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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of Registrant as specified in Its Charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices, including Zip Code)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES|_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2004
----------------------------- --------------------------------
Class A Common Stock 3,651,190
Class B Common Stock 4,608,945
CONGOLEUM CORPORATION
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003....................................3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2004 and 2003
(unaudited)..........................................................4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 (unaudited)............5
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)..........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................22
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........31
Item 4. Controls and Procedures.............................................32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........32
Item 3. Defaults Upon Senior Securities.....................................32
Item 4. Submission of Matters to a Vote of Security Holders.................32
Item 5. Other Information...................................................32
Item 6. Exhibits............................................................33
Signatures...................................................................34
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
September 30, December 31,
2004 2003
- ---------------------------------------------------------------------------------------
(unaudited)
- ---------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 27,586 $ 2,169
Restricted cash 18,077 1,757
Accounts receivable, net 18,569 13,560
Inventories 43,096 44,995
Prepaid expenses and other current assets 8,089 9,672
Deferred income taxes 8,457 8,752
- -------------------------------------------------------------------------------------
Total current assets 123,874 80,905
Property, plant and equipment, net 81,125 87,035
Other assets, net 7,552 7,959
- -------------------------------------------------------------------------------------
Total assets $ 212,551 $ 175,899
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 13,534 $ 4,544
Accrued liabilities 27,092 24,655
Asbestos-related liabilities 21,712 9,819
Revolving Credit Loan - secured debt 8,638 10,232
Accrued taxes 2,463 130
Deferred income taxes 4,556 4,376
- -------------------------------------------------------------------------------------
Total current liabilities 77,995 53,756
- -------------------------------------------------------------------------------------
Liabilities subject to compromise 153,804 --
Long-term debt -- 99,773
Accrued pension liability -- 24,032
Other liabilities -- 11,222
Deferred income taxes 3,900 4,376
Accrued post retirement benefit obligation -- 8,517
- -------------------------------------------------------------------------------------
Total liabilities 235,699 201,676
=====================================================================================
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 September 30, 2004 and
December 31, 2003, respectively 47 47
Class B common stock, par value $0.01; 4,608,945 shares
authorized issued and outstanding 46 46
Additional paid-in capital 49,105 49,105
Retained deficit (44,700) (46,778)
Accumulated other comprehensive loss (19,833) (20,384)
Less Class A common stock held in treasury, at cost;
1,085,760 shares 7,813 7,813
- -------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (23,148) (25,777)
- -------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity (deficit) $ 212,551 $ 175,899
=====================================================================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share amounts)
Net sales ......................................... $ 58,871 $ 61,139 $173,822 $169,715
Cost of sales ..................................... 41,812 46,126 126,326 129,779
Selling, general and administrative expenses ...... 12,959 13,356 37,961 39,072
-------- -------- -------- --------
Income from operations ......................... 4,100 1,657 9,535 864
Other income (expense):
Interest income ................................ 26 7 26 55
Interest expense ............................... (2,417) (2,278) (6,976) (6,748)
Other income ................................... 212 310 877 946
-------- -------- -------- --------
Income (loss) before taxes ..................... 1,921 (304) 3,462 (4,883)
Provision (benefit) for income taxes .............. 768 (1,584) 1,384 (1,584)
-------- -------- -------- --------
Net Income (loss) ................................. $ 1,153 $ 1,280 $ 2,078 $ (3,299)
======== ======== ======== ========
Net Income (loss) per common
share, basic ............................ $ 0.14 $ 0.15 $ 0.25 $ (0.40)
======== ======== ======== ========
Net Income (loss) per common
share, diluted .......................... $ 0.13 $ 0.15 $ 0.25 $ (0.40)
======== ======== ======== ========
Weighted average number of common
shares outstanding, basic ............... 8,260 8,260 8,260 8,260
======== ======== ======== ========
Weighted average number of common
shares outstanding, diluted ............. 8,583 8,260 8,422 8,260
======== ======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------
2004 2003
(In thousands)
Cash flows from operating activities:
Net Income (loss) ....................................... $ 2,078 $ (3,299)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation ........................................ 8,126 8,352
Amortization ........................................ 419 419
Deferred income taxes ............................... 550 --
Changes in certain assets and liabilities:
Accounts and notes receivable ..................... (5,009) (2,752)
Inventories ....................................... 1,899 5,070
Prepaid expenses and other assets ................. 3,498 3,615
Accounts payable .................................. 8,990 (3,096)
Accrued expenses .................................. 14,526 (7,009)
Asbestos-related expenses ......................... (4,500) (11,145)
Other liabilities ................................. 504 (850)
-------- --------
Net cash provided by (used in) operating
activities ................................... 31,081 (10,695)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (2,246) (3,969)
Proceeds from asset retirement ....................... 30 --
-------- --------
Net cash used in investing activities .......... (2,216) (3,969)
-------- --------
Cash flows from Financing activities:
Net short-term (payments) borrowings ................. (1,594) 8,497
Net change in restricted cash ........................ (1,854) (4,117)
-------- --------
Net cash (used in) provided by financing
activities ................................... (3,448) 4,380
-------- --------
Net increase (decrease) in cash and cash equivalents ....... 25,417 (10,284)
Cash and cash equivalents:
Beginning of period ..................................... 2,169 18,277
-------- --------
End of period ........................................... $ 27,586 $ 7,993
======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of Congoleum Corporation's (the "Company" or
"Congoleum") consolidated financial position, results of operations and cash
flows have been included. Operating results for the three and nine-month periods
ended September 30, 2004 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2004. For further information,
refer to the consolidated financial statements and related footnotes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Based upon the nature of the Company's operations, facilities and
management structure, the Company considers its business to constitute a single
segment for financial reporting purposes.
Certain amounts appearing in the prior period's condensed consolidated
financial statements have been reclassified to conform to the current period's
presentation.
The financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. As described more fully below
and in Note 6, there is substantial doubt about the Company's ability to
continue as a going concern unless it obtains relief from its substantial
asbestos liabilities through a successful reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code").
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 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 requisite votes of asbestos
personal injury claimants necessary to seek approval of a proposed, pre-packaged
Chapter 11 plan of reorganization. In January 2004, the Company filed its
proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. On November 8, 2004 Congoleum filed a modified plan of reorganization and
related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Creditors' Committee, the
Future Claimants representative and other asbestos claimant representatives. The
Bankruptcy Court has scheduled a hearing to consider approval of the disclosure
statement and plan voting procedures for December 9, 2004. There can be no
assurance that the disclosure statement hearing will not be rescheduled to a
later date, or that the proposed plan of reorganization will not be modified
further. Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
6
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plan of reorganization and related matters.
There can be no assurances that these or other insurance carriers will not file
objections to the recently filed modified plan of reorganization.
The proposed modified plan of reorganization, if confirmed, would leave
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against the Company. The proposed modified 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 (the
"Plan Trust") that would fund the settlement of all pending and future asbestos
claims and protect the Company from future asbestos-related claims and
litigation by channeling all asbestos claims to the Plan Trust pursuant to the
provisions of Section 524(g) of the Bankruptcy Code. Other creditors would be
unimpaired under the plan. The Company anticipates that it will take until the
second quarter of 2005 to obtain confirmation of its proposed plan of
reorganization. There can be no assurance that the proposed plan will not be
modified again.
Based on its reorganization, 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 the proposed plan to settle asbestos
liabilities through a Plan Trust established pursuant to the provisions of
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, and the Company may record significant additional charges
should the minimum estimated cost increase.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 6 of the Notes to Unaudited
Condensed 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 of reorganization. As a result, any
alternative plan of reorganization pursued by the Company or confirmed by the
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 approval, 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 has implemented this guidance in its consolidated financial
statements for periods commencing 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. Liabilities for asbestos claims are recorded based
7
upon the minimum amount the Company expects to spend for its contribution to,
and costs to settle asbestos liabilities through, a Plan Trust established under
Section 524(g) of the Bankruptcy Code. Obligations arising post-petition, and
pre-petition obligations that are secured or that the Bankruptcy Court has
authorized the Company to pay, are not classified as liabilities subject to
compromise. Other 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. Recent Accounting Principles
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 Interpretation") resulting in
multiple effective dates based on the nature as well as the creation date of the
VIE. The adoption of FIN 46 and the Revised Interpretation had no impact on the
Company's consolidated financial statements.
The Company discloses stock-based compensation information in accordance
with FASB Statement No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123"
and 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 companies 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 (loss), as reported, to pro forma net
income (loss) 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
earnings per share is as follows (in thousands, except per share data):
(dollars in thousands, except per For the Three Months For the Nine Months
share amounts) Ended September 30, Ended September 30,
2004 2003 2004 2003
------ ------ ------ -------
Net Income / (Loss):
As reported $1,153 $1,280 $2,078 $(3,299)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects, pro forma (57) (53) (161) (156)
------ ------ ------ -------
As adjusted $1,096 $1,227 $1,917 $(3,455)
====== ====== ====== =======
Net Income / (Loss) per share:
Basic, as reported $ 0.14 $ 0.15 $ 0.25 $ (0.40)
Pro forma compensation expense (0.01) (0.01) (0.02) (0.02)
------ ------ ------ -------
Basic, as adjusted $ 0.13 $ 0.14 $ 0.23 $ (0.42)
====== ====== ====== =======
8
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
------ ------ ------ ------
Net Income / (Loss) per share:
Diluted, as reported $0.13 $0.15 $0.25 $(0.40)
Pro forma compensation expense (0.01) (0.01) (0.02) (0.02)
----- ----- ----- ------
Diluted, as adjusted $0.12 $0.14 $0.23 $(0.42)
===== ===== ===== ======
3. Inventories
A summary of the major components of inventories is as follows (in
thousands):
September 30, December 31,
2004 2003
---- ----
--------------------------------------------------------------
Finished goods $35,579 $37,959
Work-in-process 2,420 1,266
Raw materials and supplies 5,097 5,770
--------------------------------------------------------------
Total inventories $43,096 $44,995
--------------------------------------------------------------
4. Income / (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net loss by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is calculated by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period.
5. 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 in accordance with SOP 96-1. As assessments and cleanup
programs progress, these liabilities are adjusted based upon the progress in
determining the timing and extent of remedial actions and the related costs and
damages. The recorded liabilities are not reduced by the amount of insurance
recoveries. Such estimated insurance recoveries are reflected in other
non-current 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. The pending proceedings relate to eight
disposal sites in New Jersey, Maryland and Pennsylvania 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
9
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA and certain
other laws, the Company, as a PRP, can be held jointly and severally liable for
all environmental costs associated with a site.
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 81 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998; however, the groundwater remediation phase has not begun
and the remedial investigation/feasibility study related to the groundwater
remediation has not been approved. The PRP group estimated that future costs of
groundwater remediation, based on engineering and consultant studies conducted,
would be approximately $26 million. Congoleum's proportionate share, based on
waste disposed at the site, is estimated to be approximately 5.8%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities. Estimated total cleanup costs, including capital
outlays and future maintenance costs for soil and groundwater remediation are
primarily based on engineering studies.
The outcome of these matters could result in significant expenses or
judgments that could have a material adverse effect on the results of
operations, cash flows, and the financial position of the Company.
6. 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 Bankruptcy Code, and later in 2003,
consistent with this strategy, the Company entered into a settlement agreement
with various asbestos personal injury 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 allowed claimants who qualified to participate in the
Claimant Agreement (the "Qualifying Claimants") to settle their claims for the
Matrix value, secured in part (75%) by a 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 qualified for payment under unfunded
settlement agreements entered into by the Company with plaintiffs that had
asbestos claims pending against the Company and which claims were 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").
10
The Claimant Agreement incorporated pre-existing settlement agreements and
settled certain trial-listed claims 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 for
the remaining 25%. Under the proposed plan of reorganization, after the
establishment of the Plan Trust, the assets in the Collateral Trust would be
transferred to the Plan Trust. The Company expects that any claims subject to
the Claimant Agreement that are unsatisfied as of the confirmation of the plan
of reorganization by the Bankruptcy Court would be channeled to the Plan Trust.
In October 2003, the Company began soliciting acceptances for its proposed
pre-packaged plan of reorganization and the Company received the votes necessary
for acceptance of the plan in late December 2003.
On November 8, 2004 Congoleum announced that it had filed a modified plan
of reorganization and related documents with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos Creditors'
Committee, the Future Claimants representative and other asbestos claimant
representatives. The Bankruptcy Court has scheduled a hearing to consider
approval of the disclosure statement and plan voting procedures for December 9,
2004.
The Company's proposed modified plan of reorganization provides for, among
other things, an assignment of certain rights in, and proceeds of, the Company's
applicable insurance to the Plan 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 Plan Trust
pursuant to the provisions of Section 524(g) of the Bankruptcy Code. The
Company's other creditors are unimpaired under the proposed plan and will be
paid in the ordinary course of business. There can be no assurance that the
disclosure statement will not be modified.
There can be no assurance that the hearing will not be rescheduled to a
later date or that the proposed plan of reorganization will not be modified
further.
Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plan of reorganization and related matters.
There can be no assurances that these or other insurance carriers will not file
objections to the recently filed modified plan of reorganization.
Under the modified plan of reorganization and related documents,
Congoleum's assignment of insurance recoveries to the Collateral Trust is net of
costs incurred in connection with insurance coverage litigation. Congoleum is
entitled to withhold from recoveries, or seek reimbursement from the trust, for
coverage litigation costs incurred after January 1, 2003 in excess of $6 million
of coverage litigation costs. Furthermore, once insurance recoveries exceed $375
million, Congoleum is entitled to withhold from recoveries, or seek
reimbursement from the trust, for the first $6 million of coverage litigation
costs. Congoleum also paid $1.3 million in claims processing fees in connection
with claims settled under the Claimant Agreement. Congoleum is entitled to
withhold from recoveries, or seek reimbursement from the trust for the $1.3
million claims processing fee once insurance recoveries exceed $375 million.
11
In connection with the modifications to the Plan and Collateral Trust,
Congoleum agreed to indemnify the Claimants Counsel and the trustee of the
Collateral Trust for all acts relating to the modification of the Plan and the
Collateral Trust, including attorneys' fees, up to a maximum of $3 million.
The Company's proposed plan of reorganization and related documents
provide for the channeling of asbestos property damage claims in addition to
asbestos personal injury claims to the Plan Trust established pursuant to the
provisions of Section 524(g) of the Bankruptcy Code. There were no property
damage claims asserted against the Company at the time of its bankruptcy filing.
The Bankruptcy Court approved an order establishing a bar date of May 3, 2004
for the filing of asbestos property damage claims. The claims agent appointed in
the Company's bankruptcy proceeding has advised the Company that, as of the Bar
date, it received 35 timely filed asbestos property damage claims asserting
liquidated damages in the amount of approximately $0.8 million plus additional
unspecified amounts. The Company is currently reviewing the filed asbestos
property damage claims.
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 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. This adjustment amount could result
in the principal amount of the note increasing materially. For example, if the
adjustment amount were calculated based on the excess of 51% of the equity value
of Congoleum over $2.7 million during the 90 consecutive day trading period
ended September 30, 2004, the resulting adjustment amount would be $11 million.
Under the terms of the proposed plan, interest on the outstanding principal of
the Company Note will accrue at a rate of 9% per annum, with interest on the
Original Principal Amount payable quarterly and interest on the Additional
Principal Amount 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 become 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
12
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 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
American Biltrite, Inc. (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 Company 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 Company, 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 modified Chapter 11 plan of reorganization, the Company Note and the
ABI Pledge Agreement.
13
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.
14
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 modified 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 remaining 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 $7.2 million at a minimum, and could be materially
higher.
Pending Asbestos Claims
In 2003, the Company was one of many defendants in approximately 22
thousand pending lawsuits (including workers' compensation cases) involving
approximately 106 thousand individuals, alleging personal injury or death from
exposure to asbestos or asbestos-containing products. Claims involving
approximately 80 thousand individuals have been settled pursuant to the Claimant
Agreement and litigation related to unsettled or new claims is presently stayed
by the bankruptcy statute. The Company expects unsettled and future claims to be
handled in accordance with the terms of its plan of reorganization and related
trust.
Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including resilient sheet vinyl and tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company discontinued
the manufacture of asbestos-containing sheet products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing sheet and tile products are nonfriable
(i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
Status of Insurance Coverage
During the period that Congoleum produced asbestos-containing products,
the Company purchased primary and excess insurance policies providing in excess
of $1 billion coverage for general and product liability claims. Through August
2002, substantially all asbestos-related claims and defense costs were paid
through primary insurance coverage. In August 2002, the Company received notice
that its primary insurance limits had been paid in full. The payment of limits
in full by one of the primary insurance companies was based on its contention
15
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 primary insurance limits 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. Congoleum has reached a settlement agreement with the
insurance carrier whose policies contained the non-cumulation provisions,
pursuant to which that carrier will pay Congoleum $15.4 million in full
satisfaction of its policy limits. Pursuant to the terms of the Security
Agreement, the Company is obligated to pay any insurance proceeds it receives
under the settlement agreement, net of any fees and expenses it may be entitled
to deduct, to the Collateral Trust. Payment of such fees and expenses are
subject to Court Order or approval. The Company does not expect this settlement
agreement to have a material effect on its financial condition or results of
operations. As of December 31, 2002, the Company had entered into additional
settlement agreements with asbestos claimants exceeding the amount of previously
disputed coverage. The excess carriers have objected to the reasonableness of
several of these settlements, and Congoleum believes that they 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. The excess insurance carriers
have also raised various objections to the Company's proposed plan of
reorganization.
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. The excess
insurance carriers 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 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. On April 19, 2004, the court denied a motion for
summary judgment by the excess carriers that the Claimant Agreement was not
binding on them because Congoleum had breached the consent and cooperation
clauses of their insurance policies by, among other things, entering into the
Claimant Agreement without their consent. Congoleum argues, among other things,
that it was entitled to enter into the Claimant Agreement and/or the Claimant
Agreement was binding on the excess insurance carriers because they were in
breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and/or the Claimant
Agreement was fair, reasonable and in good faith and/or there was and is no
prejudice to the excess insurance carriers from the Claimant Agreement and/or
the excess insurance carriers had breached their duties of good faith and fair
dealing.
On August 12, 2004, the Court entered a case management order that sets
forth the deadlines for completing fact and expert discovery, establishes
deadlines for dispositive and pre-trial motion practice and divides the trial
into three phases.
16
The first phase of the trial is scheduled to begin on February 28, 2005,
and will address the following issues:
All issues and claims relating to whether the insurers are obligated to
provide coverage under the policies at issue in this litigation for the global
claimant's agreement entered into by Congoleum including but not limited to all
issues and claims relating to both Congoleum's decision and conduct in entering
into the Claimant Agreement and filing a pre-packaged bankruptcy and the
insurance company defendants' decisions and conduct in opposing the Claimant
Agreement and Congoleum's pre-packaged bankruptcy, the reasonableness and good
faith of the Claimant Agreement, whether the Claimant Agreement breached any
insurance policies and, if so, whether the insurance companies suffered any
prejudice, and whether the insurance companies' opposition to the Claimant
Agreement and bankruptcy and various other conduct by the insurers has breached
their duties of good faith and fair dealing such that they are precluded from
asserting that Congoleum's decision to enter into the Claimant Agreement
constitutes any breach(es) on the part of Congoleum.
The second phase of the trial will address all coverage issues, including
but not limited to trigger and allocation. The final phase of the trial
remaining will address bad faith punitive damages, if appropriate.
Given the actions of its excess insurance carriers, the Company believes
it likely that it would currently have to fund any 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:
Nine Months Ended Year Ended
(in millions) September 30, December 31,
2004 2003
---- ----
Indemnity costs paid by the
Company's Insurance carriers $ -- $ --
Indemnity costs paid by the Company -- 0.8
Defense costs paid by the Company 0.4 4.5
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.
There were no non-cash settlements with assignment of insurance proceeds in the
nine months ended September 30, 2004.
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.
17
The Company is seeking recovery from its insurance carriers of the amounts
it has paid for defense and indemnity, and intends to seek recovery for any
future payments of defense and indemnity. In light of the assignment of the
rights to its applicable insurance proceeds to the Collateral Trust and the
planned reorganization, the Company does not anticipate recovering these costs.
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 settlement
agreements and trial listed settlement agreements with claims secured by the
Collateral Trust total $25 million.
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. At September
30, 2004, the Company estimates the minimum remaining amount of the
contributions and costs to be $7.2 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.
Although no additional charge has been recorded in 2004, additional charges may
be required later in the year should the minimum estimated cost increase. 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
liability reserves and receivables for reimbursable coverage related litigation
costs and claims processing fee from December 31, 2003 to September 30, 2004:
Balance at Balance at
(in thousands) 12/31/03 Spending 9/30/04
-------------------------------------------
Reserves $ 9,819 $(2,573) $ 7,246
Receivables (3,586) (1,927) (5,513)
18
7. Product Warranties
The Company provides product warranties for specific product lines and
accrues for estimated future warranty cost in the period in which the revenue is
recognized. The following table sets forth activity in the Company's warranty
reserves (in millions) for the:
Nine Months Ended Year Ended
September 30, December 31,
2004 2003
---- ----
Beginning balance $2.7 $2.6
Accruals 4.4 6.3
Charges (4.2) (6.2)
---- ----
Ending balance $2.9 $2.7
==== ====
8. Liabilities Subject to Compromise
As a result of the Company's Chapter 11 filing (see Notes 1 and 6 to the
Unaudited Condensed Consolidated Financial Statements), pursuant to SOP 90-7,
the Company is required to segregate pre-petition liabilities that are subject
to compromise and report them separately on the consolidated 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 pre-petition debt is recorded at
face value and is classified within liabilities subject to compromise. In
addition, the Company's accrued interest expense on its Senior Notes is also
recorded in liabilities subject to compromise. See Notes 1 and 6 to the
Unaudited Condensed Consolidated Financial Statements for further discussion of
the Company's asbestos liability.
Liabilities subject to compromise at September 30, 2004 are as follows:
(dollars in thousands)
Debt (at face value) $100,000
Pre-petition other payables and accrued interest 11,899
Pension liability 22,105
Other post-retirement benefit obligation 8,195
Pre-petition other liabilities 11,605
--------
Total liabilities subject to compromise $153,804
========
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.
19
9. Accrued Liabilities
A summary of the significant components of accrued liabilities consists of
the following (in thousands):
September 30, December 31,
2004 2003
----------------------------------------------------------------
Accrued warranty, marketing and
sales promotion $19,589 $14,918
Employee Compensation and
Related benefits 5,563 3,474
Interest -- 3,677
Environmental remediation and
Product related liabilities -- 834
Other 1,940 1,752
----------------------------------------------------------------
Total accrued liabilities $27,092 $24,655
----------------------------------------------------------------
Pursuant to SOP 90-7, accrued interest payable and environmental and
certain product related liabilities have been included in liabilities subject to
compromise. See Note 8 to the Unaudited Condensed Consolidated Financial
Statements for further discussion of liabilities subject to compromise.
10. Other Liabilities
A summary of the significant components of other liabilities consists of
the following (in thousands):
September 30, December 31,
2004 2003
-----------------------------------------------------------------
Environmental remediation and
Product-related liabilities $ -- $ 5,105
Accrued workers' Compensation Claims -- 5,130
Other -- 987
-----------------------------------------------------------------
Total other liabilities $ -- $11,222
-----------------------------------------------------------------
Pursuant to SOP 90-7, the other liabilities at September 30, 2004, have
been included in liabilities subject to compromise. See Note 8 to the unaudited
condensed Consolidated Financial Statements for further discussion of
liabilities subject to compromise.
11. Pension Plans
The Company sponsors several non-contributory defined benefit pension
plans covering most of the Company's employees. Benefits under the plan 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
20
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 components of the net periodic benefit cost
for the Pension and Other Benefit Plans for the three months ended September 30,
2004 and 2003:
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
(In thousands)
Components of Net Periodic Benefit Cost:
Service cost ........................... $ 312 $ 50 $ 293 $ 47
Interest cost .......................... 1,052 140 1,056 137
Expected return on plan assets ......... (842) -- (692) --
Recognized net actuarial loss .......... 349 11 399 9
Amortization of transition obligation .. (18) -- (18) --
Amortization of prior service cost ..... (72) (116) (71) (116)
------- ----- ------- -----
Net periodic benefit cost .................. $ 781 $ 85 $ 967 $ 77
======= ===== ======= =====
The following summarizes the components of the net periodic benefit cost
for the Pension and Other Benefit Plans for the nine months ended September 30,
2004 and 2003:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
(In thousands)
Components of Net Periodic Benefit Cost:
Service cost ........................... $ 982 $ 150 $ 880 $ 141
Interest cost .......................... 3,212 420 3,167 411
Expected return on plan assets ......... (2,538) -- (2,077) --
Recognized net actuarial loss .......... 1,098 33 1,196 27
Amortization of transition obligation .. (54) -- (54) --
Amortization of prior service cost ..... (214) (348) (212) (348)
------- ----- ------- -----
Net periodic benefit cost .................. $ 2,486 $ 255 $ 2,900 $ 231
======= ===== ======= =====
21
The weighted average assumptions used to determine net periodic benefit
cost were as follows:
September 30, 2004 September 30, 2003
------------------ ------------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Discount rate.............................. 6.25% 6.75% 6.25% 6.75%
Expected long-term return on plan assets... 7.00% -- 7.00% --
Rate of compensation increase.............. 4.00%- -- 4.00%- --
5.50% 5.50%
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto contained in Item
1 of this Quarterly Report on Form 10-Q.
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. Please refer to the section entitled "Risk Factors That May Affect
Future Results" for additional discussion of factors that could cause actual
results to differ significantly from historical results or statements regarding
the Company's expectations regarding future events.
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 requisite votes of the
asbestos personal injury claimants necessary to seek approval of a proposed
pre-packaged Chapter 11 plan of reorganization. In January 2004, the Company
filed its proposed pre-packaged plan of reorganization and disclosure statement
with the court. On November 8, 2004 Congoleum announced that it had filed a
modified plan of reorganization and related documents with the Bankruptcy Court
reflecting the result of further negotiations with representatives of the
Asbestos Creditors' Committee, the Future Claimants representative, and other
asbestos claimant representatives. The Bankruptcy Court has scheduled a hearing
to consider approval of the disclosure statement and plan voting procedures for
December 9, 2004. There can be no assurances that the disclosure statement
hearing will not be rescheduled, that Congoleum will obtain the requisite
acceptances of the proposed plan of reorganization, or that the plan will not be
22
modified further. The Company is presently involved in litigation with certain
insurance carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to the
Company's previously proposed plan of reorganization and related matters. There
can be no assurances that these or other insurance carriers will not file
objections to the recently filed modified plan of reorganization.
The proposed modified plan of reorganization, if confirmed, would leave
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against the Company. The proposed modified 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 claims and litigation by channeling all
asbestos claims to the Plan Trust pursuant to the provisions of Section 524(g)
of the Bankruptcy Code. Other creditors would be unimpaired under the plan. The
Company expects that it will take the balance of 2004 to obtain confirmation of
its proposed plan of reorganization.
Based on its reorganization, 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 pursuant to the provisions of 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.
Further, although no charges have been recorded in 2004, significant additional
charges may be required later in the year should the minimum estimated cost
increase. 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 its
proposed 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 6 of the Notes to
Unaudited Condensed Consolidated Financial Statements contained in this Report.
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.
Results of Operations
Three and nine months ended September 30, 2004 as compared to three and nine
months ended September 30, 2003.
Net sales for the quarter ended September 30, 2004 were $58.9 million as
compared to $61.1 million for the quarter ended September 30, 2003, a decrease
of $2.2 million, or 3.6%. The decrease in sales resulted primarily from lower
sales into the manufactured housing industry coupled with reduced shipments of
tile to the mass merchandiser customers. Partially offsetting these declines
were improvements in resilient sheet sales reflecting a new product
23
introduction, Xclusive, and slight sales growth in the Duraproduct category.
Year to date net sales totaled $173.8 million as compared to $169.7 million for
the same period last year, an increase of $4.1 million, or 2.4%. Higher sales to
the manufactured housing industry accounted for substantially all the increase.
Gross profit for the quarter ended September 30, 2004 totaled $17.1
million, or 29.0% of net sales, compared to $15.0 million, or 24.6% of net sales
for the same period last year. The increase in gross profit reflects a sharp
improvement in mix resulting from Xclusive, a new sheet product introduction,
the impact of selling price increases, and the benefit of cost reduction
programs instituted in 2003 partially offset by significantly higher raw
material pricing. Year to date gross profit was $47.5 million, or 27.3% of net
sales compared to $39.9 million, or 23.5% of net sales for the same period last
year. The increase in gross profit reflects the higher sales, an improvement in
sales mix, and the ongoing benefit of cost reduction programs instituted in late
2003, partially offset by sharply higher raw-material costs. The Company expects
the higher raw material cost trends experienced in the third quarter to continue
or even worsen into the fourth quarter, and adversely pressure profit margins
during the balance of 2004.
Selling, general and administrative expenses were $13.0 million for the
quarter ended September 30, 2004 as compared to $13.4 million for the quarter
ended September 30, 2003, a decrease of $0.4 million. The decrease in expenses
reflects a severance charge taken in the third quarter of 2003 for workforce
reductions coupled with lower marketing expenses, partially offset by higher
research and development costs and medical and pension expenses. As a percent of
net sales, selling, general and administrative expenses were 22.0% of sales for
the quarter ended September 30, 2004 compared to 21.8% of sales for the quarter
ended September 30, 2003. Year to date selling, general and administrative
expenses totaled $38.0 million down $1.1 million versus the same period last
year, reflecting elimination of severance charges incurred in 2003 and lower
marketing expenses partially offset by higher research and development related
expenses. As a percent of net sales, selling, general and administrative
expenses totaled 21.8% for the nine months ended September 30, 2004 compared to
23.0% for the same period last year.
Income from operations was $4.1 million for the quarter ended September
30, 2004 compared to $1.7 million for the same period last year. The improvement
in operating income reflects the higher gross profit coupled with lower selling,
general and administrative expenses. Year to date income from operations totaled
$9.5 million as compared to $0.9 million for the same period last year resulting
from the improvement in gross profit coupled with lower selling, general and
administrative expenses.
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
condensed 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 Unaudited Condensed Consolidated
Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q,
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.
24
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 6 of the Notes to Consolidated Financial
Statements, which are contained in Item 1 of the Quarterly Report on Form 10-Q.
These matters have had and will continue to 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. During the
first nine months of 2004, the Company spent $4.5 million and during the balance
of 2004, expects to incur an additional $7.2 million at a minimum in fees,
expenses, and trust contributions in connection with obtaining confirmation of
its plan. Actual amounts that will be contributed to the Plan Trust and costs
for implementing the Plan of Reorganization could be materially higher. The
Company also expects to recover $5.5 million from insurance recoveries, the
Collateral Trust or its successor pursuant to terms of the Claimant Agreement
and related documents, which provide for the Collateral Trust to reimburse
certain insurance coverage litigation expenses of the Company. Timing of such
recovery will depend on when insurance recoveries exceed $375 million.
Unrestricted cash and cash equivalents, including short-term investments
at September 30, 2004, were $27.6 million, an increase of $25.4 million from
December 31, 2003. 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. Funds deposited in this account but not yet applied
to the loan balance which amounted to $3.6 million and $1.8 million at September
30, 2004 and December 31, 2003 respectively, are recorded as restricted cash.
Additionally, a $14.5 million settlement received in August 2004 from an
insurance carrier, which is subject to the lien of the Collateral Trust is
included as restricted cash at September 30, 2004. Working capital was $45.9
million at September 30, 2004, up from $27.1 million at December 31, 2003. The
ratio of current assets to current liabilities at September 30, 2004 was 1.6 to
one, compared to 1.5 to one at December 31, 2003. Net cash provided by
operations during the first nine months of 2004 was $31.1 million, as compared
to cash used by operations of $10.7 million in the first nine months of 2003.
The increase in cash provided by operations in the first nine months of 2004
versus the first nine months of 2003 was primarily due to the unusually low
level of accounts payable and accrued expenses at December 31, 2003. This
unusually low level was due to limited manufacturing activity, coupled with
creditors managing their pre-petition credit exposure and Congoleum prepaying
certain expenses prior to its December 31, 2003 bankruptcy filing. As a result
of its bankruptcy filing, the Company was not permitted to make $8.6 million in
interest payments on its Senior Notes that were due February 1, 2004, and August
1, 2004, respectively which also reduced cash usage in the first nine months of
2004 compared to 2003. Expenditures related to asbestos liabilities and the
Company's reorganization plan were $4.5 million in 2004, compared to $11.1
million in 2003, which also contributed to the increase in cash from operations.
Capital expenditures in the first nine months of 2004 totaled $2.2 million. The
Company is currently planning capital expenditures of approximately $5 million
in 2004.
25
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 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 September 30, 2004. Borrowings under this
facility are collateralized by inventory and receivables. At September 30, 2004,
based on the level of receivables and inventory, $23.1 million was available
under the facility, of which $4.3 million was utilized for outstanding letters
of credit and $8.6 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
will be renewed beyond its 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 Note 5 to the Unaudited
Condensed Consolidated Financial Statements). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of the
Company's owned and previously owned facilities. The 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
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 customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant
expenses incurred by, or judgments assessed against, the Company.
26
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, 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, and planned capital expenditures for the foreseeable future, plus 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 Company also anticipates it will be
able to obtain exit financing upon confirmation of its proposed plan. Such
financing will be required to replace its debtor-in-possession credit facility
and permit the Company to pay accrued interest on its Senior Notes and other
obligations needed to be satisfied in connection with the confirmation of the
proposed plan of reorganization.
Risk Factors That May Affect Future Results
The Company has significant asbestos liability and funding exposure, and its
modified plan of reorganization may not be confirmed.
As more fully set forth in Notes 1 and 6 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 these obligations pursuant to the terms of its
reorganization plan is dependent on obtaining the necessary votes accepting the
plan and 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
acceptance or confirmation of its modified 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. 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, classes of creditors, or other parties in the Bankruptcy proceeding
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 controlling shareholder's, American
Biltrite Inc.'s, lenders, customers, suppliers and other constituencies to the
27
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 maybe 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 the Company,
(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 6 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 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
28
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. Recent industry supply
conditions for specialty resins used in flooring have been very tight, despite
significant price increases, in part due to a fire at a large resin plant
earlier in 2004. Although the Company has not experienced any difficulties
obtaining resin, there can be no assurances that it may not have difficulty in
the future, particularly if global supply conditions deteriorate.
The Company believes that suitable alternative suppliers are available for
substantially all other 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.
29
In addition, the Company could incur significant increases in the costs of
its raw materials. Although the Company generally attempts to pass on increases
in the costs of its raw materials to its customers, the Company's ability to do
so is, to a large extent, dependent upon the rate and magnitude of any increase,
competitive pressures and market conditions for its products. There have been in
the past, and may be in the future, periods of time during which increases in
these costs cannot be recovered. During those periods of time, there could be a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company operates in a highly competitive flooring industry and some of its
competitors have greater resources and broader distribution channels than the
Company.
The market for the Company's products is highly competitive. The Company
encounters competition from three other manufacturers in North America 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 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.
30
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 have historically
accounted for 60% to 65% of the Company's net sales.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 87%
of the Company's outstanding long-term debt as of September 30, 2004 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 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this quarterly 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 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 II. OTHER INFORMATION
Item 1. Legal Proceedings: The information contained in Note 5
"Environmental and Other Liabilities" and Note 6 "Asbestos
Liabilities" of the Notes to Unaudited Condensed Consolidated
Financial Statements is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: The commencement of the
Chapter 11 proceedings constituted an event of default under the
indenture governing the Company's 8 5/8% Senior Notes. In
addition, due to the Chapter 11 proceedings, the Company was
precluded from making the interest payments due February 1, 2004
and August 1, 2004 on the Senior Notes. The amount of accrued
interest that was not paid on the Senior Notes on those dates is
approximately $8.6 million. As of September 30, 2004, the
principal amount of the Senior Notes is approximately $100
million. These amounts, plus $309,000 of accrued interest on the
interest due but not paid on February 1, 2004 and August 1, 2004
are included in "Liabilities Subject to Compromise."
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
32
Item 6. Exhibits:
(a) Exhibits
Exhibit
Number Exhibits
------ --------
3.1 Amended Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
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.
32.2 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.
33
CONGOLEUM CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: November 12, 2004 By: /s/ Howard N. Feist III
----------------------------------
(Signature)
Howard N. Feist III
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial & Accounting Officer)
34
Exhibit Index
Exhibit
Number Exhibits
------ --------
3.1 Amended Certificate of Incorporation of the Company(1)
3.2 Amended and Restated Bylaws of the Company(1)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
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.
32.2 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.
(1) 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.
35