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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2004 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655 (Registrant's telephone
number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at November 4, 2004
- ------------------- -------------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets--Assets as of
September 30, 2004 (unaudited) and December 31, 2003 ....... 3
Consolidating Condensed Balance Sheets--Liabilities
and Stockholders' Equity as of September 30, 2004
(unaudited) and December 31, 2003 ......................... 4
Consolidating Condensed Statements of Operations
for the three months ended September 30, 2004
and 2003 (unaudited) ...................................... 5
Consolidating Condensed Statements of Operations
for the nine months ended September 30, 2004 and
2003 (unaudited) .......................................... 6
Consolidating Condensed Statements of Cash Flows
for the nine months ended September 30, 2004 and
2003 (unaudited) .......................................... 7
Notes to Unaudited Consolidating Condensed Financial
Statements ................................................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ............................................... 42
Item 4. Controls and Procedures ................................... 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................... 43
Item 3. Defaults Upon Senior Securities ........................... 43
Item 6. Exhibits .................................................. 44
Signature .......................................................... 45
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
September December September December September December September December
30, 2004 31, 2003 30, 2004 31, 2003 30, 2004 31, 2003 30, 2004 31, 2003
------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 28,108 $ 3,959 $ 27,586 $ 2,169 $ 522 $ 1,790
Restricted cash 18,077 1,757 18,077 1,757
Accounts receivable, net 48,340 36,010 $ (95) $(280) 18,569 13,560 29,866 22,730
Inventories 84,781 81,480 (223) (240) 43,096 44,995 41,908 36,725
Assets of discontinued
operation 2,809 2,902 2,809 2,902
Deferred income taxes 10,738 11,033 8,457 8,752 2,281 2,281
Prepaid expense & other
current assets 10,633 13,113 8,089 9,672 2,544 3,441
------------------------------------------------------------------------------------------------
Total current assets 203,486 150,254 (318) (520) 123,874 80,905 79,930 69,869
Proper, plant & equipment,
net 125,494 134,285 81,125 87,035 44,369 47,250
Other assets:
Insurance for
asbestos-related
liabilities 10,700 10,700 10,700 10,700
Goodwill, net 11,300 11,300 11,300 11,300
Other assets 11,423 13,440 (186) (186) 7,552 7,959 4,057 5,667
------------------------------------------------------------------------------------------------
33,423 35,440 (186) (186) 7,552 7,959 26,057 27,667
------------------------------------------------------------------------------------------------
Total assets $362,403 $319,979 $(504) $(706) $212,551 $175,899 $150,356 $144,786
================================================================================================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
September December September December September December September December
30, 2004 31, 2003 30, 2004 31, 2003 30, 2004 31, 2003 30, 2004 31, 2003
------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 25,378 $ 13,327 $ (95) $ (280) $ 13,534 $ 4,544 $ 11,939 $ 9,063
Accrued expenses 49,371 42,261 29,555 24,785 19,816 17,476
Asbestos-related liabilities 21,712 9,819 21,712 9,819 -- --
Liabilities of discontinued
operation 318 688 -- -- 318 688
Deferred income taxes 4,556 4,376 4,556 4,376 -- --
Notes payable 19,379 18,125 8,638 10,232 10,741 7,893
Current portion of
long-term debt 21,319 21,289 -- -- 21,319 21,289
------------------------------------------------------------------------------------------------
Total current liabilities 142,033 109,885 (95) (280) 77,995 53,756 64,133 56,409
Long-term debt, less current
portion 2,943 103,626 -- 99,773 2,943 3,853
Asbestos-related liabilities 10,700 10,700 10,700 10,700
Other liabilities 17,435 62,126 -- (186) 3,900 48,147 13,535 14,165
Noncontrolling interests 589 663 589 663
Liabilities subject to
compromise 153,618 -- (186) -- 153,804 --
------------------------------------------------------------------------------------------------
327,318 287,000 (281) (466) 235,699 201,676 91,900 85,790
Stockholders' equity
Common stock 46 46 (93) (93) 93 93 46 46
Additional paid-in capital 19,548 19,548 (49,105) (49,105) 49,105 49,105 19,548 19,548
Retained earnings 48,709 47,573 35,052 35,035 (44,700) (46,778) 58,357 59,316
Accumulated other
comprehensive loss (18,086) (19,056) 6,110 6,110 (19,833) (20,384) (4,363) (4,782)
Less treasury shares (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
------------------------------------------------------------------------------------------------
Total stockholders' equity 35,085 32,979 (223) (240) (23,148) (25,777) 58,456 58,996
------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $362,403 $319,979 $ (504) $ (706) $212,551 $175,899 $150,356 $144,786
================================================================================================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended September 30, 2004 and 2003
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2004 2003 2004 2003 2004 2003 2004 2003
-----------------------------------------------------------------------------------------
Net sales $113,180 $107,825 $ 56 $ (1) $58,871 $61,139 $54,253 $46,687
Cost of products sold 80,564 78,807 52 (13) 41,812 46,126 38,700 32,694
Selling, general &
administrative expenses 26,520 26,701 12,959 13,356 13,561 13,345
-----------------------------------------------------------------------------------------
Income from operations 6,096 2,317 4 12 4,100 1,657 1,992 648
Other (income) expense
Interest income (26) (21) (26) (7) -- (14)
Interest expense 3,136 2,849 2,417 2,278 719 571
Other (income) expense 12 (350) 56 16 (212) (310) 168 (56)
-----------------------------------------------------------------------------------------
3,122 2,478 56 16 2,179 1,961 887 501
-----------------------------------------------------------------------------------------
Income (loss) before taxes 2,974 (161) (52) (4) 1,921 (304) 1,105 147
and other items
Provision (credit) for income
taxes 1,342 (1,562) 768 (1,584) 574 22
Noncontrolling interests (118) (53) (118) (53)
-----------------------------------------------------------------------------------------
Income from continuing
operations 1,514 1,348 (52) (4) 1,153 1,280 413 72
Discontinued operation (70) (922) (70) (922)
-----------------------------------------------------------------------------------------
Net income (loss) $ 1,444 $ 426 $(52) $ (4) $ 1,153 $ 1,280 $ 343 $ (850)
=========================================================================================
Income per common share
from continuing operations,
basic and diluted $ 0.44 $ 0.39
Discontinued operation (0.02) (0.27)
----------------------
Net income per common
share, basic and diluted $ 0.42 $ 0.12
======================
Weighted average number
of common and equivalent
shares outstanding
Basic 3,442 3,442
======================
Diluted 3,466 3,442
======================
Dividends declared per common
share $ -- $ --
======================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Nine Months Ended September 30, 2004 and 2003
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2004 2003 2004 2003 2004 2003 2004 2003
------------------------------------------------------------------------------------------
Net sales $325,105 $313,271 $ 146 $ 22 $173,822 $169,715 $151,137 $143,534
Cost of products sold 234,034 231,200 (86) 11 126,326 129,779 107,794 101,410
Selling, general &
administrative expenses 79,166 80,111 37,961 39,072 41,205 41,039
------------------------------------------------------------------------------------------
Income from operations 11,905 1,960 232 11 9,535 864 2,138 1,085
Other (income) expense
Interest income (38) (171) (26) (55) (12) (116)
Interest expense 9,185 8,386 6,976 6,748 2,209 1,638
Other (income) expense (256) (1,970) 215 59 (877) (946) 406 (1,083)
------------------------------------------------------------------------------------------
8,891 6,245 215 59 6,073 5,747 2,603 439
------------------------------------------------------------------------------------------
Income (loss) before taxes
and other items 3,014 (4,285) 17 (48) 3,462 (4,883) (465) 646
Provision (credit) for income
taxes 1,395 (1,381) 1,384 (1,584) 11 203
Noncontrolling interests (141) (143) (141) (143)
------------------------------------------------------------------------------------------
Income (loss) from
continuing operations 1,478 (3,047) 17 (48) 2,078 (3,299) (617) 300
Discontinued operation (342) (11,538) (342) (11,538)
------------------------------------------------------------------------------------------
Net income (loss) $ 1,136 $ (14,585) $ 17 $(48) $ 2,078 $ (3,299) $ (959) $(11,238)
==========================================================================================
Income (loss) per common
share from continuing
operations, basic and
diluted $ 0.43 $ (0.89)
Discontinued operation (0.10) (3.35)
-----------------------
Net income (loss) per
common share, basic
and diluted $ 0.33 $ (4.24)
=======================
Weighted average number of
common and equivalent
shares outstanding
Basic 3,442 3,442
=======================
Diluted 3,455 3,442
=======================
Dividends declared per
common share $ -- $ 0.1875
=======================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2004 and 2003
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2004 2003 2004 2003 2004 2003 2004 2003
-------------------------------------------------------------------------------
Operating activities
Net income (loss) $ 1,136 $(14,585) $ 17 $(48) $ 2,078 $ (3,299) $ (959) $(11,238)
Net loss from discontinued operation 342 11,538 342 11,538
--------------------------------------------------------------------------------
Income (loss) from continuing operations 1,478 (3,047) 17 (48) 2,078 (3,299) (617) 300
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 13,246 13,498 8,545 8,771 4,701 4,727
Deferred income taxes 550 -- 550 --
Loss on disposal of property and equipment 184 -- 184 --
Change in operating assets and liabilities:
Accounts and notes receivable (12,326) (4,826) (282) (790) (5,009) (2,752) (7,035) (1,284)
Inventories (2,984) 6,401 (17) 48 1,899 5,070 (4,866) 1,283
Prepaid expenses and other assets 6,009 4,482 3,498 3,615 2,511 867
Accounts payable and accrued expenses 28,870 (9,529) 282 790 23,516 (10,105) 5,072 (214)
Asbestos-related expenses (4,500) (11,145) (4,500) (11,145)
Noncontrolling interests (74) 143 (74) 143
Other (155) (1,150) 504 (850) (659) (300)
--------------------------------------------------------------------------------
Net cash provided (used) by operating
activities 30,298 (5,173) -- -- 31,081 (10,695) (783) 5,522
Investing activities
Investments in property, plant and equipment (3,955) (6,062) (2,246) (3,969) (1,709) (2,093)
Proceeds from sale of property, plant
and equipment 30 -- 30 --
--------------------------------------------------------------------------------
Net cash used by investing activities (3,925) (6,062) -- -- (2,216) (3,969) (1,709) (2,093)
Financing activities
Net short-term borrowings 982 10,044 (1,594) 8,497 2,576 1,547
Payments on long-term debt (897) (865) (897) (865)
Net change in restricted cash (1,854) (4,117) (1,854) (4,117)
Dividends paid -- (645) -- (645)
--------------------------------------------------------------------------------
Net cash (used) provided by financing
activities (1,769) 4,417 -- -- (3,448) 4,380 1,679 37
Effect of foreign exchange rate changes on cash 164 (1,463) 164 (1,463)
--------------------------------------------------------------------------------
Net cash provided (used) by continuing
operations 24,768 (8,281) -- -- 25,417 (10,284) (649) 2,003
Net cash used by discontinued operations (619) (2,554) (619) (2,554)
Cash and cash equivalents at beginning of period 3,959 20,160 2,169 18,277 1,790 1,883
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $28,108 $ 9,325 $ -- $ -- $27,586 $ 7,993 $ 522 $ 1,332
================================================================================
See accompanying notes to consolidating condensed financial statements.
7
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and provisions for
discontinued operations) considered necessary for a fair presentation 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 footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Historical financial results have been restated to reflect the classification of
American Biltrite Inc.'s wholly owned subsidiary, Janus Flooring Corporation
("Janus"), as a discontinued operation in accordance with the Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets" (See Note H).
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") filed a
reorganization plan on December 31, 2003. The accompanying consolidating
condensed financial statements include the results for Congoleum for all periods
presented. ABI continues to own a majority of the voting stock of Congoleum. As
a result, the Company expects to continue to control Congoleum while it is in
reorganization proceedings. On November 8, 2004, Congoleum filed a modified plan
of reorganization, disclosure statement and related documents with the
Bankruptcy Court. Although there can be no assurances that the plan will not be
modified again or that Congoleum will obtain the necessary acceptances and
approvals required for confirmation of the plan, the terms of the plan
anticipate no changes in equity ownership of Congoleum upon emergence from
reorganization. Accordingly, the Company has elected to continue to consolidate
the financial statements of Congoleum in its consolidated results because it
believes that is the appropriate presentation given its anticipated continuing
control of Congoleum. However, the accompanying financial statements also
present the details of consolidation to separately show the financial condition,
operating results and cash flows of ABI (excluding Congoleum and its wholly
owned subsidiaries) and Congoleum and its wholly owned subsidiaries, which may
be more meaningful for certain analyses.
8
Note A - Basis of Presentation (continued)
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
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum'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 American Institute of Certified Public Accountants 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 United States Bankruptcy Code ("the Bankruptcy Code").
Congoleum has implemented this guidance in its consolidated financial statements
for periods commencing after December 31, 2003. Pursuant to SOP 90-7, companies
in reorganization under the Bankruptcy Code 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 upon the minimum amount Congoleum 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 Congoleum to pay, are not classified as
liabilities subject to compromise. Other pre-petition claims (which would be
classified as liabilities subject to compromise) may arise due to the rejection
by Congoleum of executory contracts or unexpired leases pursuant to the
Bankruptcy Code, or as a result of the allowance by the Bankruptcy Court of
contingent or disputed claims.
The consolidated balance sheet at December 31, 2003 has been derived from the
audited financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidating condensed
financial statements have been reclassified to conform to the current period's
presentations.
9
Note B - Stock Based Compensation
The Company and Congoleum disclose 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 provision of SFAS 123 that permits 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 and Congoleum have
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 consolidated net income (loss), as reported, to pro forma
consolidated net income (loss) including compensation expense for the Company's
and Congoleum's stock-based plans as calculated based on the fair value at the
grant dates for awards made under these plans in accordance with the provisions
of SFAS 123 as amended by SFAS 148, as well as a comparison of as reported and
pro forma basic and diluted EPS follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss):
As reported $ 1,444 $ 426 $ 1,136 $(14,585)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related tax
effects (101) (58) (225) (168)
-------- -------- -------- --------
Pro forma $ 1,343 $ 368 $ 911 $(14,753)
======== ======== ======== ========
Net income (loss) per share:
As reported $ 0.42 $ 0.12 $ 0.33 $ (4.24)
Pro forma compensation expense (0.03) (0.01) (0.07) (0.05)
-------- -------- -------- --------
Pro forma $ 0.39 $ 0.11 $ 0.26 $ (4.29)
======== ======== ======== ========
10
Note C - Inventories
Inventories at September 30, 2004 and December 31, 2003 consisted of the
following (in thousands):
September 30, December 31,
2004 2003
------------- ------------
Finished goods $63,051 $62,072
Work-in-process 10,607 7,953
Raw materials and supplies 11,123 11,455
-------- --------
$84,781 $81,480
======== ========
Note D - Accrued Expenses
Accrued Expenses at September 30, 2004 and December 31, 2003 consisted of the
following (in thousands):
September 30, December 31,
2004 2003(1)
------------- ------------
Accrued advertising and sales
promotions $22,111 $19,071
Employee compensation and related
benefits 10,763 7,018
Warranty 2,944 2,700
Interest 163 3,879
Environmental matters 522 1,559
Royalties 1,255 1,205
Taxes payable 3,540 --
Other 8,073 6,829
-------- --------
$49,371 $42,261
======== ========
(1) Certain amounts included in the above line-item balances at December 31,
2003 have been reclassified as liabilities subject to compromise at
September 30, 2004. See Note F.
11
Note E - Other Liabilities
Other Liabilities at September 30, 2004 and December 31, 2003 consisted of the
following (in thousands):
September 30, December 31,
2004 2003(1)
------------- ------------
Pension benefits $2,247 $26,278
Environmental remediation and
product related liabilities 3,854 9,301
Other postretirement benefits 464 8,517
Deferred income taxes 9,908 10,355
Accrued workers' compensation
claims -- 5,130
Accrued compensation -- 370
Other 962 2,175
-------- --------
$17,435 $62,126
======== ========
(1) Certain amounts included in the above line-item balances at December 31,
2003 have been reclassified as liabilities subject to compromise at
September 30, 2004. See Note F.
Note F - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J to the Unaudited
Consolidating Condensed Financial Statements), pursuant to SOP 90-7, Congoleum
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 Congoleum's pre-petition debt is recorded at face value and
is classified within liabilities subject to compromise. In addition, Congoleum's
accrued but unpaid interest expense on its 8 5/8% Senior Notes Due 2008 is also
recorded in liabilities subject to compromise. See Notes A and J to the
Unaudited Consolidating Condensed Financial Statements for further discussion of
Congoleum's asbestos liability.
12
Note F - Liabilities Subject to Compromise (continued)
Liabilities subject to compromise at September 30, 2004 are as follows (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
----------
153,804
Elimination--Payable to American Biltrite (186)
----------
Total liabilities subject to compromise $153,618
==========
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims.
Note G - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
13
Note G - Pension Plans (continued)
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three and
nine months ended September 30, 2004 and 2003 (in thousands):
Three Months Ended Three Months Ended
September 30, 2004 September 30, 2003
---------------------- ----------------------
Other Other
Pension Benefits Pension Benefits
--------- ---------- --------- ---------
Components of Net Periodic
Benefit Cost:
Service cost $ 500 $ 50 $ 469 $ 47
Interest cost 1,402 140 1,369 137
Expected return on plan
assets (1,210) -- (1,024) --
Recognized net actuarial loss (61) 11 (61) 9
Amortization of transition
obligation (35) -- (44) --
Amortization of prior
service cost 349 (116) 399 (116)
-------- -------- -------- -------
Net periodic benefit cost $ 945 $ 85 $ 1,108 $ 77
======== ======== ======== =======
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
--------------------- ----------------------
Other Other
Pension Benefits Pension Benefits
--------- ---------- --------- ---------
Components of Net Periodic
Benefit Cost:
Service cost $ 1,556 $ 150 $ 1,388 $ 141
Interest cost 4,206 420 4,079 411
Expected return on plan
assets (3,636) -- (3,035) --
Recognized net actuarial loss (183) 33 (185) 27
Amortization of transition
obligation (104) -- (126) --
Amortization of prior
service cost 1,098 (348) 1,196 (348)
-------- ------- ------- ------
Net periodic benefit cost $ 2,937 $ 255 $ 3,317 $ 231
======== ======= ======= ======
14
Note G - Pension Plans (continued)
The weighted average assumptions used to determine net periodic benefit cost
were as follows:
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
------------------------ -----------------------
Other Other
Pension Benefits Pension Benefits
------------------------ -----------------------
Discount rate 6.25% - 6.75% 6.75% 6.25% - 6.75% 6.75%
Expected long-term return on
plan assets 7.00% - 7.50% -- 7.00% - 7.50% --
Rate of compensation increase 4.00% - 5.50% -- 4.00% - 5.50% --
Note H - Discontinued Operation
During 2003, the Company decided to discontinue the operations of its Janus
subsidiary, a manufacturer of pre-finished hardwood flooring, and sell the
related assets. Results of Janus, including charges resulting from the shutdown,
are being reported as a discontinued operation.
Note I - Commitments and Contingencies
In the ordinary course of their businesses, the Company and Congoleum become
involved in lawsuits, administrative proceedings, product liability and other
matters, as more fully described below. In some of these proceedings, plaintiffs
may seek to recover large and sometimes unspecified amounts, and the matters may
remain unresolved for several years.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted to
reflect such revisions and progress.
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's consolidated balance sheet. Due
to the relative magnitude and wide range of estimates of these liabilities and
the fact that recourse related to these liabilities is generally limited to
Congoleum, these matters are discussed separately following matters for which
ABI has actual or potential liability. However, since ABI includes Congoleum in
ABI's consolidating financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidating financial
statements.
15
Note I - Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,895 pending claims involving
approximately 3,429 individuals as of September 30, 2004. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Nine Months
Ended Year Ended
September 30, December 31,
2004 2003
-------------- -------------
Beginning claims 1,954 884
New claims 455 1,367
Settlements (14) (14)
Dismissals (500) (283)
------- -------
Ending claims 1,895 1,954
======= =======
The total indemnity costs incurred to settle claims during the nine months ended
September 30, 2004 and twelve months ended December 31, 2003 were $952,000 and
$270,000, respectively, all of which were paid by ABI's insurance carriers
pursuant to ABI's relevant insurance policies, as were the related defense
costs. The average indemnity cost per resolved claim was approximately $1,900
for the nine months ended September 30, 2004 and $900 for the year ended
December 31, 2003.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable. The Company estimates its liability to
defend and resolve current and reasonably anticipated future asbestos-related
claims (not including claims asserted against Congoleum), based upon a strategy
to actively defend or seek settlement for those claims in the normal course of
business. Factors such as recent and historical settlement and trial results,
the incidence of past and recent claims, the number of cases pending against it
and asbestos litigation developments that may impact the exposure of the Company
were considered in performing these estimates. In 2003, the Company engaged an
outside actuary to assist it in developing estimates of the Company's liability
for resolving asbestos claims at December 31, 2003. The actuary estimated the
range of liability for settlement of current claims pending and claims
anticipated to be filed through 2009 was $10.7 million to $16.0 million. The
Company believes no amount within this
16
Note I - Commitments and Contingencies (continued)
range is more likely than any other, and accordingly has recorded the minimum
liability estimate of $10.7 million in its consolidated financial statements.
The Company also believes that, based on this minimum liability estimate, the
corresponding amount of insurance probable of recovery is $10.7 million at
December 31, 2003 and September 30, 2004, which has been included in other
assets.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and proposed plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a five year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that resolution of its asbestos related liabilities
resulting from Congoleum's anticipated plan will be limited to liabilities
derivative of claims asserted against Congoleum as may be afforded under Section
524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2003 Annual Report on Form 10-K that it has
been named as a Potentially Responsible Party ("PRP") within the meaning of the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended ("CERCLA"), with respect to four sites located in three separate states.
ABI also reported that it is potentially responsible for response and
remediation costs with respect to three state-supervised sites. There have been
no material developments relating to these sites during the nine month period
ended September 30, 2004.
A lawsuit was brought by Olin Corporation ("Olin"), the present owner of a
former chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three other named defendants were liable for a portion of
the site's soil and groundwater response and remediation costs at the site. A
wholly-owned subsidiary of ABI owned and operated the Wilmington plant from 1959
to 1964 and for approximately one month during 1964 American Biltrite Inc. held
title to the property directly.
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus pay an annual reimbursement of $100,000 for Olin's
internal costs as long as Olin is actively working on remediating the site.
Under an agreement between ABI and TBC, TBC is liable for 37.5% of the costs
that may be incurred by ABI in connection with this lawsuit and 37.5% of the
amounts due under the settlement agreement with Olin.
17
Note I - Commitments and Contingencies (continued)
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. ABI has estimated Olin's
total future response costs at September 30, 2004 will be in the range of $12.3
million to $25.0 million. As of September 30, 2004, ABI has estimated its
potential liability to Olin net of expected recoveries from TBC to be in the
range of $1.7 million to $3.4 million excluding the $100,000 annual
reimbursement for Olin's internal costs and any recoveries from insurance.
The State of Maine Department of Environmental Protection has put the present
owner of a former ABI plant on notice to clean up a dumpsite where there is
exposed asbestos from sheet vinyl waste along with other hazardous substances.
ABI is reviewing the condition of the site and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
approximately $1 million. ABI has not yet entered a final cost sharing agreement
with the current owner. Under an agreement between ABI and TBC, TBC is liable
for 37.5% of the costs incurred by ABI at this site.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the state supervised sites,
the Olin Site and the Maine Site. An agreement was executed by ABI and its
carriers regarding the payment of the defense costs for the Olin Site. ABI has
reached agreements with three of its insurance carriers whereby the carriers
have reimbursed the Company $1.9 million for past and current environmental
claims. One carrier has also agreed to reimburse the Company for 2.5% of the
Company's liabilities regarding future environmental expenses related to the
Olin Site. ABI and certain other insurance carriers continue to discuss ABI's
remaining demands for insurance coverage for these sites. As of September 30,
2004, the Company has accrued $4.4 million for ABI's estimable and probable
amounts for environmental-related contingencies described above. Additionally,
the Company has recorded an asset related to insurance recoveries relating to
those contingencies, net of reimbursements to certain PRP's, for $875,000.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order whereby the Company has
provided a self-guarantee in the amount of $750,000 to the New Jersey Department
of Environmental Protection to assure the funding for any environmental
remediation the state may require at that location. Pursuant to the contribution
in 1993 of the Company's former tile division to Congoleum, Congoleum assumed
liability for the cost of cleaning up the site. The Company remains contingently
liable in the event that Congoleum fails to perform or fund any required
remediation relating to this site.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations and cash flows of the
Company.
18
Note I - Commitments and Contingencies (continued)
Congoleum
Congoleum 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 Bankruptcy Code. See Note J - "Congoleum Asbestos Liabilities and
Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability in connection with those other sites depends on
many factors, including the volume of material contributed to the site by
Congoleum, the number of other PRP's and their financial viability, the
remediation methods and technology to be used and the extent to which costs may
be recoverable by Congoleum from relevant insurance policies. However, under
CERCLA, and certain other laws, as a PRP, Congoleum can be held jointly and
severally liable for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 81 companies, substantially all of which are large financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater remediation phase has not begun and the
remedial investigation/feasibility study related to the groundwater remediation
has not been approved. The PRP group estimated that future costs of groundwater
remediation for this site, based on engineering and consultant studies
conducted, would be approximately $26 million. Congoleum's proportionate share,
based on waste disposed at the site, is estimated to be approximately 5.8%.
Congoleum also accrues remediation costs for certain facilities owned by
Congoleum on an undiscounted basis. Congoleum has entered into an administrative
consent order with the New Jersey Department of Environmental Protection and has
self-guaranteed certain remediation funding sources and financial
responsibilities. Estimated total clean-up costs, including capital outlays and
future maintenance costs for soil and groundwater remediation are primarily
based on engineering studies.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, Congoleum, which could have a material adverse
effect on the financial position, results of operation and cash flows of
Congoleum.
19
Note J - Congoleum Asbestos Liabilities and Reorganization
On December 31, 2003, Congoleum and two of its subsidiaries each filed their
respective voluntary petitions commencing cases for reorganization relief under
Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for
the District of New Jersey. These Chapter 11 cases are being jointly
administered as Case No. 03-51524 (KCF), styled In re Congoleum Corporation, et
al., and were commenced in order to resolve Congoleum's asbestos-related
liabilities and any future asbestos-related liability that might be asserted
against Congoleum. On November 8, 2004, Congoleum filed a modified plan of
reorganization, disclosure statement 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
on the disclosure statement and voting procedures for December 9, 2004. As a
result of the modifications to the plan, Congoleum will resolicit required
acceptances of the plan, as modified, from Congoleum's current known asbestos
claimants and others entitled to vote on the plan. There can be no assurances
that the hearing will not be rescheduled, that the plan will not be modified
again or that Congoleum will obtain the necessary acceptances and approvals
required for confirmation of the plan. Congoleum is also involved in litigation
with certain insurance carriers related to disputed insurance coverage for
asbestos related liabilities. Certain insurance carriers filed various
objections to Congoleum's previous plan of reorganization and related matters,
and there can be no assurances that certain insurance carriers will not file
objections to the most recently filed plan of reorganization.
The proposed plan and collateral trust agreement, as modified, will obligate
Congoleum, together with the plan trust, to indemnify certain asbestos claimant
representatives for all costs and liabilities (including attorneys' fees)
relating to the negotiation of the modification of the plan and the collateral
trust. Congoleum's indemnification obligations in this regard are capped under
the modified plan and plan trust agreement at $3 million. In addition, the plan
modifications further obligate Congoleum to fund any actual costs in excess of
$2 million incurred by such asbestos claimant representatives in connection with
the confirmation of the plan, subject to Bankruptcy Court approval of those
costs.
The proposed plan, if confirmed, would leave most of Congoleum's non-asbestos
creditors unimpaired and would resolve all pending and future asbestos claims
against Congoleum. The plan of reorganization would provide for, among other
things, an assignment of, or grant a security interest in, certain rights in,
and proceeds of, Congoleum's applicable insurance to a plan trust established
under Section 524(g) of the Bankruptcy Code that would fund distributions to
pending and future asbestos claimants and provide for the issuance of an
injunction that would protect Congoleum from all future asbestos-related
litigation and liabilities by channeling all current and future asbestos claims
to the plan trust. Congoleum's general unsecured creditors would be unimpaired
under the plan.
As part of Congoleum's plan of reorganization, ABI expects that Congoleum's
indemnification obligations to ABI with respect to current and future asbestos
personal injury claims related to ABI's former tile division operations that it
contributed to Congoleum in 1993 not covered by ABI insurance will be channeled
to the plan trust established under Section 524(g) of the Bankruptcy Code. ABI
and Congoleum expect to contribute, among other things, to the plan trust that
would be established pursuant to Congoleum's Chapter 11 reorganization $250,000
in
20
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
cash from ABI and a note from Congoleum in an initial aggregate principal amount
of $2.7 million with payment of such note contribution secured by a pledge by
ABI of both the common stock of Congoleum that it owns as well as certain of its
rights to receive certain indemnity payments from Congoleum. ABI does not expect
that Congoleum's note contribution to the plan trust would have a material
adverse effect on ABI's liquidity or capital resources. The principal amount of
the note that Congoleum would contribute to the trust under the proposed plan is
expected to be subject to future increase in an amount equal to the amount by
which 51% of the equity value of Congoleum as of the last trading day of the 90
consecutive trading day period commencing on the first anniversary of the
effective date of Congoleum's confirmed Chapter 11 plan of reorganization
exceeds $2.7 million. 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. The adjusted
principal amount of the note would be effective as of the measurement date of
the adjustment. The proposed plan also provides for a possible additional
contribution by ABI to the plan trust in the event ABI sells its interest in
Congoleum before the third anniversary of the date as of which the principal
amount of the note contributed by Congoleum to the plan trust is measured for
purposes of determining whether the principal amount is to be increased. The
expected amount of any additional contribution by ABI would be equal to 50% of
any amount by which 51% of the equity value of Congoleum implied by ABI's sale
of its interest in Congoleum exceeds the aggregate principal amount of the note
contributed by Congoleum to the plan trust outstanding as of the measurement
date for determining whether the principal amount of that note would be
increased and after taking into account any such increase in the principal
amount.
While Congoleum believes its plan is feasible and in the best interest of all of
Congoleum's constituents, there are sufficient risks and uncertainties such that
no assurances of the outcome of Congoleum's Chapter 11 case can be given.
Congoleum expects that its remaining costs to confirm and effect its proposed
plan, consisting principally of legal and advisory fees and contributions to the
plan trust to be established upon confirmation of the plan will be approximately
$7.2 million at a minimum and could be materially higher.
21
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three and
nine months ended September 30, 2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) $ 1,444 $ 426 $ 1,136 $(14,585)
Foreign currency translation
adjustments 827 (223) 419 2,200
Minimum pension liability adjustment -- -- 551 --
-------- -------- -------- --------
Total comprehensive income (loss) $ 2,271 $ 203 $ 2,106 $(12,385)
======== ======== ======== ========
Note L - Earnings (Loss) Per Share
Basic and diluted earnings per share are computed in accordance with FASB
Statement No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires both
basic earnings per share, which is based on the weighted-average number of
common shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common equivalent shares outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings, which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape products
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of the Company's majority-owned subsidiary K&M
Associates L.P., a national costume jewelry supplier to mass merchandisers and
department stores. The Company's Canadian division produces flooring, rubber and
other industrial products.
22
Note M - Industry Segments (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net Sales
Net sales to external customers:
Flooring products $ 58,927 $ 61,139 $ 173,968 $ 169,737
Tape products 20,569 20,676 64,922 60,902
Jewelry 22,714 16,259 53,587 53,531
Canadian division 10,970 9,751 32,628 29,101
--------- --------- --------- ---------
Total net sales to
external customers 113,180 107,825 325,105 313,271
Intersegment net sales:
Flooring products -- 4 69 37
Tape products 46 2 92 74
Jewelry -- -- -- --
Canadian division 1,728 1,193 4,628 5,056
--------- --------- --------- ---------
Total intersegment net sales 1,774 1,199 4,789 5,167
Reconciling items
Intersegment net sales (1,774) (1,199) (4,789) (5,167)
--------- --------- --------- ---------
Total consolidated net sales $ 113,180 $ 107,825 $ 325,105 $ 313,271
========= ========= ========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Segment profit (loss)
Flooring products $ 1,921 $ (304) $ 3,462 $ (4,883)
Tape products (57) 321 (144) 121
Jewelry 2,700 1,005 3,505 2,585
Canadian division (255) (684) (1,398) (818)
--------- --------- --------- ---------
Total segment profit (loss) 4,309 338 5,425 (2,995)
--------- --------- --------- ---------
Reconciling items
Corporate items (1,276) (496) (2,444) (1,244)
Intercompany profit (loss) (59) (3) 33 (46)
--------- --------- --------- ---------
Total consolidated income
(loss) before income
taxes and other items $ 2,974 $ (161) $ 3,014 $ (4,285)
========= ========= ========= =========
23
Note M - Industry Segments (continued)
September 30, December 31,
2004 2003
------------- ------------
Segment assets
Flooring products $212,551 $175,899
Tape products 56,036 54,415
Jewelry 43,874 37,272
Canadian division 39,221 35,642
--------- ---------
Total segment assets 351,682 303,228
Reconciling items
Assets of discontinued operation 2,809 2,902
Corporate items 24,214 23,858
Intersegment accounts receivable (15,881) (9,575)
Intersegment profit in inventory (235) (248)
Intersegment other asset (186) (186)
--------- ---------
Total consolidated assets $362,403 $319,979
========= =========
24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's (and
its majority-owned subsidiary Congoleum's) expectations, as of the date of this
report, of future events and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are cautioned
not to place undue reliance on any forward-looking statements. Factors that
could cause or contribute to the Company's actual results differing from its
expectations include those factors discussed elsewhere in this report, including
in the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 and in the Company's other filings with the Securities and
Exchange Commission.
On December 31, 2003, the Company's subsidiary Congoleum and two of Congoleum's
subsidiaries each filed their respective voluntary petitions commencing cases
for reorganization relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of New Jersey. These Chapter 11 cases
are being jointly administered as Case No. 03-51524 (KCF), styled In re
Congoleum Corporation, et al., to resolve claims that have been or might in the
future be asserted against Congoleum related to the use of asbestos in its
products decades ago. On November 8, 2004, Congoleum filed a modified plan of
reorganization, disclosure statement 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
on the disclosure statement and voting procedures for December 9, 2004. As a
result of the modifications to the plan, Congoleum will resolicit required
acceptances of the plan, as modified, from Congoleum's current known asbestos
claimants and others entitled to vote on the plan. There can be no assurances
that the hearing will not be rescheduled, that the plan will not be modified
again or that Congoleum will obtain the necessary acceptances and approvals
required for confirmation of the plan. Congoleum is also involved in litigation
with certain insurance carriers related to disputed insurance coverage for
asbestos related liabilities. Certain insurance carriers filed various
objections to Congoleum's previous plan of reorganization and related matters,
and there can be no assurances that certain insurance carriers will not file
objections to the most recently filed plan of reorganization.
The proposed plan and collateral trust agreement, as modified, will obligate
Congoleum, together with the plan trust, to indemnify certain asbestos claimant
representatives for all costs and liabilities (including attorneys' fees)
relating to the negotiation of the modification of the plan and the collateral
trust. Congoleum's indemnification obligations in this regard are capped under
the modified plan and plan trust agreement at $3 million. In addition, the plan
modifications further obligate Congoleum to fund any actual costs in excess of
$2 million incurred by such asbestos claimant representatives in connection with
the confirmation of the plan, subject to Bankruptcy Court approval of those
costs.
Based on its reorganization strategy, which included Congoleum settling certain
asbestos claims prior to commencing its Chapter 11 case, Congoleum has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
25
Bankruptcy Code. Congoleum recorded charges of $17.3 million in the fourth
quarter of 2002, and an additional charge of $3.7 million in the fourth quarter
of 2003, to increase its recorded liability to the estimated minimum cost to
complete its plan of reorganization. Congoleum expects that its remaining costs
to confirm and effect its proposed plan, consisting principally of legal and
advisory fees and contributions to the plan trust to be established upon
confirmation of the plan will be approximately $7.2 million at a minimum. Actual
amounts that will be contributed to the plan trust and costs for obtaining
confirmation of and implementing the plan of reorganization could be materially
higher, which could have a material effect on ABI's and Congoleum's consolidated
results of operations as well as Congoleum's financial position.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Results of Janus, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidating financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as of the date of
our financial statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. We believe that
our most critical accounting policies, upon which our financial condition
depends and which involve the most complex or subjective decisions or
assessments, are those described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, filed with the Securities and Exchange
Commission. There have been no material changes of what we consider to be our
critical accounting policies or the disclosure we provided regarding those
policies in that Form 10-K.
26
Results of Operations
ABI & Non-Debtor Subsidiaries
Net sales for the third quarter of 2004 were $54.3 million compared to $46.7
million in the third quarter of 2004, an increase of $7.6 million or 16.3%. This
increase was primarily due to a 39.7% increase in Jewelry division sales
resulting from the successful introduction of new licensed products as well as
higher sales of basic product lines. Canadian division sales increased by 12.5%
due to improved sales of industrial products and foreign currency translation
gains resulting from the stronger Canadian dollar, while Tape division sales
were essentially level with year earlier levels. Net sales for the first nine
months of 2004 were $151.1 million, up $7.6 million or 5.3% from the first nine
months of 2003. This increase is primarily due to higher Tape division sales in
the first half of 2004 as end user market conditions improved, together with
higher Canadian division sales, principally resulting from foreign currency
translation gains.
Cost of products sold as a percentage of net sales was 71.3% in the third
quarter of 2004 compared to 70.0% in the third quarter of 2003. The increase in
cost of products sold is primarily due to increases in costs at the Jewelry and
Tape divisions, partially offset by lower costs at the Canadian division. Costs
for Jewelry products have increased due to a higher cost product mix. This in
turn is partly due to more licensed brand name products, whose costs include
royalties, in the sales mix. Both the Tape and Canadian operations experienced
significant increases in raw material costs in the third quarter, but these were
more than offset at the Canadian division by improved efficiency due to higher
production levels. The Tape and Canadian divisions are likely to face continued
margin pressure from higher raw material costs, as it may be difficult to
institute price increases sufficient to fully offset these higher costs. For the
nine months ended September 30, 2004, cost of products sold as a percentage of
net sales was 71.3% compared with 70.7% during the same period one year earlier.
The year-to-date increase in cost of products sold percentage is primarily due
to royalties and product mix at the Jewelry division.
Selling, general and administrative expenses in the third quarter of 2004 were
$13.6 million, an increase of 1.6% or $0.2 million compared with the third
quarter of 2003. This increase was due primarily to higher Corporate expenses
for legal and accounting fees and borrowing costs. As a percentage of net sales,
selling, general and administrative expenses were 25.0% for the third quarter of
2004 compared to 28.6% of net sales for the same quarter last year, primarily as
a result of the increase in sales. For the nine months ended September 30, 2004,
selling, general and administrative expenses as a percentage of net sales were
27.3%, down from 28.6% in the first nine months of 2003, also reflecting the
sales increase.
Interest expense for the third quarter of 2004 was $719,000 compared to $571,000
in the third quarter of 2003. For the nine months ended September 30, 2004 and
2003, interest expense was $2.2 million and $1.6 million, respectively. The
increase in interest expense for the three and nine month periods of 2004 versus
2003 was due to higher interest rates on certain of the Company's borrowings and
the interest on borrowings related to the discontinued Janus business, which are
included in loss of discontinued operation in 2003 but in interest expense of
continuing operations in 2004.
27
Other expense was $168,000 for the third quarter of 2004 compared to other
income of $56,000 for the same quarter of 2003. For the nine months ended
September 30, 2004, other expense was $406,000 versus other income of $1.1
million for the nine months ended September 30, 2003. The increase in other
expense for the three and nine month periods of 2004 versus 2003 was primarily
due to unfavorable changes in foreign exchange rates.
Income from continuing operations in the third quarter of 2004 was $413,000
compared to income from continuing operations of $72,000 in the corresponding
prior year period due to improved operating results largely offset by
unfavorable foreign exchange conversion rates and higher interest and income tax
expenses. The loss from continuing operations for the nine months ended
September 30, 2004 was $617,000 compared to income of $300,000 for the same
period last year. The change from income last year to a loss this year is due
primarily to unfavorable foreign exchange rates and higher interest expense,
partially offset by a benefit from income taxes.
Congoleum
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
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. Congoleum 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
28
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
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, declined $1.3
million in the first nine months of 2004 to $0.5 million. Cash used by operating
activities, principally for seasonal working capital increases, were financed
with short term borrowings. Working capital at September 30, 2004 was $15.8
million, up from $13.5 million at December 31, 2003. The ratio of current assets
to current liabilities at September 30, 2004 was 1.25, essentially the same as
at December 31, 2003. Capital expenditures in the first nine months of 2004 were
$1.7 million compared to $2.1 million for the first nine months of 2003. It is
anticipated that capital spending for the full year 2004 will be between $2
million and $3 million.
The Company has recorded provisions which it believes are adequate for
environmental remediation and non-asbestos product-related liabilities,
including provisions for testing and potential remediation of conditions at its
own facilities. While the Company believes its estimate of the future amount of
these liabilities is reasonable, that most of such amounts will be paid over a
period of three to ten years and that the Company expects to have sufficient
resources to fund such amounts, the actual timing and amount of such payments
may differ significantly from the Company's assumptions. Although the effect of
future government regulation could have a significant effect on the Company's
costs, the Company is not aware of any pending legislation or regulation
relating to these matters that would have a material adverse effect on its
consolidated results of operations or financial position. There can be no
assurances that such costs could be passed along to its customers.
Cash requirements for capital expenditures, working capital, debt service, and
any share repurchases are expected to be financed from operating activities and
borrowings under existing bank lines of credit. As of September 30, 2004,
approximately $27.8 million in the aggregate was available for borrowing by the
Company under its bank lines of credit subject to the value from time to time of
the collateral securing outstanding borrowings under those lines of credit. At
September 30, 2004, $10.7 million was outstanding under revolving credit lines
and $0.8 million was outstanding under letters of credit. An additional $16.3
million was available for borrowing as of that date under the Company's
29
revolving credit lines. The Company believes that its cash flow from operations,
expected proceeds from the sale of the Janus assets and borrowings available
under its existing bank lines of credit will be adequate for its expected
capital expenditure, working capital, and debt service needs, subject to
compliance with the covenants contained in its debt agreements referred to below
and the ability of the Company to replace or refinance its existing credit
facility that is scheduled to expire on January 1, 2006 on satisfactory terms.
American Biltrite Inc. has two principal debt agreements that it is party to as
borrower. The first of those agreements is a credit agreement (the "Credit
Facility") with Fleet National Bank ("Fleet"). The Credit Facility provides the
Company with a revolving credit facility of up to $20 million, including up to
$5 million for the issuances of letters of credit. The amounts that the Company
can borrow under the Credit Facility are subject to reduction from time to time
if the borrowing base is less than $20 million. Interest is payable on amounts
borrowed under the Credit Facility at rates which generally vary between a LIBOR
based rate plus 1.0% to a LIBOR based rate plus 2.75% depending on the Company's
leverage ratio, as determined under the Credit Facility. Certain domestic
subsidiaries of the Company have agreed to guarantee the Company's obligations
under the Credit Facility. The Credit Facility expires on January 1, 2006.
The second principal debt agreement that American Biltrite Inc. is a party to
(the "Note Agreement") is with The Prudential Insurance Company of America
("Prudential"). Under the Note Agreement, the Company previously issued notes in
an aggregate principal amount of $20 million (the "Series A Notes"). The Series
A Notes generally bear interest at a rate of 7.91% per annum, and the Company is
obligated to pay Prudential an additional fee on each interest payment date if
the Company's and certain of its subsidiaries' ratio of debt to EBITDA, as
defined under the Note Agreement, exceeds certain levels. The amount of those
fees that may be payable by the Company varies depending on the extent the
Company's and certain of its subsidiaries' debt exceeds EBITDA, as determined
under the Note Agreement, and is capped at 2% of the outstanding principal
amount of the Series A Notes. Principal on the Senior A Notes is repayable in
five annual installments of $4.0 million beginning on August 28, 2006. In
addition, the Note Agreement provides for possible issuances of additional notes
by the Company for up to an aggregate principal amount of $15 million, which
additional notes will mature not later than 10 years after the date of issuance
and will bear interest at rates to be determined on or about the time of
issuance.
Both the Credit Facility and the Note Agreement contain certain covenants that
the Company must satisfy. The covenants included in the Credit Facility and the
Note Agreement include certain financial tests, restrictions on the ability of
the Company to incur additional indebtedness or to grant liens on its assets and
restrictions on the ability of the Company to pay dividends on its capital
stock. Pursuant to the Credit Facility and the Note Agreement, the Company and
certain of its domestic subsidiaries granted Fleet and Prudential a security
interest in most of the Company's and its domestic subsidiaries' assets. The
security interest granted does not include the shares of capital stock of the
Company's majority-owned subsidiary Congoleum Corporation or the assets of
Congoleum Corporation.
30
The Company was in compliance with the financial covenants contained in the
Credit Facility and the Note Agreement as of September 30, 2004; however, there
can be no assurance that it will be able to satisfy all covenants as of December
31, 2004, the next measurement date for determining compliance with those
covenants, or on the successive measurement dates thereafter. Furthermore, there
can be no assurance that the Company will be able to obtain any amendments to
any covenants that might be necessary to enable it to achieve compliance. If it
fails to satisfy those covenants it will be in default under the respective debt
agreements.
In the past, the Company has had to amend its credit agreements in order to
avoid being in default of those agreements as a result of failing to satisfy
certain financial covenants contained in those agreements. The Company is
currently negotiating modifications to financial covenants for 2005 under the
Note Agreement to make them comparable to the 2005 financial covenants in the
recently amended Credit Facility. While the Company has been successful in such
negotiations previously and believes it will be so again, failure to obtain such
modifications or to obtain waivers of certain existing financial covenants would
likely result in the Company failing to satisfy the financial covenants as
currently comprised during the measurement periods in 2005. Such a failure would
constitute a default under the Note Agreement.
Pursuant to the terms of the Credit Facility and the Note Agreement, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If a default occurs, Fleet and Prudential could respectively
require the Company to repay all amounts outstanding under the respective debt
agreements. If a default occurs and the Company is unable to obtain a waiver
from Fleet and Prudential and the Company is required to repay all amounts
outstanding under those agreements, the Company would need to obtain funding
from another source. Otherwise, the Company would likely be unable to repay
those outstanding amounts, in which case, Fleet as administrative agent over the
collateral securing the amounts outstanding under the Credit Facility and the
Note Agreement, might exercise Fleet's and Prudential's rights over that
collateral. Any default by the Company under the Credit Facility or the Note
Agreement that results in the Company being required to immediately repay
outstanding amounts under its debt agreements would have a material adverse
effect on the Company's business, results of operations and financial condition.
As noted above, the Credit Facility and the Note Agreement restrict the
Company's ability to obtain additional financing. Moreover, since the Company
and most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited. The Company currently believes that its cash flow from
operations, expected proceeds from the sale of the Janus assets and borrowings
available under its existing credit facilities will be adequate for its expected
capital expenditure, working capital and debt service needs, subject to
compliance with the covenants contained in its debt agreements and the ability
of the Company to replace or refinance its existing credit facility that is
scheduled to expire on January 1, 2006 on satisfactory terms. However, if
circumstances change, the inability of the Company to obtain any necessary
additional debt financing would likely have a material adverse effect on its
business, operations and financial condition.
Under Congoleum's anticipated plan of reorganization, it is expected that
certain rights that the Company may have to receive indemnification for claims
under the plan of reorganization or the joint venture agreement relating to the
contribution by ABI to Congoleum in 1993 of the Company's tile division, subject
to certain exceptions, will not be paid to the Company for so long as any
obligations owed to the plan trust established pursuant to Congoleum's plan by
Congoleum under the promissory note expected to be contributed by Congoleum to
the plan trust remain outstanding. Instead, those amounts will be held in escrow
by the plan trust and be pledged by the Company as collateral securing
Congoleum's obligations under that promissory note until released from such
31
escrow and paid to the Company pursuant to the terms of Congoleum's plan of
reorganization, the promissory note and the pledge agreement expected to be
entered into by the Company with regard to the collateral expected to be pledged
by the Company to secure Congoleum's obligations under the promissory note. To
the extent the amounts that are subject to that escrow are material, that could
have a material adverse effect on the Company's liquidity and capital resources
since those escrowed amounts represent amounts that would have already been paid
by the Company but not yet reimbursed to the Company to the extent they remain
in escrow.
In addition, the terms of Congoleum's plan of reorganization are expected to
provide that the Company will no longer have certain other rights to receive
indemnification under the joint venture agreement or Congoleum's plan of
reorganization for asbestos-related property damage claims. To the extent that
the Company pays material amounts for asbestos-related property damage claims
that the Company would have been entitled to be reimbursed for by Congoleum
absent the provisions of Congoleum's plan of reorganization, that could have a
material adverse effect on the Company's liquidity and capital resources.
Furthermore, to the extent that the amount of any of the Company's indemnity
claims against the plan trust established pursuant to Congoleum's plan of
reorganization are reduced pursuant to the distribution procedures under
Congoleum's plan of reorganization to an amount less than the corresponding
amount paid by the Company, that could have a material adverse effect on the
Company's liquidity and capital resources.
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's board of directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the Credit Facility, aggregate dividend
payments (since September 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Facility, earned after September 30,
2003. Under the Note Agreement, aggregate dividend payments (since December 31,
2000) generally may not exceed the sum of $6 million plus 50% of cumulative
consolidated net income (accounting for Congoleum under the equity method of
accounting), as determined under the Note Agreement, earned after December 31,
2000.
In addition, under the terms of Congoleum's plan of reorganization, the Company
expects to contribute $250,000 in cash to the plan trust to be established upon
confirmation of the Congoleum plan.
Congoleum
The consolidated 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 condensed
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the Unaudited Consolidating Condensed
Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q,
there is substantial doubt about Congoleum'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.
32
Congoleum 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 A and J of the Notes to Unaudited Consolidating Condensed
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, Congoleum 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, Congoleum spent $4.5 million and during
the balance of 2004, expects to spend a further $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. Congoleum 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 Congoleum. 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 Congoleum's accounts receivable are deposited in an account assigned by
Congoleum 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 and $1.8 million at September 30,
2004 and December 31, 2003 respectively, are recorded as restricted cash.
Additionally, the $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, Congoleum was not permitted to make the $8.6 million
interest payment on its Senior Notes that was 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
Congoleum'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.
Congoleum is currently planning capital expenditures of approximately $5.0
million in 2004.
33
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 Congoleum to borrow from the facility. Congoleum 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. Congoleum
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 Congoleum 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 Congoleum will be able to obtain a similar or sufficient
facility upon exit from bankruptcy, or that the debtor-in-possession facility
would be renewed beyond its expiration on December 31, 2004.
In addition to the provision for asbestos litigation discussed previously,
Congoleum 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. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (see Note I of the Unaudited Consolidating Condensed
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 Congoleum'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 Congoleum's liability in proportion to other potentially
responsible parties, and the extent to which costs may be recoverable from
insurance. Congoleum has recorded provisions in its financial statements for the
estimated probable loss associated with all known general and environmental
contingencies. While Congoleum 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 Congoleum's assumptions. Although future government
regulation could have a significant effect on Congoleum's costs, Congoleum 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, Congoleum.
34
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Although Congoleum did
not generate cash from operations in 2003, Congoleum anticipates that it will
generate cash from operations in 2004. Congoleum 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
Chapter 11 plan of reorganization. Congoleum's inability to obtain confirmation
of the proposed plan in a timely manner would have a material adverse effect on
Congoleum's ability to fund its operating, investing and financing requirements.
Congoleum 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 Congoleum 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 and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, I and J of the Notes to Unaudited
Consolidating Condensed Financial Statements, which are included in this report,
the Company and its majority-owned subsidiary Congoleum have significant
liability and funding exposure for asbestos-related personal injury claims, and
in light of Congoleum's asbestos liability, Congoleum has filed a Chapter 11
plan of reorganization in Bankruptcy Court. In connection with Congoleum's
strategy for resolving its asbestos liability, it previously entered into
settlement agreements with various asbestos claimants, which provided for an
aggregate settlement value of approximately $491 million. Settlement of this
obligation pursuant to the terms of Congoleum's proposed plan is dependent on
Bankruptcy Court confirmation of the plan, including determinations by the
Bankruptcy Court that, among other things, the plan has satisfied certain
criteria under the Bankruptcy Code.
There can be no assurance that Congoleum will be successful in obtaining
confirmation of Congoleum's plan in a timely manner or at all. Any alternative
plan of reorganization pursued by Congoleum or confirmed by the Bankruptcy Court
could vary significantly from the description in this report. Furthermore, the
estimated costs and contributions required to confirm and to effect the proposed
plan of reorganization or an alternative plan could be significantly greater
than currently estimated. Any plan of reorganization pursued by Congoleum will
be subject to numerous conditions, approvals and other requirements, including
resolicitation of acceptances of the plan, as modified, from Congoleum's current
known asbestos claimants and others entitled to vote on the modified plan,
acceptances and Bankruptcy Court approvals. There can be no assurance that such
conditions, approvals and other requirements will be satisfied or obtained. As
part of Congoleum's plan, Congoleum would contribute to the plan trust certain
of Congoleum's rights to receive insurance proceeds for asbestos liabilities
under its applicable insurance policies. Congoleum is currently involved in
litigation with certain of its insurance carriers related to disputed insurance
coverage for asbestos related liabilities, and certain insurance carriers have
filed various objections to Congoleum's plan of reorganization and related
matters. It is expected that these insurers will continue to vigorously contest
any obligation to provide Congoleum with insurance coverage for Congoleum's
asbestos
35
liabilities and seek to prevent any contribution by Congoleum of its rights to
receive insurance for asbestos matters to the plan trust. There can be no
assurance that these insurers will not be successful in these regards. If the
insurers are able to successfully refuse an obligation to provide Congoleum with
insurance coverage for Congoleum's asbestos liabilities or prevent Congoleum's
proposed contribution of its rights to receive insurance proceeds for asbestos
matters to the plan trust as part of Congoleum's plan of reorganization, that
would have a material adverse effect on Congoleum's ability to obtain approval
of its plan of reorganization.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses that would likely have a material adverse effect on the
Company's financial position.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's goals for resolving asbestos liability by
Congoleum pursuing its plan of reorganization bankruptcy filing include: (i) the
future cost and timing of estimated asbestos liabilities and payments and
availability of insurance coverage and reimbursement from insurance companies,
which underwrote the applicable insurance policies for Congoleum and the
Company, for asbestos-related claims, (ii) costs relating to the execution and
implementation of any plan of reorganization pursued by Congoleum, (iii) timely
reaching an agreement with other creditors, classes of creditors, or other
parties in the Bankruptcy proceeding, that exist or may emerge, (iv) the
Company's and Congoleum's satisfaction of the conditions and obligations under
their respective outstanding debt instruments, and amendment of those
outstanding debt instruments, as necessary, to permit the contemplated note
contribution by Congoleum to the plan trust and pledge by the Company of certain
of its assets including the shares of Congoleum stock owned by the Company and
certain amounts the Company would otherwise be entitled to receive from
Congoleum as indemnification for certain liabilities and expenses relating to
the Company's former tile division, in connection with Congoleum's plan of
reorganization and to make certain financial covenants in those debt instruments
less restrictive, (v) the response from time-to-time of the Company's and
Congoleum's lenders, customers, suppliers and other constituencies to the
ongoing process arising from the strategy to settle asbestos liability, (vi)
Congoleum's ability to maintain debtor-in-possession financing to provide it
with sufficient funding during the pendency of its Chapter 11 case and exit
financing to provide it with sufficient funding for its operations after
emerging from the bankruptcy process, in each case, on reasonable terms (vii)
timely obtaining sufficient creditor and court approval of any reorganization
plan (viii) developments in and the outcome of the insurance coverage litigation
pending in New Jersey State Court involving Congoleum, the Company and certain
insurers and (ix) compliance with the Bankruptcy Code, including section 524(g).
In addition, in view of American Biltrite's relationships with Congoleum,
American Biltrite could be affected by Congoleum's negotiations, and there can
be no assurance as to what that impact, positive or negative, might be. In any
event, the failure of Congoleum to obtain confirmation of its proposed plan of
reorganization would have a material adverse effect on Congoleum's business,
results of operations or financial condition and could have a material adverse
effect on American Biltrite's business, results of operations or financial
condition.
36
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan of reorganization Congoleum
may decide to pursue. To date, Congoleum has expended significant amounts
pursuant to resolving its asbestos liability relating to its proposed Chapter 11
plan of reorganization. To the extent any federal legislation is enacted which
does not credit Congoleum for amounts paid by Congoleum pursuant to its plan of
reorganization or requires the Company or Congoleum to pay significant amounts
to any national trust or otherwise, such legislation could have a material
adverse effect on the Company or Congoleum's businesses, results of operations
and financial conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A, I and J of the Notes to Unaudited Consolidated Condensed
Financial Statements, which are included in this report.
The Company relies on debt financing to help fund its operations and other
general corporate purposes and any default by it under its credit facilities or
inability to obtain any necessary debt financing would likely have a material
adverse effect on its business, operations and financial condition.
The Company relies on borrowings under its existing credit facilities to help
finance, among other things, its operations, working capital and capital
expenditures. The Company and most of its domestic subsidiaries have granted a
security interest to the lenders under the Company's primary credit facilities
in most of the Company's and its domestic subsidiaries' assets. The collateral
that is subject to this security interest does not include the shares of capital
stock of Congoleum or assets of Congoleum.
The Company's credit facility (the "Credit Facility") with Fleet National Bank
("Fleet") has a final maturity date of January 1, 2006. In addition, the Company
has a debt agreement (the "Note Agreement") with The Prudential Insurance
Company of America ("Prudential") that requires the Company to make annual
principal payments in the amount of $4 million beginning in 2006. Both
agreements require the Company to meet certain financial covenants on a
quarterly basis. The Company is currently negotiating modifications to financial
covenants for 2005 under the Note Agreement to make them comparable to the 2005
financial covenants in the recently amended Credit Facility. While the Company
has been successful in such negotiations previously and believes it will be so
again, failure to obtain such modifications or to obtain waivers of certain
existing financial covenants would likely result in the Company failing to
satisfy the financial covenants as currently comprised during the measurement
periods in 2005. Such a failure would constitute a default under the Note
Agreement.
37
If the Company defaults under the Credit Facility or Note Agreement
(collectively, the "Facilities"), the respective lenders under those Facilities
have certain rights and remedies under those Facilities, and Fleet, in its
capacity as collateral agent, has obligations to such lenders and associated
rights with respect to the collateral, including the right to accelerate payment
of all amounts outstanding under the facilities and certain rights to
administration, assembly and sale of collateral in connection with certain
defaults.
There can be no assurances that the Company will be able to meet certain of the
financial covenants contained in the Credit Facility and the Note Agreement as
of December 31, 2004, the next measurement date for determining compliance with
those covenants, or on the successive measurement dates thereafter, or that the
Company will be able to obtain any amendments to any covenants that might be
necessary to enable it to achieve compliance. Any default by the Company under
the Facilities that is not waived would likely have a material adverse effect on
its business, operations and financial condition.
Under the terms of the Facilities, the Company's ability to obtain additional
debt financing is limited. Moreover, since the Company and most of its domestic
subsidiaries have already granted security interests in most of their assets,
the Company's ability to obtain any additional debt financing may be limited.
The inability of the Company to obtain any necessary additional debt financing
and to replace or refinance the Credit Facility on satisfactory terms would
likely have a material adverse effect on its business, operations and financial
condition.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their facilities and to comply with
existing environmental laws. Those amounts may be substantial. Although the
Company and Congoleum expect that they would have sufficient resources to fund
any such liabilities, there is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies. Moreover, in addition to
potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company or Congoleum
to modify or curtail their operations, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
38
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims (in addition to asbestos related claims) and other
matters. In some of these proceedings, plaintiffs may seek to recover large and
sometimes unspecified amounts and the matters may remain unresolved for several
years. These matters could have a material adverse effect on the Company's
business, results of operations and financial condition if the Company or
Congoleum, as applicable, is unable to successfully defend against or settle
these matters and its insurance coverage is insufficient to satisfy any
judgments against it or settlements relating to these matters or the Company or
Congoleum, as applicable, is unable to collect insurance proceeds relating to
these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third-party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design,
engineer and manufacture their own products. Most of the raw materials required
by the Company for its manufacturing operations are available from multiple
sources; however, the Company does purchase some of its raw materials from a
single source or supplier. In addition, the Company is dependent on foreign
suppliers for economical sourcing of its jewelry and certain other goods. Any
significant delay in or disruption of the supply of goods (including disruptions
resulting from political risks or shipping disruptions) could substantially
increase the Company's cost of materials, require product reformulation or
require qualification of new suppliers, any one or more of which could
materially adversely affect the Company's business, results of operations or
financial condition. Recent industry supply conditions for specialty resins used
in the production of flooring by Congoleum and the Canadian division 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 and Congoleum have not
experienced any difficulties obtaining resin, there can be no assurances that
they may not have difficulty in the future, particularly if global supply
conditions deteriorate. The Company's majority-owned subsidiary Congoleum does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
Congoleum's specifications. Although Congoleum does not anticipate any loss of
this source of supply, replacement could take a considerable period of time and
interrupt production of certain products, which could have a material adverse
effect on Congoleum's business, results of operations or financial condition and
the Company's business and results of operations.
39
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the Bankruptcy Code and emerge from bankruptcy as a
continuing operating company that has shed much of their pre-filing liabilities,
those competitors could have a cost competitive advantage over the Company or
Congoleum. In addition, in order to maintain their competitive positions, the
Company and Congoleum may need to make substantial investments in their
businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
40
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
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics, which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape and flooring divisions principally sell their products
through distributors. Sales to five unaffiliated customers have historically
accounted for 20% to 25% of the Company's tape division net sales. The loss of
the largest unaffiliated customer and/or two or more of the other affiliated
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations and financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors have historically accounted for 60% to 65%
of Congoleum's net sales.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers have historically accounted for 70% to 75% of K&M's net sales. The
loss of K&M Associates L.P.'s largest customer would likely have a material
adverse effect on the Company's business, results of operations or financial
condition.
41
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, the same persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, none of whom have an employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on their investments but do not consider this
interest rate market risk exposure to be material to their financial condition
or results of operations. The Company and Congoleum invest primarily in highly
liquid debt instruments with strong credit ratings and short-term (less than one
year) maturities. The carrying amount of these investments approximates fair
value due to the short-term maturities. The substantial majority of the
Company's outstanding consolidated long-term debt as of September 30, 2004
consisted of indebtedness with a fixed rate of interest, which is not subject to
change based upon changes in prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe and Asia,
giving rise to exposure to market risks from changes in foreign exchange rates.
Foreign currency exchange rate movements also affect the Company's competitive
position, as exchange rate changes may affect business practices and/or pricing
strategies of non-U.S. based competitors. For foreign currency exposures
existing at September 30, 2004, a 10% unfavorable movement in currency exchange
rates in the near term would not materially affect the Company's consolidated
operating results, financial position or cash flows.
Neither the Company nor Congoleum currently use derivative financial
instruments, derivative commodity instruments or other financial instruments to
manage their exposure to changes in interest rates, foreign currency exchange
rates, commodity prices or equity prices and do not hold any instruments for
trading purposes.
42
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, our disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to our Chief Executive Officer
and Chief Financial Officer by others within those entities, particularly
during the period in which this report was being prepared, and (2)
effective, in that they provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Commission's
rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are 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 I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements is incorporated herein by
reference.
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due February 1 and August 1, 2004 on the
Senior Notes. The aggregate amount of the interest payments that was not paid on
the Senior Notes with respect to those interest payment due dates is
approximately $8.6 million. As of September 30, 2004, the aggregate outstanding
principal amount of the Senior Notes is approximately $100 million. These
amounts, plus $155,000 of accrued interest on the unpaid interest that was due
on February 1 and August 1, 2004 with respect to the Senior Notes, are included
in the line item "Liabilities Subject to Compromise" in the Company's
consolidated balance sheet included in this report.
43
Item 6. Exhibits
Exhibit No. Description
- ---------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of
September 11, 2004
31.1 Certification of the Principal Executive
Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer
of the Registrant Pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended.
32 Certification of the Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
I Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
II Incorporated by reference to the exhibit of the Company's Form 8-K filed
on September 14, 2004.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: November 12, 2004 BY: /s/ Howard N. Feist III
------------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
45
INDEX OF EXHIBITS
Exhibit No. Description
- --------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of
September 11, 2004
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.
32 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ----------
I Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
II Incorporated by reference to the exhibit of the Company's Form 8-K filed
on September 14, 2004.
46