.
Environmental Regulation
Due to the nature of the Company's business and certain of the substances
which are or have been used, produced or discharged by the Company, the
Company's operations are subject to extensive federal, state and local laws and
regulations relating to the generation, storage, disposal, handling, emission,
transportation and discharge into the environment of hazardous substances. The
Company, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility under New Jersey's Environmental Clean-up
Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act.
The Company does not anticipate that the additional costs of these measures will
be significant. The Company also agreed to be financially responsible for any
cleanup measures required at its Trenton tile facility when that facility was
acquired in 1993. In 2003, the Company incurred capital expenditures of
approximately $1.2 million for environmental compliance and control facilities.
The Company has also budgeted $1.0 million in 2004 for planned spending on
environmental compliance and control.
The Company has historically expended substantial amounts for compliance
with existing environmental laws and regulations, including those matters
described above. The Company will continue to be required to expend amounts in
the future for costs related to prior activities at its facilities and third
party sites and for ongoing costs to comply with existing environmental laws,
and those amounts may be substantial. Because environmental requirements have
grown increasingly strict, the outcome of these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of the Company.
8
Employees
At December 31, 2003, the Company employed a total of 921 personnel,
compared to 1,064 employees at December 31, 2002.
The Company has entered into collective bargaining agreements with hourly
employees at three of its plants and with the drivers of the trucks that provide
interplant transportation. These agreements cover approximately 550 of the
Company's employees. The Trenton tile plant has a five-year collective
bargaining agreement, which expires in May 2008. The Marcus Hook plant has a
five-year collective bargaining agreement which expires in November 2008. This
agreement is with the United Steelworkers of America. Marcus Hook also has a
five-year collective bargaining agreement with the Teamsters Union which expires
in January 2009. The Finksburg plant has no union affiliation. In the past five
years, there have been no strikes by employees of the Company and the Company
believes that its employee relations are satisfactory.
Item 2. PROPERTIES
The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, as well as storage space in Trenton, New Jersey, which
are described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Trenton, NJ Leased Warehousing 111,314
Mercerville, NJ Leased Corporate Offices 55,092
The Finksburg facility consists primarily of a 16-foot wide felt
production line.
The Marcus Hook facility is capable of manufacturing rotogravure printed
sheet flooring in widths of up to 16 feet. Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.
The Trenton sheet facility is capable of manufacturing rotogravure printed
and through-chip inlaid sheet products in widths up to 6 feet. Major production
lines, all six-foot wide, include an oven, a rotary laminating line and a press.
The examination, packing and warehousing of all sheet products (except products
for the manufactured housing market) occur at the Trenton plant distribution
center.
9
The Trenton tile facility consists of three major production lines, a
four-foot wide commercial tile line, a two-foot wide residential tile line and a
one-foot wide residential tile line.
Productive capacity and extent of utilization of the Company's facilities
are dependent on a number of factors, including the size, construction, and
quantity of product being manufactured, some of which also dictate which
production line(s) must be utilized to make a given product. The Company's major
production lines were operated an average of 88% of the hours available on a
five-day, three-shift basis in 2003, with the corresponding figure for
individual production lines ranging from 36% to 105%.
Although many of the Company's manufacturing facilities have been
substantially depreciated for financial reporting purposes, the Company has
generally maintained and improved the productive capacity of these facilities
over time through a program of regular capital expenditures. The Company
considers its manufacturing facilities to be adequate for its present and
anticipated near-term production needs.
Item 3. LEGAL PROCEEDINGS
Bankruptcy proceedings and Asbestos-Related Liabilities: On December 31,
2003, Congoleum filed a voluntary petition with the United States Bankruptcy
Court for the District of New Jersey (Case No. 03-51524) seeking relief under
Chapter 11 of the United States Bankruptcy Code, as a means to resolve claims
asserted against it related to the use of asbestos in its products decades ago.
During 2003, Congoleum obtained the asbestos personal injury claimant votes
necessary for approval of a proposed pre-packaged Chapter 11 plan of
reorganization and in January 2004 filed its pre-packaged plan of reorganization
and disclosure statement with the court. The Bankruptcy Court has not yet
scheduled a hearing to consider approval of the proposed plan. Congoleum is also
involved in litigation with certain insurance carriers related to disputed
insurance coverage for asbestos related liabilities, and certain insurance
carriers have filed various objections to Congoleum's plan of reorganization and
related matters. See Notes 1 and 16 of the Notes to Consolidated Financial
Statements, which are contained in Item 8 of this Annual Report on Form 10-K.
Environmental Liabilities: The Company is named, together with a large
number (in most cases, hundreds) of other companies, as a potentially
responsible party ("PRP") in pending proceedings under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), as amended,
and similar state laws. In four instances, although not named as a PRP, the
Company has received a request for information. These pending proceedings
currently relate to four disposal sites in New Jersey, Pennsylvania, Maryland
and Connecticut in which recovery from generators of hazardous substances is
sought for the cost of cleaning up the contaminated waste sites. The Company's
ultimate liability and funding exposure in connection with those sites depends
on many factors, including the volume of material contributed to the site, the
number of other PRPs and their financial viability, the remediation methods and
technology to be used and the extent to which costs may be recoverable from
insurance. However, under CERCLA, and certain other laws, as a PRP, the Company
can be held jointly and severally liable for all environmental costs associated
with a site.
10
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 81 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998; however, the groundwater remediation phase has not begun
and the remedial investigation/feasibility study related to the groundwater
remediation has not been approved. The PRP group estimated that future costs of
groundwater remediation, based on engineering and consultant studies conducted,
would be approximately $26 million. Congoleum's proportionate share, based on
waste disposed at the site, is estimated to be approximately 5.8%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities for clean-up and removal activities arising from
operating manufacturing plants in New Jersey. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.
The Company anticipates that these matters will be resolved over a period
of years and that after application of expected insurance recoveries, funding
the costs will not have a material adverse impact on the Company's liquidity or
financial position.
Other: In the ordinary course of its business, the Company becomes
involved in lawsuits, administrative proceedings, product liability claims, and
other matters. In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts and the matters may remain unresolved
for several years.
The total balances of environmental, asbestos-related, and other
liabilities and the related insurance receivables deemed probable of recovery at
December 31 are as follows:
2003 2002
---- ----
- ----------------------------------------------------------------------------------------------------
(in millions) Liability Receivable Liability Receivable
- ----------------------------------------------------------------------------------------------------
Environmental liabilities $ 5.3 $ 2.7 $ 5.2 $ 2.0
Asbestos product liability(1) 9.8 3.6 21.3 --
Other 1.0 0.1 1.0 0.2
- ----------------------------------------------------------------------------------------------------
Total $16.1 $ 6.4 $27.5 $ 2.2
- ----------------------------------------------------------------------------------------------------
(1) The asbestos product liability at December 31, 2003 and 2002 reflects
the estimated cost to settle asbestos liabilities through a pre-packaged plan of
reorganization under Chapter 11. Actual liability pursuant to settlement
agreements is in excess of $491 million. See Note 16 of Notes to Consolidated
Financial Statements.
11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Class A common stock is listed on the American Stock
Exchange under the symbol CGM. The following table reflects the high and low
closing prices (rounded to the nearest one-hundredth) based on American Stock
Exchange trading over the past two years.
2003 High Low
- -------------------------------------------------------------------
First Quarter $0.51 $0.23
Second Quarter 0.80 0.44
Third Quarter 0.80 0.56
Fourth Quarter 0.94 0.50
2002 High Low
- -------------------------------------------------------------------
First Quarter $2.40 $1.80
Second Quarter 3.30 2.08
Third Quarter 2.25 1.42
Fourth Quarter 1.50 0.35
The Company does not anticipate paying any cash dividends prior to
confirmation of a plan of reorganization or in the foreseeable future
thereafter. Any change in the Company's dividend policy after confirmation of a
plan of reorganization will be within the discretion of the Board of Directors,
subject to restrictions contained in the Company's plan of reorganization and
debt or other agreements, and will depend, among other things, on the Company's
solvency, earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant.
The number of registered and beneficial holders of the Company's Class A
common stock on February 25, 2004 was approximately 1,000.
13
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2003:
Number of Securities
Number of Remaining
Securities to Available For
be Issued Upon Weighted Average Future Issuance
Exercise of Exercise Price Under Equity
Outstanding Of Outstanding Compensation Plans
Options, Warrants Options, Warrants (excluding securities
Plan Category And Rights and Rights reflected in column A)
------------- ---------- ---------- ----------------------
(A) (B) (C)
Equity compensation plans
approved by security holders 652,500 $1.99 145,500
Equity compensation plans not
approved by security holders 15,500 $2.17 34,500
------- -------
Total 668,000 $1.99 180,000
======= =======
On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase up to
50,000 shares of the Company's Class A common stock. The 1999 Plan did not
require or receive stockholder approval. The Options granted under the 1999 Plan
have ten-year terms and vest six months from the grant date. The exercise price
for each Option is the fair market value on the date of the grant. As of
December 31, 2003, an aggregate of 140,300 shares of common stock were issuable
upon the exercise of outstanding Options.
14
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
For the years ended December 31,
- ----------------------------------------------------------------------------------------------------------
2003 2002(1) 2001(1) 2000(1) 1999(1)
- ----------------------------------------------------------------------------------------------------------
Consolidated Statement of
Operations Data:
Net sales ............................... $ 220,706 $ 237,206 $ 218,760 $ 219,575 $ 242,654
Cost of sales ........................... 166,864 179,699 165,683 170,373 176,559
Selling, general and
administrative expenses Expenses ...... 56,911 70,119 48,952 49,326 54,076
Distributor transition expenses ......... -- -- -- 7,717 --
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations ........... (3,069) (12,612) 4,125 (7,841) 12,019
Interest expense, net ................... (8,843) (8,112) (7,591) (5,714) (6,101)
Other income, net ....................... 1,276 1,543 1,320 1,450 1,729
- ----------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting
change ................................ (10,636) (19,181) (2,146) (12,105) 7,647
Provision (benefit) for income taxes .... (3,874) 92 (506) (3,976) 2,719
- ----------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change .................. (6,762) (19,273) (1,640) (8,129) 4,928
Cumulative effect of accounting
change ................................ -- (10,523) -- -- --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) ....................... $ (6,762) $ (29,796) $ (1,640) $ (8,129) $ 4,928
- ----------------------------------------------------------------------------------------------------------
Income (loss) per common share before
Cumulative effect of accounting
change .............................. $ (0.82) $ (2.33) $ (0.20) $ (0.98) $ 0.57
Cumulative effect of accounting
change .............................. -- (1.27) -- -- --
Net income (loss) per common
share, basic and diluted .............. $ (0.82) $ (3.60) $ (0.20) $ (0.98) $ 0.57
- ----------------------------------------------------------------------------------------------------------
Average shares outstanding .............. 8,260 8,260 8,260 8,267 8,699
- ----------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
Data (at end of period):
Total assets ............................ $ 175,899 $ 203,991 $ 265,413 $ 238,662 $ 231,817
Total long-term debt .................... 99,773 99,724 99,674 99,625 99,575
Stockholders' equity (deficit) .......... (25,777) (16,078) 25,054 29,310 40,130
15
Note 1: The impact of the adoption of Statement of Financial Accounting
Standards No.142 ("SFAS No. 142"), on the Company's financial statements
resulted in the elimination of $0.4 million of goodwill amortization expense, or
$0.05 per share, for the twelve months ended December 31, 2002. Had SFAS 142
been adopted in 2001, 2000, and 1999, the impact would have been the elimination
of $0.4 million of goodwill amortization expense, or $0.05 per share, for each
of the years.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained in Item 8 of this
Annual Report on Form 10-K.
Results of Operations
The Company's business is cyclical and is affected by the same economic
factors that affect the remodeling and housing industries in general, including
the availability of credit, consumer confidence, changes in interest rates,
market demand and general economic conditions.
In addition to external economic factors, the Company's results are
sensitive to sales and manufacturing volume, competitors' pricing, consumer
preferences for flooring products, raw material costs and the mix of products
sold. The manufacturing process is capital intensive and requires substantial
investment in facilities and equipment. The cost of operating these facilities
generally does not vary in direct proportion to production volume and,
consequently, operating results fluctuate disproportionately with changes in
sales volume.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the United States Bankruptcy Code, as a means
to resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the court. The Bankruptcy Court has
not yet scheduled a hearing to consider approval of the proposed plan. Congoleum
is also involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers have filed various objections to Congoleum's plan of
reorganization and related matters.
The pre-packaged plan, if confirmed, would leave non-asbestos creditors
unimpaired and would resolve all pending and future asbestos claims against the
Company. The plan of reorganization would provide for, among other things, an
assignment of certain rights in, and proceeds of, Congoleum's applicable
insurance to a trust that would fund the settlement of all pending and future
asbestos claims and protect the Company from future asbestos-related litigation
by channeling all asbestos claims to the trust under Section 524(g) of the
Bankruptcy Code. Other creditors would be unimpaired under the plan. The
Bankruptcy Court has authorized the Company to pay trade creditors in the
ordinary course of business. The Company expects that it will take most of 2004
to obtain confirmation of its plan.
17
Based on its pre-packaged bankruptcy strategy, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded charges of $17.3 million in the fourth
quarter of 2002 and an additional $3.7 million in the fourth quarter of 2003 to
provide for the estimated minimum costs of completing its reorganization. Actual
amounts that will be contributed to the plan trust and costs for pursuing and
implementing the plan of reorganization could be materially higher if the
Company is not successful in obtaining confirmation of the pre-packaged plan of
reorganization in a timely manner. The maximum amount potentially available to
settle asbestos liabilities is the going concern or liquidation value of the
Company.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Notes 1 and 16 of the Notes to
Consolidated Financial Statements contained in Item 8 of this Annual Report on
Form 10-K. In addition, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors that May Affect
Future Results - The Company has significant asbestos liability and funding
exposure, and its proposed pre-packaged plan of reorganization may not be
confirmed" for a discussion of certain factors that could cause actual results
to differ from the Company's goals for resolving its asbestos liability through
the proposed plan of reorganization.
Year ended December 31, 2003 as compared to year ended December 31, 2002
Net sales for the year ended December 31, 2003 were $220.7 million as
compared to $237.2 million for the year ended December 31, 2002, a decrease of
$16.5 million or 7%. The decrease resulted primarily from lower sales in the
do-it-yourself tile category coupled with continued weakness in the Manufactured
Housing market. Improved resilient sheet volume, particularly in base-grade and
trade-up builder products, coupled with a price increase and lower sales
allowances, helped to partially mitigate the sales decline.
Gross profit for the year ended December 31, 2003 totaled $53.8 million,
or 24.4% of sales, compared to $57.5 million, or 24.2% of sales, for the year
ended December 31, 2002. Gross margins improved slightly as improved pricing,
manufacturing efficiencies and cost reduction programs helped offset raw
material cost increases.
Selling, general and administrative expenses were $56.9 million for the
year ended December 31, 2003 as compared to $70.1 million for the year ended
December 31, 2002, a decrease of $13.2 million. Selling, general and
administrative expenses for 2003 and 2002 included $3.7 million and $17.3
million of cost associated with asbestos-related claims, respectively. As a
percent of net sales, selling, general and administrative expenses were 25.8%
and 29.6% for the years ended December 31, 2003 and 2002, respectively. During
2003, cost savings initiatives were implemented that helped offset increases in
pension, medical and other related costs.
18
The Company recorded a charge of $3.7 million during the fourth quarter of
2003, included in selling, general, and administrative expenses, to increase its
recorded liability for resolving asbestos-related claims. The recorded liability
at December 31, 2003 represents the minimum estimated cost that the Company will
incur to resolve its asbestos-related liability through the execution of the
Company's proposed plan of reorganization. If the Company is not successful in
obtaining confirmation of its proposed plan of reorganization in a timely
manner, actual costs could be significantly higher. The proposed plan also would
require the Company to make an additional contribution to the plan trust one
year after confirmation of the plan equal to 51% of any increase in the market
value of the Company's shares at that time over their value on June 6, 2003. No
provision has been made for the cost of this possible additional contribution,
which could be material. The Company will adjust its recorded liability should
its estimates change.
The loss from operations was $3.1 million for the year ended December 31,
2003 compared to a loss of $12.6 million for the year ended December 31, 2002,
an improvement of $9.5 million. This smaller loss from operations was primarily
due to the lower asbestos-related charge, offset by lower gross margin dollars.
Interest income declined from $0.3 million in 2002 to $0.1 million in 2003
due to lower average cash equivalent and short-term investment balances.
Interest expense increased from $8.4 million in 2002 to $8.9 million in 2003,
reflecting increased borrowings under the revolver. The Company recorded a tax
benefit of $3.9 million on a loss before income taxes of $10.6 million in 2003
as a result of utilizing certain loss carry forwards that had previously been
fully reserved.
Year ended December 31, 2002 as compared to year ended December 31, 2001
Net sales for the year ended December 31, 2002 were $237.2 million as
compared to $218.8 million for the year ended December 31, 2001, an increase of
$18.4 million or 8.4%. The increase resulted primarily from strong sales of the
DuraStone product line, which was introduced in August 2001, and improved
resilient sheet sales in both the base grade and trade up builder segment,
partially offset by lower luxury and contract tile sales.
Gross profit for the year ended December 31, 2002 was $57.5 million, or
24.2% of sales, compared to $53.1 million in 2001, or 24.3% of sales, an
increase of $4.4 million over the year ended December 31, 2001. Gross profit
margins declined slightly as costs of expanding sales and the product mix impact
of increased base grade builder product sales offset improved manufacturing
efficiencies and cost reduction programs.
Selling, general and administrative expenses were $70.1 million for the
year ended December 31, 2002, which includes asbestos-related costs of $17.3
million, as compared to $49.0 million for the year ended December 31, 2001, an
increase of $21.2 million or 43.2%. As a percent of net sales, selling, general
and administrative expenses were 29.6% and 22.4% for the years ended December
31, 2002 and 2001, respectively. In addition to the asbestos-related charge,
significant investments in additional displays and samples to support the
DuraStone product line and higher promotional support contributed to the
increase.
19
The Company recorded a charge of $17.3 million in the fourth quarter of
2002, included in selling, general and administrative expenses, to adjust its
recorded liability for resolving asbestos-related claims against it. The
recorded liability at December 31, 2002 represented the then-minimum estimated
cost that the Company would incur to resolve its asbestos-related liability
through a plan of reorganization.
Loss from operations was $12.6 million for the year ended December 31,
2002, compared to income of $4.1 million for the year ended December 31, 2001, a
decrease of $16.7 million. This change was primarily due to the asbestos charge.
Interest income declined from $0.7 million in 2001 to $0.3 million in 2002
due to a combination of lower average cash equivalent and short-term investment
balances and lower interest rates. Interest expense increased from $8.3 million
in 2001 to $8.4 million in 2002, due to lower capitalized interest in 2002
compared to 2001.
The Company recorded a tax provision of $92 thousand on a loss before
income taxes and the cumulative effect of accounting change of $19.2 million in
2002. The tax provision included a benefit from the reduction of $529 thousand
for a tax valuation allowance as a result of utilizing certain loss carry
forwards that had previously been fully reserved. This benefit was offset by an
additional provision for valuation allowance. For 2001, the effective tax rate
was 23.6%, resulting in a tax benefit of $506 thousand which included a
reduction for a tax valuation allowance of $273 thousand.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 provides that goodwill and
intangible assets with indefinite lives will not be amortized, but rather will
be tested for impairment on an annual basis. SFAS No. 142 was effective for the
Company as of January 1, 2002. During the first quarter of 2002, the Company
performed a transitional impairment test of goodwill in accordance with SFAS No.
142 and concluded that there was impairment. The Company compared the implied
fair value of goodwill to the carrying value of goodwill and it was determined
that based on the fair value of the Company's assets and liabilities, there
should be no goodwill recorded. Accordingly, the Company recorded an impairment
loss of $10.5 million during the first quarter of 2002, which has been recorded
as the cumulative effect of a change in accounting principle as of January 1,
2002.
During the fourth quarter of 2002, the Company recorded other
comprehensive expense of $11.3 million relating to the recognition of a minimum
pension liability. The Company reduced its assumed long-term rate of return on
pension plan assets from 9% to 7% and its discount rate from 7.25% to 6.75%.
20
Liquidity and Capital Resources
The consolidated financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, the
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern. As
described more fully in the Notes to the Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
The Company is a defendant in a large number of asbestos-related lawsuits
and on December 31, 2003 filed a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. See Notes 1 and 16 of the Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report on
Form 10-K. These matters will have a material adverse impact on liquidity and
capital resources. During 2003, the Company paid $5.3 million in defense and
indemnity costs related to asbestos-related claims and $13.5 million in fees and
expenses related to implementation of its planned reorganization under Chapter
11 and litigation with certain insurance companies. Congoleum expects to spend a
further $9.8 million at a minimum in fees, expenses, and trust contributions in
connection with obtaining confirmation of its plan. The Company also expects to
recover $3.6 million from the Collateral Trust or its successor pursuant to
terms of the Claimant Agreement and related documents which provide for the
trust to reimburse certain expenses of the Company. Timing of such recovery will
depend on when the trust receives funds from insurance settlements or other
sources.
Unrestricted cash and cash equivalents, including short-term investments
at December 31, 2003, were $2.2 million, a decrease of $16.1 million from
December 31, 2002. Under the terms of its revolving credit agreement, payments
on the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. Working capital was
$27.1 million at December 31, 2003, down from $28.8 million one year earlier.
The ratio of current assets to current liabilities at December 31, 2003 was 1.5
to one, compared to 1.4 to one a year earlier. The ratio of debt to total
capital at December 31, 2003 was .57 compared to .49 at December 31, 2002. Net
cash used by operations during the year ended December 31, 2003 was $20.0
million, as compared to cash provided by operations of $10.0 million in 2002.
Cash from operations decreased from 2002 to 2003 as funds were used to reduce
accounts payable and accrued expenses offset by lower inventories and accounts
receivables. Expenditures related to asbestos liabilities and the Company's
reorganization plan were $18.8 million in 2003, compared to $ 3.4 million in
2002, accounting for slightly more than half the decrease. The remainder of the
decrease was primarily due to a low level of manufacturing and shipment activity
at the end of 2003, combined with creditors managing their pre-petition credit
exposure, and the Company prepaying certain expenses, prior to its December 31,
2003 Chapter 11 filing. These accounts are not expected to remain at the
unusually low levels experienced at the end of 2003. Capital expenditures in
2003 totaled $4.6 million. The Company is currently planning capital
expenditures of approximately $6 million in 2004 and between $5 and $8 million
in 2005.
21
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing provides a one year revolving credit facility
with borrowings up to $30.0 million. Interest is based on .75% above the prime
rate. This financing agreement contains certain covenants which include the
maintenance of a minimum tangible net worth and EBITDA. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financial agreement must
be met in order for the Company to borrow from the facility. The Company was in
compliance with these covenants at December 31, 2003. Borrowings under this
facility are collateralized by inventory and receivables. At December 31, 2003,
based on the level of receivables and inventory, $22.4 million, was available
under the facility, of which $4.1 million was utilized for outstanding letters
of credit and $10.2 million was utilized by the revolving loan. The Company
anticipates that its debtor-in-possession financing facility will be replaced
with a revolving credit facility on substantially similar terms upon
confirmation of its plan of reorganization. While the Company expects the
facilities discussed above will provide it with sufficient liquidity, there can
be no assurances that it will continue to be in compliance with the required
covenants, that the Company will be able to obtain a similar or sufficient
facility upon exit from bankruptcy, or that the debtor-in-possession facility
would be renewed if the Company's plan of reorganization is not confirmed by
that facility's expiration on December 31, 2004.
In addition to the provision for asbestos litigation discussed previously,
the Company has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. The Company is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against the Company.
Among these claims, the Company is a named party in several actions associated
with waste disposal sites (more fully discussed in "Legal Proceedings" in Part
I, Item 3 and "Environmental Regulation" in Part I, Item 1). These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites and
certain of the Company's owned and previously owned facilities. The
contingencies also include claims for personal injury and/or property damage.
The exact amount of such future cost and timing of payments are indeterminable
due to such unknown factors as the magnitude of cleanup costs, the timing and
extent of the remedial actions that may be required, the determination of the
Company's liability in proportion to other potentially responsible parties, and
the extent to which costs may be recoverable from insurance. The Company has
recorded provisions in its financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While the
Company believes its estimate of the future amount of these liabilities is
reasonable, and that they will be paid over a period of five to ten years, the
timing and amount of such payments may differ significantly from the Company's
assumptions. Although the effect of future government regulation could have a
significant effect on the Company's costs, the Company is not aware of any
pending legislation which would reasonably have such an effect. There can be no
assurances that the costs of any future government regulations could be passed
along to its customers. Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.
22
The outcome of these environmental matters could result in significant
expenses incurred by or judgments assessed against the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. Although the
Company did not generate cash from operations in 2003 (as more fully discussed
above), the Company anticipates that it will generate cash from operations in
2004. The Company believes these sources will be adequate to fund working
capital requirements, debt service payments, planned capital expenditures for
the foreseeable future, and its current estimates for costs to settle and
resolve its asbestos liabilities through its pre-packaged Chapter 11 plan of
reorganization. The Company's inability to obtain confirmation of the proposed
plan in a timely manner would have a material adverse effect on the Company's
ability to fund its operating, investing and financing requirements.
The following table summarizes the Company's contractual obligations for
future principal payments on its debt and future minimum rental payments on its
non-cancelable operating leases at December 31, 2003. The Company does not have
payment obligations under capital leases or long term purchase contracts.
Payments Due by Period
(amounts in thousands)
- ---------------------------------------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Long-term debt $100,000 $ -- $ -- $100,000 $ --
Operating leases 11,644 2,762 4,091 3,158 1,633
- ---------------------------------------------------------------------------------------------------------
Total $111,644 $2,762 $4,091 $103,158 $1,633
=========================================================================================================
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's 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 making estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from these estimates under different assumptions or conditions.
23
Critical accounting policies are defined as those that entail significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes its most critical accounting policies upon which its financial
condition depends, and which involve the most complex or subjective decisions or
assessments, are those described below. For a discussion on the application of
these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
Asbestos Liabilities - As discussed in Notes 1 and 16 of the Notes to
Consolidated Financial Statements, the Company is a party to a significant
number of lawsuits stemming from its manufacture of asbestos-containing
products. During 2003, Congoleum obtained the asbestos personal injury claimant
votes necessary for approval of a proposed pre-packaged Chapter 11 plan of
reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the court. The Bankruptcy Court has
not yet scheduled a hearing to consider approval of the proposed plan. Congoleum
is also involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers have filed various objections to Congoleum's plan of
reorganization and related matters. The Company's estimated minimum gross
liability to cover settlements of current asbestos claims is $491 million, which
is substantially in excess of both the total assets of the Company as well as
the Company's previous estimates made in prior periods of the maximum liability
for both known and unasserted claims. While the Company purchased insurance
coverage it believes applies to these claims, some of the insurance carriers are
presently insolvent and the remaining solvent insurance carriers have disputed
their coverage obligations. The Company believes the ultimate amount of its
liability, and the amount of recoverable insurance, will be determined through
some combination of negotiation, litigation, and bankruptcy court order, but
that these amounts can no longer be reasonably estimated given all the
uncertainties that presently exist.
The Company expects that insurance will provide the vast majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of the Company
itself. The Company believes that it does not have the necessary financial
resources to litigate and/or settle asbestos claims in the ordinary course of
business.
In light of its bankruptcy filing and proposed plan of reorganization, the
Company believes the most meaningful measure of its probable loss due to
asbestos litigation is the amount it will have to contribute to the plan trust
plus the costs to effect the reorganization. The Company estimates the minimum
remaining costs to complete the reorganization process to be $9.8 million, which
it has recorded as a current liability. The Company also expects to recover $3.6
million from the Collateral Trust or its successor pursuant to terms of the
Claimant Agreement and related documents which provide for the trust to
reimburse certain expenses of the Company. Timing of such recovery will depend
on when the trust receives funds from insurance settlements or other sources.
The maximum amount of the range of possible asbestos loss is limited to the
going concern or liquidation value of the Company, an amount which the Company
believes is substantially less than the minimum estimated liability for the
known claims against it.
24
The Company will update its estimates, if appropriate, as additional
information becomes available during the reorganization process, resulting in
potentially material adjustments to the Company's earnings in future periods.
Inventories - Inventories are stated at the lower of cost or market. The
LIFO (last-in, first-out) method of determining cost is used for substantially
all inventories. The Company records as a charge to cost of goods sold any
amount required to reduce the carrying value of inventories to the net
realizable sales value.
Valuation of Deferred Tax Assets - The Company provides for valuation
reserves against its deferred tax assets in accordance with the requirements of
Statement of Financial Accounting Standards No.109. In evaluating the recovery
of deferred tax assets, the Company makes certain assumptions as to future
events such as the ability to generate future taxable income. At December 31,
2003, the Company has provided a 100% valuation allowance for its net deferred
tax assets.
Environmental Contingencies - As discussed previously, the Company has
incurred liabilities related to environmental remediation costs at both
third-party sites and Company-owned sites. Management has recorded both
liabilities and insurance receivables in its financial statements for its
estimate of costs and insurance recoveries for future remediation activities.
These estimates are based on certain assumptions such as the extent of cleanup
activities to be performed, the methods employed in the cleanup activities, the
Company's relative share in costs at sites where other parties are involved, and
the ultimate insurance coverage available. These projects tend to be long-term
in nature, and these assumptions are subject to refinement as facts change. As
such, it is possible that the Company may need to revise its recorded
liabilities and receivables for environmental costs in future periods resulting
in potentially material adjustments to the Company's earnings in future periods.
Pension Plans and Post-Retirement Benefits - The Company accounts for its
defined benefit pension plans in accordance with SFAS No. 87, "Employers'
Accounting for Pensions," which requires that amounts recognized in financial
statements be determined on an actuarial basis. As permitted by SFAS No. 87, the
Company uses a calculated value of the expected return on plan assets (which is
further described below). Under SFAS No. 87, the effects of the actual
performance of the pension plan's assets and changes in pension liability
discount rates on the Company's computation of pension income or expense are
amortized over future periods.
The most significant element in determining the Company's pension income
or expense in accordance with SFAS No. 87 is the expected return on plan assets.
For 2004, the Company has assumed that the expected long-term rate of return on
plan assets will be 7.0%. The assumed long-term rate of return on assets is
applied to the value of plan assets. This produces the expected return on plan
assets that is included in determining pension expense. The difference between
this expected return and the actual return on plan assets is deferred. The net
deferral of past asset gains or losses ($26.0 million at 12/31/03) will
ultimately be recognized as an adjustment to future pension expense.
25
At the end of each year, the Company determines the discount rate to be
used to calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the Company
looks to rates of return on high-quality, fixed-income investments that receive
one of the two highest ratings given by a recognized ratings agency. At December
31, 2003, the Company determined this rate to be 6.25%.
The Company accounts for its post-retirement benefits other than pensions
in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions," which requires that amounts recognized in
financial statements be determined on a actuarial basis. These amounts are
projected based on the January 1, 2003 SFAS No. 106 valuation and the 2003
year-end disclosure assumptions, including a discount rate of 6.75% and health
care cost trend rates of 9% in 2004 reducing to an ultimate rate of 5% in 2009.
Risk Factors That May Affect Future Results
The Company has significant asbestos liability and funding exposure, and its
proposed pre-packaged plan of reorganization may not be confirmed.
As more fully set forth in Notes 1 and 16 of the Notes to the Consolidated
Financial Statements, which are included in this report, the Company has
significant liability and funding exposure for asbestos claims. The Company has
entered into settlement agreements with various asbestos claimants totaling $491
million. Satisfaction of this obligation pursuant to the terms of the
pre-packaged plan is dependent on a determination by the Bankruptcy Court that
the plan has satisfied certain criteria under the Bankruptcy Code, among other
things.
There can be no assurance that the Company will be successful in obtaining
confirmation of its pre-packaged plan in a timely manner or at all, and any
alternative plan of reorganization pursued by the Company or confirmed by the
Bankruptcy Court could vary significantly from the description in this report
(including descriptions incorporated by reference in this report). Furthermore,
the estimated costs and contributions to effect the contemplated plan of
reorganization or an alternative plan could be significantly greater than
currently estimated. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court approvals, and there can be no assurance that such conditions,
approvals and other requirements will be satisfied or obtained.
Some additional factors that could cause actual results to differ from the
Company's goals for resolving its asbestos liability through the prepackaged
plan of reorganization bankruptcy filing include: (i) the future cost and timing
of estimated asbestos liabilities and payments and availability of insurance
coverage and reimbursement from insurance companies, which underwrote the
applicable insurance policies for the Company for asbestos-related claims and
other costs relating to the execution and implementation of any plan of
reorganization pursued by the Company, (ii) timely reaching agreement with other
creditors, or classes of creditors, that exist or may emerge, (iii) satisfaction
of the conditions and obligations under the Company's outstanding debt
instruments, (iv) the response from time-to-time of the Company's and its
26
controlling shareholder's, American Biltrite Inc.'s, lenders, customers,
suppliers and other constituencies to the ongoing process arising from the
Company's strategy to settle its asbestos liability, (v) the Company's ability
to maintain debtor-in-possession financing sufficient to provide it with funding
that may be needed during the pendency of its Chapter 11 case and to obtain exit
financing sufficient to provide it with funding that may be needed for its
operations after emerging from the bankruptcy process, in each case, on
reasonable terms, (vi) timely obtaining sufficient creditor and court approval
of any reorganization plan pursued by it, (vii) developments in and the outcome
of insurance coverage litigation pending in New Jersey State Court involving
Congoleum, ABI, and certain insurers, and (viii) compliance with the Bankruptcy
Code, including section 524(g). In any event, if the Company is not successful
in obtaining sufficient creditor and court approval of its pre-packaged plan of
reorganization, such failure would have a material adverse effect upon its
business, results of operations and 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 business, results of operations or
financial condition, or upon any plan of reorganization it may decide to pursue.
To date, the Company 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 the Company for amounts paid by the Company pursuant to its plan of
reorganization or requires the Company to pay significant amounts to any
national trust or otherwise, such legislation could have a material adverse
effect on the Company's business, results of operations and financial condition.
As a result of the Company's significant liability and funding exposure for
asbestos claims, there can be no assurance that if it were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company.
For further information regarding the Company's asbestos liability,
insurance coverage and strategy to resolve its asbestos liability, please see
Notes 1 and 16 of Notes to Consolidated Financial Statements, which are included
in this report.
The Company may incur substantial liability for environmental, product and
general liability claims in addition to asbestos-related claims, and its
insurance coverage and its likely recoverable insurance proceeds may be
substantially less than the liability incurred by the Company for these claims.
Environmental Liabilities. Due to the nature of the Company's business and
certain of the substances which are or have been used, produced or discharged by
the Company, the Company's operations are subject to extensive federal, state
and local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws or regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites. The Company will continue to be required to expend amounts in the future
for costs related to prior activities at its facilities and third party sites,
and for ongoing costs to comply with existing
27
environmental laws; such amounts may be substantial. There is no certainty that
these amounts will not have a material adverse effect on its business, results
of operations and financial condition because, as a result of environmental
requirements becoming increasingly strict, the Company is unable to determine
the ultimate cost of compliance with environmental laws and enforcement
policies. Moreover, in addition to potentially having to pay substantial amounts
for compliance, future environmental laws or regulations may require or cause
the Company to modify or curtail its operations, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Product and General Liabilities. In the ordinary course of its business,
the Company becomes involved in lawsuits, administrative proceedings, product
liability claims (in addition to asbestos-related claims) and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several years.
These matters could have a material adverse effect on the Company's business,
results of operations and financial condition if the Company is unable to
successfully defend against or settle these matters; its insurance coverage is
insufficient to satisfy unfavorable judgments or settlements relating to these
matters; or the Company is unable to collect insurance proceeds relating to
these matters.
The Company is dependent upon a continuous supply of raw materials from third
party suppliers and would be harmed if there were a significant, prolonged
disruption in supply or increase in its raw material costs.
The Company's business is dependent upon a continuous supply of raw
materials from third party suppliers. The principal raw materials used by the
Company in its manufacture of sheet and tile flooring are vinyl resins,
plasticizers, latex, limestone, stabilizers, cellulose paper fibers, urethane
and transfer print paper. The Company purchases most of these raw materials from
multiple sources. Although the Company has generally not had difficulty in
obtaining its requirements for these materials, it has occasionally experienced
significant price increases for some of these materials.
The Company believes that suitable alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products. In an attempt to protect against
this risk of loss of supply, the Company maintains a raw material inventory and
continually seeks to develop new sources which will provide continuity of supply
for its raw material requirements. However, there is no certainty that the
Company's maintenance of its raw material inventory or its ongoing efforts to
develop new sources of supply would be successful in avoiding a material adverse
effect on its business, results of operations and financial condition if it were
to realize an extended interruption in the supply of its raw materials.
In addition, the Company could incur significant increases in the costs of
its raw materials. Although the Company generally attempts to pass on increases
in the costs of its raw
28
materials to its customers, the Company's ability to do so is, to a large
extent, dependent upon the rate and magnitude of any increase, competitive
pressures and market conditions for its products. There have been in the past,
and may be in the future, periods of time during which increases in these costs
cannot be recovered. During those periods of time, there could be a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company operates in a highly competitive flooring industry and some of its
competitors have greater resources and broader distribution channels than the
Company.
The market for the Company's products is highly competitive. The Company
encounters competition from three other manufacturers in North America and, to a
much lesser extent, foreign manufacturers. Some of the Company's competitors
have greater financial and other resources and access to capital than the
Company. Furthermore, like the Company, one of the Company's major competitors
has sought protection under Chapter 11 of the Bankruptcy Code. When such
competitor emerges from bankruptcy as a continuing operating company it may have
shed much of its pre-filing liabilities and have a competitive cost advantage
over the Company as a result of having shed those liabilities. In addition, in
order to maintain its competitive position, the Company may need to make
substantial investments in its business, including its product development,
manufacturing facilities, distribution network and sales and marketing
activities. Competitive pressures may also result in decreased demand for the
Company's products and in the loss of the Company's market share for its
products. Moreover, due to the competitive nature of the Company's industry, the
Company may be commercially restricted from raising or even maintaining the
sales prices of its products, which could result in the Company incurring
significant operating losses if its expenses were to increase or otherwise
represent an increased percentage of the Company's sales.
The Company's business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.
The Company is subject to the effects of general economic conditions. A
sustained general economic slowdown could have serious negative consequences for
the Company's business, results of operations and financial condition. Moreover,
the Company's business is cyclical and is affected by the economic factors that
affect the remodeling and housing industries in general and the manufactured
housing industry specifically, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.
The Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.
The Company's business depends upon its ability to timely manufacture and
deliver products that meet the needs of its customers and the end users of the
Company's products. If the
29
Company were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of its efforts to differentiate
mid and high-end products through color, design and other attributes, the
Company offers enhanced warranties with respect to wear, moisture discoloration
and other performance characteristics which generally increase with the price of
such products. If the Company were to incur a significant number of warranty
claims, the resulting warranty costs could be substantial.
The Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor of the Company could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company currently sells its products through approximately 17
distributors providing approximately 53 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
The Company considers its distribution network very important to maintaining its
competitive position. Although the Company has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations and financial condition.
The Company derives a significant percentage of its sales from two of its
distributors, LaSalle-Bristol Corporation and Mohawk Industries, Inc.
LaSalle-Bristol Corporation serves as the Company's distributor in the
manufactured housing market, and Mohawk Industries, Inc. serves as a retail
market distributor of the Company. These two distributors accounted for 65% of
the Company's net sales for the twelve months ended December 31, 2003 and 59% of
the Company's net sales for the year ended December 31, 2002.
30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 90%
of the Company's outstanding long-term debt as of December 31, 2003 consisted of
indebtedness with a fixed rate of interest which is not subject to change based
upon changes in prevailing market interest rates. Under its current policies,
the Company does not use derivative financial instruments, derivative commodity
instruments or other financial instruments to manage its exposure to changes in
interest rates, foreign currency exchange rates, commodity prices or equity
prices and does not hold any instruments for trading purposes.
31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
December 31, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,169 $ 18,277
Restricted cash 1,757 --
Accounts receivable, less allowances
of $1,049 and $1,204 as of December 31, 2003 and 2002, respectively 13,560 17,034
Inventories 44,995 50,725
Prepaid expenses and other current assets 9,672 7,868
Deferred income taxes 8,752 7,901
- ----------------------------------------------------------------------------------------------------------
Total current assets 80,905 101,805
Property, plant, and equipment, net 87,035 93,556
Other assets, net 7,959 8,630
- ----------------------------------------------------------------------------------------------------------
Total assets $ 175,899 $ 203,991
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,544 $ 14,647
Accrued liabilities 24,655 33,021
Asbestos-related liabilities 9,819 21,295
Revolving Credit Loan 10,232 --
Accrued taxes 130 59
Deferred income taxes 4,376 3,954
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 53,756 72,976
Long-term debt 99,773 99,724
Accrued pension liability 24,032 22,932
Other liabilities 11,222 11,782
Deferred income taxes 4,376 3,947
Accrued postretirement benefit obligation 8,517 8,708
- ----------------------------------------------------------------------------------------------------------
Total liabilities 201,676 220,069
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950
shares issued and 3,651,190 outstanding as of December 31, 2003 and
2002, respectively 47 47
Class B common stock, par value $0.01; 4,608,945 shares authorized
Issued and outstanding at December 31, 2003 and 2002, respectively 46 46
Additional paid-in capital 49,105 49,105
Retained deficit (46,778) (40,016)
Accumulated other comprehensive loss (20,384) (17,447)
--------- ---------
(17,964) (8,265)
Less Class A common stock held in treasury, at cost; 1,085,760 shares at
December 31, 2003 and 2002, respectively 7,813 7,813
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (25,777) (16,078)
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 175,899 $ 203,991
==========================================================================================================
The accompanying notes are an integral part of the financial statements.
32
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the years ended
December 31,
2003 2002 2001
---- ---- ----
- -----------------------------------------------------------------------------------------------------------
Net sales ........................................................... $ 220,706 $ 237,206 $ 218,760
Cost of sales ....................................................... 166,864 179,699 165,683
Selling, general and administrative expenses ........................ 56,911 70,119 48,952
- -----------------------------------------------------------------------------------------------------------
(Loss) income from operations .............................. (3,069) (12,612) 4,125
Other income (expense):
Interest income ................................................ 63 263 708
Interest expense ............................................... (8,906) (8,375) (8,299)
Other income ................................................... 1,343 1,647 1,350
Other expense .................................................. (67) (104) (30)
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative
effect of accounting change ............................ (10,636) (19,181) (2,146)
Provision (benefit) for income taxes ................................ (3,874) 92 (506)
- -----------------------------------------------------------------------------------------------------------
Net loss before accounting change .......................... (6,762) (19,273) (1,640)
Cumulative effect of accounting change ................ -- (10,523) --
- -----------------------------------------------------------------------------------------------------------
Net loss .............................................. $ (6,762) $ (29,796) $ (1,640)
- -----------------------------------------------------------------------------------------------------------
Net loss per common share, before cumulative
effect of accounting change, basic and diluted ........ $ (0.82) $ (2.33) $ (0.20)
Cumulative effect of accounting change ................ -- (1.27) --
- -----------------------------------------------------------------------------------------------------------
Net loss per common share, basic and diluted ............... $ (0.82) $ (3.60) $ (0.20)
- -----------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding ....... 8,260 8,260 8,260
===========================================================================================================
The accompanying notes are an integral part of the financial statements.
33
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
Accumulated
Additional Other Total Comprehensive
Common Stock Paid-in Retained Comprehensive Treasury Stockholders' Income
Class A Class B Capital Deficit Loss Stock Equity (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000............. $ 47 $ 46 $ 49,105 $ (8,580) $ (3,494) $(7,813) $ 29,311
Minimum pension liability adjustment,
net of tax benefit of $1,504......... (2,617) (2,617) $ (2,617)
Net loss............................... (1,640) (1,640) (1,640)
---------
Net comprehensive loss................. $ (4,257)
=========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001............. 47 46 49,105 (10,220) (6,111) (7,813) 25,054
Minimum pension liability adjustment... (11,336) (11,336) $(11,336)
Net loss............................... (29,796) (29,796) (29,796)
---------
Net comprehensive loss................. $(41,132)
=========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002............. 47 46 49,105 (40,016) (17,447) (7,813) (16,078)
Minimum pension liability adjustment... (2,937) (2,937) (2,937)
Net loss............................... (6,762) (6,762) (6,762)
---------
Net comprehensive loss................. $ (9,699)
=========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003............. $ 47 $ 46 $ 49,105 $(46,778) $(20,384) ($7,813) $(25,777)
==================================================================================================================
The accompanying notes are an integral part of the financial statements.
34
Consolidated Statements of Cash Flows
(dollars in thousands)
For the years ended
December 31,
2003 2002 2001
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ................................................ $ (6,762) $(29,796) $ (1,640)
Adjustments to reconcile net loss to net
Cash provided by (used in) operating activities:
Depreciation ................................... 11,149 10,714 11,363
Amortization ................................... 612 559 818
Deferred income taxes .......................... (882) 4,112 (652)
Cumulative effect of accounting change ......... -- 10,523 --
Changes in certain assets and liabilities:
Accounts and notes receivable .............. 3,474 898 7,595
Inventories ................................ 5,730 5,057 (2,875)
Prepaid expenses and other current assets .. (1,667) 602 (4,870)
Accounts payable ........................... (10,103) (4,047) (1,706)
Accrued liabilities ........................ (19,842) 15,373 (8,802)
Other liabilities .......................... (1,664) (4,025) 566
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities ........................... (19,955) 9,970 (203)
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net ............................... (4,628) (8,366) (7,858)
Purchase of short-term investments ...................... -- -- (4,175)
Maturities of short-term investments .................... -- 1,416 14,856
- -------------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities ........................... (4,628) (6,950) 2,823
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings ............................... 10,232 -- --
Net change in restricted cash ........................... (1,757)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities ...... 8,475 -- --
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ......... (16,108) 3,020 2,620
Cash and cash equivalents:
Beginning of year ....................................... 18,277 15,257 12,637
- -------------------------------------------------------------------------------------------------
End of year ............................................. $ 2,169 $ 18,277 $ 15,257
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
35
Notes to Consolidated Financial Statements
1. Basis of Presentation
The Consolidated Financial Statements of Congoleum Corporation (the
"Company" or "Congoleum") have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern. As described more fully below, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003 Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the United States Bankruptcy Code, as a means
to resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization and in January 2004 filed its pre-packaged plan of
reorganization and disclosure statement with the court. The Bankruptcy Court has
not yet scheduled a hearing to consider approval of the plan of reorganization.
Congoleum is also involved in litigation with certain insurance carriers related
to disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers have filed various objections to Congoleum's plan or
reorganization and related matters.
The pre-packaged plan, if confirmed, would leave non-asbestos creditors
unimpaired and would resolve all pending and future asbestos claims against the
Company. The plan of reorganization would provide, among other things, for an
assignment of certain rights in, and proceeds of, Congoleum's applicable
insurance to a trust that would fund the settlement of all pending and future
asbestos claims and protect the Company from future asbestos-related litigation
by channeling all asbestos claims to the trust under Section 524(g) of the
Bankruptcy Code. Other creditors would be unimpaired under the plan. The
Bankruptcy Court has authorized the Company to pay trade creditors in the
ordinary course of business. The Company expects that it will take most of 2004
to obtain confirmation of its plan.
Based on its pre-packaged bankruptcy strategy, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded a charge of $17.3 million in the fourth
quarter of 2002 and an additional $3.7 million in the fourth quarter of 2003 to
provide for the estimated minimum costs of completing its reorganization. Actual
amounts that will be contributed to the plan trust and costs for pursuing and
implementing the plan of reorganization could be materially higher.
36
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 16 of the Notes to
Consolidated Financial Statements. There can be no assurance that the Company
will be successful in realizing its goals in this regard or in obtaining
confirmation of its proposed plan. As a result, any alternative plan of
reorganization pursued by the Company or confirmed by a bankruptcy court could
vary significantly from the description in this report and the estimated costs
and contributions to effect the contemplated plan of reorganization could be
significantly greater than currently estimated. Any plan of reorganization
pursued by the Company will be subject to numerous conditions, approvals and
other requirements, including bankruptcy court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained. Delays in getting the Company's plan of reorganization
approved by the Bankruptcy Court could result in a proceeding that takes longer
and is more costly than the Company has estimated.
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
The Company will implement this guidance in consolidated financial statements
for periods after December 31, 2003.
Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Substantially all of the Company's liabilities at
December 31, 2003 will be reclassified as liabilities subject to compromise.
Obligations arising post petition, and pre-petition obligations that are secured
or that the Bankruptcy Court authorizes the Company to pay, will not be
classified as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may
arise due to the rejection of executory contracts or unexpired leases, or as a
result of the allowance of contingent or disputed claims.
2. Summary of Significant Accounting Policies:
Nature of Business - Congoleum manufactures resilient sheet and tile flooring
products. These products, together with a limited quantity of related products
purchased for resale, are sold primarily to wholesale distributors and major
retailers in the United States and Canada. Based upon the nature of the
Company's operations, facilities and management structure, the Company considers
its business to constitute a single segment for financial reporting purposes.
Basis of Consolidation - The accompanying consolidated financial statements
reflect the operations, financial position and cash flows of Congoleum
Corporation and include the accounts of the Company and its subsidiaries after
elimination of all significant intercompany transactions in consolidation.
37
Use of Estimates and Critical Accounting Policies - The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Critical
accounting policies are defined as those that entail significant judgments and
estimates, and could potentially result in materially different results under
different assumptions and conditions. The Company believes that the most
critical accounting policies upon which its financial condition depends, and
which involve the most complex or subjective decisions or assessments, concern
asbestos liabilities, environmental contingencies, valuation of deferred tax
assets, and pension plan and post-retirement benefits. A discussion on the
application of these and other accounting policies is provided in "Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations-Critical Accounting Policies".
Although the Company makes every effort to ensure the accuracy of the
estimates and assumptions used in the preparation of its financial statements or
in the application of accounting policies, if business conditions are different
than the Company has assumed they will be, or if the Company used different
estimates and assumptions, it is possible that materially different amounts
could be reported in the Company's financial statements.
Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the estimated
sales value of goods returned, trade discounts and customers' allowances.
Cash and Cash Equivalents - All highly liquid debt instruments with a maturity
of three months or less at the time of purchase are considered to be cash
equivalents.
Restricted Cash - Under the terms of its revolving credit agreement, payments on
the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. At December 31, 2003,
cash of approximately $1.8 million was restricted. There was no restricted cash
at December 31, 2002 as there were no borrowings under the Company's revolving
credit agreement.
Short-Term Investments - The Company invests in highly liquid debt instruments
with strong credit ratings. Commercial paper investments with a maturity greater
than three months, but less than one year at the time of purchase, are
considered to be short-term investments. The Company maintains cash and cash
equivalents and short-term investments with certain financial institutions. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment strategy.
Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories. The Company records as a charge to cost of goods sold any amount
required to reduce the carrying value of inventories to the net realizable sales
value.
38
Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings, 15 years for building improvements, production equipment and
heavy-duty vehicles, 3 to 10 years for light-duty vehicles and office
furnishings and equipment) on the straight-line method for financial reporting
and accelerated methods for income tax purposes. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the asset
and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is reflected in operations.
Debt Issue Costs - Costs incurred in connection with the issuance of debt have
been capitalized and are being amortized over the life of the related debt. Such
costs at December 31, 2003 and 2002 amounted to $1.6 million and $2.2 million,
net of accumulated amortization of $2.2 million and $1.7 million, respectively,
and are included in other noncurrent assets.
Environmental Remediation - The Company is subject to federal, state and local
environmental laws and regulations. The Company records a liability for
environmental remediation claims when a cleanup program or claim payment becomes
probable and the costs can be reasonably estimated. The recorded liabilities are
not discounted for delays in future payments (see Notes 4, 6, and 15).
Asbestos Liabilities and Plan of Reorganization - The Company is a defendant in
a large number of asbestos-related lawsuits and has filed a pre-packaged plan of
reorganization under Chapter 11 of the United States Bankruptcy Code as part of
its strategy to resolve this liability (See Note 16). Accounting for
asbestos-related and reorganization costs includes significant assumptions and
estimates, and actual results could differ materially from those estimates.
Income Taxes - The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS No. 109 requires current recognition
of net deferred tax assets to the extent that it is more likely than not that
such net assets will be realized. To the extent that the Company believes that
its net deferred tax assets will not be realized, a valuation allowance must be
recorded against those assets.
Allowance for Doubtful Accounts and Cash Discounts - The Company provides an
allowance for doubtful accounts and cash discounts based on estimates of
historical collection experience and a review of the current status of trade
accounts receivable, revising its estimates when circumstances dictate.
39
Product Warranties - The Company provides product warranties for specific
product lines and accrues for estimated future warranty cost in the period in
which the revenue is recognized. The following table sets forth activity in the
Company's warranty reserves (in millions):
December 31,
2003 2002 2001
---- ---- ----
Beginning balance $2.6 $2.5 $2.9
Accruals 6.3 5.1 4.3
Charges (6.2) (5.0) (4.7)
----- ----- -----
Ending balance $2.7 $2.6 $2.5
==== ==== ====
Shipping and Handling Costs - Shipping costs for the years ended December 31,
2003, 2002 and 2001 were $1.6 million, $2.1 million, and $3.5 million,
respectively, and are included in selling, general and administrative expenses.
Earnings Per Share - SFAS No. 128, "Earnings Per Share", requires the
computation of basic and diluted earnings per share. The calculation of basic
earnings per share is based on the average number of common shares outstanding
during the period. Diluted earnings per share reflect the effect of all
potentially diluted securities which consist of outstanding common stock
options. For all periods presented, basic and diluted shares outstanding are the
same.
Goodwill - Goodwill represents the excess of acquisition costs over the
estimated fair value of the net assets acquired and was amortized through
year-end 2001 using the straight-line method principally over 40 years. During
the first quarter of 2002, the Company performed a transitional impairment test
in accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). As a result, the
Company concluded that the goodwill was impaired and recorded a goodwill
impairment charge for the cumulative effect of change in accounting principle of
$10.5 million.
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of January 1, 2001:
(In thousands, except per share amounts) For the Twelve Months Ended
December 31, December 31, December 31,
2003 2002 2001
------------- ------------- -------------
Net loss before cumulative effect of Accounting change:
As reported $ (6,762) $ (19,273) $ (1,640)
Goodwill amortization -- -- 432
--------- ---------- ---------
As adjusted $ (6,762) $ (19,273) $ (1,208)
========= ========== =========
Net loss per share before cumulative effect of accounting change:
As reported $ (0.82) $ (2.33) $ (0.20)
Goodwill amortization -- -- .05
--------- ---------- ---------
As adjusted $ (0.82) $ (2.33) $ ( 0.15)
========= ========== =========
40
Long-lived assets - The Company periodically considers whether there has
been a permanent impairment in the value of its long-lived assets, primarily
property and equipment, in accordance with Financial Accounting Standards Board
("FASB") issued Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company evaluates various factors, including current and
projected future operating results and the undiscounted cash flows for the under
performing long-lived assets. The Company then compares the carrying amount of
the asset to the estimated future undiscounted cash flows expected to result
from the use of the asset. To the extent that the estimated future undiscounted
cash flows are less than the carrying amount of the asset, the asset is written
down to its estimated fair market value and an impairment loss is recognized.
The value of impaired long-lived assets is adjusted periodically based on
changes in these factors. At December 31, 2003, the Company determined, based on
its evaluation, that the carrying value of its long-lived assets was
appropriate. No adjustments to the carrying costs were made.
Accounting for stock-based compensation - The Company discloses
stock-based compensation information in accordance with FASB issued Statement
No. 148 ("SFAS 148"),"Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123" and FASB issued Statement
No. 123 ("SFAS 123"),"Accounting for Stock-Based Compensation." SFAS 148
provides additional transition guidance for companies that elect to voluntarily
adopt the provisions of SFAS 123. SFAS 148 does not change the provisions of
SFAS 123 that permit entities to continue to apply the intrinsic value method of
Accounting Principles Board Opinion No. 25 ("APB 25"),"Accounting for Stock
Issued to Employees." The Company has elected to continue to account for its
stock-based plans under APB 25, as well as to provide disclosure of stock-based
compensation as outlined in SFAS 123 as amended by SFAS 148.
A reconciliation of net income, as reported, to pro forma net income
including compensation expense for the Company's stock-based plans as calculated
based on the fair value at the grant dates for awards made under these plans in
accordance with the provisions of SFAS 123, as amended by SFAS 148, as well as a
comparison of as reported and pro forma basic and diluted EPS follows (in
thousands, except per share data):
For the twelve months ended December 31,
(dollars in thousands, except per share amounts) 2003 2002 2001
----------- ----------- ------------
Net loss:
As reported $ (6,762) $(29,796) $ (1,640)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects, pro forma 208 113 381
--------- --------- ---------
As adjusted $ (6,970) $(29,909) $ (2,021)
========= ========= =========
Net loss per share:
As reported $ (0.82) $ (3.60) $ (0.20)
Pro forma compensation expense (0.03) (0.02) (0.04)
--------- --------- ---------
As adjusted $ (0.85) $ (3.62) $ (0.24)
========= ========= =========
41
The fair value for these options granted was estimated at the date of grant
using a Black-Scholes option pricing model.
A summary of the assumptions used for stock option grants are as follows:
Twelve Months Ended
------------------------------------
December 31, 2003 December 31, 2002
----------------- -----------------
1995 Stock Option Plan:
Dividend yield 0.0% 0.0%
Expected volatility 92.0% 92.0%
Option forfeiture rate 10.0% 10.0%
Risk free interest rate 3.37% 3.52%
Expected lives 7.0 years 7.0 years
There were no options granted in 2001 under the 1995 Plan.
Twelve Months Ended
-----------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
------------------ ------------------ -------------------
1999 Stock Option Plan:
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 92.0% 92.0% 50.0%
Option forfeiture rate 10.0% 10.0% 10.0%
Risk free interest rate 2.28% 1.52% 4.23%
Expected lives 3.0 years 3.0 years 3.0 years
A summary of the weighted average fair value of option grants are as follows:
Twelve Months Ended
----------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
------------------ ------------------- -------------------
Fair value of option grants under the 1995 Plan $0.36 $2.05 $ --
Fair value of option grants under the 1999 Plan $0.75 $1.20 $1.67
Recently Issued Accounting Standards - In November 2001, Emerging Issues
Task Force (EITF) issue 01-9, "Accounting for Consideration Given by a Vendor to
a Customer or Reseller of the Vendor's Products ("EITF 01-9"), was issued.
Congoleum adopted EITF 01-9 effective January 1, 2002 as required. This issue
addresses the manner in which companies account for sales incentives to their
customers. The Company's current accounting policies for the recognition of
costs related to these programs, which is to accrue for costs as benefits are
earned by the Company's customers, are in accordance with the consensus reached
in this issue. The Company has reclassified amounts previously recorded in
selling, general and administrative expense as a reduction in net sales. The
impact for the twelve months ending December 31, 2002 and 2001 was a reduction
of net sales and of selling, general and administrative expenses of $4.1
million, and $4.5 million, respectively.
42
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Adoption of this standard did not have an effect on the
Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities (VIEs). In December 2003, the FASB completed deliberations of proposed
modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE. The
Revised Interpretations must be applied no later than the second quarter of
fiscal year 2004. The adoption of FIN 46 has no impact on the Company's
consolidated financial statements as of December 31, 2003 and the Company does
not expect there to be an impact on the consolidated financial statements from
the adoption of the deferred provisions in the second quarter of fiscal year
2004.
Reclassifications - Certain amounts appearing in the prior years'
financial statements have been reclassified to conform to the current year's
presentation.
3. Inventories:
A summary of the major components of inventories is as follows (in
thousands):
December 31, December 31,
2003 2002
--------------------------------------------------------------------------
Finished goods $ 37,959 $ 38,702
Work-in-process 1,266 3,467
Raw materials and supplies 5,770 8,556
--------------------------------------------------------------------------
Total inventories $ 44,995 $ 50,725
==========================================================================
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $3.6 million and $2.1 million lower than reported at December 31,
2003 and 2002, respectively.
43
4. Property, Plant, and Equipment:
A summary of the major components of property, plant, and equipment is as
follows (in thousands):
December 31, December 31,
2003 2002
--------------------------------------------------------------------------
Land $ 2,930 $ 2,930
Buildings and improvements 46,009 45,542
Machinery and equipment 176,369 172,415
Construction-in-progress 5,439 5,265
--------------------------------------------------------------------------
230,747 226,152
Less accumulated depreciation 143,712 132,596
--------------------------------------------------------------------------
Total property, plant,
and equipment, net $ 87,035 $ 93,556
==========================================================================
Interest is capitalized in connection with the construction of major
facilities and equipment. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest cost was $0.3 million in each of 2003, 2002, and
2001.
The amount of approved but unexpended capital appropriations at December
31, 2003 was $2.5 million, substantially all of which is planned to be expended
during 2004.
5. Accrued Liabilities:
A summary of the significant components of accrued liabilities consists of
the following (in thousands):
December 31, December 31,
2003 2002
--------------------------------------------------------------------------
Accrued warranty, marketing and
sales promotion $14,918 $24,113
Employee Compensation and
related benefits 3,474 3,518
Interest 3,677 3,601
Environmental remediation
and product related
liabilities 834 834
Other 1,752 955
--------------------------------------------------------------------------
Total accrued liabilities $24,655 $33,021
==========================================================================
44
6. Debt:
In connection with its bankruptcy filing on December 31, 2003, the Company
obtained debtor-in-possession financing which expires at the end of 2004 that
provides for borrowings up to $30.0 million depending on levels of the Company's
inventory and receivables. This agreement, the terms of which are substantially
the same as the pre-petition credit agreement it replaced, provides for a
monthly commitment fee based on the average daily unused portion of the
commitment equal to three-eighths of one percent and a monthly servicing fee of
approximately three thousand dollars. This financing agreement contains certain
covenants, which include the maintenance of a minimum tangible net worth and
EBITDA. It also includes restrictions on the incurrence of additional debt and
limitations on capital expenditures. The Company was in compliance with these
covenants at December 31, 2003. While the Company expects it will be able to
meet these covenants during the balance of 2004, there can be no assurances of
continued compliance. Borrowings under this facility are collateralized by
inventory and receivables. At December 31, 2003, based on the level of
receivables and inventory, $22.4 million was available under this facility.
There were $10.2 million in borrowings outstanding under this facility at
December 31, 2003 and no borrowings outstanding at December 31, 2002. The
facility also provides for standby letters of credit, the outstanding amount of
which was $4.1 million and $1.8 million at December 31, 2003 and 2002,
respectively.
Long-term debt consists of the following (in thousands):
December 31, December 31,
2003 2002
-----------------------------------------------------------------
8 5/8% Senior Notes
Due 2008 $99,773 $99,724
=================================================================
On August 3, 1998, the Company issued $100 million of 8 5/8% Senior Notes
maturing August 1, 2008 priced at 99.505 to yield 8.70%. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after August 1, 2003 at predetermined redemption prices (ranging from 104% to
100%), plus accrued and unpaid interest to date of redemption. The Indenture
under which the notes were issued includes certain restrictions on additional
indebtedness and uses of cash, including dividend payments. During 2003, the
Company and the trustee of the indenture governing the Company's 8 5/8% Senior
Notes Due 2008 amended the indenture, and sufficient note holders consented to
amendments, to explicitly permit the Company to take steps in connection with
preparing and filing its prepackaged plan of reorganization under Chapter 11 of
the Bankruptcy Code.
45
7. Other Liabilities:
Summary of significant components of other liabilities consists of the
following (in thousands):
December 31, December 31,
2003 2002
--------------------------------------------------------------------------
Environmental remediation and
product-related liabilities $ 5,105 $ 5,396
Accrued workers'
Compensation claims 5,130 5,499
Other 987 887
--------------------------------------------------------------------------
Total other liabilities $11,222 $11,782
--------------------------------------------------------------------------
8. Research and Development Costs:
Total research and development costs charged to operations amounted to
$3.1 million, $3.5 million and $3.5 million for the years ended December 31,
2003, 2002, and 2001, respectively.
9. Operating Lease Commitments and Rent Expense:
The Company leases certain office facilities and equipment under leases
with varying terms. Certain leases contain rent escalation clauses. These rent
expenses are recognized on a straight line basis over the respective term of the
lease.
Future minimum lease payments of non-cancelable operating leases having
initial or remaining lease terms in excess of one year as of December 31, 2003
are as follows (in thousands):
Years Ending
--------------------------------------------------------------------------
2004 $ 2,762
2005 2,444
2006 1,647
2007 1,561
2008 1,597
Thereafter 1,633
--------------------------------------------------------------------------
Total minimum lease payments $11,644
--------------------------------------------------------------------------
Rent expense was $3.7 million, $3.7 million and $3.6 million for the years
ended December 31, 2003, 2002, and 2001, respectively.
46
10. Pensions and Other Postretirement Plans
The Company sponsors several noncontributory defined benefit pension plans
covering most of the Company's employees. Benefits under the plans are based on
years of service and employee compensation. Amounts funded annually by the
Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below in "Other Benefits").
The following summarizes the change in the benefit obligation; the change in
plan assets; the funded status; and reconciliation to the amounts recognized in
the balance sheets for the pension benefits and other benefits plans. The
measurement date for all items set forth below is the last day of the fiscal
year presented.
Obligations and Funded Status
At December 31,
Pension Benefits Other Benefits
-------------------- --------------------
(In thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 64,188 $ 59,939 $ 8,341 $ 7,033
Service cost 1,174 1,057 189 157
Interest cost 4,223 4,217 546 522
Amendments/Plan Change -- 14 -- --
Actuarial (gain) loss 8,217 3,457 610 1,115
Benefits paid (4,559) (4,496) (509) (486)
-------------------------------------------
Benefit obligation at end of year $ 73,243 $ 64,188 $ 9,177 $ 8,341
-------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 39,483 $ 44,003 $ -- $ --
Actual return on plan assets 7,728 (4,713) -- --
Employer contribution 4,752 4,689 -- --
Benefits paid (4,559) (4,496) -- --
-------------------------------------------
Fair value of plan assets at end of year $ 47,404 $ 39,483 $ -- $ --
-------------------------------------------
Funded (unfunded) status $(25,839) $(24,705) $(9,177) $(8,341)
Unrecognized transition amount (125) (196) -- --
Unrecognized net actuarial loss 26,027 24,363 848 272
Unrecognized prior service cost (713) (996) (603) (1,065)
-------------------------------------------
Net amount recognized $ (650) $ (1,534) $(8,932) $(9,134)
-------------------------------------------
47
Amounts recognized in the balance sheets consist of:
Pension Benefits Other Benefits
--------------------------- ----------------------------
(in thousands) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Accrued benefit cost $(24,032) $(22,932) $(8,932) $(9,134)
Intangible asset 328 436 -- --
Deferred tax asset 2,670 3,515 -- --
Accumulated other Comprehensive income 20,384 17,447 -- --
--------------------------------------------------------
Net amount recognized $ (650) $ (1,534) $(8,932) $(9,134)
========================================================
The accumulated benefit obligation for all defined benefit pension plans was
$70,962 and $62,415 at December 31, 2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets:
December 31,
---------------------------
2003 2002
------------- -------------
Projected benefit obligation $73,243 $64,188
Accumulated benefit obligation 70,962 62,415
Fair value of plan assets 47,404 39,483
Components of Net Periodic Benefit Cost (Income):
Pension Benefits Other Benefits
------------------------------------ -----------------------------------
(In thousands) 2003 2002 2001 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Service cost $1,174 $1,057 $1,089 $189 $157 $142
Interest cost 4,223 4,217 4,140 546 522 474
Expected return on plan assets (2,769) (3,948) (4,068) -- -- --
Recognized net actuarial loss (gain) 1,595 686 363 34 14 (9)
Amortization of transition obligation (72) (22) 76 -- -- --
Amortization of prior service cost (283) (241) (242) (462) (462) (462)
------------------------------------------------------------------------
Net periodic benefit cost $3,868 $1,749 $1,358 $307 $231 $145
========================================================================
48
10. Pensions and Other Postretirement Plans (continued)
Additional Information
Pension Benefits Other Benefits
--------------------------- ----------------------------
(in thousands) 2003 2002 2003 2002
--------------------------------------------------------
Increase in minimum liability included in other
comprehensive income, net of tax benefit $(2,937) $(11,336) N/A N/A
The weighted-average assumptions used to determine benefit obligation as of
year-end were as follows:
Pension Benefits Other Benefits
----------------- ------------------
(in thousands) 2003 2002 2003 2002
------------------------------------
Discount rate 6.25% 6.75% 6.75% 6.75%
Rate of compensation increase 5.00% 5.00% -- --
The weighted-average assumptions used to determine net periodic benefit cost
(income) were as follows:
Pension Benefits Other Benefits
-------------------------------- --------------------------------
(In thousands) 2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 7.25% 6.75% 6.75% 7.25%
Expected long-term return on plan assets 7.00% 7.00% 9.00% -- -- --
Rate of compensation increase 5.00% 5.00% 5.00% -- -- --
In developing the overall expected long-term return on plan assets assumption, a
building block approach was used in which rates of return in excess of inflation
were considered separately for equity securities, debt securities, and other
assets. The excess returns were weighted by the representative target allocation
and added along with an appropriate rate of inflation to develop the overall
expected long-term return on plan assets assumption. The Company believes this
determination is consistent with SFAS 87.
Assumed healthcare cost trend rates as of year-end were as follows:
December 31,
-------------------------
2003 2002
------------ ------------
Healthcare cost trend rate assumed for next year 9.0% 9.0%
Ultimate healthcare cost trend rate 5.0% 5.0%
Year that the assumed rate reaches ultimate rate 2009 2008
49
10. Pensions and Other Postretirement Plans (continued)
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for healthcare benefits. A one-percentage point change in assumed
healthcare cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components $ 64 $ 55
Effect on post-retirement benefit obligation $666 $594
Plan Assets
For the pension plans, the weighted-average asset allocation at December 31,
2003, and December 31, 2002, by asset category, are as follows:
Plan Assets at
December 31,
--------------------------
Asset Category 2003 2002
--------------------------
Equity securities 58% 54%
Debt securities 41% 45%
Other 1% 1%
--------------------------
Total 100% 100%
==========================
The Company has developed an investment strategy for the pension plans. The
investment strategy is to emphasize total return; that is, the aggregate return
from capital appreciation and dividend and interest income. The primary
objective of the investment management for the plan's assets is the emphasis on
consistent growth; specifically, growth in a manner that protects the Plan's
assets from excessive volatility in market value from year to year. The
investment policy takes into consideration the benefit obligations, including
timing of distributions.
The primary objective for the plan is to provide long-term capital appreciation
through investment in equity and debt securities. The Company's target asset
allocation is consistent with the weighted - average allocation at December 31,
2003.
The Company selects professional money managers whose investment policies are
consistent with the Company's investment strategy and monitors their performance
against appropriate benchmarks.
Cash Flows
Contributions
The Company expects to contribute $ 8.9 million to its pension plan and $ 0.5
million to its other postretirement plan in 2004.
50
10. Pensions and Other Postretirement Plans (continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect future service as appropriate, are
expected to be paid. The benefit payments are based on the same assumptions used
to measure the Company's benefit obligation at the end of fiscal 2003.
Pension Other
Benefits Benefits
--------- --------
2004 $ 4,937 $ 529
2005 4,976 562
2006 5,044 594
2007 5,100 648
2008 5,138 699
2009-2013 $ 27,573 $ 3,938
Defined Contribution Plan
The Company also has two 401(k) defined contribution retirement plans that cover
substantially all employees. Eligible employees may contribute up to 20% of
compensation, with partially matching Company contributions. The charge to
income relating to the Company match was $0.4 million, $1.2 million and $1.4
million for the years ended December 31, 2003, 2002 and 2001, respectively.
11. Income Taxes:
Income taxes are comprised of the following (in thousands):
For the years ended December 31,
---------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Current:
Federal $ (3,201) $ (4,057) $ 40
State 72 38 106
Deferred:
Federal (745) 4,111 (652)
State (437) (54) (273)
Valuation allowance 437 54 273
- -------------------------------------------------------------------------------
Benefit for
Income taxes $ (3,874) $ 92 $(506)
===============================================================================
51
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate expressed as a percentage of income before
income taxes:
For the years ended December 31,
----------------------------------------
2003 2002 2001
--------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit (0.4) (1.9) 7.5
Reorganization costs -- (21.2) --
Goodwill -- (12.0) (6.8)
Other 2.8 0.8 (11.1)
--------------------------------------------------------------------------
Effective tax rate 36.4% (0.3)% 23.6%
==========================================================================
Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences (in thousands):
December 31, December 31,
2003 2002
--------------------------------------------------------------------------
Deferred tax asset:
Accounts receivable $ 90 $ 104
Unfunded pension liability 2,598 3,808
Environmental remediation and
Product-related reserves 5,673 5,575
Postretirement benefit obligations 3,835 3,911
Tax credit and other carryovers 8,170 6,551
Other accruals 902 1,777
--------------------------------------------------------------------------
Deferred tax asset 21,268 21,726
Valuation allowance (2,321) (1,884)
--------------------------------------------------------------------------
Net deferred tax asset 18,947 19,842
--------------------------------------------------------------------------
Deferred tax liability:
Depreciation and amortization (12,648) (13,554)
Inventory (3,991) (3,954)
Other (2,308) (2,334)
--------------------------------------------------------------------------
Total deferred tax liability (18,947) (19,842)
--------------------------------------------------------------------------
Net deferred tax asset $ ------ $ ------
==========================================================================
52
At December 31, 2003 and 2002, the Company had available federal net
operating loss carryforwards of approximately $10.3 million and $7.1 million,
respectively, to offset future taxable income. The federal loss carry-forwards
will begin to expire in 2020.
12. Supplemental Cash Flow Information:
Cash payments for interest were $9.2 million, $8.6 million and $8.6
million for the years ended December 31, 2003, 2002 and 2001, respectively. Net
cash refunds for income taxes were $3.0 million, $3.9 million and $145 thousand
for the years ended December 31, 2003, 2002, and 2001, respectively.
13. Related Party Transactions:
The Company and its controlling shareholder, American Biltrite Inc.
("ABI") provide certain goods and services to each other pursuant to negotiated
agreements. The Company had the following transactions with ABI (in thousands):
For the years ended December 31,
----------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Sales made to ABI $ 57 $ 198 $ 214
Sales commissions earned by ABI 68 141 71
Raw material
Transfers to ABI 1,996 1,869 3,413
Computer service
Income earned from ABI 75 32 22
Material purchases
From ABI 7,342 10,092 8,330
Indemnification
payments made to ABI 2,163 0 0
Management fees paid
to ABI 608 590 580
================================================================================
Amounts as of December 31, 2003 and 2002 due from ABI totaled $281
thousand and $94 thousand, respectively, and are included in accounts
receivable. Amounts as of December 31, 2003 and 2002 due to ABI totaled $186
thousand and $1.2 million, respectively, and are included in accounts payable.
14. Major Customers:
Substantially all the Company's sales are to select flooring distributors
and retailers located in the United States and Canada. Economic and market
conditions, as well as the individual financial condition of each customer, are
considered when establishing allowances for losses from doubtful accounts.
53
Two customers, LaSalle-Bristol Corporation and Mohawk Industries, Inc.,
accounted for 24% and 41%, respectively, of the Company's net sales for the year
ended December 31, 2003, 23% and 36%, respectively, for the year ended December
31, 2002, and 25% and 23%, respectively, for the year ended December 31, 2001.
Mohawk Industries accounted for 39% and 45% of accounts receivable at December
31, 2003 and 2002, respectively, while Lowe's and Home Depot accounted for 15%
and 12%, respectively, of accounts receivable at December 31, 2003 and 2002.
15. Environmental and Other Liabilities:
The Company records a liability for environmental remediation claims when
a cleanup program or claim payment becomes probable and the costs can be
reasonably estimated. As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries approximated $2.8 million and $2.2 million at
December 31, 2003 and 2002, respectively, and are reflected in other noncurrent
assets and are considered probable of recovery.
The Company is named, together with a large number (in most cases,
hundreds) of other companies, as a potentially responsible party ("PRP") in
pending proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act, as amended, ("CERCLA"), and similar state laws.
In addition, in four other instances, although not named as a PRP, the Company
has received a request for information. These pending proceedings currently
relate to four disposal sites in New Jersey, Pennsylvania, Maryland and
Connecticut in which recovery from generators of hazardous substances is sought
for the cost of cleaning up the contaminated waste sites. The Company's ultimate
liability in connection with those sites depends on many factors, including the
volume of material contributed to the site, the number of other PRP's and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable from insurance. However, under CERCLA
and certain other laws, the Company, as a PRP, can be held jointly and severally
liable for all environmental costs associated with a site.
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 81 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998; however, the groundwater remediation phase has not begun
and the remedial investigation/feasibility study related to the groundwater
remediation has not been approved. The PRP group estimated that future costs of
groundwater remediation, based on engineering and consultant studies conducted,
would be approximately $26 million. Congoleum's proportionate share, based on
waste disposed at the site, is estimated to be approximately 5.8%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation
54
funding sources and financial responsibilities. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation are primarily based on engineering studies.
The outcome of these matters could result in significant expenses or
judgments that could have a material adverse effect on the financial position of
the Company.
16. Asbestos Liabilities:
Claims Settlement and Chapter 11 Reorganization
In early 2003 the Company announced that it was seeking to resolve its
asbestos liabilities through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the United States Bankruptcy Code.
In furtherance of the agreement in principle, the Company entered into a
settlement agreement with various asbestos claimants (the "Claimant Agreement").
As contemplated by the Claimant Agreement, the Company also entered into
agreements establishing a pre-petition trust (the "Collateral Trust") to
distribute funds in accordance with the terms of the Claimant Agreement, and
granting the Collateral Trust a security interest in its rights under applicable
insurance coverage and payments from insurers for asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix
(the "Matrix") and allows claimants who qualify and participate in the Claimant
Agreement to settle their claim for the Matrix value secured in part (75%) by
the security interest in the collateral granted to the Collateral Trust. The
Collateral Trust provides for distribution of trust assets according to various
requirements that give priority (subject to aggregate distribution limits) to
participating claimants who had pre-existing unfunded settlement agreements
("pre-existing settlement agreements") with the Company and participating
claimants who qualify for payment under unfunded settlement agreements entered
into by the Company with plaintiffs that have asbestos claims pending against
the Company and which claims are scheduled for trial after the effective date of
the Claimant Agreement but prior to the commencement of the Company's
anticipated Chapter 11 reorganization case ("trial-listed settlement
agreements").
The Claimant Agreement settled claims pertaining to pre-existing
settlement agreements or trial-listed settlement agreements for a fully secured
claim against the Collateral Trust, and it settled all other claims for a
secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim against Congoleum for the remaining 25%. Under the proposed
plan, after the establishment of the Plan Trust (as defined below), the assets
in the Collateral Trust would be transferred to the Plan Trust. The Company
expects that any claims contemplated by the Claimant Agreement that are
unsatisfied as of the confirmation of the plan of reorganization by the
Bankruptcy Court would be channeled to be paid in accordance with the Plan
Trust.
55
In October 2003, the Company began soliciting acceptances for its
pre-packaged plan of reorganization, and received the votes necessary for
acceptance of the plan in late December 2003.
The Company's proposed plan of reorganization provides for, among other
things, an assignment of certain rights in, and proceeds of, the Company's
applicable insurance to a trust that will be established upon confirmation of
the Company's proposed plan of reorganization (the "Plan Trust"), which would
fund the settlement of all pending and future asbestos claims and protect the
Company from future asbestos-related litigation by channeling all asbestos
claims to the Plan Trust under Section 524(g) of the Bankruptcy Code.
Congoleum's other creditors are unimpaired under the proposed plan and will be
paid in the ordinary course of business. In January 2004, the Bankruptcy Court
approved payment of pre-petition obligations to trade creditors in the ordinary
course of business.
The Company expects to issue a promissory note (the "Company Note") to the
Plan Trust as part of the Company's proposed plan of reorganization. Under the
terms of the proposed plan, the original principal amount of the Company Note
will be $2,738,234.75 (the "Original Principal Amount") and will be subject to
increase 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 the Company's confirmed pre-packaged Chapter 11 plan of
reorganization (the "Principal Adjustment Date") in an amount equal to the
excess, if any, of the amount by which 51% of the Company's market
capitalization as of the Principal Adjustment Date (based upon (subject to
certain exceptions) the total number of shares of the Company's common stock
outstanding as of such date multiplied by the average of the closing trading
prices of the Company'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 Company Note. Under the terms of the proposed plan, interest on
outstanding principal of the Company Note will accrue at a rate of 9% per annum,
interest on the Original Principal Amount will accrue and be payable quarterly
and interest on the Additional Principal Amount will accrue quarterly and be
added to the Additional Principal Amount as additional principal. Upon the
earlier of August 1, 2008 and the date that all of the Senior Notes are repaid
in full, interest on the then outstanding Additional Principal Amount will then
accrue and be payable quarterly.
Under the terms of the proposed plan of reorganization all principal on
the Company Note then outstanding together with any accrued but unpaid interest
will be payable in full on the tenth anniversary of the date of the Company
Note, subject to the right of the Plan Trust to accelerate all amounts then owed
on the Company Note following an uncured event of default under the Company
Note. Events of default under the Company 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 Senior Notes, the breach by the Company of any
covenant or agreement contained in the Company Note which remains uncured 30
days
56
following notice by the Plan Trust to the Company and ABI of the breach and a
material breach of the pledge agreement (the "ABI Pledge Agreement") by ABI
(which agreement is discussed below) which remains uncured 30 days following
notice by the Plan Trust to ABI and the Company of the breach. The terms of the
Company Note would provide that, upon the occurrence of an event of default
under the Company Note, the Company and ABI would have 10 days from the date
they receive notice that an event of default has occurred to cure the event of
default. If the event of default remains uncured after the 10-day cure period,
the aggregate outstanding principal amount of the Company Note together with any
accrued but unpaid interest thereon would become immediately due and payable if
the event of default relates to an uncured event of default of the indenture
governing the Company's Senior Notes, and with regard to other events of default
of the Company Note, the Plan Trust may, upon notice to the Company and ABI,
declare the aggregate outstanding principal amount of the Company Note together
with any accrued but unpaid interest thereon to be immediately due and payable.
The Plan Trust's rights to payment under the Company 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 Senior Notes and the Company's credit
facility, except that regularly scheduled interest payments under the Company
Note are expected to be payable by the Company so long as no default or event of
default has occurred or is continuing under the indenture governing the
Company's Senior Notes or the Company's credit facility.
The proposed plan of reorganization contemplates that, pursuant to the ABI
Pledge Agreement, ABI will pledge all of the shares of the Company's common
stock that ABI owns, together with any other equity interests and rights ABI may
own or hold in the Company, as of the date of the Company Note, as collateral
for the Company's obligations under the Company Note. As additional security for
the Company Note, the ABI Pledge Agreement and the terms of the Company's
proposed plan of reorganization provide that any amounts that the Plan Trust
would be obligated to pay ABI pursuant to any rights of indemnity that ABI may
have against the Plan Trust for asbestos-related claims pursuant to the
Company'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 ABI
are parties to (as amended, the "Joint Venture Agreement"), will not be paid by
the Plan Trust until after any amounts due and payable to the Plan Trust under
the Company Note have been paid in full to the Plan Trust. Until such time, any
such indemnity payments that would otherwise have been payable by the Plan Trust
to ABI, would be set aside by the Plan Trust and held in escrow by the Plan
Trust for ABI's benefit and pledged by ABI as additional collateral securing the
Company's obligations under the Company Note until released from such escrow and
paid to ABI, as further provided under the Company's proposed plan of
reorganization, the Company Note and the ABI Pledge Agreement.
The Company Note, the ABI Pledge Agreement and the Company's proposed plan
of reorganization also provide that the Company would be prohibited from making
any payments to ABI pursuant to any rights of indemnity that ABI may have
against the Company for claims pursuant to the Joint Venture Agreement until
after any amounts due and payable to the Plan Trust under the Company Note have
been paid in full to the Plan Trust. Until such time, any such indemnity
payments that would otherwise have been payable to ABI by the Plan Trust, will
be paid by the Company to the Plan Trust and the Plan Trust will set aside and
hold in escrow such amounts for ABI's benefit and ABI will pledge such amounts
as additional collateral securing the Company's obligations under the Company
Note until released from such escrow and paid to ABI, as further provided under
the Company's pre-packaged Chapter 11 plan of reorganization, the Company Note
and the ABI Pledge Agreement.
57
Under the proposed plan of reorganization ABI would be permitted to prepay
the principal amount of the Company Note, in whole but not in part, without any
penalty or premium at any time following the Principal Adjustment Date and any
interest that may have accrued but not yet paid at the time of any principal
repayment would be due and payable at the time of the principal repayment. The
Company would be obligated to repay ABI for any amounts paid by ABI pursuant to
the Company Note, which repayment obligation would by evidenced by a promissory
note or notes to be issued by the Company to ABI. Any such note would have
similar payment terms as those expected to be afforded to the Plan Trust with
regard to the Company 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 Company Note and
with regard to amounts owing and payable pursuant to the Senior Notes and credit
facility, except that the right of full subordination with regard to the Senior
Notes and credit facility would contain an exception that would allow the
Company to make regularly scheduled interest payments to ABI pursuant to any
such note so long as no default or event of default has occurred or is
continuing under the indenture or the Company's credit facility.
The proposed plan of reorganization also provides that if ABI prepays the
Company Note and ABI sells all or substantially all of the shares of the
Company's stock that it holds as of the Principal Adjustment Date during the
three-year period following such date, ABI would be obligated to make a
contribution to the Plan Trust if the equity value of the Company implied by the
price paid to ABI for the shares of the Company's stock exceeded the greater of
$2,738,234.75 or 51% of the Company's market capitalization as of the Principal
Adjustment Date (based upon (subject to certain exceptions) the total number of
shares of the Company's common stock outstanding as of such date multiplied by
the average of the closing trading prices of the Company's Class A common stock
for the 90 consecutive trading days ending on the Principal Adjustment Date). In
such instance, the proposed plan would obligate ABI to pay to the Plan Trust an
amount equal to 50% of such excess amount. Under the terms of the Company's
proposed plan of reorganization, the Company would be obligated to repay ABI for
any amounts paid by ABI to the Plan Trust pursuant to this obligation. In
satisfaction of this repayment obligation, the Company would issue a promissory
note to ABI in a principal amount equal to the amount of any such payments made
by ABI 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 Senior Notes and 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 governing the Senior Notes or the Company's
credit facility.
The proposed plan provides that the Plan Trust would be able to transfer
the Company Note, in whole but not in part, at any time following the Principal
Adjustment Date. Upon any transfer of the Company Note, the amounts pledged by
ABI and held in escrow by the Plan Trust for ABI's benefit with regard to ABI's
indemnity rights discussed above, will be paid by the Plan Trust, first, to the
Plan Trust in repayment of principal then outstanding on the Company Note
together with any accrued but unpaid interest thereon and, second, any amounts
remaining would be distributed by the Plan Trust to ABI.
58
ABI has agreed to make a cash contribution in the amount of $250 thousand
to the Plan Trust upon the formation of the Plan Trust. As previously discussed,
under the expected terms of the Company's proposed plan of reorganization, ABI
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 the
Company, which claims are expected to be channeled to the Plan Trust. However,
the proposed plan of reorganization does not provide that any other asbestos
claims that may be asserted against ABI would be channeled to the Plan Trust.
While the Company believes its proposed pre-packaged Chapter 11 plan is
feasible and should be confirmed by the Bankruptcy Court, there are sufficient
risks and uncertainties such that no assurances of the outcome can be given. In
addition, the costs to effect the reorganization process, consisting principally
of legal and advisory fees and contributions to the Plan Trust, including one or
more notes expected to be contributed to the Plan Trust by the Company are
expected to be approximately $25 million at a minimum. Of this estimated amount,
the Company paid, during the year December 31, 2003, $18.8 million for legal
fees, indemnity settlements and reorganization costs related to asbestos
litigation.
Pending Asbestos Claims
The Company has been served notice that it is one of many defendants in
approximately 22 thousand pending lawsuits (including workers' compensation
cases) involving approximately 106 thousand individuals as of December 31, 2003,
alleging personal injury or death from exposure to asbestos or
asbestos-containing products. There were approximately 16 thousand lawsuits at
December 31, 2002 that involved approximately 57 thousand individuals. Activity
related to asbestos claims was as follows:
Year ended Year ended
December 31, 2003 December 31, 2002
-------------------------------------------------------------------------
Beginning claims................ 16,156 6,563
New claims...................... 6,246 10,472
Settlements..................... (66) (69)
Dismissals...................... (450) (810)
-------------------------------------------------------------------------
Ending claims................... 21,886 16,156
Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including resilient sheet vinyl and tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company discontinued
the manufacture of asbestos-containing sheet products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing sheet and tile products are nonfriable
(i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
59
Status of Insurance Coverage
During the period that Congoleum produced asbestos-containing products,
the Company purchased primary and excess insurance policies providing in excess
of $1 billion coverage for general and product liability claims. Through August
2002, substantially all asbestos-related claims and defense costs were paid
through primary insurance coverage. In August 2002, the Company received notice
that its primary insurance coverage was exhausted. The exhaustion of limits by
one of the primary insurance companies was based on its contention that limits
in successive policies were not cumulative for asbestos claims and that
Congoleum was limited to only one policy limit for multiple years of coverage.
Certain excess insurance carriers claimed that the non-cumulation provisions of
the primary policies were not binding on them and that there remained an
additional $13 million in indemnity coverage plus related defense costs before
their policies were implicated. On April 10, 2003, the New Jersey Supreme Court
ruled in another case involving the same non-cumulation provisions as in the
Congoleum primary policies (the "Spaulding Case") that the non-cumulation
provisions are invalid under New Jersey law and that the primary policies
provide coverage for the full amount of their annual limits for all successive
policies. Although Congoleum is not a party to this case, the decision in the
Spaulding Case is likely binding on Congoleum and its primary insurance
companies. Thus, based on the Spaulding Case decision, the primary insurance
companies are obligated to provide the additional coverage previously disputed
by the excess carriers. As of December 31, 2002, the Company had entered into
additional settlement agreements with asbestos claimants exceeding the amount of
previously disputed coverage. While the excess carriers have objected to the
reasonableness of several of these settlements, Congoleum believes that the
primary insurance company will now cover these settlements. Notwithstanding that
the primary insurance company will likely pay these settlements, Congoleum also
believes that the excess carriers will continue to dispute the reasonableness of
the settlements and contend that their policies still are not implicated and
will dispute their coverage for that and other various reasons in ongoing
coverage litigation and have also raised various objections to the Company's
planned reorganization strategy and negotiations.
The excess insurance carriers have objected to the global settlement of
the asbestos claims currently pending against Congoleum ("Claimant Agreement")
on the grounds that, among other things, the negotiations leading to the
settlement and the Claimant Agreement violate provisions in their insurance
policies, including but not limited to the carriers' right to associate in the
defense of the asbestos cases, the duty of Congoleum to cooperate with the
carriers and the right of the carriers to consent to any settlement, and also
contend the Claimant Agreement is not fair, reasonable or in good faith.
Congoleum disputes the allegations and contentions of the excess insurance
carriers. On Friday, November 7, 2003, the court denied a motion for summary
judgment by the excess insurance carriers that the Claimant Agreement was not
fair, reasonable or in good faith, ruling that material facts concerning these
issues were in dispute. Discovery continues in the coverage litigation.
60
Given the actions of its excess insurance carriers, the Company believes
it likely that, pending settlement with or payment of re-opened limits by the
primary policies, it will have to continue funding asbestos-related expenses for
defense expense and indemnity itself. However, litigation by asbestos claimants
against the Company is stayed pursuant to the Company's bankruptcy, and the
Company does not anticipate its future expenditures for defense and indemnity of
asbestos related claims, other than expenditures pursuant to its proposed (or an
alternative) plan of reorganization, will be significant.
Payments Related to Asbestos Claims
The following table sets forth amounts paid to defend and settle claims:
(in millions) Year Ended December 31,
2003 2002
---- ----
Indemnity costs paid by the Company's
insurance carriers $0.0 $1.3
Indemnity costs paid by the Company 0.8 2.7
Defense costs paid by the Company 4.5 1.4
The amounts shown in the above table do not include non-cash settlements
using assignments of insurance proceeds, which amounted to $477 million in 2003
and $14.4 million in 2002.
The Company's primary insurance carriers paid defense costs in addition to
the above amounts through August 2002. Such amounts were not reported to the
Company by year of payment, and have not been included in the table.
At December 31, 2003, there were no additional settlements outstanding
that the Company had agreed to fund other than settlements pursuant to the
Claimant Agreement.
The Company is seeking recovery from its insurance carriers of the amounts
it has paid for defense and indemnity, and intends to seek recovery for any
future payments of defense and indemnity. In light of the planned assignment of
or grant of a security interest in certain rights in and proceeds of its
applicable insurance to the Collateral Trust and the planned reorganization, the
Company does not anticipate recovering these costs from the insurance companies.
Accounting for Asbestos-Related Claims
Under the terms of the Claimant Agreement, the Company's claims processing
agent processed 79,630 claims meeting the requirements of the Claimant Agreement
with a settlement value of $466 million. In addition, pre-existing settlements
agreements and trial listed settlement agreements with claims secured by the
collateral trust total $25 million.
61
The Company's gross liability of $491 million for these settlements is
substantially in excess of both the total assets of the Company as well as the
Company's previous estimates made in prior periods of the maximum liability for
both known and unasserted claims. The Company believes that it does not have the
necessary financial resources to litigate and/or fund judgments and/or
settlements of the asbestos claims in the ordinary course of business.
Therefore, the Company believes the most meaningful measure of its probable loss
due to asbestos litigation is the amount it will have to contribute to the Plan
Trust plus the costs to effect its reorganization under Chapter 11. The Company
estimates the minimum remaining amount of the contributions and costs to be $9.8
million, which it has recorded as a current liability. During the fourth quarter
of 2003, the Company recorded a charge of $3.7 million to increase its recorded
liability to the minimum estimated amount. The maximum amount of the range of
possible asbestos-related losses is limited to the going concern or liquidation
value of the Company, an amount which the Company believes is substantially less
than the minimum gross liability for the known claims against it.
The Company has not attempted to make an estimate of its probable
insurance recoveries given the accounting for its estimate of future
asbestos-related costs. Substantially all future insurance recoveries have been
assigned to the Collateral or Plan Trust.
Amounts Recorded in Financial Statements
The table below provides an analysis of changes in the Company's asbestos
reserves and related receivables from December 31, 2002 to December 31, 2003:
Spending Recoveries
Balance at Additions Against From Balance at
(in thousands) 12/31/02 Reclassifications (Deletions) Reserve Insurance 12/31/03
---------------------------------------------------------------------------------------------
Reserves
Current $21,295 -- $7,292 $(21,233) $2,466 $ 9,820
Receivables
Current (3,587) (3,587)
------- ------ ------ --------- ------ -------
Net Asbestos
Liability $21,295 -- $3,705 $(21,233) $2,466 $ 6,233
======= ====== ====== ========= ====== =======
62
The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2001 to December 31, 2002:
Spending Recoveries
Balance at Additions Against From Balance at
(in thousands) 12/31/01 Reclassifications (Deletions) Reserve Insurance 12/31/02
----------------------------------------------------------------------------------------
Reserves
Current $ 300 $7,219 19,241 $(5,465) -- $21,295
Long-term 53,003 (7,219) (45,784) -- -- --
--------------------------------------------------------------------------------------
53,303 -- (26,543) (5,465) -- 21,295
------ ------- -------- ------- ------- ------
Receivables
Long-term 45,163 -- (43,884) -- 1,279 --
--------------------------------------------------------------------------------------
45,163 -- (43,884) -- 1,279 --
------ -- -------- -- ----- --
Net Asbestos
Liability $ 8,140 $ -- $17,341 $(5,465) $1,279 $21,295
======= ======= ======== ====== =======
17. Stock Option Plans:
Under the Company's 1995 Stock Option Plan, as amended, (the "1995 Plan")
options to purchase up to 800,000 shares of the Company's Class A common stock
may be issued to officers and key employees. Such options may be either
incentive stock options or nonqualified stock options, and the options' exercise
price must be at least equal to the fair value of the Company's Class A common
stock on the date of grant. All options granted under the 1995 Plan have
ten-year terms and vest over five years at the rate of 20% per year beginning on
the first anniversary of the date of grant.
On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted options to purchase up to 50,000 shares of the
Company's Class A common stock. Options granted under the 1999 Plan have
ten-year terms and vest six months from the grant date.
In December 2001, the Company offered its eligible option holders an
exchange of all options then outstanding and granted to them under the 1995 Plan
or the 1999 Plan for new stock options to be granted under those plans not
earlier than six months and one day after the date the Company canceled any
options tendered to and accepted by it pursuant to the offer to exchange. On
January 4, 2002, the Company accepted and canceled 667,500 options that had been
previously granted under the 1995 Plan and 9,500 options that had been
previously granted under the 1999 Plan that were tendered to and accepted by the
Company pursuant to the offer to exchange.
63
On July 11, 2002, the Company issued 665,500 options under the 1995 Plan
and 9,500 options under the 1999 Plan at an exercise price of $2.05 per share
pursuant to the exchange. The new options granted under the 1995 Plan will
generally vest annually in equal installments over a five-year period beginning
on the first anniversary of the date of grant, and the new options granted under
the 1999 Plan will generally vest fully six months from the date of grant.
On February 1, 2003, the Company issued 28,000 options under the 1995 Plan
at an exercise price of $0.36 per share. The new options granted under the 1995
Plan will generally vest annually in equal installments over five year period
beginning on the first anniversary of the date of the grant.
On July 1, 2003, the Company issued 2,500 options under the 1999 Plan at
an exercise price of $0.75 per share. The new options granted under the 1999
Plan will generally vest fully six months from the date of grant.
A summary of the Company's 1995 Stock Option Plan activity, and related
information, is as follows:
December 31, 2003:
- --------------------------------------------------------------------------------
Weighted average
Shares Exercise price
Options outstanding
Beginning of year 678,500 $ 2.09
Options granted 28,000 0.36
Options exercised -- --
Options forfeited (54,000) 2.05
--------
Options outstanding
end of year 652,500 $ 1.99
- --------------------------------------------------------------------------------
Exercisable at end of year 127,300 $ 2.09
Weighted average remaining
Contractual life 8.53 years --
Stock options available
for future issuance 145,500 --
- --------------------------------------------------------------------------------
64
December 31, 2002:
Weighted average
Shares Exercise price
Options outstanding
Beginning of year 676,000 $ 9.98
Options granted 670,000 2.05
Options canceled (667,500) 10.04
Options forfeited -- --
---------
Options outstanding
end of year 678,500 $ 2.09
- --------------------------------------------------------------------------------
Exercisable at end of year 4,400 $ 6.06
Weighted average remaining
Contractual life 9.5 years --
Stock options available
for future issuance 119,500 --
- --------------------------------------------------------------------------------
December 31, 2001:
- --------------------------------------------------------------------------------
Weighted average
Shares Exercise price
- --------------------------------------------------------------------------------
Options outstanding
Beginning of year 693,000 $ 9.93
Options granted -- --
Options exercised -- --
Options forfeited (17,000) 7.87
--------
Options outstanding
end of year 676,000 $ 9.98
- --------------------------------------------------------------------------------
Exercisable at end of year 486,200 $11.27
Weighted average remaining
Contractual life 5 years --
Stock options available
for future issuance 122,000 --
- --------------------------------------------------------------------------------
The weighted average grant date fair value of options granted under the
1995 Plan in 2003 and 2002 was $0.36 and $2.05, respectively. There were no
options granted in 2001.
65
The exercise price of options granted under the 1999 Plan and outstanding
at December 31, 2003 range from $0.75 to $7.19 per share.
A summary of the 1999 Plan activity, and related information, is as
follows:
December 31, 2003:
- --------------------------------------------------------------------------------
Weighted average
Shares Exercise price
Options outstanding
Beginning of year 13,000 $2.44
Options granted 2,500 0.75
Options exercised -- --
Options forfeited -- --
------ -----
Options outstanding
End of year 15,500 $2.17
- --------------------------------------------------------------------------------
December 31, 2002:
- --------------------------------------------------------------------------------
Weighted average
Shares Exercise price
- --------------------------------------------------------------------------------
Options outstanding beginning of year 10,500 $5.30
Options granted 12,000 2.05
Options canceled 9,500 5.11
Options forfeited -- --
------- ----
Options outstanding end of year 13,000 $2.44
- --------------------------------------------------------------------------------
December 31, 2001:
- --------------------------------------------------------------------------------
Weighted average
Shares Exercise price
- --------------------------------------------------------------------------------
Options outstanding beginning of year 8,000 $6.02
Options granted 2,500 3.00
Options exercised -- --
Options forfeited -- --
------ ------
Options outstanding end of year 10,500 $5.30
- --------------------------------------------------------------------------------
The weighted average grant date fair value of options granted under the
1999 Plan in 2003, 2002, and 2001 was $0.75, $1.20 and $1.67, respectively.
66
18. Stockholders' Equity:
Holders of shares of the Company's Class B common stock are entitled to
two votes per share on all matters submitted to a vote of stockholders other
than certain extraordinary matters. The holders of shares of the Company's Class
A common stock are entitled to one vote per share on all matters submitted to a
vote of stockholders.
In November 1998, the Board of Directors authorized the Company to
repurchase an additional $5.0 million of the Company's common stock (Class A and
Class B shares) through the open market or through privately negotiated
transactions, bringing the total authorized common share repurchases to $15.0
million. Under the total plan, Congoleum has repurchased shares of its common
stock at an aggregate cost of $14.0 million through December 31, 2003. No shares
were repurchased during 2003 or 2002. Shares of Class B stock repurchased
(totaling 741,055 shares) have been retired. As of December 31, 2003, American
Biltrite Inc. owned 151,100 Class A shares and 4,395,605 Class B shares that
represented an aggregate 69.5% of the voting interest of the Company.
19. Fair Value of Financial Instruments
The Company's cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt are financial instruments. With
the exception of the Company's long-term debt, the carrying value of these
financial instruments approximates their fair value at December 31, 2003 and
2002. The Company's long-term debt had a book value of $99.7 million and a fair
market value of $65.0 million at December 31, 2003. The Company's long-term debt
had a book value of $99.7 million and a fair market value of $45.0 million at
December 31, 2002.
The fair value of the Company's long-term debt is determined based on
quoted market values. The fair value of the Company's other financial
instruments is determined based on discounted cash flows. Due to the short
period over which the cash flows are expected to be realized, the carrying value
of the financial instruments approximates the net present value of cash flows
and changes in interest rate assumptions would not have a material effect on the
calculation.
67
20. Quarterly Financial Data (Unaudited):
The following table summarizes unaudited quarterly financial information
(in thousands):
Year ended December 31, 2003
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $53,581 $54,995 $61,139 $50,991
Gross profit 12,667 12,256 15,013 13,906
Net income
(loss) (2,588) (1,991) 1,280 (3,463)(1)
Net income
(loss) per
Common share $ (.31) $ (.24) $ .15 $ (.42)
- --------------------------------------------------------------------------------
Year ended December 31, 2002
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales $57,926 $67,976 $57,736 $53,568
Gross profit 13,861 16,367 15,548 11,731
Net income
(loss) (11,170)(2) 842 552 (20,020)(3)
Net income
(loss) per
Common share $ (1.35) $ 0.10 $ 0.07 $ (2.42)
- --------------------------------------------------------------------------------
(1) The loss in the fourth quarter of 2003 includes $3.7 million or $0.45 per
share for the effect of the asbestos-related charges described in Notes 1 and
Note 16.
(2) The loss in the first quarter of 2002 includes $10.5 million or $1.27 per
share for the cumulative effect of an accounting change referred to in Note 1 of
the Financial Statements.
(3) The loss in the fourth quarter of 2002 includes $17.3 million or $2.10 per
share for the effect of the asbestos-related charge described in Note 1 and Note
16.
68
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors
and Stockholders of
Congoleum Corporation:
We have audited the accompanying consolidated balance sheets of Congoleum
Corporation as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2003. Our audits also
included the financial statement Schedule listed in the index at Item 15(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Congoleum
Corporation at December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 2002,
Congoleum Corporation changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets."
The accompanying financial statements have been prepared assuming that Congoleum
Corporation will continue as a going concern. As more fully described in Note 1,
"Basis of Presentation," to the consolidated financial statements, the Company
has been and continues to be named in a growing number of lawsuits stemming
primarily from the Company's manufacture of asbestos-containing products. The
Company has incurred significant charges to earnings to reflect its estimate of
costs associated with this litigation. On December 31, 2003 Congoleum filed a
voluntary petition with the United States Bankruptcy court for the District of
New Jersey (Case No. 03-51524) seeking relief under Chapter 11 of the United
States Bankruptcy Code, as a means to resolve claims asserted against it related
to the use of asbestos in its products decades ago. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1,
"Basis of Presentation," to the consolidated financial statements. The financial
69
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 5, 2004
70
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this annual report (the "Evaluation Date").
Based on this evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to
material information relating to the Company required to be included
in the Company's reports filed or submitted under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any significant changes in the Company's internal controls over
financial reporting during the last quarter covered by this annual
report that has materially affected or is reasonably likely to
materially affect the Company's internal control over financial
reporting.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2004.
Item 11. EXECUTIVE COMPENSATION
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2004.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item (except the Equity Compensation
Plan Information called for by Item 201(d) of Regulation S-K which is included
in Part II hereof), is hereby incorporated by reference to the Registrant's
definitive Proxy Statement for its Annual Meeting of Shareholders to be held on
May 10, 2004.
71
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2004.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2004.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K
1. The following financial statements of the Company are included in
this report on Form 10-K: Page Number
Balance Sheets at December 31, 2003 and December 31, 2002 32
Statements of Operations for each of the three years ended
December 31, 2003, 2002 and 2001 33
Statements of Changes in Stockholders Equity for each of the
three years ended December 31, 2003, 2002 and 2001 34
Statements of Cash Flows for each of the three years ended
December 31, 2003, 2002 and 2001 35
Notes to Consolidated Financial Statements 36
Supplementary Data
Quarterly Financial Data (Unaudited) 68
(2) The following financial statement schedule is included in this
report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts 80
All other schedules are omitted because they are not
required, inapplicable, or the information is otherwise
shown in the financial statements or notes thereto.
(3) Exhibits
These exhibits, required to be filed by Item 601 of Regulation
S-K, are listed in the Exhibit Index included in this report
at pages 77 through 79.
72
Exhibit
Number Exhibits
------ --------
3.1 Amended Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company.
4.1 Registration Rights Agreement, dated as of February 8, 1995 by and
between the Company and Hillside.
4.2 Indenture, dated as of August 3, 1998, by and between the Company
and First Union National Bank, as trustee.
4.2.1 First Supplemental Indenture, dated as of March 28, 2003, between
the Company and Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee.
4.2.2 Second Supplemental Indenture, dated as of August 7, 2003, between
the Company and Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee.
10.1 Joint Venture Agreement, dated as of December 16, 1992, by and
among Resilient Holdings, Hillside, the Company (collectively, the
"Congoleum Group"), Hillside Capital Incorporated ("Hillside
Capital") and American Biltrite.
10.2 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite.
10.3 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American Biltrite
and the Company.
10.3.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.3.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.3.3 Third Amendment, dated as of March 10, 1998, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.3.4 Fourth Amendment, dated as of November 7, 2002, to Personal
Services Agreement, by and between American Biltrite and the
Company.
10.4 Business Relations Agreement, dated as of March 11, 1993, by and
between American Biltrite and the Company.
10.4.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company.
10.5 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company.
10.6 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico Company").
10.7 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company.
10.8 Undertaking Concerning Amtico Trademark, dated November 29, 1993,
by and between American Biltrite and Amtico Company.
10.9 Form of 1995 Stock Option Plan.
10.9.1 Form of Amendment to 1995 Stock Option Plan.
10.10 Form of Congoleum Corporation 1999 Stock Option Plan for
Non-Employee Directors.
10.10.1 Form of Amendment to Non-Qualified, Non-Employee Directors Stock
Option Plan.
10.11 Loan and Security Agreement, dated December 10, 2001 (the "Congress
Financial Loan Agreement") by and between Congress Financial Corp.
(the "Lender") and the Company.
73
10.11.1 Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial Corporation
and Congoleum Corporation.
10.11.2 Amendment No. 2 to Loan and Security Agreement, dated as of
February 27, 2003, by and between Congress Financial Corporation
and Congoleum Corporation.
10.11.3 Ratification and Amendment Agreement dated January 23, 2004, by and
between the Company and Congress Financial Corporation.
10.12 Settlement Agreement Between the Company and Various Asbestos
Claimants dated April 10, 2003.
10.12.1 First Amendment to Settlement Agreement Between the Company and
Various Asbestos Claimants dated June 6, 2003.
10.13 Collateral Trust Agreement, dated April 16, 2003, by and between
the Company, Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust, and Wilmington Trust
Company, solely in its capacity as Delaware Trustee of the
Collateral Trust.
10.13.1 First Amendment to Collateral Trust Agreement, dated June 6, 2003,
by and between the Company, Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust, and
Wilmington Trust Company, solely in its capacity as Delaware
Trustee of the Collateral Trust.
10.14 Security Agreement, dated April 16, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust.
10.14.1 Second Security Agreement, dated April 17, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust.
10.14.2 Termination Agreement, dated June 6, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust.
10.14.3 Superceding Security Agreement, dated June 11, 2003, by and between
the Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Ernst & Young LLP.
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
33.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Joint Prepackaged Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code of Congoleum Corporation, et al.
99.2 Disclosure Statement of Congoleum Corporation, Congoleum Sales,
Inc. and Congoleum Fiscal, Inc.
74
(b) Reports on Form 8-K.
On December 31, 2003, filed a report on Form 8-K reporting that Congoleum
Corporation issued a press release announcing that it had obtained the asbestos
claimant votes necessary for approval of its pre-packaged Chapter 11 plan of
reorganization and proceeded with its bankruptcy filing in Trenton, New Jersey.
On December 19, 2003, filed a report on Form 8-K reporting that Congoleum
Corporation issued a press release announcing that it had extended the deadline
for votes to be submitted on the approval of its pre-packaged Chapter 11 plan of
reorganization until 5:00 p.m. Eastern Time on December 24, 2003
On November 11, 2003, filed a report in Form 8-K reporting that Congoleum
Corporation, issued a press release announcing its financial results for the
three and nine months ended September 30, 2003.
On October 27, 2003, filed a report on Form 8-K reporting that Congoleum
Corporation issued a press release announcing that it had finalized documents
relating to its pre-packaged Chapter 11 plan of reorganization and mailed them
to asbestos personal injury claimants and other parties in interest.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
30th day of March, 2004.
CONGOLEUM CORPORATION
By: /s/ Roger S. Marcus
-----------------------
Roger S. Marcus
President, Chairman & Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Roger S. Marcus President, Chairman, Chief Executive Officer March 30, 2004
- ------------------------- and Director (Principal Executive Officer)
Roger S. Marcus
/s/ Howard N. Feist III Chief Financial Officer March 30, 2004
- ------------------------- (Principal Financial and Accounting Officer)
Howard N. Feist III
/s/ Richard G. Marcus Vice Chairman and Director March 30, 2004
- -------------------------
Richard G. Marcus
/s/ William M. Marcus Director March 30, 2004
- -------------------------
William M. Marcus
/s/ John N. Irwin III Director March 30, 2004
- -------------------------
John N. Irwin III
/s/ Cyril C. Baldwin, Jr. Director March 30, 2004
- -------------------------
Cyril C. Baldwin, Jr.
/s/ Mark S. Newman Director March 30, 2004
- -------------------------
Mark S. Newman
/s/ Mark N. Kaplan Director March 30, 2004
- -------------------------
Mark N. Kaplan
/s/ C. Barnwell Straut Director March 30, 2004
- -------------------------
C. Barnwell Straut
76
INDEX TO EXHIBITS
Exhibit
Number Exhibits
------ --------
3.1 Amended Certificate of Incorporation of the Company. (3)
3.2 Amended and Restated Bylaws of the Company. (3)
4.1 Registration Rights Agreement, dated as of February 8, 1995 by and
between the Company and Hillside. (2)
4.2 Indenture, dated as of August 3, 1998, by and between the Company
and First Union National Bank, as trustee. (4)
4.2.1 First Supplemental Indenture, dated as of March 28, 2003, between
the Company and Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee. (11)
4.2.2 Second Supplemental Indenture, dated as of August 7, 2003, between
the Company and Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee. (12)
10.1 Joint Venture Agreement, dated as of December 16, 1992, by and
among Resilient Holdings, Hillside, the Company (collectively, the
"Congoleum Group"), Hillside Capital Incorporated ("Hillside
Capital") and American Biltrite. (1)
10.2 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite. (1)
10.3 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American Biltrite
and the Company. (1)
10.3.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company. (2)
10.3.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company. (5)
10.3.3 Third Amendment, dated as of March 10, 1998, to Personal Services
Agreement, by and between American Biltrite and the Company. (5)
10.3.4 Fourth Amendment, dated as of November 7, 2002, to Personal
Services Agreement, by and between American Biltrite and the
Company. (11)
10.4 Business Relations Agreement, dated as of March 11, 1993, by and
between American Biltrite and the Company. (1)
10.4.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company. (5)
10.5 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company. (5)
10.6 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico Company").
(2)
10.7 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company. (2)
10.8 Undertaking Concerning Amtico Trademark, dated November 29, 1993,
by and between American Biltrite and Amtico Company. (2)
10.9 Form of 1995 Stock Option Plan. (2)
10.9.1 Form of Amendment to 1995 Stock Option Plan. (6)
10.10 Form of Congoleum Corporation 1999 Stock Option Plan for
Non-Employee Directors. (8)
10.10.1 Form of Amendment to non-qualified, non-employee Directors Stock
Option Plan. (9)
77
10.11 Loan and Security Agreement, dated December 10, 2001 (the "Congress
Financial Loan Agreement") by and between Congress Financial Corp.
(the "Lender") and the Company. (9)
10.11.1 Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial Corporation
and Congoleum Corporation. (10)
10.11.2 Amendment No. 2 to Loan and Security Agreement, dated as of
February 27, 2003, by and between Congress Financial Corporation
and Congoleum Corporation. (11)
10.11.3 Ratification and Amendment Agreement dated January 7, 2004, by and
between the Company and Congress Financial Corporation.
10.12 Settlement Agreement Between the Company and Various Asbestos
Claimants dated April 10, 2003. (12)
10.12.1 First Amendment to Settlement Agreement Between the Company and
Various Asbestos Claimants dated June 6, 2003. (12)
10.13 Collateral Trust Agreement, dated April 16, 2003, by and between
the Company, Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust, and Wilmington Trust
Company, solely in its capacity as Delaware Trustee of the Collateral
Trust. (12)
10.13.1 First Amendment to Collateral Trust Agreement, dated June 6, 2003,
by and between the Company, Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust, and
Wilmington Trust Company, solely in its capacity as Delaware
Trustee of the Collateral Trust. (12)
10.14 Security Agreement, dated April 16, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust. (12)
10.14.1 Second Security Agreement, dated April 17, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust. (12)
10.14.2 Termination Agreement, dated June 6, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust. (12)
10.14.3 Superceding Security Agreement, dated June 11, 2003, by and between
the Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust. (12)
21.1 Subsidiaries of the Company. (7)
23.1 Consent of Independent Auditors, Ernst & Young LLP.
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
33.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Joint Prepackaged Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code of Congoleum Corporation, et al.(13)
99.2 Disclosure Statement of Congoleum Corporation, Congoleum Sales,
Inc. and Congoleum Fiscal, Inc. (13)
78
- ----------
(1) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Registration Statement on Form S-1 (File No.
33-71836) declared effective by the Securities and Exchange Commission on
January 25, 1994.
(2) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Registration Statement on Form S-1 (File No.
33-87282) declared effective by the Securities and Exchange Commission on
February 1, 1995.
(3) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996.
(4) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.
(5) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K for the fiscal period
ended December 31, 1997.
(6) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K for the fiscal period
ended December 31, 1996.
(7) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K for the fiscal period
ended December 31, 1998.
(8) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Registration Statement on Form S-8 (File No.
33-84387) declared effective by the Securities and Exchange Commission on
August 3, 1999.
(9) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K for the fiscal period
ended December 31, 2001.
(10) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2002.
(11) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K for the period ended
December 31, 2002.
(12) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q for the period
ended June 30,2003.
(13) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Current Report on Form 8-K dated October 27,
2003.
79
SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Reversed to Balance
Beginning Income Other At end
Of Period Statement Changes Deductions (a) of Period
--------- --------- ------- -------------- ---------
Year ended December 31, 2003: $(1,204) $ 34 $121(b) $(1,049)
Allowance for doubtful
Accounts and cash
Discounts
Year ended December 31, 2002: $(1,859) $655(b) $(1,204)
Allowance for
doubtful Accounts
and cash Discounts
Year ended December 31, 2001: $(1,934) $ -- $ 67(b) $ 8 $(1,859)
Allowance for
doubtful Accounts
and cash Discounts
(a) Balances written off, net of recoveries.
(b) Represents net provision (utilization) of the allowance for doubtful
accounts and cash discounts.
80