Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0398678
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices And Zip Code)
(609) 584-3000
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Class A Common Stock, par value $0.01 per share American Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
1
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES |_| NO |X|
As of June 30, 2004, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $9.0
million based on the closing price ($2.60 per share) on the American Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant, American Biltrite Inc. and
Hillside Capital Incorporated. All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant. As of March 15, 2005, an
aggregate of 3,651,590 shares of Class A Common Stock and an aggregate of
4,608,945 shares of Class B Common Stock of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Congoleum Corporation's Proxy Statement for the 2005 Annual
Meeting of Shareholders to be held on May 10, 2005, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2004, are
incorporated by reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS Page
----------------- ----
PART 1
- ------
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
- -------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER 13
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 16
CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 76
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES 76
ITEM 9B. OTHER INFORMATION 76
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 76
ITEM 11. EXECUTIVE COMPENSATION 76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 77
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 77
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 77
PART IV
- -------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 77
3
PART I
Item 1. BUSINESS
Factors That May Affect Future Results
Some of the information presented in or incorporated by reference in this
report constitutes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks,
uncertainties and assumptions. These statements can be identified by the use of
the words such as "anticipate," "believe," "estimate," "expect," "intend,"
"plan," "project" and other words of similar meaning. In particular, these
include statements relating to intentions, beliefs or current expectations
concerning, among other things, future performance, results of operations, the
outcome of contingencies such as bankruptcy and other legal proceedings, and
financial conditions. These statements do not relate strictly to historical or
current facts. These forward-looking statements are based on Congoleum
Corporation (the "Company" or "Congoleum") 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. Any or all of
these statements may turn out to be incorrect. By their nature, forward-looking
statements involve risks and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future. Any
forward-looking statements made in this report speak only as of the date of such
statement. It is not possible to predict or identify all factors that could
potentially cause actual results to differ materially from expected and
historical results. Factors that could cause or contribute to the Company's
actual results differing from its expectations include those factors discussed
elsewhere in this report, including in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors That May Affect Future Results," and in the Company's
other filings with the Securities and Exchange Commission.
General
Congoleum Corporation (the "Company" or "Congoleum") was incorporated in
Delaware in 1986, but traces its history in the flooring business back to Nairn
Linoleum Co., which began in 1886.
Congoleum produces both sheet and tile floor covering products with a wide
variety of product features, designs and colors. Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible
felt, printing a design on the gel, applying a wear layer, heating the gel layer
sufficiently to cause it to expand into a cushioned foam and, in some products,
adding a urethane coating. The Company also produces through-chip-inlaid sheet
products for both residential and commercial markets. These products are
produced by applying an adhesive coat and solid vinyl colored chips to a felt
backing and laminating the sheet under pressure with a heated drum. Tile
flooring is manufactured by creating a base stock (consisting primarily of
limestone and vinyl resin) which is less flexible than the backings for sheet
4
flooring, and transferring or laminating to it preprinted colors and designs
followed by a wear layer and, in some cases, a urethane coating. Commercial tile
is manufactured by including colored vinyl chips in the pigmented base stock.
For do-it-yourself tile, an adhesive is applied to the back of the tile. The
differences between products within each of the two product lines consist
primarily of content and thickness of wear layers and coatings, the use of
chemical embossing to impart a texture, the complexity of designs and the number
of colors. Congoleum also purchases sundries and accessory products for resale.
Congoleum's products serve both the residential and commercial
hard-surface flooring markets, and are used in remodeling, manufactured housing,
new construction and commercial applications. These products, together with a
limited quantity of related products purchased for resale, are sold primarily to
wholesale distributors and major retailers in the United States and Canada.
Based upon the nature of the Company's operations, facilities and management
structure, the Company considers its business to constitute a single segment for
financial reporting purposes.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve
claims asserted against it related to the use of asbestos in its products
decades ago. During 2003, Congoleum obtained the requisite votes of asbestos
personal injury claimants necessary to seek approval of a proposed, pre-packaged
Chapter 11 plan of reorganization. In January 2004, the Company filed its
proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. On November 8, 2004, Congoleum filed a modified plan of reorganization
and related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures on December 9, 2004 and has scheduled a hearing to begin on April 12,
2005 to consider confirmation of the plan. The Company has solicited and
received the acceptances necessary for confirmation of its plan. However, there
can be no assurance that the confirmation hearing will not be rescheduled to a
later date, that the proposed plan of reorganization will not be modified
further or that the Bankruptcy Court will approve the plan. Congoleum is
presently involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers filed various objections to Congoleum's previously proposed
plan of reorganization and related matters. There can be no assurances that
these or other insurance carriers will not file objections to the recently filed
modified plan of reorganization. Certain other parties have also filed various
objections to Congoleum's plan of reorganization. See Notes 1 and 17 of the
Notes to Consolidated Financial Statements, which are contained in Item 8 of
this Annual Report on Form 10-K.
The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and any amendments to these reports filed with or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
free of charge through its Web site (www.congoleum.com), as soon as reasonably
practical after electronically filed with, or otherwise furnished to, the
Securities and Exchange Commission. The Company's code of ethics is also posted
on its Web site or may be obtained without charge by sending a written request
to Mr. Howard N. Feist III of the Company at its office at 3500 Quakerbridge
Road, P.O. Box 3127, Mercerville, NJ 08619. Amendments to, or waivers of, the
code of ethics, if any, that relate to the Chief Executive Officer, Chief
5
Financial Officer, Chief Accounting Officer or other persons performing such
function, will also be posted on the Web site.
As a result of the filing of its Bankruptcy case, the Company is required
to file periodically with the Bankruptcy Court certain financial information on
an unconsolidated basis for itself and two subsidiaries. This information
includes Statements of Financial Affairs, schedules and certain monthly
operating reports (in forms prescribed by the Federal Rules of Bankruptcy
Procedure). The debtors' informational filings with the Bankruptcy Court,
including the Statements of Financial Affairs, schedules and monthly operating
reports (collectively, the "Bankruptcy Reports"), are available to the public at
the office of the Clerk of the Bankruptcy Court, Clarkson S. Fisher U.S.
Courthouse, 402 East State Street, Trenton, NJ 08608. Certain of the Bankruptcy
Reports may be viewed at www.njb.uscourts.gov (Case No. 03-51524).
The Company is furnishing the information set forth above for convenience
of reference only. The Company cautions that the information contained in the
Bankruptcy Reports is or will be unaudited and subject to change and not
prepared in accordance with generally accepted accounting principles or for the
purpose of providing the basis for an investment decision relating to any of the
securities of the Company. In view of the inherent complexity of the matters
that may be involved in the Bankruptcy case, the Company does not undertake any
obligation to make any further public announcement with respect to any
Bankruptcy Reports that may be filed with the Bankruptcy Court or the matters
referred to therein.
Raw Materials
The principal raw materials used in the manufacture of sheet and tile
flooring are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print paper. Most of these raw
materials are purchased from multiple sources. Although the Company has
generally not had difficulty in obtaining its requirements for these materials,
it has occasionally experienced significant price increases for some of these
materials. Raw material prices in 2004 increased significantly, and recent
industry supply conditions for specialty resins used in flooring have been very
tight, despite significant price increases, in part due to an explosion at a
large resin plant in 2004 that destroyed the plant. Although the Company has not
experienced any significant difficulties obtaining specialty resin, there can be
no assurances that it may not have difficulty in the future, particularly if
global supply conditions deteriorate.
The Company believes that alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print film, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of certain products. The Company maintains a raw material inventory
and continually looks to develop new sources to provide continuity of supply for
its raw material requirements.
6
Patents and Trademarks
The Company believes that the Congoleum brand name, as well as the other
trademarks it holds, are important to maintaining its competitive position.
The Company also believes that patents and know-how play an important role
in furthering and maintaining competitive position. In particular, the Company
utilizes a proprietary transfer printing process for certain tile products that
it believes produces visual effects that only one competitor is presently able
to duplicate.
Distribution
The Company currently sells its products through approximately 17
distributors providing approximately 76 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Net sales to customers in the United States for the years ended December 31,
2004, 2003 and 2002 totaled $221.3 million, $211.8 million and $228.5 million,
respectively, with net sales to customers outside the United States for the
years ended December 31, 2004, 2003, and 2002 totaling $8.2 million, $8.9
million, and $8.7 million, respectively.
The sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October. See Note 21 of the Notes
to Consolidated Financial Statements for a comparison of quarterly operating
results for the years ended December 31, 2004 and 2003. Orders are generally
shipped as soon as a truckload quantity has been accumulated, and backorders can
be canceled without penalty. At December 31, 2004, the backlog of unshipped
orders was $6.4 million, compared to $6.3 million at December 31, 2003.
The Company considers its distribution network very important to
maintaining its competitive position. Although the Company has more than one
distributor in some of its distribution territories and actively manages its
credit exposure to its distributors, the loss of a major distributor could have
a material adverse impact on the Company's sales, at least until a suitable
replacement is in place. For the year ended December 31, 2004, two customers
each accounted for over 10% of the Company's net sales. These customers were its
distributor to the manufactured housing market, LaSalle-Bristol Corporation, and
the Company's retail market distributor, Mohawk Industries, Inc. Together, they
accounted for approximately 70% of the Company's net sales in 2004.
Working Capital
The Company produces goods for inventory and sells on credit to customers.
Generally, the Company's distributors carry inventory as needed to meet local or
rapid delivery requirements. The Company's credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
7
In 2005, the Company anticipates spending an additional $6.5 million at a
minimum to obtain confirmation of its plan of reorganization under Chapter 11 of
the United States Bankruptcy Code and $9.3 million in connection with the
related insurance coverage litigation, which will have a material impact on its
liquidity and cash flow, although the Company anticipates that its existing cash
(including restricted cash) and credit arrangements should be sufficient to fund
these expenditures.
Product Warranties
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of efforts to differentiate mid-
and high-end products through color, design and other attributes, the Company
offers enhanced warranties with respect to wear, moisture discoloration and
other performance characteristics, which increase with the selling price of such
products.
Competition
The market for the Company's products is highly competitive. Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. The Company believes, based upon its market research, that
purchase decisions are influenced primarily by fashion elements such as design,
color and style, durability, ease of maintenance, price and ease of
installation. Both tile and sheet resilient flooring are easy to replace for
repair and redecoration and, in the Company's view, have advantages over other
floor covering products in terms of both price and ease of installation and
maintenance.
The Company encounters competition from three other manufacturers in North
America and, to a lesser extent, foreign manufacturers. In the resilient
category, Armstrong World Industries, Inc. has the largest market share. Some of
the Company's competitors have substantially greater financial and other
resources and access to capital than the Company.
Research and Development
The Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise in
the manufacturing process. Expenditures for research and development for the
year ended December 31, 2004 were $4.3 million, compared to $3.1 million and
$3.5 million for the years ended December 31, 2003 and 2002, respectively.
8
Environmental Regulation
Due to the nature of the Company's business and certain of the substances
which are or have been used, produced or discharged by the Company, the
Company's operations are subject to extensive federal, state and local laws and
regulations relating to the generation, storage, disposal, handling, emission,
transportation and discharge into the environment of hazardous substances. The
Company, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility under New Jersey's Environmental Clean-up
Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act.
The Company does not anticipate that the additional costs of these measures will
be significant. The Company also agreed to be financially responsible for any
cleanup measures required at its Trenton tile facility when that facility was
acquired in 1993. In 2004, the Company incurred capital expenditures of
approximately $0.6 million for environmental compliance and control facilities.
The Company has also budgeted $0.4 million in 2005 for planned spending on
environmental compliance and control.
The Company has historically expended substantial amounts for compliance
with existing environmental laws and regulations, including those matters
described above. The Company will continue to be required to expend amounts in
the future for costs related to prior activities at its facilities and third
party sites and for ongoing costs to comply with existing environmental laws,
and those amounts may be substantial. Because environmental requirements have
grown increasingly strict, the outcome of these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of the Company. See Item 3 below for certain additional
information regarding environmental matters.
Employees
At December 31, 2004, the Company employed a total of 875 personnel,
compared to 921 employees at December 31, 2003.
The Company has entered into collective bargaining agreements with hourly
employees at three of its plants and with the drivers of the trucks that provide
interplant transportation. These agreements cover approximately 500 of the
Company's employees. The Trenton tile plant has a five-year collective
bargaining agreement with United Steelworkers of America - Local 547, which
expires in May 2008. The Trenton sheet plant has a five-year collective
bargaining agreement with United Steelworkers of America - Local 107L, which
expires in February 2006. The Marcus Hook plant has a five-year collective
bargaining agreement with the United Steelworkers of America - Local 12698-01,
which expires in November 2008. The Marcus Hook plant also has a five-year
collective bargaining agreement with the Teamsters Union - Local 312, which
expires in January 2009. The Finksburg plant has no union affiliation. In the
past five years, there have been no strikes by employees of the Company and the
Company believes that its employee relations are satisfactory.
9
Item 2. PROPERTIES
The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, as well as storage space in Trenton, New Jersey, which
are described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Trenton, NJ Leased Warehousing 111,314
Mercerville, NJ Leased Corporate Offices 55,902
The Finksburg facility consists primarily of a 16-foot wide flooring felt
production line.
The Marcus Hook facility is capable of manufacturing rotogravure printed
sheet flooring in widths of up to 16 feet. Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.
The Trenton sheet facility is capable of manufacturing rotogravure printed
and through-chip inlaid sheet products in widths up to 6 feet. Major production
lines, all six-foot wide, include an oven, a rotary laminating line and a press.
The examination, packing and warehousing of all sheet products (except products
for the manufactured housing market) occur at the Trenton plant distribution
center.
The Trenton tile facility consists of three major production lines, which
are a four-foot wide commercial tile line, a two-foot wide residential tile line
and a one-foot wide residential tile line.
Productive capacity and extent of utilization of the Company's facilities
are dependent on a number of factors, including the size, construction, and
quantity of product being manufactured, some of which also dictate which
production line(s) must be utilized to make a given product. The Company's major
production lines were operated an average of 81% of the hours available on a
five-day, three-shift basis in 2004 with the corresponding figure for individual
production lines ranging from 53% to 99%.
Although many of the Company's manufacturing facilities have been
substantially depreciated for financial reporting purposes, the Company has
generally maintained and improved the productive capacity of these facilities
over time through a program of regular capital expenditures. The Company
considers its manufacturing facilities to be adequate for its present and
anticipated near-term production needs.
10
Item 3. LEGAL PROCEEDINGS
Bankruptcy Proceedings and Asbestos-Related Liabilities: On December 31,
2003, Congoleum filed a voluntary petition with the United States Bankruptcy
Court for the District of New Jersey (Case No. 03-51524) seeking relief under
Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted against
it related to the use of asbestos in its products decades ago. During 2003,
Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of a proposed, pre-packaged Chapter 11 plan of
reorganization. In January 2004, the Company filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy Court. On November
8, 2004, Congoleum filed a modified plan of reorganization and related documents
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the Asbestos Claimants' Committee, the Future Claimants'
Representative and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures on December 9, 2004
and has scheduled a hearing to begin on April 12, 2005 to consider confirmation
of the plan. The Company has solicited and received the acceptances necessary
for confirmation of its plan. However, there can be no assurance that the
confirmation hearing will not be rescheduled to a later date, that the proposed
plan of reorganization will not be modified further or that the Bankruptcy Court
will approve the plan. Congoleum is presently involved in litigation with
certain insurance carriers related to disputed insurance coverage for asbestos
related liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plan of reorganization and related matters.
There can be no assurances that these or other insurance carriers will not file
objections to the recently filed modified plan of reorganization. Certain other
parties have also filed various objections to Congoleum's plan of
reorganization. See Notes 1 and 17 of the Notes to Consolidated Financial
Statements, which are contained in Item 8 of this Annual Report on Form 10-K.
Environmental Liabilities: The Company is named, together with a large
number (in most cases, hundreds) of other companies, as a potentially
responsible party ("PRP") in pending proceedings under the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
and similar state laws. In addition, in four other instances, although not named
as a PRP, the Company has received a request for information. The pending
proceedings relate to eight disposal sites in New Jersey, Pennsylvania, and
Maryland in which recovery from generators of hazardous substances is sought for
the cost of cleaning up the contaminated waste sites. The Company's ultimate
liability in connection with those sites depends on many factors, including the
volume of material contributed to the site, the number of other PRPs and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable from insurance. However, under CERCLA,
and certain other laws, the Company, as a PRP, can be held jointly and severally
liable for all environmental costs associated with a site.
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 81 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998 and a groundwater treatment system was installed
thereafter. The Environmental Protection Agency ("EPA") recently selected a
remedy for the soil and shallow groundwater; however, the remedial
11
investigation/feasibility study related to the deep groundwater has not been
completed. The PRP group estimates that future costs of the remedy recently
selected by EPA based on engineering estimates would be approximately $11
million. Congoleum's proportionate share, based on waste disposed at the site,
is estimated to be approximately 5.7%, or $0.7 million. The majority of
Congoleum's share of costs is presently being paid by one of its insurance
carriers, whose remaining policy limits for this claim will cover approximately
half this amount. Congoleum expects the balance to be funded by other insurance
carriers and the Company.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities for clean-up and removal activities arising from
operating manufacturing plants in New Jersey. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.
The Company anticipates that these matters will be resolved over a period
of years and that after application of expected insurance recoveries, funding
the costs will not have a material adverse impact on the Company's liquidity or
financial position. However, unfavorable developments in these matters could
result in significant expenses or judgments that could have a material adverse
effect on the financial position of the Company.
Other: In the ordinary course of its business, the Company becomes
involved in lawsuits, administrative proceedings, product liability claims (in
addition to asbestos-related claims), and other matters. In some of these
proceedings, plaintiffs may seek to recover large and sometimes unspecified
amounts and the matters may remain unresolved for several years.
The total balances of environmental, asbestos-related, and other
liabilities and the related insurance receivable and deemed probable of recovery
at December 31 are as follows:
2004 2003
---- ----
- --------------------------------------------------------------------------------
(in millions) Liability Receivable Liability Receivable
- --------------------------------------------------------------------------------
Environmental liabilities $ 4.6 $ 2.1 $ 5.3 $ 2.7
Asbestos product liability(1) 23.8 8.8 9.8 3.6
Other 0.9 0.1 1.0 0.1
- --------------------------------------------------------------------------------
Total $ 29.3 $ 11.0 $ 16.1 $ 6.4
================================================================================
(1) The asbestos product liability at December 31, 2004 and 2003 reflects the
estimated cost to settle asbestos liabilities through an amended plan of
reorganization under Chapter 11. This liability includes $14.5 million
received in connection with an insurance settlement (recorded as
restricted cash), which the Company is required to contribute to a trust.
Actual liability pursuant to settlement agreements is in excess of $491
million. The receivable related to asbestos product liability represents
amounts paid by the Company for which it is entitled to reimbursement
pursuant to the terms of the settlement agreements and related documents.
See Note 17 of Notes to Consolidated Financial Statements.
12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Class A common stock is listed on the American Stock
Exchange under the symbol CGM. The following table reflects the high and low
sales prices (rounded to the nearest penny) based on American Stock Exchange
trading over the past two years.
2004 High Low
-------------------------------------------------------------------
First Quarter $4.19 $0.75
Second Quarter 2.75 1.81
Third Quarter 5.40 2.66
Fourth Quarter 6.64 3.70
2003 High Low
-------------------------------------------------------------------
First Quarter $0.53 $0.15
Second Quarter 0.85 0.43
Third Quarter 0.83 0.53
Fourth Quarter 0.98 0.50
The Company's Class B common stock is not listed on any exchange. Holders
of Class A common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders and holders of Class B common stock are
entitled to two votes per share on all matters other than certain extraordinary
matters. Each share of class B common stock is convertible into one share of
Class A common stock under certain circumstances, including a sale or other
transfer by the holders of such shares to a person or entity other than an
affiliate of the transferor. Both classes vote together as a single class on all
matters with limited exceptions. Except with respect to voting rights and
conversion rights, the Class A common stock and the Class B common stock are
identical.
The Company has not paid any cash dividends in 2004, 2003 or 2002 and does
not anticipate paying any cash dividends prior to confirmation of a plan of
reorganization or in the foreseeable future thereafter. Any change in the
Company's dividend policy after confirmation of a plan of reorganization will be
within the discretion of the Board of Directors, subject to restrictions
contained in the Company's plan of reorganization and debt or other agreements,
and will depend, among other things, on the Company's solvency, earnings, debt
service and capital requirements, restrictions in financing agreements, business
conditions and other factors that the Board of Directors deem relevant.
13
The number of registered and beneficial holders of the Company's Class A
common stock on March 15, 2005 was approximately 1,000. The number of registered
and beneficial holders of the Company's Class B common stock on March 15, 2005
was two.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2004:
Number of Securities
Number of Remaining
Securities to Weighted Available For
be Issued Upon Average Future Issuance
Exercise of Exercise Price Under Equity
Outstanding Of Outstanding Compensation Plans
Options, Warrants Options, Warrants (excluding securities
Plan Category And Rights and Rights reflected in column A)
------------- ---------- ---------- ----------------------
(A) (B) (C)
Equity compensation plans
approved by security holders 686,500 $1.99 111,100
Equity compensation plans
not approved by security
holders 17,000 $1.94 33,000
------ ------
Total 703,500 $1.99 144,100
======= =======
On September 21 1995, the Company established its 1995 Stock Option Plan,
as amended (the "1995 Plan"), under which options to purchase up to 800,000
shares of the Company's Class A common stock may be issued to officers and key
employees. Such options may be either incentive stock options or nonqualified
stock options, and the options' exercise price must be at least equal to the
fair value of the Company's Class A common stock on the date of grant. All
options granted under the 1995 Plan have ten-year terms and vest over five years
at the rate of 20% per year beginning on the first anniversary of the date of
grant.
On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase up to
50,000 shares of the Company's Class A common stock. The 1999 Plan did not
require or receive stockholder approval. The Options granted under the 1999 Plan
have ten-year terms and vest six months from the grant date. The exercise price
for each Option is the fair market value on the date of the grant.
As of December 31, 2004, an aggregate of 270,100 shares of common stock
were issuable upon the exercise of outstanding options under the 1995 Plan and
1999 Plan.
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
For the years ended December 31,
- ---------------------------------------------------------------------------------------------------------------
2004 2003 2002(1) 2001(1) 2000(1)
---- ---- ------- ------- -------
Consolidated Statements of Operations Data:
Net sales ..................................... $ 229,493 $ 220,706 $ 237,206 $ 218,760 $ 219,575
Cost of sales ................................. 167,844 166,864 179,699 165,683 170,373
Selling, general and administrative expenses .. 52,925 56,911 70,119 48,952 49,326
Distributor transition expenses ............... -- -- -- -- 7,717
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from operations ................. 8,724 (3,069) (12,612) 4,125 (7,841)
Interest expense, net ......................... (9,332) (8,843) (8,112) (7,591) (5,714)
Other income, net ............................. 1,011 1,276 1,543 1,320 1,450
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting change ..... 403 (10,636) (19,181) (2,146) (12,105)
Provision (benefit) for income taxes .......... (2,545) (3,874) 92 (506) (3,976)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change .......................... 2,948 (6,762) (19,273) (1,640) (8,129)
Cumulative effect of accounting change ........ -- -- (10,523) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) ............................. $ 2,948 $ (6,762) $ (29,796) $ (1,640) $ (8,129)
- ---------------------------------------------------------------------------------------------------------------
Income (loss) per common share before
cumulative effect of accounting change:
Basic ............................... $ 0.36 $ (0.82) $ (2.33) $ (0.20) $ (0.98)
Diluted ............................. 0.35 (0.82) (2.33) (0.20) (0.98)
Cumulative effect of accounting change ........ -- -- (1.27) -- --
Net income (loss) per common share:
Basic ............................... $ 0.36 $ (0.82) $ (3.60) $ (0.20) $ (0.98)
Diluted ............................. 0.35 (0.82) (3.60) (0.20) (0.98)
- ---------------------------------------------------------------------------------------------------------------
Average shares outstanding: Basic ............. 8,260 8,260 8,260 8,260 8,267
Diluted ........... 8,498 8,260 8,260 8,260 8,267
- ---------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data
(at end of period):
Total assets .................................. $ 212,882 $ 175,899 $ 203,991 $ 265,413 $ 238,662
Total long-term debt .......................... -- 99,773 99,724 99,674 99,625
Liabilities subject to compromise ............. 151,515 -- -- -- --
Stockholders' equity (deficit) ................ (20,989) (25,777) (16,078) 25,054 29,310
(1) The impact of the adoption of Statement of Financial Accounting
Standards No. 142 ("SFAS No. 142") on the Company's financial
statements resulted in the elimination of $0.4 million of goodwill
amortization expense, or $0.05 per share, for the twelve months
ended December 31, 2002. Had SFAS No. 142 been adopted in 2001 and
2000, the impact would have been the elimination of $0.4 million of
goodwill amortization expense, or $0.05 per share, for each of those
two years.
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained in Item 8 of this
Annual Report on Form 10-K.
Results of Operations
The Company's business is cyclical and is affected by the same economic
factors that affect the remodeling and housing industries in general, including
the availability of credit, consumer confidence, changes in interest rates,
market demand and general economic conditions.
In addition to external economic factors, the Company's results are
sensitive to sales and manufacturing volume, competitors' pricing, consumer
preferences for flooring products, raw material costs and the mix of products
sold. The manufacturing process is capital intensive and requires substantial
investment in facilities and equipment. The cost of operating these facilities
generally does not vary in direct proportion to production volume and,
consequently, operating results fluctuate disproportionately with changes in
sales volume.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve
claims asserted against it related to the use of asbestos in its products
decades ago. During 2003, Congoleum obtained the requisite votes of asbestos
personal injury claimants necessary to seek approval of a proposed, pre-packaged
Chapter 11 plan of reorganization. In January 2004, the Company filed its
proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. On November 8, 2004, Congoleum filed a modified plan of reorganization
and related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures on December 9, 2004 and has scheduled a hearing to begin on April 12,
2005 to consider confirmation of the plan. The Company has solicited and
received the acceptances necessary for confirmation of its plan. However, there
can be no assurance that the confirmation hearing will not be rescheduled to a
later date, or that the proposed plan of reorganization will not be modified
further or that the Bankruptcy Court will approve the plan. Congoleum is
presently involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers filed various objections to Congoleum's previously proposed
plan of reorganization and related matters. There can be no assurances that
these or other insurance carriers will not file objections to the recently filed
modified plan of reorganization. Certain other parties have also filed various
objections to Congoleum's plan of reorganization.
16
The proposed modified plan of reorganization, if confirmed, would leave
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against the Company. The proposed modified plan of
reorganization would provide, among other things, for an assignment of certain
rights in, and proceeds of, Congoleum's applicable insurance to a trust (the
"Plan Trust") that would fund the settlement of all pending and future asbestos
claims and protect the Company from future asbestos-related claims and
litigation by channeling all asbestos claims to the Plan Trust pursuant to the
provisions of Section 524(g) of the Bankruptcy Code. Other creditors would be
unimpaired under the plan. The Company anticipates that it will take until the
third quarter of 2005 to obtain confirmation of its proposed plan of
reorganization. There can be no assurance that the proposed plan will not be
modified again, or that a confirmation order, if entered, will not be appealed.
In anticipation of Congoleum's commencement of the Chapter 11 cases,
Congoleum entered into a settlement agreement with various asbestos personal
injury claimants (the "Claimant Agreement"), which provides for an aggregate
settlement value of at least $491 million. As contemplated by the Claimant
Agreement, Congoleum also entered into agreements establishing a pre-petition
trust (the "Collateral Trust") to distribute funds in accordance with the terms
of the Claimant Agreement and granting the Collateral Trust a security interest
in its rights under applicable insurance coverage and payments from insurers for
asbestos claims. Under Congoleum's proposed plan of reorganization, after the
establishment of the trust to be established upon confirmation of the plan of
reorganization, the assets in the Collateral Trust would be transferred to the
Plan Trust. The Company expects that any claims subject to the Claimant
Agreement that are unsatisfied as of the confirmation of the plan of
reorganization by the Bankruptcy Court would be channeled to the Plan Trust.
Based on its proposed plan of reorganization, the Company has made
provisions in its financial statements for the minimum amount of the range of
estimates for its contribution to the Plans Trust and costs to effect the
proposed plan to settle asbestos liabilities through a Plan Trust established
pursuant to the provisions of Section 524(g) of the Bankruptcy Code. The Company
recorded a charge of $17.3 million in the fourth quarter of 2002, an additional
$3.7 million in the fourth quarter of 2003, and a further $5.0 million in the
fourth quarter of 2004 to provide for the estimated minimum costs of completing
its reorganization. Actual amounts that will be contributed to the Plan Trust
and costs for pursuing and implementing the plan of reorganization could be
materially higher, and the Company may record significant additional charges
should the minimum estimated cost increase.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Notes 1 and 17 of the Notes to
Consolidated Financial Statements contained in Item 8 of this Annual Report on
Form 10-K. In addition, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results - The Company has significant asbestos liability and funding
exposure, and its proposed amended plan of reorganization may not be confirmed"
for a discussion of certain factors that could cause actual results to differ
from the Company's goals for resolving its asbestos liability through the
proposed plan of reorganization.
17
Year ended December 31, 2004 as compared to year ended December 31, 2003
Net sales for the year ended December 31, 2004 totaled $229.5 million as
compared to $220.7 million for the year ended December 31, 2003, an increase of
$8.8 million or 4%. The increase in sales resulted from improvements in
residential sheet sales reflecting the introduction in the second half of 2004
of a new high-end product, Xclusive, continued improvements in sales of the
DuraCeramic tile product, higher shipments to the manufactured housing industry,
and the effect of a price increase. Partially offsetting these improvements were
declines in Do-It-Yourself tile sales to mass merchandisers, lower DuraStone
product sales and less demand for residential sheet specials.
Gross profit for the year ended December 31, 2004 totaled $61.6 million,
or 26.8% of net sales, compared to $53.8 million or 24.4% of net sales for the
year ended December 31, 2003. The increase in gross margins were driven by
improvement in product mix, particularly residential sheet, coupled with
improved manufacturing efficiencies and the impact of cost reduction programs
initiated in the second half of 2003. These factors helped offset sharply higher
raw material costs experienced during the second half of the year. The
significant raw material inflation experienced in 2004 is expected to continue
into 2005, and will reduce profit margins to the extent it cannot be recovered
through price increases.
Selling, general and administrative expenses were $52.9 million for the
year ended December 31, 2004 as compared to $56.9 million for the year ended
December 31, 2003, a decrease of $4.0 million. Selling, general and
administrative expenses for 2004 and 2003 included $5.0 million and $3.7
million, respectively, of costs associated with asbestos-related reorganization
claims. As a percent of net sales, selling, general and administrative expenses
were 23.1% and 25.8% for the years ended December 31, 2004 and 2003,
respectively. The lower selling, general and administrative expenses reflect the
impact of several cost savings initiatives instituted in the second half of
2003, including workforce reductions, reduced merchandising and sampling
expenses, and elimination of trade shows. These initiatives, coupled with
further cost reduction steps taken in the fall of 2004, helped offset increased
costs in healthcare, pensions and performance related incentive fees.
The Company recorded a charge of $5.0 million during the fourth quarter of
2004, included in selling, general, and administrative expenses, to increase its
estimated recorded liability for resolving asbestos-related claims. The recorded
liability at December 31, 2004 represents the minimum estimated cost that the
Company would incur to resolve its asbestos-related liability through the
execution of the Company's proposed plan of reorganization. If the Company is
not successful in obtaining confirmation of its proposed plan of reorganization
in a timely manner, actual costs could be significantly higher. The proposed
plan also would require the Company to make an additional contribution to the
Plan Trust one year after confirmation of the plan equal to 51% of any increase
in market value of the Company's shares at that time over their value on June 6,
2003. For example, if the adjustment amount were calculated for the period ended
December 31, 2004, the resulting adjustment amount would be $17.8 million. No
provision has been made for the cost of this possible additional contribution,
which could be material. The Company will adjust its recorded liability should
its estimates change. In addition, it is expected that the terms of the Note
will require the Company to make interest payments prior to such note's maturity
date.
18
Income from operations was $8.7 million for the year ended December 31,
2004 compared to a loss of $3.1 million for the same period in the prior year,
an improvement of $11.8 million. This improvement in operating income reflects
higher sales and margins coupled with reductions in operating expenses.
Interest income was unchanged at $0.1 million for the years ended December
31, 2004 and 2003, respectively. Interest expense increased from $8.9 million in
2003 to $9.4 million in 2004, primarily reflecting the accrued interest on
unpaid Senior Note interest. Due to the Chapter 11 proceedings, the Company was
precluded from making the interest payments due February 1, 2004 and August 1,
2004 on the Senior Notes.
The Company recorded a tax benefit of $2.5 million on income before taxes
of $0.4 million in 2004. This relates primarily to anticipated tax benefits
associated with certain prior year expenditures for resolving asbestos related
liabilities, which the Company has determined may be carried back but were not
previously recognized.
Year ended December 31, 2003 as compared to year ended December 31, 2002
Net sales for the year ended December 31, 2003 were $220.7 million as
compared to $237.2 million for the year ended December 31, 2002, a decrease of
$16.5 million or 7%. The decrease resulted primarily from lower sales in the
Do-It-Yourself tile category coupled with continued weakness in the Manufactured
Housing market. Improved resilient sheet volume, particularly in base-grade and
trade-up builder products, coupled with a price increase and lower sales
allowances, helped to partially mitigate the sales decline.
Gross profit for the year ended December 31, 2003 totaled $53.8 million,
or 24.4% of net sales, compared to $57.5 million, or 24.2% of net sales, for the
year ended December 31, 2002. Gross margins improved slightly as improved
pricing, manufacturing efficiencies and cost reduction programs helped offset
raw material cost increases.
Selling, general and administrative expenses were $56.9 million for the
year ended December 31, 2003 as compared to $70.1 million for the year ended
December 31, 2002, a decrease of $13.2 million. Selling, general and
administrative expenses for 2003 and 2002 included $3.7 million and $17.3
million of cost associated with asbestos-related claims, respectively. As a
percent of net sales, selling, general and administrative expenses were 25.8%
and 29.6% for the years ended December 31, 2003 and 2002, respectively. During
2003, cost savings initiatives were implemented that helped offset increases in
pension, medical and other related costs.
The Company recorded a charge of $3.7 million during the fourth quarter of
2003, included in selling, general, and administrative expenses, to increase its
recorded liability for resolving asbestos-related claims to the then estimated
minimum cost to resolve its asbestos-related liability through the execution of
its proposed plan of reorganization.
19
The loss from operations was $3.1 million for the year ended December 31,
2003 compared to a loss of $12.6 million for the year ended December 31, 2002,
an improvement of $9.5 million. This smaller loss from operations was primarily
due to the lower asbestos-related charge, offset by lower gross margin dollars.
Interest income declined from $0.3 million in 2002 to $0.1 million in 2003
due to lower average cash equivalent and short-term investment balances.
Interest expense increased from $8.4 million in 2002 to $8.9 million in 2003,
reflecting increased borrowings under the Company's revolving credit agreement.
The Company recorded a tax benefit of $3.9 million on a loss before income
taxes of $10.6 million in 2003 as a result of utilizing certain loss carry
forwards that had previously been fully reserved.
Liquidity and Capital Resources
The consolidated financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, the
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern. As
described more fully in the Notes to the Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
The Company is a defendant in a large number of asbestos-related lawsuits
and on December 31, 2003 filed a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. See Notes 1 and 17 of the Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report on
Form 10-K. These matters will have a material adverse impact on liquidity and
capital resources. During 2004, the Company paid $10.8 million in fees and
expenses related to implementation of its planned reorganization under Chapter
11 and litigation with certain insurance companies. Pursuant to terms of the
Claimant Agreement and related documents, Congoleum is entitled to reimbursement
for certain expenses it incurs for claims processing costs and expenses in
connection with pursuit of insurance coverage. At December 31, 2004, Congoleum
had $8.8 million recorded as a receivable for such reimbursements. The amount
and timing of reimbursements that will be received will depend on when the trust
receives funds from insurance settlements or other sources and whether the
insurance proceeds exceed $375 million, which is the required threshold for
reimbursement of the first $7.3 million spent by Congoleum. Congoleum believes
this threshold will be met, although there can be no assurances to that effect.
Congoleum expects to spend a further $9.3 million at a minimum in fees,
expenses, and trust contributions in connection with obtaining confirmation of
its plan, which amount is recorded in its reserve for asbestos-related
liabilities (in addition to the $14.5 million insurance settlement being held as
restricted cash). It also expects to spend a further $9.3 million during 2005 in
connection with pursuit of insurance coverage, for which it expects to be
reimbursed as discussed above.
20
As part of the Company's proposed plan of reorganization, Congoleum will
also issue a promissory note to the Plan Trust. Under the terms of the proposed
plan, the original principal amount of the Company Note will be $2.7 million and
will be subject to increase as of the last trading day of the 90 consecutive
trading day period commencing on the first anniversary of the effective date of
the Company's plan of reorganization in an amount equal to the excess, if any,
of the amount by which 51% of the Company's market capitalization as of that
date 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 for the period ended December 31, 2004, the resulting adjustment
amount would be $17.8 million. Although the scheduled repayment date for this
note does not occur until its tenth anniversary of issuance, this debt may
affect Congoleum's ability to obtain other sources of financing or refinance
existing obligations. In addition, it is expected that the terms of the Note
will require the Company to make interest payments prior to such note's maturity
date.
The proposed plan and collateral trust agreement (agreement related to the
Collateral Trust), as modified, would 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 $3.0 million. In addition, the plan would further obligate
Congoleum to fund any actual costs in excess of $2.0 million incurred by such
asbestos claimant representatives in connection with the confirmation of the
plan, subject to Bankruptcy Court approval of those costs.
Unrestricted cash and cash equivalents, including short-term investments
at December 31, 2004, were $29.7 million, an increase of $27.5 million from
December 31, 2003. The increase includes accrued but unpaid interest during 2004
of $8.9 million. Under the terms of its revolving credit agreement, payments on
the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $1.2 million and $1.8 million at December
31, 2004 and December 31, 2003, respectively, are recorded as restricted cash.
Additionally, a $14.5 million settlement received in August 2004 from an
insurance carrier, which is subject to the lien of the Collateral Trust, is
included as restricted cash at December 31, 2004. The Company expects to
contribute these funds, less any amounts withheld pursuant to reimbursement
arrangements, to the trust formed upon confirmation of its plan of
reorganization. Working capital was $35.3 million at December 31, 2004, up from
$29.9 million one year earlier. The ratio of current assets to current
liabilities at December 31, 2004 was 1.4 to 1.0, compared to 1.6 to 1.0 at
December 31, 2003. The ratio of debt to total capital at December 31, 2004 was
0.47 to 1.0 compared to 0.57 to 1.0 at December 31, 2003. Net cash provided by
operations during the year ended December 31, 2004 was $31.1 million, as
compared to net cash used by operations of $20.0 million in 2003. Net cash from
operations increased from 2003 to 2004 due to improved operating results,
resumption of normal trade credit which had contracted at the end of 2003,
non-payment of interest on the Company's Senior Notes while operating under
Chapter 11, and improved inventory management.
21
Capital expenditures in 2004 totaled $3.4 million. The Company is
currently planning capital expenditures of approximately $6.9 million in 2005
and between $6 million and $7 million in 2006, primarily for maintenance and
improvement of plants and equipment, which it expects to fund with cash from
operations and credit facilities.
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 agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on June
30, 2005 with borrowings up to $30.0 million. Interest is based on 0.75% above
the prime rate. This financing agreement contains certain covenants, which
include the maintenance of a minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"). It also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and conditions under this financing agreement must be met in order for
the Company to borrow from the facility. The Company was in compliance with
these covenants at December 31, 2004. Borrowings under this facility are
collateralized by inventory and receivables. At December 31, 2004, based on the
level of receivables and inventory, $18.7 million was available under the
facility, of which $4.3 million was utilized for outstanding letters of credit
and $9.5 million was utilized by the revolving loan. The Company anticipates
that its debtor-in-possession financing facility will be replaced with a
revolving credit facility on substantially similar terms upon confirmation of
its plan of reorganization. While the Company expects the facilities discussed
above will provide it with sufficient liquidity, there can be no assurances that
it will continue to be in compliance with the required covenants, that the
Company will be able to obtain a similar or sufficient facility upon exit from
bankruptcy, or that the debtor-in-possession facility would be renewed if the
Company's plan of reorganization is not confirmed by that facility's expiration
on June 30, 2005.
In addition to the provision for asbestos litigation discussed previously,
the Company has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. The Company is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against the Company.
Among these claims, the Company is a named party in several actions associated
with waste disposal sites (more fully discussed in "Legal Proceedings" in Part
I, Item 3 and "Environmental Regulation" in Part I, Item 1). These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites and
certain of the Company's owned and previously owned facilities. The
contingencies also include claims for personal injury and/or property damage.
The exact amount of such future cost and timing of payments are indeterminable
due to such unknown factors as the magnitude of cleanup costs, the timing and
extent of the remedial actions that may be required, the determination of the
Company's liability in proportion to other potentially responsible parties, and
the extent to which costs may be recoverable from insurance. The Company has
recorded provisions in its financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While the
Company believes its estimate of the future amount of these liabilities is
reasonable, and that they will be paid over a period of five to ten years, the
timing and amount of such payments may differ significantly from the Company's
assumptions. Although the effect of future government regulation could have a
22
significant effect on the Company's costs, the Company is not aware of any
pending legislation which would reasonably have such an effect. There can be no
assurances that the costs of any future government regulations could be passed
along to its customers. Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.
The outcome of these environmental matters could result in significant
expenses incurred by or judgments assessed against the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. The Company
generated $31.1 million in cash from operations in 2004 (as more fully discussed
above), which includes $8.9 million of accrued but unpaid interest on long-term
debt. The Company believes these sources will be adequate to fund working
capital requirements, debt service payments, planned capital expenditures for
the foreseeable future, and its current estimates for costs to settle and
resolve its asbestos liabilities through its proposed Chapter 11 plan of
reorganization. The Company's inability to obtain confirmation of the proposed
plan of reorganization in a timely manner would have a material adverse effect
on the Company's ability to fund its operating, investing and financing
requirements.
The following table summarizes the Company's contractual obligations for
future principal payments on its debt and future minimum rental payments on its
non-cancelable operating leases at December 31, 2004. The Company does not have
payment obligations under capital leases or long term purchase contracts.
Payments Due by Period
(amounts in thousands)
- --------------------------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Long-term debt $100,000 $ -- $100,000 $ -- $ --
Operating leases 13,596 3,183 6,555 3,858 --
- --------------------------------------------------------------------------------------------
Total $113,596 $3,183 $106,555 $3,858 $ --
============================================================================================
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires making estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from these estimates under different assumptions or conditions. Critical
23
accounting policies are defined as those that entail significant judgments and
estimates, and could potentially result in materially different results under
different assumptions and conditions. The Company believes its most critical
accounting policies upon which its financial condition depends, and which
involve the most complex or subjective decisions or assessments, are those
described below. For a discussion on the application of these and other
accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements contained in Item 8 of this Annual Report on Form 10-K.
Asbestos Liabilities - As discussed in Notes 1 and 17 of the Notes to
Consolidated Financial Statements, the Company is a party to a significant
number of lawsuits stemming from its manufacture of asbestos-containing
products. During 2003, Congoleum obtained the asbestos personal injury claimant
votes necessary for approval of a proposed pre-packaged Chapter 11 plan of
reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court. On November
8, 2004, Congoleum filed a modified plan of reorganization and related documents
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the Asbestos Claimants' Committee, the Future Claimants'
Representative and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures on December 9,
2004. The Bankruptcy Court has scheduled a hearing to begin on April 12, 2005 to
consider approval of the proposed plan. Congoleum is also involved in litigation
with certain insurance carriers related to disputed insurance coverage for
asbestos related liabilities, and certain insurance carriers have filed various
objections to Congoleum's plan of reorganization and related matters. The
Company's estimated minimum gross liability to cover settlements of current
asbestos claims is $491 million, which is substantially in excess of both the
total assets of the Company as well as the Company's previous estimates made in
prior periods of the maximum liability for both known and unasserted claims.
While the Company purchased insurance coverage it believes applies to these
claims, some of the insurance carriers are presently insolvent and the remaining
solvent insurance carriers have disputed their coverage obligations. The Company
believes the ultimate amount of its liability, and the amount of recoverable
insurance, will be determined through some combination of negotiation,
litigation, and bankruptcy court order, but that these amounts cannot be
reasonably estimated given all the uncertainties that presently exist.
The Company expects that insurance will provide the vast majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of the Company
itself. The Company does not have the necessary financial resources to litigate
and/or settle asbestos claims in the ordinary course of business.
In light of its bankruptcy filing and proposed plan of reorganization, the
Company believes the most meaningful measure of its probable loss due to
asbestos litigation is the amount it will have to contribute to the Plan Trust
plus the costs to effect the reorganization. The Company estimates the minimum
remaining costs to complete the reorganization process to be $9.3 million, of
which it has recorded $6.6 million as a current liability and $2.7 million as a
long-term liability (representing the minimum estimated amount of the note to be
contributed to the Plan Trust). These amounts do not include the liability
associated with a $14.5 million insurance settlement recorded as restricted cash
which the Company expects to contribute, less any amounts withheld pursuant to
reimbursement arrangements, to the Plan Trust formed upon confirmation of its
24
plan of reorganization. The Company also expects to recover $8.8 million from
insurance proceeds or the Collateral Trust or its successor pursuant to terms of
the Claimant Agreement and related documents which provide for the Plan Trust to
reimburse certain expenses of the Company. The amount and timing of
reimbursements that will be received will depend on when the trust receives
funds from insurance settlements or other sources and whether the insurance
proceeds exceed $375 million, which is the required threshold for reimbursement
of the first $7.3 million spent by Congoleum. Congoleum believes this threshold
will be met, although there can be no assurances to that effect. The maximum
amount of the range of possible asbestos loss is limited to the going concern or
liquidation value of the Company, an amount which the Company believes is
substantially less than the minimum estimated liability for the known claims
against it.
The Company will update its estimates, if appropriate, as additional
information becomes available during the reorganization process, which could
result in potentially material adjustments to the Company's earnings in future
periods.
Inventories - Inventories are stated at the lower of cost or market. The
LIFO (last-in, first-out) method of determining cost is used for substantially
all inventories. The Company records as a charge to cost of goods sold any
amount required to reduce the carrying value of inventories to the net
realizable sales value.
Valuation of Deferred Tax Assets - The Company provides for valuation
reserves against its deferred tax assets in accordance with the requirements of
Statement of Financial Accounting Standards No. 109. In evaluating the recovery
of deferred tax assets, the Company makes certain assumptions as to future
events such as the ability to generate future taxable income. At December 31,
2004, the Company has provided a 100% valuation allowance for its net deferred
tax assets.
Environmental Contingencies - The Company has incurred liabilities related
to environmental remediation costs at both third-party sites and Company-owned
sites. Management has recorded both liabilities and insurance receivables in its
financial statements for its estimate of costs and insurance recoveries for
future remediation activities. These estimates are based on certain assumptions
such as the extent of cleanup activities to be performed, the methods employed
in the cleanup activities, the Company's relative share in costs at sites where
other parties are involved, and the ultimate insurance coverage available. These
projects tend to be long-term in nature, and these assumptions are subject to
refinement as facts change. As such, it is possible that the Company may need to
revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods.
Pension Plans and Post-Retirement Benefits - The Company accounts for its
defined benefit pension plans in accordance with SFAS No. 87, "Employers'
Accounting for Pensions," which requires that amounts recognized in financial
statements be determined on an actuarial basis. As permitted by SFAS No. 87, the
Company uses a calculated value of the expected return on plan assets (which is
further described below). Under SFAS No. 87, the effects of the actual
performance of the pension plan's assets and changes in pension liability
discount rates on the Company's computation of pension income or expense are
amortized over future periods.
25
The most significant element in determining the Company's pension income
or expense in accordance with SFAS No. 87 is the expected return on plan assets.
For 2004, the Company has assumed that the expected long-term rate of return on
plan assets will be 7.0%. The assumed long-term rate of return on assets is
applied to the value of plan assets. Which produces the expected return on plan
assets that is included in determining pension expense. The difference between
this expected return and the actual return on plan assets is deferred. The net
deferral of past actuarial gains or losses ($21.2 million loss at December 31,
2004) will ultimately be recognized as an adjustment to future pension expense.
At the end of each year, the Company determines the discount rate to be
used to calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the Company
looks to rates of return on high-quality, fixed-income investments that receive
one of the two highest ratings given by a recognized ratings agency. At December
31, 2004, the Company determined this rate to be 6.25%.
The Company accounts for its post-retirement benefits other than pensions
in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions," which requires that amounts recognized in
financial statements be determined on a actuarial basis. These amounts are
projected based on the January 1, 2004 SFAS No. 106 valuation and the 2004
year-end disclosure assumptions, including a discount rate of 6.25% and health
care cost trend rates of 9% in 2005 reducing to an ultimate rate of 5% in 2010.
Risk Factors That May Affect Future Results
The Company has significant asbestos liability and funding exposure, and its
proposed amended plan of reorganization may not be confirmed.
As more fully set forth in Notes 1 and 17 of the Notes to Consolidated
Financial Statements, which are included in this Annual Report on Form 10-K, the
Company has significant liability and funding exposure for asbestos claims. The
Company has entered into settlement agreements with various asbestos claimants
totaling $491 million. Satisfaction of this obligation pursuant to the terms of
the amended plan of reorganization is dependent on a determination by the
Bankruptcy Court that the plan has satisfied certain criteria under the
Bankruptcy Code, among other things.
There can be no assurance that the Company will be successful in obtaining
confirmation of its amended plan of reorganization in a timely manner or at all,
and any alternative plan of reorganization pursued by the Company or confirmed
by the Bankruptcy Court could vary significantly from the description set forth
in this Annual Report on Form 10-K. Furthermore, the estimated costs and
contributions to effect the contemplated plan of reorganization or an
alternative plan could be significantly greater than currently estimated. Any
plan of reorganization pursued by the Company will be subject to numerous
conditions, approvals and other requirements, including Bankruptcy Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.
26
Some additional factors that could cause actual results to differ from the
Company's goals for resolving its asbestos liability through the amended plan of
reorganization bankruptcy filing include: (i) the future cost and timing of
estimated asbestos liabilities and payments and availability of insurance
coverage and reimbursement from insurance companies, which underwrote the
applicable insurance policies for the Company for asbestos-related claims and
other costs relating to the execution and implementation of any plan of
reorganization pursued by the Company, (ii) timely reaching agreement with other
creditors, or classes of creditors, that exist or may emerge, (iii) satisfaction
of the conditions and obligations under the Company's outstanding debt
instruments, (iv) the response from time to time of the Company's and its
controlling shareholder's, American Biltrite Inc.'s, lenders, customers,
suppliers and other constituencies to the ongoing process arising from the
Company's strategy to settle its asbestos liability, (v) the Company's ability
to maintain debtor-in-possession financing sufficient to provide it with funding
that may be needed during the pendency of its Chapter 11 case and to obtain exit
financing sufficient to provide it with funding that may be needed for its
operations after emerging from the bankruptcy process, in each case, on
reasonable terms, (vi) timely obtaining sufficient creditor and court approval
of any reorganization plan pursued by it, (vii) developments in and the outcome
of insurance coverage litigation pending in New Jersey State Court involving
Congoleum and certain insurers, and (viii) compliance with the Bankruptcy Code,
including Section 524(g). In any event, if the Company is not successful in
obtaining sufficient creditor and court approval of its amended plan of
reorganization, such failure would have a material adverse effect upon its
business, results of operations and financial condition.
In addition, there has been federal legislation proposed that, if adopted,
would establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its business, results of operations or
financial condition, or upon any plan of reorganization it may decide to pursue.
To date, the Company has expended significant amounts pursuant to resolving its
asbestos liability relating to its proposed amended Chapter 11 plan of
reorganization. To the extent any federal legislation is enacted, which does not
credit the Company for amounts paid by the Company pursuant to its plan of
reorganization or requires the Company to pay significant amounts to any
national trust or otherwise, such legislation could have a material adverse
effect on the Company's business, results of operations and financial condition.
As a result of the Company's significant liability and funding exposure for
asbestos claims, there can be no assurance that if it were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company.
For further information regarding the Company's asbestos liability,
insurance coverage and strategy to resolve its asbestos liability, please see
Notes 1 and 17 of Notes to Consolidated Financial Statements, which are included
in this Annual Report on Form 10-K.
27
The Company may incur substantial liability for environmental, product and
general liability claims in addition to asbestos-related claims, and its
insurance coverage and its likely recoverable insurance proceeds may be
substantially less than the liability incurred by the Company for these claims.
Environmental Liabilities. Due to the nature of the Company's business and
certain of the substances which are or have been used, produced or discharged by
the Company, the Company's operations are subject to extensive federal, state
and local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws or regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites. The Company will continue to be required to expend amounts in the future
for costs related to prior activities at its facilities and third party sites,
and for ongoing costs to comply with existing environmental laws; such amounts
may be substantial. There is no certainty that these amounts will not have a
material adverse effect on its business, results of operations and financial
condition because, as a result of environmental requirements becoming
increasingly strict, the Company is unable to determine the ultimate cost of
compliance with environmental laws and enforcement policies. Moreover, in
addition to potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company to modify or
curtail its operations, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Product and General Liabilities. In the ordinary course of its business,
the Company becomes involved in lawsuits, administrative proceedings, product
liability claims (in addition to asbestos-related claims) and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several years.
These matters could have a material adverse effect on the Company's business,
results of operations and financial condition if the Company is unable to
successfully defend against or settle these matters, its insurance coverage is
insufficient to satisfy unfavorable judgments or settlements relating to these
matters, or the Company is unable to collect insurance proceeds relating to
these matters.
The Company is dependent upon a continuous supply of raw materials from third
party suppliers and would be harmed if there were a significant, prolonged
disruption in supply or increase in its raw material costs.
The Company's business is dependent upon a continuous supply of raw
materials from third party suppliers. The principal raw materials used by the
Company in its manufacture of sheet and tile flooring are vinyl resins,
plasticizers, latex, limestone, stabilizers, cellulose paper fibers, urethane
and transfer print paper. The Company purchases most of these raw materials from
multiple sources. Although the Company has generally not had difficulty in
obtaining its requirements for these materials, it has occasionally experienced
significant price increases for some of these materials. Raw material prices in
2004 increased significantly, and recent industry supply conditions for
specialty resins used in flooring have been very tight, despite significant
price increases, in part due to an explosion at a large resin plant in 2004 that
destroyed the plant. Although the Company has not experienced any significant
28
difficulties obtaining specialty resin, there can be no assurances that it may
not have difficulty in the future, particularly if global supply conditions
deteriorate.
The Company believes that suitable alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products. In an attempt to protect against
this risk of loss of supply, the Company maintains a raw material inventory and
continually seeks to develop new sources which will provide continuity of supply
for its raw material requirements. However, there is no certainty that the
Company's maintenance of its raw material inventory or its ongoing efforts to
develop new sources of supply would be successful in avoiding a material adverse
effect on its business, results of operations and financial condition if it were
to realize an extended interruption in the supply of its raw materials.
In addition, the Company could incur significant increases in the costs of
its raw materials. Although the Company generally attempts to pass on increases
in the costs of its raw materials to its customers, the Company's ability to do
so is, to a large extent, dependent upon the rate and magnitude of any increase,
competitive pressures and market conditions for its products. There have been in
the past, and may be in the future, periods of time during which increases in
these costs cannot be recovered. During those periods of time, there could be a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company operates in a highly competitive flooring industry and some of its
competitors have greater resources and broader distribution channels than the
Company.
The market for the Company's products is highly competitive. The Company
encounters competition from three other manufacturers in North America and, to a
lesser extent, foreign manufacturers. Some of the Company's competitors have
greater financial and other resources and access to capital than the Company.
Furthermore, like the Company, one of the Company's major competitors has sought
protection under Chapter 11 of the Bankruptcy Code. When such competitor emerges
from bankruptcy as a continuing operating company it may have shed much of its
pre-filing liabilities and have a competitive cost advantage over the Company as
a result of having shed those liabilities. In addition, in order to maintain its
competitive position, the Company may need to make substantial investments in
its business, including its product development, manufacturing facilities,
distribution network and sales and marketing activities. Competitive pressures
may also result in decreased demand for the Company's products and in the loss
of the Company's market share for its products. Moreover, due to the competitive
nature of the Company's industry, the Company may be commercially restricted
from raising or even maintaining the sales prices of its products, which could
result in the Company incurring significant operating losses if its expenses
were to increase or otherwise represent an increased percentage of the Company's
sales.
29
The Company's business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.
The Company is subject to the effects of general economic conditions. A
sustained general economic slowdown could have serious negative consequences for
the Company's business, results of operations and financial condition. Moreover,
the Company's business is cyclical and is affected by the economic factors that
affect the remodeling and housing industries in general and the manufactured
housing industry specifically, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.
The Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.
The Company's business depends upon its ability to timely manufacture and
deliver products that meet the needs of its customers and the end users of the
Company's products. If the Company were to realize an unexpected, significant
and prolonged disruption of its operations at any of its facilities, including
disruptions in its manufacturing operations, it could result in shipment delays
of its products, depletion of its inventory as a result of reduced production
and increased production costs as a result of taking actions in an attempt to
cure the disruption or carry on its business while the disruption remains. Any
resulting delay, depletion or increased production cost could result in
increased costs, lower revenues and damaged customer and product end user
relations, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of its efforts to differentiate
mid- and high-end products through color, design and other attributes, the
Company offers enhanced warranties with respect to wear, moisture discoloration
and other performance characteristics, which generally increase with the price
of such products. If the Company were to incur a significant number of warranty
claims, the resulting warranty costs could be substantial.
The Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor of the Company could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company currently sells its products through approximately 17
distributors providing approximately 76 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
The Company considers its distribution network very important to maintaining its
competitive position. Although the Company has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations and financial condition.
30
The Company derives a significant percentage of its sales from two of its
distributors, LaSalle-Bristol Corporation and Mohawk Industries, Inc.
LaSalle-Bristol Corporation serves as the Company's distributor in the
manufactured housing market, and Mohawk Industries, Inc. serves as a retail
market distributor of the Company. These two distributors accounted for 70% of
the Company's net sales for the year ended December 31, 2004 and 65% of the
Company's net sales for the year ended December 31, 2003.
Stockholder votes are controlled by ABI; our interests may not be the same as
ABI's interests.
ABI owns a majority (approximately 55% as of December 31, 2004) of the
outstanding shares of our common stock, representing a 68.3% voting interest. As
a result, ABI can elect all of our directors and can control the vote on all
matters, including determinations such as: approval of mergers or other business
combinations, sales of all or substantially all of our assets, any matters
submitted to a vote of our stockholders, issuance of any additional common stock
or other equity securities, incurrence of debt other than in the ordinary course
of business, the selection and tenure of our Chief Executive Officer, payment of
dividends with respect to common stock or other equity securities and other
matters that might be favorable to ABI. ABI's ability to prevent an unsolicited
bid for us or any other change in control could have an adverse effect on the
market price for our common stock.
Possible future sales of shares by ABI could adversely affect the market for our
stock.
ABI may sell shares of our common stock in compliance with the federal
securities laws. By virtue of ABI's current control of us, ABI could sell large
amounts of shares of our common stock by causing us to file a registration
statement that would allow them to sell shares more easily. In addition, ABI
could sell shares of our common stock without registration. Although we can make
no prediction as to the effect, if any, that such sales would have on the market
price of our common stock, sales of substantial amounts of our common stock, or
the perception that such sales could occur, could adversely affect the market
price of our common stock. If ABI sells or transfers shares of our common stock
as a block, another person or entity could become our controlling stockholder.
The Company depends on key executives to run its business, and the loss of any
of these executives would likely harm the Company's business.
The Company depends on key executives to run its business. The Company's
future success will depend largely upon the continued service of these key
executives, all whom have no employee contract with the Company, and may
terminate their employment at any time without notice. Although certain key
executives of the Company are, directly or indirectly, large shareholders of the
Company, 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.
31
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 90%
of the Company's outstanding long-term debt as of December 31, 2004 consisted of
indebtedness with a fixed rate of interest which is not subject to change based
upon changes in prevailing market interest rates. Under its current policies,
the Company does not use derivative financial instruments, derivative commodity
instruments or other financial instruments to manage its exposure to changes in
interest rates, foreign currency exchange rates, commodity prices or equity
prices and does not hold any instruments for trading purposes.
32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
December 31, December 31,
2004 2003
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 29,710 $ 2,169
Restricted cash .................................................... 15,682 1,757
Accounts receivable, less allowances
of $1,174 and $1,049 as of December 31, 2004
and 2003, respectively ........................................... 17,621 13,560
Inventories ........................................................ 39,623 44,995
Prepaid expenses and other current assets .......................... 5,124 9,672
Deferred income taxes .............................................. 10,678 8,752
- ---------------------------------------------------------------------------------------------------
Total current assets .......................................... 118,438 80,905
Property, plant, and equipment, net .................................. 79,550 87,035
Other assets, net .................................................... 14,894 7,959
- ---------------------------------------------------------------------------------------------------
Total assets .................................................. $ 212,882 $ 175,899
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................... $ 10,296 $ 4,544
Accrued liabilities ................................................ 26,395 24,655
Asbestos-related liabilities ....................................... 21,079 7,081
Revolving credit loan .............................................. 9,500 10,232
Accrued taxes ...................................................... 1,670 130
Deferred income taxes .............................................. -- 4,376
Liabilities subject to compromise - current .......................... 14,225 --
- ---------------------------------------------------------------------------------------------------
Total current liabilities ..................................... 83,165 51,018
Long-term debt ....................................................... -- 99,773
Asbestos-related liabilities ......................................... 2,738 2,738
Accrued pension liability ............................................ -- 24,032
Other liabilities .................................................... -- 11,222
Deferred income taxes ................................................ 10,678 4,376
Accrued post-retirement benefit obligation ........................... -- 8,517
Liabilities subject to compromise - long term ........................ 137,290 --
- ---------------------------------------------------------------------------------------------------
Total liabilities ............................................. 233,871 201,676
- ---------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01;
20,000,000 shares authorized; 4,736,950
shares issued and 3,651,590 shares
outstanding as of December 31, 2004 and
4,736,950 shares issued and 3,651,190
shares outstanding at December 31, 2003, respectively .............. 47 47
Class B common stock, par value $0.01; 4,608,945
shares authorized, issued and outstanding at
December 31, 2004 and 2003, respectively .......................... 46 46
Additional paid-in capital ........................................... 49,106 49,105
Retained deficit ..................................................... (43,830) (46,778)
Accumulated other comprehensive loss ................................. (18,545) (20,384)
------- -------
(13,176) (17,964)
Less Class A common stock held in treasury,
at cost; 1,085,760 shares at December 31,
2004 and 2003, respectively ........................................ 7,813 7,813
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ......................... (20,989) (25,777)
- ---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) .......... $ 212,882 $ 175,899
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
33
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the years ended
December 31,
2004 2003 2002
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales ................................................................. $ 229,493 $ 220,706 $ 237,206
Cost of sales ............................................................. 167,844 166,864 179,699
Selling, general and administrative expenses .............................. 52,925 56,911 70,119
===================================================================================================================================
Income (loss) from operations ...................................... 8,724 (3,069) (12,612)
Other income (expense):
Interest income ....................................................... 114 63 263
Interest expense ...................................................... (9,446) (8,906) (8,375)
Other income .......................................................... 1,285 1,343 1,647
Other expense ......................................................... (274) (67) (104)
===================================================================================================================================
Income (loss) before income taxes and cumulative
effect of accounting change .................................... 403 (10,636) (19,181)
Provision (benefit) for income taxes ...................................... (2,545) (3,874) 92
===================================================================================================================================
Net income (loss) before accounting change ......................... 2,948 (6,762) (19,273)
Cumulative effect of accounting change ......................... -- -- (10,523)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) .................................................. $ 2,948 $ (6,762) $ (29,796)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share, before
cumulative effect of account change
Basic ................................................ $ 0.36 $ (0.82) $ (2.33)
Diluted .............................................. 0.35 (0.82) (2.33)
Cumulative effect of accounting change
basic and diluted .............................................. -- -- (1.27)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share
Basic ................................................. $ 0.36 $ (0.82) $ (3.60)
Diluted ............................................... 0.35 (0.82) (3.60)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding
Basic ................................................. 8,260 8,260 8,260
Diluted ............................................... 8,498 8,260 8,260
The accompanying notes are an integral part of the financial statements.
34
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands)
Accumulated
Common Stock Additional Other Total
Class Class Paid-in Retained Comprehensive Treasury Stockholders' Comprehensive
A B Capital Deficit Loss Stock Equity Income (Loss)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 ..... $47 $46 $49,105 $(10,220) $ (6,111) $(7,813) $ 25,054
Minimum pension liability
Adjustment ...................... -- -- -- -- (11,336) -- (11,336) $(11,336)
Net loss ........................ -- -- -- (29,796) -- -- (29,796) (29,796)
--------
Net comprehensive loss .......... $(41,132)
========
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 ...... 47 46 49,105 (40,016) (17,447) (7,813) (16,078)
Minimum pension liability
Adjustment ...................... -- -- -- -- (2,937) -- (2,937) $ (2,937)
Net loss ........................ -- -- -- (6,762) -- -- (6,762) (6,762)
--------
Net comprehensive loss .......... $ (9,699)
========
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 ..... 47 46 49,105 (46,778) (20,384) (7,813) (25,777)
Exercise of option .............. -- -- 1 -- -- -- 1
Minimum pension liability
Adjustment ...................... -- -- -- -- 1,839 -- 1,839 $ 1,839
Net income ...................... -- -- -- 2,948 -- -- 2,948 2,948
--------
Net comprehensive income ........ $ 4,787
========
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 ...... $47 $46 $49,106 $(43,830) $(18,545) $(7,813) $(20,989)
The accompanying notes are an integral part of the financial statements.
35
Consolidated Statements of Cash Flows
(dollars in thousands) For the years ended
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) ....................................................... $ 2,948 $ (6,762) $(29,796)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation .................................................... 10,883 11,149 10,714
Amortization .................................................... 545 612 559
Deferred income taxes ........................................... -- (882) 4,112
Cumulative effect of accounting change .......................... -- -- 10,523
Changes in certain assets and liabilities:
Accounts and notes receivable ............................... (4,061) 3,473 898
Inventories ................................................. 5,372 5,730 5,057
Prepaid expenses and other current assets ................... 2,340 (1,667) 602
Accounts payable ............................................ 5,752 (10,103) (4,047)
Accrued liabilities ......................................... 16,142 (8,366) (5,622)
Accrued asbestos related .................................... (5,754) (11,475) 20,995
Other liabilities ........................................... (3,102) (1,664) (4,025)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ............. 31,065 (19,955) 9,970
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net ....................................... (3,428) (4,628) (8,366)
Purchase of short-term investments .............................. -- -- --
Maturities of short-term investments ............................ -- -- 1,416
Proceeds from sale of retired assets ............................ 30 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities ............. (3,398) (4,628) (6,950)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings ....................................... (732) 10,232 --
Net change in restricted cash ................................... 605 (1,757) --
Proceeds from exercise of options ............................... 1 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .................................... (126) 8,475 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ......................... 27,541 (16,108) 3,020
Cash and cash equivalents:
Beginning of year ................................................ 2,169 18,277 15,257
- -----------------------------------------------------------------------------------------------------------------------------------
End of year ...................................................... $ 29,710 $ 2,169 $ 18,277
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
36
Notes to Consolidated Financial Statements
1. Basis of Presentation:
The Consolidated Financial Statements of Congoleum Corporation (the
"Company" or "Congoleum") have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern. As described more fully below, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve
claims asserted against it related to the use of asbestos in its products
decades ago. During 2003, Congoleum obtained the requisite votes of asbestos
personal injury claimants necessary to seek approval of a proposed, pre-packaged
Chapter 11 plan of reorganization. In January 2004, the Company filed its
proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. On November 8, 2004, Congoleum filed a modified plan of reorganization
and related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures on December 9, 2004 and has scheduled a hearing to begin on April 12,
2005 to consider confirmation of the plan. The Company has solicited and
received the acceptances necessary for confirmation of its plan. However, there
can be no assurance that the confirmation hearing will not be rescheduled to a
later date, that the proposed plan of reorganization will not be modified
further or that the Bankruptcy Court will approve the plan. Congoleum is
presently involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers filed various objections to Congoleum's previously proposed
plan of reorganization and related matters. There can be no assurances that
these or other insurance carriers will not file objections to the recently filed
modified plan of reorganization. Certain other parties have also filed various
objections to Congoleum's plan of reorganization.
The proposed modified plan of reorganization, if confirmed, would leave
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against the Company. The proposed modified plan of
reorganization would provide, among other things, for an assignment of certain
rights in, and proceeds of, Congoleum's applicable insurance to a Plan Trust
that would fund the settlement of all pending and future asbestos claims and
protect the Company from future asbestos-related litigation by channeling all
asbestos claims to the Plan Trust under Section 524(g) of the Bankruptcy Code.
Other creditors would be unimpaired under the plan. The Bankruptcy Court has
authorized the Company to pay trade creditors in the ordinary course of
business. The Company expects that it will take until the third quarter of 2005
to obtain confirmation of its plan of reorganization.
37
Based on its proposed plan of reorganization, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through the Plan Trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded a charge of $17.3 million in the fourth
quarter of 2002, an additional $3.7 million in the fourth quarter of 2003 and a
further $5.0 million in the fourth quarter of 2004 to provide for the estimated
minimum costs of completing its reorganization. Actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing the plan
of reorganization could be materially higher.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 17 of the Notes to
Consolidated Financial Statements. There can be no assurance that the Company
will be successful in realizing its goals in this regard or in obtaining
confirmation of its proposed plan of reorganization. As a result, any
alternative plan of reorganization pursued by the Company or confirmed by a
bankruptcy court could vary significantly from the description in this Annual
Report on Form 10-K and the estimated costs and contributions to effect the
contemplated plan of reorganization could be significantly greater than
currently estimated. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court approvals, and there can be no assurance that such conditions,
approvals and other requirements will be satisfied or obtained. Delays in
getting the Company's plan of reorganization approved by the Bankruptcy Court
could result in a proceeding that takes longer and is more costly than the
Company has estimated.
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
The Company implemented this guidance in consolidated financial statements for
periods after December 31, 2003.
Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Substantially all of the Company's liabilities at
December 31, 2003 have been reclassified as liabilities subject to compromise.
Obligations arising post-petition, and pre-petition obligations that are secured
are not classified as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may
arise due to the rejection of executory contracts or unexpired leases, or as a
result of the allowance of contingent or disputed claims.
2. Summary of Significant Accounting Policies:
Nature of Business - Congoleum manufactures resilient sheet and tile flooring
products. These products, together with a limited quantity of related products
purchased for resale, are sold primarily to wholesale distributors and major
retailers in the United States and Canada. Based upon the nature of the
Company's operations, facilities and management structure, the Company considers
its business to constitute a single segment for financial reporting purposes.
38
Basis of Consolidation - The accompanying consolidated financial statements
reflect the operations, financial position and cash flows of the Company and
include the accounts of the Company and its subsidiaries after elimination of
all significant intercompany transactions in consolidation.
Use of Estimates and Critical Accounting Policies - The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Critical accounting
policies are defined as those that entail significant judgments and estimates,
and could potentially result in materially different results under different
assumptions and conditions. The Company believes that the most critical
accounting policies upon which its financial condition depends, and which
involve the most complex or subjective decisions or assessments, concern
asbestos liabilities, environmental contingencies, valuation of deferred tax
assets, and pension plan and post-retirement benefits.
Although the Company believes it employs reasonable and appropriate
estimates and assumptions in the preparation of its financial statements and in
the application of accounting policies, if business conditions are different
than the Company has assumed they will be, or if the Company used different
estimates and assumptions, it is possible that materially different amounts
could be reported in the Company's financial statements.
Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the estimated
sales value of goods returned, trade discounts and customers' allowances.
Cash and Cash Equivalents - All highly liquid debt instruments with a maturity
of three months or less at the time of purchase are considered to be cash
equivalents.
Restricted Cash - Under the terms of its revolving credit agreement, payments on
the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. At December 31, 2004
and 2003, cash of approximately $1.2 and $1.8 million was restricted under this
financing agreement. Additionally, a $14.5 million settlement received in August
2004 from an insurance carrier, which is subject to the lien of the Collateral
Trust, is included as restricted cash at December 31, 2004.
Short-Term Investments - The Company invests in highly liquid debt instruments
with strong credit ratings. Commercial paper investments with a maturity greater
than three months, but less than one year at the time of purchase, are
considered to be short-term investments. The Company maintains cash and cash
equivalents and short-term investments with certain financial institutions. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment strategy.
39
Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories. The Company records as a charge to cost of goods sold any amount
required to reduce the carrying value of inventories to the net realizable sales
value.
Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings, 15 years for building improvements, production equipment and
heavy-duty vehicles, 3 to 10 years for light-duty vehicles and office
furnishings and equipment) on the straight-line method for financial reporting
and accelerated methods for income tax purposes. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the asset
and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is reflected in operations.
Debt Issue Costs - Costs incurred in connection with the issuance of debt have
been capitalized and are being amortized over the life of the related debt. Such
costs at December 31, 2004 and 2003 amounted to $1.2 million and $1.6 million,
respectively, net of accumulated amortization of $2.6 million and $2.2 million,
respectively, and are included in other noncurrent assets.
Environmental Remediation - The Company is subject to federal, state and local
environmental laws and regulations. The Company records a liability for
environmental remediation claims when a cleanup program or claim payment becomes
probable and the costs can be reasonably estimated. The recorded liabilities are
not discounted for delays in future payments (see Notes 6 and 16).
Asbestos Liabilities and Plan of Reorganization - The Company is a defendant in
a large number of asbestos-related lawsuits and has filed a proposed plan of
reorganization under Chapter 11 of the United States Bankruptcy Code to resolve
this liability (see Note 17). Accounting for asbestos-related and reorganization
costs includes significant assumptions and estimates, and actual results could
differ materially from those estimates.
Income Taxes - The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS No. 109 requires current recognition
of net deferred tax assets to the extent that it is more likely than not that
such net assets will be realized. To the extent that the Company believes that
its net deferred tax assets will not be realized, a valuation allowance must be
recorded against those assets.
Allowance for Doubtful Accounts and Cash Discounts - The Company provides an
allowance for doubtful accounts and cash discounts based on estimates of
historical collection experience and a review of the current status of trade
accounts receivable, revising its estimates when circumstances dictate.
40
Product Warranties - The Company provides product warranties for specific
product lines and accrues for estimated future warranty cost in the period in
which the revenue is recognized. The following table sets forth activity in the
Company's warranty reserves (in millions):
December 31,
2004 2003 2002
------- ------- -------
Beginning balance $ 3.1 $ 2.7 $ 2.6
Accruals 5.0 6.8 5.7
Charges (5.4) (6.4) (5.6)
------- ------- -------
Ending balance $ 2.7 $ 3.1 $ 2.7
======= ======= =======
Shipping and Handling Costs - Shipping costs for the years ended December 31,
2004, 2003 and 2002 were $1.9 million, $1.6 million, and $2.1 million,
respectively, and are included in selling, general and administrative expenses.
Earnings Per Share - SFAS No. 128, "Earnings Per Share", requires the
computation of basic and diluted earnings per share. The calculation of basic
earnings per share is based on the average number of common shares outstanding
during the period. Diluted earnings per share reflect the effect of all
potentially diluted securities which consist of outstanding common stock
options.
Goodwill - Goodwill represents the excess of acquisition costs over the
estimated fair value of the net assets acquired and was amortized through
year-end 2001 using the straight-line method principally over 40 years. During
the first quarter of 2002, the Company performed a transitional impairment test
in accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). As a result, the
Company concluded that the goodwill was impaired and recorded a goodwill
impairment charge for the cumulative effect of change in accounting principle of
$10.5 million.
Long-lived Assets - The Company periodically considers whether there has been a
permanent impairment in the value of its long-lived assets, primarily property
and equipment, in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company evaluates various factors, including current and projected
future operating results and the undiscounted cash flows for the
under-performing long-lived assets. The Company then compares the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. To the extent that the estimated future
undiscounted cash flows are less than the carrying amount of the asset, the
asset is written down to its estimated fair market value and an impairment loss
is recognized. The value of impaired long-lived assets is adjusted periodically
based on changes in these factors. At December 31, 2004, the Company determined,
based on its evaluation, that the carrying value of its long-lived assets was
appropriate. No adjustments to the carrying costs were made.
41
Accounting for Stock-based Compensation - The Company discloses stock-based
compensation information in accordance with FASB Statement No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" and FASB issued Statement No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation." SFAS 148 provides additional
transition guidance for companies that elect to voluntarily adopt the provisions
of SFAS 123. SFAS 148 does not change the provisions of SFAS 123 that permit
entities to continue to apply the intrinsic value method of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company has elected to continue to account for its stock-based
plans under APB 25, as well as to provide disclosure of stock-based compensation
as outlined in SFAS 123 as amended by SFAS 148.
A reconciliation of net income (loss), as reported, to pro forma net
income (loss) including compensation expense for the Company's stock-based plans
as calculated based on the fair value at the grant dates for awards made under
these plans in accordance with the provisions of SFAS 123, as amended by SFAS
148, as well as a comparison of as reported and pro forma basic and diluted EPS
is as follows:
For Year Ended December 31,
---------------------------
(in thousands, except per share data) 2004 2003 2002
---------- ---------- ----------
Net income (loss):
As reported $ 2,948 $ (6,762) $ (29,796)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects, pro forma 203 208 113
---------- ---------- ----------
As adjusted $ 2,745 $ (6,970) $ (29,909)
========== ========== ==========
Net income (loss) per share:
As reported-basic $ 0.36 $ (0.82) $ (3.60)
Pro forma compensation expense (0.02) (0.03) (0.02)
---------- ---------- ----------
As adjusted-basic $ 0.34 $ (0.85) $ (3.62)
========== ========== ==========
Net income (loss) per share:
As reported-diluted $ 0.35 $ (0.82) $ (3.60)
Pro forma compensation expense (0.02) (0.03) (0.02)
---------- ---------- ----------
As adjusted-diluted $ 0.33 $ (0.85) $ (3.62)
========== ========== ==========
42
The fair value for these options granted was estimated at the date of
grant using a Black-Scholes option pricing model. A summary of the assumptions
used for stock option grants are as follows:
For Year Ended December 31,
---------------------------
------------------------------------------------------
2004 2003 2002
---- ---- ----
------------------------------------------------------
1995 Stock Option Plan:
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 92.0% 92.0% 92.0%
Option forfeiture rate 10.0% 10.0% 10.0%
Risk free interest rate 5.02% 3.37% 3.52%
Expected lives 7.0 years 7.0 years 7.0 years
For Year Ended December 31,
---------------------------
---------------------------------------------------------
2004 2003 2002
---- ---- ----
---------------------------------------------------------
1999 Stock Option Plan:
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 92.0% 92.0% 92.0%
Option forfeiture rate 10.0% 10.0% 10.0%
Risk free interest rate 2.38% 2.28% 1.52%
Expected lives 3.0 years 3.0 years 3.0 years
A summary of the weighted average fair value of option grants are as follows:
For Year Ended December 31,
---------------------------
----------------------------------------------
2004 2003 2002
---- ---- ----
----------------------------------------------
Fair value of option grants under the 1995 Plan $1.94 $0.36 $2.05
Fair value of option grants under the 1999 Plan $2.60 $0.75 $1.20
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) replaces SFAS
No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of
Cash Flows. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Pro forma disclosure is no longer an
alternative to financial statement recognition. SFAS No. 123(R) is effective for
public companies at the beginning of the first interim or annual period
beginning after June 15, 2005. SFAS No. 123(R) allows for either prospective
recognition of compensation expense or retrospective recognition, which may be
back to the original issuance of SFAS No. 123 or only to interim periods in the
year of adoption. The Company is currently evaluating these transition methods
and determining the effect on the Company's consolidated results of operations
and whether the adoption will result in amounts that are similar to the current
pro-forma disclosures under SFAS No. 123. The Company expects to adopt SFAS No.
123(R) on July 1, 2005.
43
In November 2001, Emerging Issues Task Force (EITF) issue 01-9,
Accounting for Consideration Given by Vendor to Customer or Reseller of the
Vendor's Products, was issued. The Company adopted EITF 01-9 effective January
1, 2002 as required. This issue addresses the manner in which companies account
for sales incentives to their customers. The Company's current accounting
policies for the recognition of costs related to these programs, which is to
accrue for costs as benefits are earned by the Company's customers, are in
accordance with the consensus reached in this issue. The Company has
reclassified amounts previously recorded in selling general and administrative
expense as a reduction in net sales. The impact for the year ended December 31,
2002 was a reduction of net sales and of selling, general and administrative
expenses by $4.1 million.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities ("VIEs"). In December 2003, the FASB completed deliberations of
proposed modifications to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date of the VIE. The
Revised Interpretations must be applied no later than the second quarter of
fiscal year 2004. The adoption of FIN 46 had no impact on the Company's
consolidated financial statements as of December 31, 2004.
Reclassifications - Certain amounts appearing in the prior years' financial
statements have been reclassified to conform to the current year's presentation.
3. Inventories:
A summary of the major components of inventories is as follows (in
thousands):
December 31, December 31,
2004 2003
-------------------------------------------------------------------
Finished goods $32,811 $ 37,959
Work-in-process 1,415 1,266
Raw materials and supplies 5,397 5,770
-------------------------------------------------------------------
Total inventories $39,623 $ 44,995
===================================================================
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $0.6 million and $3.6 million lower than reported at December 31,
2004 and 2003, respectively.
44
4. Property, Plant, and Equipment:
A summary of the major components of property, plant, and equipment is as
follows (in thousands):
December 31, December 31,
2004 2003
----------------------------------------------------------------------
Land $ 2,930 $ 2,930
Buildings and improvements 46,257 46,009
Machinery and equipment 182,162 176,369
Construction-in-progress 1,430 5,439
----------------------------------------------------------------------
232,779 230,747
Less accumulated depreciation 153,229 143,712
----------------------------------------------------------------------
Total property, plant,
and equipment, net $ 79,550 $ 87,035
======================================================================
Interest is capitalized in connection with the construction of major
facilities and equipment. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest cost was $0.2 million in 2004 and $0.3 million in
each of 2003 and 2002.
The amount of approved but unexpended capital appropriations at December
31, 2004 was $1.2 million, substantially all of which is planned to be expended
during 2005.
5. Liabilities Subject to Compromise:
As a result of the Company's Chapter 11 filing (see Notes 1 and 17 to the
Consolidated Financial Statements), pursuant to SOP 90-7, the Company is
required to segregate pre-petition liabilities that are subject to compromise
and report them separately on the consolidated balance sheet. Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of the Company's pre-petition debt is recorded at face value
and is classified within liabilities subject to compromise. In addition, the
Company's accrued interest expense on its Senior Notes is also recorded in
liabilities subject to compromise. See Notes 1 and 17 to the Consolidated
Financial Statements for further discussion of the Company's asbestos liability.
45
Liabilities subject to compromise at December 31, 2004 are as follows: (in
thousands)
December 31,
2004
-------------------------------------------------------------------
Current
-------
Pre-petition other payables and accrued interest $14,225
Non-current
-----------
Debt (at face value) 100,000
Pension liability 16,936
Other post-retirement benefit obligation 8,303
Pre-petition other liabilities 12,051
------
-------------------------------------------------------------------
Total liabilities subject to compromise $ 151,515
=======
===================================================================
Additional pre-petition claims (liabilities subject to compromise) may
arise due to the rejection of executory contracts or unexpired leases, or as a
result of the allowance of contingent or disputed claims.
6. Accrued Liabilities:
A summary of the significant components of accrued liabilities consists of
the following (in thousands):
December 31, December 31,
2004 2003
---------------------------------------------------------------------
Accrued warranty, marketing and
sales promotion $18,487 $14,918
Employee compensation and
related benefits 4,735 3,474
Interest -- 3,677
Environmental remediation and
product related liabilities -- 834
Other 3,173 1,752
---------------------------------------------------------------------
Total accrued liabilities $26,395 $24,655
=====================================================================
As a result of the Company's Chapter 11 bankruptcy filing and in
accordance with SOP 90-7, certain liabilities are included in liabilities
subject to compromise on the balance sheet as of December 31, 2004 (see Note 5).
46
7. Debt:
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 (as amended and approved by the Bankruptcy Court
to date) provides a revolving credit facility expiring on June 30, 2005 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 EBITDA. It also includes restrictions on the incurrence
of additional debt and limitations on capital expenditures. The covenants and
conditions under this financing agreement must be met in order for the Company
to borrow from the facility. The Company was in compliance with these covenants
at December 31, 2004. Borrowings under this facility are collateralized by
inventory and receivables. At December 31, 2004, based on the level of
receivables and inventory, $18.7 million was available under the facility, of
which $4.3 million was utilized for outstanding letters of credit and $9.5
million was utilized by the revolving loan. The Company anticipates that its
debtor-in-possession financing facility will be replaced with a revolving credit
facility on substantially similar terms upon confirmation of its plan of
reorganization. While the Company expects the facilities discussed above will
provide it with sufficient liquidity, there can be no assurances that it will
continue to be in compliance with the required covenants, that the Company will
be able to obtain a similar or sufficient facility upon exit from bankruptcy, or
that the debtor-in-possession facility will be renewed if the Company's plan of
reorganization is not confirmed by that facility's expiration of June 30, 2005.
Long-term debt consists of the following (in thousands):
December 31, December 31,
2004 2003
------------------------------------------------------------------------
8-5/8% Senior Notes due 2008 $ -- $99,773
$ -- $99,773
===== =======
========================================================================
On August 3, 1998, the Company issued $100 million of 8 5/8% Senior Notes
maturing August 1, 2008 priced at 99.505% to yield 8.70%. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after August 1, 2003 at predetermined redemption prices (ranging from 104% to
100%), plus accrued and unpaid interest to the date of redemption. The indenture
under which the notes were issued includes certain restrictions on additional
indebtedness and uses of cash, including dividend payments. During 2003, the
Company and the trustee under the indenture governing the Senior Notes amended
the indenture, and sufficient note holders consented, to explicitly permit the
Company to take steps in connection with preparing and filing its prepackaged
plan of reorganization under Chapter 11 of the Bankruptcy Code. The commencement
of the Chapter 11 proceedings constituted an event of default under the
indenture governing the Company's 8 5/8% Senior Notes. In addition, due to the
Chapter 11 proceedings, the Company was precluded from making the interest
payments due February 1, 2004 and August 1, 2004 on the Senior Notes. The amount
47
of accrued interest that was not paid on the Senior Notes on those dates is
approximately $8.6 million. As of December 31, 2004, the principal amount of the
Senior Notes, net of unamortized original issue discount, was $99.8 million.
These amounts, plus $495,000 of accrued interest on the interest due but not
paid on February 1, 2004 and August 1, 2004, are included in "Liabilities
Subject to Compromise."
8. Other Liabilities:
A summary of significant components of other liabilities consists of the
following (in thousands):
December 31, December 31,
2004 2003
--------------------------------------------------------------------
Environmental remediation and
product-related liabilities $ -- $ 5,105
Accrued workers'
compensation claims -- 5,130
Other -- 987
--------------------------------------------------------------------
Total other liabilities $ -- $ 11,222
====================================================================
As a result of the Company's Chapter 11 bankruptcy filing and in
accordance with SOP 90-7, certain liabilities are included in liabilities
subject to compromise on the balance sheet as of December 31, 2004 (see Note 5).
9. Research and Development Costs:
Total research and development costs charged to operations amounted to
$4.3 million, $3.1 million and $3.5 million for the years ended December 31,
2004, 2003, and 2002, respectively.
10. Operating Lease Commitments and Rent Expense:
The Company leases certain office facilities and equipment under leases
with varying terms. Certain leases contain rent escalation clauses. These rent
expenses are recognized on a straight-line basis over the respective term of the
lease.
48
Future minimum lease payments of non-cancelable operating leases having
initial or remaining lease terms in excess of one year as of December 31, 2004
are as follows (in thousands):
Years Ending:
----------------------------------------------
2005 $3,183
2006 2,331
2007 2,181
2008 2,043
2009 2,078
Thereafter 1,780
----------------------------------------------
Total minimum lease payments $13,596
==============================================
Rent expense was $4.0 million, $3.7 million and $3.7 million for the years
ended December 31, 2004, 2003, and 2002, respectively.
11. Pensions and Other Postretirement Plans:
The Company sponsors several noncontributory defined benefit pension plans
covering most of the Company's employees. Benefits under the plans are based on
years of service and employee compensation. Amounts funded annually by the
Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below in "Other Benefits").
During the third quarter of 2004, the Company adopted FASB Staff Position
No. 106-2, Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare
Act"). The Medicare Act provides for a prescription drug benefit under Medicare
("Medicare Part D") as well as a federal subsidy to sponsors of retiree
healthcare benefit plans that provide benefits that are at least actuarially
equivalent to Medicare Part D. Although detailed regulations necessary to
implement the Medicare Act have not yet been finalized, the Company believes
that drug benefits offered under Other Benefit plans will qualify for the
subsidy under Medicare Part D. The effects of this subsidy were factored into
the Company's 2004 annual expense. The reduction in the benefit obligation
attributable to past service cost was approximately $74 thousand and has been
reflected as an actuarial gain. The reduction in expense for 2004 related to the
Act is approximately $18 thousand.
The following summarizes the change in the benefit obligation, the change
in plan assets, the funded status, and reconciliation to the amounts recognized
in the balance sheets for the pension benefits and other benefit plans. The
measurement date for all items set forth below is the last day of the fiscal
year presented.
49
Obligations and Funded Status:
At December 31,
Pension Benefits Other Benefits
--------------------------- ----------------------------
(in thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 73,243 $ 64,188 $ 9,177 $ 8,341
Service cost 1,293 1,174 170 189
Interest cost 4,263 4,223 484 546
Actuarial (gain) loss (2,736) 8,217 (760) 610
Medicare Rx Subsidy -- -- (74) --
---------------------------------------------------------
Benefits paid (4,465) (4,559) (455) (509)
---------------------------------------------------------
Benefit obligation at end of year $ 71,598 $ 73,243 $ 8,542 $ 9,177
---------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 47,404 $ 39,483 -- --
Actual return on plan assets 4,015 7,728 -- --
Employer contribution 5,754 4,752 -- --
Benefits paid (4,465) (4,559) -- --
---------------------------------------------------------
Fair value of plan assets at end of year $ 52,708 $ 47,404 -- --
---------------------------------------------------------
Funded (unfunded) status $(18,891) $(25,839) $(8,542) $(9,177)
Unrecognized transition amount (54) (125) -- --
Unrecognized net actuarial loss 21,209 26,027 (35) 848
Unrecognized prior service cost (427) (713) (141) (603)
---------------------------------------------------------
Net amount recognized $ 1,837 $ (650) $(8,718) $(8,932)
=========================================================
Amounts recognized in the balance sheets consist of:
Pension Benefits Other Benefits
--------------------------- ----------------------------
(in thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Accrued benefit cost $(16,936) $(24,032) $(8,718) $(8,932)
Intangible asset 228 328 -- --
Deferred tax asset -- 2,670 -- --
Accumulated other comprehensive income 18,545 20,384 -- --
---------------------------------------------------------
Net amount recognized $ 1,837 $ (650) $(8,718) $(8,932)
=========================================================
The accumulated benefit obligation for all defined benefit pension plans was
$69,416 and $70,962 at December 31, 2004 and 2003, respectively.
50
Information for pension plans with an accumulated benefit obligation in excess
of plan assets:
December 31,
(in thousands) 2004 2003
- ---------------------------------------------------------------------
Projected benefit obligation $71,598 $73,243
Accumulated benefit obligation $69,416 $70,962
Fair value of plan assets $52,708 $47,404
Components of Net Periodic Benefit Cost:
Pension Benefits Other Benefits
-------------------------------------- -------------------------------
(in thousands) 2004 2003 2002 2004 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Service cost $ 1,293 $ 1,174 $ 1,057 $ 170 $ 189 $ 157
Interest cost 4,263 4,223 4,217 484 546 522
Expected return on plan assets (3,380) (2,769) (3,948) -- -- --
Recognized net actuarial loss (gain) 1,447 1,595 686 49 34 14
Amortization of transition obligation (72) (72) (22) -- -- --
Amortization of prior service cost (285) (283) (241) (462) (462) (462)
----------------------------------------------------------------------------
Net periodic benefit cost $ 3,266 $ 3,868 $ 1,749 $ 241 $ 307 $ 231
============================================================================
Additional Information:
Pension Benefits Other Benefits
---------------- --------------
(in thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------
Increase in minimum liability included in
other comprehensive income, net of tax benefit $(1,840) $(2,937) N/A N/A
The weighted-average assumptions used to determine benefit obligation as of
year-end were as follows:
Pension Benefits Other Benefits
---------------- --------------
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------
Discount rate 6.25% 6.25% 6.25% 6.75%
Rate of compensation increase 5.50% 5.00% -- --
The weighted-average assumptions used to determine net periodic benefit cost
were as follows:
Pension Benefits Other Benefits
--------------------------------- ---------------------------------
2004 2003 2002 2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 6.25% 6.75% 6.25% 6.75% 6.75%
Expected long-term return on plan
Assets 7.00% 7.00% 7.00% -- -- --
Rate of compensation increase 5.50% 5.00% 5.00% -- -- --
51
In developing the overall expected long-term return on plan assets
assumption, a building block approach was used in which rates of return in
excess of inflation were considered separately for equity securities, debt
securities, and other assets. The excess returns were weighted by the
representative target allocation and added along with an appropriate rate of
inflation to develop the overall expected long-term return on plan assets
assumption. The Company believes this determination is consistent with SFAS 87.
Assumed healthcare cost trend rates as of year-end were as follows:
December 31,
-----------------------
2004 2003
-----------------------
Healthcare cost trend rate assumed for next year 9.0% 9.0%
Ultimate healthcare cost trend rate 5.0% 5.0%
Year that the assumed rate reaches ultimate rate 2010 2009
Assumed healthcare cost trend rates have a significant effect on the
amounts reported for healthcare benefits. A one-percentage point change in
assumed healthcare cost trend rates would have the following effects:
1 Percentage 1 Percentage
(in thousands) Point Increase Point Decrease
-------------- -------------- --------------
Effect on total of service and interest cost components $ 57 $ 51
Effect on post-retirement benefit obligation $615 $562
Plan Assets:
For the pension plans, the weighted-average asset allocation at December
31, 2004 and 2003, by asset category, are as follows:
Plan Assets at
December 31,
-----------------------
Asset Category 2004 2003
-----------------------
Equity securities 60% 58%
Debt securities 39% 41%
Other 1% 1%
-----------------------
Total 100% 100%
=======================
The Company has developed an investment strategy for the pension plans.
The investment strategy is to emphasize total return; that is, the aggregate
return from capital appreciation and dividend and interest income. The primary
objective of the investment management for the plans' assets is the emphasis on
consistent growth; specifically, growth in a manner that protects the plans'
assets from excessive volatility in market value from year to year. The
investment policy takes into consideration the benefit obligations, including
timing of distributions.
52
The primary objective for the plans is to provide long-term capital
appreciation through investment in equity and debt securities. The Company's
target asset allocation is consistent with the weighted - average allocation at
December 31, 2004.
The Company selects professional money managers whose investment policies
are consistent with the Company's investment strategy and monitors their
performance against appropriate benchmarks.
Contributions:
The Company expects to contribute $ 5.3 million to its pension plan and $
0.5 million to its other postretirement plan in 2005.
Estimated Future Benefit Payments:
The following benefit payments, which reflect future service as
appropriate, are expected to be paid. The benefit payments are based on the same
assumptions used to measure the Company's benefit obligation at the end of
fiscal 2004.
Other Benefits
Reflecting Not Reflecting
Pension Medicare Medicare
(in thousands) Benefits Rx Subsidy Rx Subsidy
- -------------- -------- ---------- ----------
2005 $ 4,624 $ 496 $ 496
2006 4,720 499 512
2007 4,826 555 567
2008 4,907 607 618
2009 5,026 616 627
2010-2014 27,319 3,790 3,832
Defined Contribution Plan:
The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 20%
of compensation, with partially matching Company contributions. The charge to
income relating to the Company match was $0.7 million, $0.4 million and $1.2
million for the years ended December 31, 2004, 2003 and 2002, respectively.
53
12. Income Taxes:
Income taxes are comprised of the following (in thousands):
For the years ended December 31,
-------------------------------------
2004 2003 2002
----------------------------------------------------------------
Current:
Federal $ 39 $(3,201) $(4,057)
State 183 72 38
Deferred:
Federal (3,843) (745) 4,111
State (1,180) (437) (54)
Valuation allowance 2,256 437 54
--------------------------------------------------------------
Benefit for
income taxes $(2,545) $(3,874) $ 92
===============================================================
The following is a reconciliation of the statutory federal income tax
rate to the Company's effective tax rate expressed as a percentage of income
before income taxes:
For the years ended December 31,
---------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes,
net of federal benefit 30.0 (0.4) (0.1)
Change in valuation allowance 267.5 -- --
Reorganization costs -- -- (21.2)
Benefit of net operating loss (991.2) 3.6 (0.3)
Goodwill -- -- (12.1)
Non-deductible, meal and
entertainment expense 26.1 (1.2) (0.4)
Other 1.4 0.4 (0.2)
- ----------------------------------------------------------------------------
Effective tax rate (632.2)% 36.4% (0.3)%
============================================================================
54
Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences (in thousands):
December 31, December 31,
2004 2003
-------------------------
Deferred tax asset:
Accounts receivable $ 140 $ 90
Unfunded pension liability -- 2,598
Environmental remediation and
product-related reserves 13,943 5,673
Postretirement benefit
obligations 3,693 3,835
Tax credit and other carryovers 7,221 8,170
Other accruals 721 902
===============================================================================
Deferred tax asset 25,718 21,268
Valuation allowance (4,577) (2,321)
- -------------------------------------------------------------------------------
Net deferred tax asset 21,141 18,947
===============================================================================
Deferred tax liability:
Depreciation and amortization (11,876) (12,648)
Inventory (2,521) (3,991)
Other (6,744) (2,308)
- -------------------------------------------------------------------------------
Total deferred tax liability (21,141) (18,947)
===============================================================================
Net deferred tax asset $ -- $ --
- -------------------------------------------------------------------------------
At December 31, 2004 and 2003, the Company had available federal net
operating loss carry forwards of approximately $6.6 million and $19.1 million,
respectively, to offset future taxable income. The federal loss carry forwards
will begin to expire in 2023.
13. Supplemental Cash Flow Information:
Cash payments for interest were $0.6 million, $9.2 million and $8.6
million for the years ended December 31, 2004, 2003 and 2002, respectively. Net
cash refunds for income taxes were $1.6 million, $3.0 million and $3.9 million
for the years ended December 31, 2004, 2003, and 2002, respectively.
55
14. Related Party Transactions:
The Company and its controlling shareholder, American Biltrite Inc.
("ABI"), provide certain goods and services to each other pursuant to negotiated
agreements. The Company had the following transactions with ABI (in thousands):
For the years ended December 31,
------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------
Sales made to ABI $ 54 $ 57 $ 198
Sales commissions earned by ABI 215 68 141
Raw material
transfers to ABI 1,521 1,996 1,869
Computer service
income earned from ABI 54 75 32
Material purchases
from ABI 6,718 7,342 10,092
Indemnification
payments made to ABI -- 2,163 --
Management fees paid
to ABI 1,527 608 590
==============================================================================
Amounts as of December 31, 2004 and 2003 due from ABI totaled $114
thousand and $281 thousand, respectively, and are included in accounts
receivable. Amounts as of December 31, 2004 and 2003 due to ABI totaled $1.2
million and $186 thousand, respectively, and are included in accounts payable
and accrued expenses.
15. Major Customers:
Substantially all the Company's sales are to select flooring distributors
and retailers located in the United States and Canada. Economic and market
conditions, as well as the individual financial condition of each customer, are
considered when establishing allowances for losses from doubtful accounts.
Two customers, LaSalle-Bristol Corporation and Mohawk Industries, Inc.,
accounted for 26% and 44%, respectively, of the Company's net sales for the year
ended December 31, 2004, 24% and 41%, respectively, for the year ended December
31, 2003, and 23% and 36%, respectively, for the year ended December 31, 2002.
Mohawk Industries accounted for 44% and 39% of accounts receivable at December
31, 2004 and 2003, respectively, while LaSalle - Bristol Corporations accounted
for 11% and 5%, respectively, of accounts receivable at December 31, 2004 and
2003.
56
16. Environmental and Other Liabilities
The Company records a liability for environmental remediation claims when
a cleanup program or claim payment becomes probable and the costs can be
reasonably estimated. As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.6 and $5.3 million at December 31, 2004 and 2003,
respectively, are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries approximated $2.1 million and $2.8 million at
December 31, 2004 and 2003, respectively, and are reflected in other noncurrent
assets and are considered probable of recovery.
The Company is named, together with a large number (in most cases,
hundreds) of other companies, as a potentially responsible party ("PRP") in
pending proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act, as amended ("CERCLA"), and similar state laws.
In addition, in four other instances, although not named as a PRP, the Company
has received a request for information. The pending proceedings 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. The Company's ultimate liability in connection with
those sites depends on many factors, including the volume of material
contributed to the site, the number of other PRPs and their financial viability,
the remediation methods and technology to be used and the extent to which costs
may be recoverable from insurance. However, under CERCLA, and certain other
laws, the Company as a PRP, can be held jointly and severally liable for all
environmental costs associated with a site.
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 81 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998 and a groundwater treatment system was installed
thereafter. EPA recently selected a remedy for the soil and shallow groundwater;
however, the remedial investigation/feasibility study related to the deep
groundwater has not been completed. The PRP group estimates that future costs of
the remedy recently selected by EPA based on engineering estimates would be
approximately $11 million. Congoleum's proportionate share, based on waste
disposed at the site, is estimated to be approximately 5.7%, or $0.7 million.
The majority of Congoleum's share of costs is presently being paid by one of its
insurance carriers, whose remaining policy limits for this claim will cover
approximately half this amount. Congoleum expects the balance to be funded by
other insurance carriers and the Company.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities. Estimated total cleanup costs, including capital
outlays and future maintenance costs for soil and groundwater remediation, are
primarily based on engineering studies.
57
The Company anticipates that these matters will be resolved over a period
of years and that after application of expected insurance recoveries, funding
the costs will not have a material adverse impact on the Company's liquidity or
financial position. However, unfavorable developments in these matters could
result in significant expenses or judgments that could have a material adverse
effect on the financial position of the Company.
17. Asbestos Liabilities:
Claims Settlement and Chapter 11 Reorganization
In early 2003, the Company announced that it was seeking to resolve its
asbestos liabilities through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code, and later in 2003,
consistent with this strategy, the Company entered into a settlement agreement
with various asbestos personal injury claimants (the "Claimant Agreement"). As
contemplated by the Claimant Agreement, the Company also entered into agreements
establishing a pre-petition trust (the "Collateral Trust") to distribute funds
in accordance with the terms of the Claimant Agreement and granting the
Collateral Trust a security interest in its rights under applicable insurance
coverage and payments from insurers for asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix
(the "Matrix") and allowed claimants who qualified to participate in the
Claimant Agreement (the "Qualifying Claimants") to settle their claims for the
Matrix value, secured in part (75%) by a security interest in the collateral
granted to the Collateral Trust. The Collateral Trust provides for distribution
of trust assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with the
Company and participating claimants who qualified for payment under unfunded
settlement agreements entered into by the Company with plaintiffs that had
asbestos claims pending against the Company and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of the Company's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and
settled certain Trial-Listed Settlement Agreement claims for a fully secured
claim against the Collateral Trust, and it settled all other claims for a
secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. Under the proposed plan of
reorganization, after the establishment of the Plan Trust, the assets in the
Collateral Trust would be transferred to the Plan Trust. The Company expects
that any claims subject to the Claimant Agreement that are unsatisfied as of the
confirmation of the plan of reorganization by the Bankruptcy Court would be
channeled to the Plan Trust.
In October 2003, the Company began soliciting acceptances for its proposed
pre-packaged plan of reorganization and the Company received the votes necessary
for acceptance of the plan in late December 2003.
58
On November 8, 2004, Congoleum announced that it had filed a modified plan
of reorganization and related documents with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos Claimants'
Committee, the Future Claimants' Representative and other asbestos claimant
representatives. The Bankruptcy Court approved the disclosure statement and plan
voting procedures on December 9, 2004 and has scheduled a hearing to begin on
April 12, 2005 to consider confirmation of the plan. The Company has solicited
and received the acceptances necessary for confirmation of its plan.
The Company's proposed modified plan of reorganization provides for, among
other things, an assignment of certain rights in, and proceeds of, the Company's
applicable insurance to the Plan Trust that would fund the settlement of all
pending and future asbestos claims and protect the Company from future
asbestos-related litigation by channeling all asbestos claims to the Plan Trust
pursuant to the provisions of Section 524(g) of the Bankruptcy Code. The
Company's other creditors are unimpaired under the proposed plan and will be
paid in the ordinary course of business.
There can be no assurance that the confirmation hearing will not be
rescheduled to a later date or that the proposed plan of reorganization will not
be modified further, or that a confirmation order, if entered, will not be
appealed.
Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plan of reorganization and related matters.
There can be no assurances that these or other insurance carriers will not file
objections to the recently filed modified plan of reorganization. Other parties
have also filed objections to the recently filed modified plan of
reorganization.
Under the modified plan of reorganization and related documents,
Congoleum's assignment of insurance recoveries to the Collateral Trust is net of
costs incurred in connection with insurance coverage litigation. Congoleum is
entitled to withhold from recoveries, or seek reimbursement from the trust, for
coverage litigation costs incurred after January 1, 2003 in excess of $6 million
of coverage litigation costs. Furthermore, once insurance recoveries exceed $375
million, Congoleum is entitled to withhold from recoveries, or seek
reimbursement from the trust, for the first $6 million. Congoleum also paid $1.3
million in claims processing fees in connection with claims settled under the
Claimant Agreement. Congoleum is entitled to withhold from recoveries, or seek
reimbursement from the trust, for the $1.3 million claims processing fee once
insurance recoveries exceed $375 million.
In connection with the modifications to the plan and Collateral Trust,
Congoleum agreed to indemnify the Claimants Counsel and the trustee of the
Collateral Trust for all acts relating to the modification of the plan and the
Collateral Trust, including attorneys' fees, up to a maximum of $3 million.
The Company's proposed plan of reorganization and related documents
provide for the channeling of asbestos property damage claims in addition to
asbestos personal injury claims to the Plan Trust established pursuant to the
provisions of Section 524(g) of the Bankruptcy Code. There were no property
damage claims asserted against the Company at the time of its bankruptcy filing.
59
The Bankruptcy Court approved an order establishing a bar date of May 3, 2004
for the filing of asbestos property damage claims. The claims agent appointed in
the Company's bankruptcy proceeding has advised the Company that, as of the bar
date, it received 35 timely filed asbestos property damage claims asserting
liquidated damages in the amount of approximately $0.8 million plus additional
unspecified amounts. The Company objected to certain claims on various grounds,
and the Court ultimately allowed 19 claims valued at $133 thousand.
The Company expects to issue a promissory note (the "Company Note") to the
Plan Trust as part of the Company's proposed plan of reorganization. Under the
terms of the proposed plan, the original principal amount of the Company Note
will be $2,738,234.75 (the "Original Principal Amount") and will be subject to
increase as of the last trading day of the 90 consecutive trading day period
commencing on the first anniversary of the effective date of the Company's
confirmed Chapter 11 plan of reorganization (the "Principal Adjustment Date") in
an amount equal to the excess, if any, of the amount by which 51% of the
Company's market capitalization as of the Principal Adjustment Date (based upon
(subject to certain exceptions) the total number of shares of the Company's
common stock outstanding as of such date multiplied by the average of the
closing trading prices of the Company's Class A common stock for the 90
consecutive trading days ending on the Principal Adjustment Date) exceeds the
Original Principal Amount (the "Additional Principal Amount"), plus any accrued
but unpaid interest or other amounts that may be added to such principal amount
pursuant to the terms of the Company Note. This adjustment amount could result
in the principal amount of the note increasing materially. For example, if the
adjustment amount were calculated during the 90 consecutive day trading period
ended December 31, 2004, the resulting adjustment amount would be $17.8 million.
Under the terms of the proposed plan, interest on the outstanding principal of
the Company Note will accrue at a rate of 9% per annum, with interest on the
Original Principal Amount payable quarterly and interest on the Additional
Principal Amount added to the Additional Principal Amount as additional
principal. Upon the earlier of August 1, 2008 and the date that all of the
Senior Notes are repaid in full, interest on the then outstanding Additional
Principal Amount will become payable quarterly.
Under the terms of the proposed plan of reorganization all principal on
the Company Note then outstanding together with any accrued but unpaid interest
will be payable in full on the tenth anniversary of the date of the Company
Note, subject to the right of the Plan Trust to accelerate all amounts then owed
on the Company Note following an uncured event of default under the Company
Note. Events of default under the Company Note would include the failure to pay
interest and principal prior to the expiration of a 10-day grace period
following the applicable due date, the occurrence of an event of default under
the indenture governing the Senior Notes, the breach by the Company of any
covenant or agreement contained in the Company Note which remains uncured 30
days following notice by the Plan Trust to the Company and ABI of the breach and
a material breach of the pledge agreement (the "ABI Pledge Agreement") by ABI
(which agreement is discussed below) which remains uncured 30 days following
notice by the Plan Trust to ABI and the Company of the breach. The terms of the
Company Note would provide that, upon the occurrence of an event of default
under the Company Note, the Company and ABI would have 10 days from the date
they receive notice that an event of default has occurred to cure the event of
default. If the event of default remains uncured after the 10-day cure period,
the aggregate outstanding principal amount of the Company Note together with any
60
accrued but unpaid interest thereon would become immediately due and payable if
the event of default relates to an uncured event of default under the indenture
governing the Company's Senior Notes, and with regard to other events of default
under the Company Note, the Plan Trust may, upon notice to the Company and ABI,
declare the aggregate outstanding principal amount of the Company Note together
with any accrued but unpaid interest thereon to be immediately due and payable.
The Plan Trust's rights to payment under the Company Note will be subordinate
and subject in right of payment to the prior payment in full of all amounts
owing and payable pursuant to the Senior Notes and the Company's credit
facility, except that regularly scheduled interest payments under the Company
Note are expected to be payable by the Company so long as no default or event of
default has occurred or is continuing under the indenture governing the
Company's Senior Notes or the Company's credit facility.
The proposed plan of reorganization contemplates that, pursuant to the ABI
Pledge Agreement, ABI will pledge all of the shares of the Company's common
stock that ABI owns, together with any other equity interests and rights ABI may
own or hold in the Company, as of the date of the Company Note, as collateral
for the Company's obligations under the Company Note. As additional security for
the Company Note, the ABI Pledge Agreement and the terms of the Company's
proposed plan of reorganization provide that any amounts that the Company would
be obligated to pay ABI pursuant to any rights of indemnity that ABI may have
against the Plan Trust for asbestos-related claims pursuant to the Company's
pre-packaged Chapter 11 plan of reorganization or a certain Joint Venture
Agreement, entered into in 1992, as to which both the Company and ABI are
parties to (as amended, the "Joint Venture Agreement"), will not be paid by the
Plan Trust until after any amounts due and payable to the Plan Trust under the
Company Note have been paid in full to the Plan Trust. Until such time, any such
indemnity payments that would otherwise have been payable by the Plan Trust to
ABI would be set aside by the Plan Trust and held in escrow by the Plan Trust
for ABI's benefit and pledged by ABI as additional collateral securing the
Company's obligations under the Company Note until released from such escrow and
paid to ABI, as further provided under the Company's proposed plan of
reorganization, the Company Note and the ABI Pledge Agreement.
The Company Note, the ABI Pledge Agreement and the Company's proposed plan
of reorganization also provide that the Company would be prohibited from making
any payments to ABI pursuant to any rights of indemnity that ABI may have
against the Company for claims pursuant to the Joint Venture Agreement until
after any amounts due and payable to the Plan Trust under the Company Note have
been paid in full to the Plan Trust. Until such time, any such indemnity
payments that would otherwise have been payable to ABI by the Company will be
paid by the Company to the Plan Trust and the Plan Trust will set aside and hold
in escrow such amounts for ABI's benefit and ABI will pledge such amounts as
additional collateral securing the Company's obligations under the Company Note
until released from such escrow and paid to ABI, as further provided under the
Company's modified Chapter 11 plan of reorganization, the Company Note and the
ABI Pledge Agreement.
Under the proposed plan of reorganization ABI would be permitted to prepay
the principal amount of the Company Note, in whole but not in part, without any
penalty or premium at any time following the Principal Adjustment Date and any
interest that may have accrued but not yet paid at the time of any principal
repayment would be due and payable at the time of the principal repayment. The
Company would be obligated to repay ABI for any amounts paid by ABI pursuant to
61
the Company Note, which repayment obligation would by evidenced by a promissory
note or notes to be issued by the Company to ABI. Any such note would have
similar payment terms as those expected to be afforded to the Plan Trust with
regard to the Company Note, which rights of repayment are expected to be
subordinate and subject in right of payment to the prior payment in full of all
amounts owing and payable to the Plan Trust with regard to the Company Note and
with regard to amounts owing and payable pursuant to the Senior Notes and credit
facility, except that the right of full subordination with regard to the Senior
Notes and credit facility would contain an exception that would allow the
Company to make regularly scheduled interest payments to ABI pursuant to any
such note so long as no default or event of default has occurred or is
continuing under the indenture or the Company's credit facility.
The proposed plan of reorganization also provides that if ABI prepays the
Company Note and ABI sells all or substantially all of the shares of the
Company's stock that it holds as of the Principal Adjustment Date during the
three-year period following such date, ABI would be obligated to make a
contribution to the Plan Trust if the equity value of the Company implied by the
price paid to ABI for the shares of the Company's stock exceeded the greater of
$2,738,234.75 or 51% of the Company's market capitalization as of the Principal
Adjustment Date (based upon (subject to certain exceptions) the total number of
shares of the Company's common stock outstanding as of such date multiplied by
the average of the closing trading prices of the Company's Class A common stock
for the 90 consecutive trading days ending on the Principal Adjustment Date). In
such instance, the proposed plan would obligate ABI to pay to the Plan Trust an
amount equal to 50% of such excess amount. Under the terms of the Company's
proposed plan of reorganization, the Company would be obligated to repay ABI for
any amounts paid by ABI to the Plan Trust pursuant to this obligation. In
satisfaction of this repayment obligation, the Company would issue a promissory
note to ABI in a principal amount equal to the amount of any such payments made
by ABI plus any accrued but unpaid interest or other amounts that may be added
to such principal amount pursuant to the terms of the promissory note which
would be subordinate and subject in right of payment to the prior payment in
full of all amounts owing and payable pursuant to the Senior Notes and credit
facility, except that regularly scheduled interest payments could be paid on
such note so long as no default or event of default has occurred or is
continuing under the indenture governing the Senior Notes or the Company's
credit facility.
The proposed plan provides that the Plan Trust would be able to transfer
the Company Note, in whole but not in part, at any time following the Principal
Adjustment Date. Upon any transfer of the Company Note, the amounts pledged by
ABI and held in escrow by the Plan Trust for ABI's benefit with regard to ABI's
indemnity rights discussed above will be paid by the Plan Trust, first, to the
Plan Trust in repayment of principal then outstanding on the Company Note
together with any accrued but unpaid interest thereon and, second, any amounts
remaining would be distributed by the Plan Trust to ABI.
ABI has agreed to make a cash contribution in the amount of $250 thousand
to the Plan Trust upon the formation of the Plan Trust. As previously discussed,
under the expected terms of the Company's proposed plan of reorganization, ABI
would receive certain relief as may be afforded under Section 524(g)(4) of the
Bankruptcy Code from asbestos claims that derive from claims made against the
Company, which claims are expected to be channeled to the Plan Trust. However,
the proposed plan of reorganization does not provide that any other asbestos
claims that may be asserted against ABI would be channeled to the Plan Trust.
62
However, the proposed plan of reorganization does not provide that any
other asbestos claims that may be asserted against ABI would be channeled to the
Plan Trust.
While the Company believes its proposed modified plan is feasible and
should be confirmed by the Bankruptcy Court, there are sufficient risks and
uncertainties such that no assurances of the outcome can be given. In addition,
the remaining costs to effect the reorganization process, consisting principally
of legal and advisory fees and contributions to the Plan Trust, including one or
more notes expected to be contributed to the Plan Trust by the Company, are
expected to be approximately $9.3 million at a minimum, and could be materially
higher.
Pending Asbestos Claims
In 2003, the Company was one of many defendants in approximately 22
thousand pending lawsuits (including workers' compensation cases) involving
approximately 106 thousand individuals, alleging personal injury or death from
exposure to asbestos or asbestos-containing products. Claims involving
approximately 80 thousand individuals have been settled pursuant to the Claimant
Agreement and litigation related to unsettled or new claims is presently stayed
by the Bankruptcy Code. The Company expects unsettled and future claims to be
handled in accordance with the terms of its plan of reorganization and related
trust.
Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including resilient sheet vinyl and tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company discontinued
the manufacture of asbestos-containing sheet products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing sheet and tile products are nonfriable
(i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
Status of Insurance Coverage
During the period that Congoleum produced asbestos-containing products,
the Company purchased primary and excess insurance policies providing in excess
of $1 billion coverage for general and product liability claims. Through August
2002, substantially all asbestos-related claims and defense costs were paid
through primary insurance coverage. In August 2002, the Company received notice
that its primary insurance limits had been paid in full. The payment of limits
in full by one of the primary insurance companies was based on its contention
that limits in successive policies were not cumulative for asbestos claims and
that Congoleum was limited to only one policy limit for multiple years of
coverage. Certain excess insurance carriers claimed that the non-cumulation
provisions of the primary policies were not binding on them and that there
remained an additional $13 million in primary insurance limits plus related
defense costs before their policies were implicated. There is insurance coverage
63
litigation currently pending between Congoleum and its excess insurance
carriers, and the guaranty funds and associations for the State of New Jersey.
The litigation was initiated on September 15, 2001, by one of Congoleum's excess
insurers (the "Coverage Action"). On April 10, 2003, the New Jersey Supreme
Court ruled in another case involving the same non-cumulation provisions as in
the Congoleum primary policies (the "Spaulding Case") that the non-cumulation
provisions are invalid under New Jersey law and that the primary policies
provide coverage for the full amount of their annual limits for all successive
policies. Congoleum has reached a settlement agreement ("Insurance Settlement")
with the insurance carrier whose policies contained the non-cumulation
provisions, pursuant to which is entitled to Congoleum $15.4 million in full
satisfaction of its policy limits, of which $14.5 million has been paid.
Pursuant to the terms of the Security Agreement, the Company is obligated to pay
any insurance proceeds it receives under the Insurance Settlement, net of any
fees and expenses it may be entitled to deduct, to the Collateral Trust. Payment
of such fees and expenses are subject to Court Order or approval. The Company
does not expect this Insurance Settlement to have a material effect on its
financial condition or results of operations. As of December 31, 2002, the
Company had entered into additional settlement agreements with asbestos
claimants exceeding the amount of previously disputed coverage. The excess
carriers have objected to the reasonableness of several of these settlements,
and Congoleum believes that they will continue to dispute the reasonableness of
the settlements and contend that their policies still are not implicated and
will dispute their coverage for that and other various reasons in ongoing
coverage litigation. The excess insurance carriers have also raised various
objections to the Company's proposed plan of reorganization.
The excess insurance carriers have objected to the global settlement of
the asbestos claims currently pending against Congoleum ("Claimant Agreement")
on the grounds that, among other things, the negotiations leading to the
settlement and the Claimant Agreement violate provisions in their insurance
policies, including but not limited to the carriers' right to associate in the
defense of the asbestos cases, the duty of Congoleum to cooperate with the
carriers and the right of the carriers to consent to any settlement. The excess
insurance carriers also contend the Claimant Agreement is not fair, reasonable
or in good faith. Congoleum disputes the allegations and contentions of the
excess insurance carriers. On November 7, 2003, the court denied a motion for
summary judgment by the excess insurance carriers that the Claimant Agreement
was not fair, reasonable or in good faith, ruling that material facts concerning
these issues were in dispute. On April 19, 2004, the court denied a motion for
summary judgment by the excess carriers that the Claimant Agreement was not
binding on them because Congoleum had breached the consent and cooperation
clauses of their insurance policies by, among other things, entering into the
Claimant Agreement without their consent. Congoleum argues, among other things,
that it was entitled to enter into the Claimant Agreement and/or the Claimant
Agreement was binding on the excess insurance carriers because they were in
breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and/or the Claimant
Agreement was fair, reasonable and in good faith and/or there was and is no
prejudice to the excess insurance carriers from the Claimant Agreement and/or
the excess insurance carriers had breached their duties of good faith and fair
dealing.
64
On August 12, 2004, the Court entered a case management order that sets
forth the deadlines for completing fact and expert discovery, establishes
deadlines for dispositive and pre-trial motion practice and divides the trial
into three phases. A new judge was assigned to the case effective February 23,
2005 and the schedule was modified as a result.
The first phase of the trial is scheduled to begin on June 6, 2005, and
will address all issues and claims relating to whether the insurers are
obligated to provide coverage under the policies at issue in this litigation for
the global Claimant Agreement entered into by Congoleum, including but not
limited to all issues and claims relating to both Congoleum's decision and
conduct in entering into the Claimant Agreement and filing a pre-packaged
bankruptcy and the insurance company defendants' decisions and conduct in
opposing the Claimant Agreement and Congoleum's pre-packaged bankruptcy, the
reasonableness and good faith of the Claimant Agreement, whether the Claimant
Agreement breached any insurance policies and, if so, whether the insurance
companies suffered any prejudice, and whether the insurance companies'
opposition to the Claimant Agreement and bankruptcy and various other conduct by
the insurers has breached their duties of good faith and fair dealing such that
they are precluded from asserting that Congoleum's decision to enter into the
Claimant Agreement constitutes any breach(es) on the part of Congoleum.
The second phase of the trial will address all coverage issues, including
but not limited to trigger and allocation. The final phase of the trial will
address bad faith punitive damages, if appropriate.
On March 18, 2005, the Company filed a motion in the Bankruptcy Court
asking the Bankruptcy Court to vacate its prior order lifting the automatic stay
in bankruptcy to permit the Coverage Action to proceed. The Company has
requested that the Coverage Action proceedings be stayed until the Company has
completed its plan confirmation process in the Bankruptcy Court. A hearing on
the Company's motion has been set for April 12, 2005.
Given the actions of its excess insurance carriers, the Company believes
it likely that it would currently have to fund any asbestos-related expenses for
defense expense and indemnity itself. However, litigation by asbestos claimants
against the Company is stayed pursuant to the Company's bankruptcy proceedings,
and the Company does not anticipate its future expenditures for defense and
indemnity of asbestos-related claims, other than expenditures pursuant to its
proposed (or an alternative) plan of reorganization, will be significant.
65
Payments Related to Asbestos Claims
The following table sets forth amounts paid to defend and settle claims:
Year Ended Year Ended
(in millions) December 31, December 31,
2004 2003
---- ----
Indemnity costs paid by the Company's
insurance carriers $ -- $ --
Indemnity costs paid by the Company -- 0.8
Defense costs paid by the Company 0.4 4.5
The amounts shown in the above table do not include non-cash settlements
using assignments of insurance proceeds, which amounted to $477 million in 2003.
There were no non-cash settlements with assignment of insurance proceeds in the
year ended December 31, 2004.
At December 31, 2004, there were no additional settlements outstanding
that the Company had agreed to fund other than settlements pursuant to the
Claimant Agreement.
The Company is seeking recovery from its insurance carriers of the amounts
it has paid for defense and indemnity, and intends to seek recovery for any
future payments of defense and indemnity. In light of the assignment of the
rights to its applicable insurance proceeds to the Collateral Trust and the
planned reorganization, the Company does not anticipate recovering these costs.
Accounting for Asbestos-Related Claims
Under the terms of the Claimant Agreement, the Company's claims processing
agent processed 79,630 claims meeting the requirements of the Claimant Agreement
with a settlement value of $466 million. In addition, Pre-Existing Settlement
Agreements and Trial-Listed Settlement Agreements with claims secured by the
Collateral Trust total $25 million.
The Company's gross liability of $491 million for these settlements is
substantially in excess of both the total assets of the Company as well as the
Company's previous estimates made in prior periods of the maximum liability for
both known and unasserted claims. The Company believes that it does not have the
necessary financial resources to litigate and/or fund judgments and/or
settlements of the asbestos claims in the ordinary course of business.
Therefore, the Company believes the most meaningful measure of its probable loss
due to asbestos litigation is the amount it will have to contribute to the Plan
Trust plus the costs to effect its reorganization under Chapter 11. At December
31, 2004, the Company estimates the minimum remaining amount of the
contributions and costs to be $9.3 million, of which it has recorded $6.6
million as a current liability and $2.7 million as a non-current liability.
These amounts do not include the liability associated with a $14.5 million
insurance settlement recorded as restricted cash, which the Company expects to
contribute, less any amounts withheld pursuant to reimbursement arrangements, to
the trust formed upon confirmation of its plan of reorganization. During the
fourth quarter of 2003, the Company recorded a charge of $3.7 million to
66
increase its recorded liability to the minimum estimated amount. During the
fourth quarter of 2004, the Company recorded an additional charge of $5.0
million to increase its recorded liability to the minimum estimated amount.
Additional charges may be required in the future should the minimum estimated
cost increase. The maximum amount of the range of possible asbestos-related
losses is limited to the going concern or liquidation value of the Company, an
amount which the Company believes is substantially less than the minimum gross
liability for the known claims against it.
The Company has not attempted to make an estimate of its probable
insurance recoveries for financial statement purposes given the accounting for
its estimate of future asbestos-related costs. Substantially all future
insurance recoveries have been assigned to the Collateral Trust or Plan Trust.
Amounts Recorded in Financial Statements
The table below provides an analysis of changes in the Company's asbestos
reserves and related receivables from December 31, 2003 to December 31, 2004:
Spending Recoveries
Balance at Additions Against From Balance at
(in thousands) 12/31/03 Reclassifications (Deletions) Reserve Insurance 12/31/04
------------------------------------------------------------------------------------
Reserves
Current $ 9,820 $(2,738) $ 10,222 $(10,754) $ -- $ 6,550
Long-Term -- 2,738 -- -- -- 2,738
Receivables
Current (3,587) 7,300 (5,222) -- -- (1,509)
Long-Term -- (7,300) -- -- -- (7,300)
------------------------------------------------------------------------------------
Net Asbestos
Liability $ 6,233 $ -- $ 5,000 $(10,754) $ -- $ 479
====== ======= ====== ========= ===== ====
The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2002 to December 31, 2003:
Spending Recoveries
Balance at Additions Against From Balance at
(in thousands) 12/31/02 Reclassifications (Deletions) Reserve Insurance 12/31/03
--------------------------------------------------------------------------------
Reserves
Current $21,295 $ -- $ 7,292 $(21,233) $2,466 $ 9,820
Receivables
Current -- -- (3,587) -- -- (3,587)
--------------------------------------------------------------------------------
Net Asbestos
Liability $21,295 $ -- $ 3,705 $(21,233) $2,466 $ 6,233
======= ===== ====== ========= ====== ======
67
18. Stock Option Plans:
Under the Company's 1995 Stock Option Plan, as amended (the "1995 Plan"),
options to purchase up to 800,000 shares of the Company's Class A common stock
may be issued to officers and key employees. Such options may be either
incentive stock options or nonqualified stock options, and the options' exercise
price must be at least equal to the fair value of the Company's Class A common
stock on the date of grant. All options granted under the 1995 Plan have
ten-year terms and vest over five years at the rate of 20% per year beginning on
the first anniversary of the date of grant.
On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted options to purchase up to 50,000 shares of the
Company's Class A common stock. Options granted under the 1999 Plan have
ten-year terms and vest six months from the grant date.
In December 2001, the Company offered its eligible option holders an
exchange of all options then outstanding and granted to them under the 1995 Plan
or the 1999 Plan for new stock options to be granted under those plans not
earlier than six months and one day after the date the Company canceled any
options tendered to and accepted by it pursuant to the offer to exchange. On
January 4, 2002, the Company accepted and canceled 667,500 options that had been
previously granted under the 1995 Plan and 9,500 options that had been
previously granted under the 1999 Plan that were tendered to and accepted by the
Company pursuant to the offer to exchange.
On July 11, 2002, the Company issued 665,500 options under the 1995 Plan
and 9,500 options under the 1999 Plan at an exercise price of $2.05 per share
pursuant to the exchange. The new options granted under the 1995 Plan will
generally vest annually in equal installments over a five-year period beginning
on the first anniversary of the date of grant, and the new options granted under
the 1999 Plan will generally vest fully six months from the date of grant.
On May 10, 2004, the Company issued 38,500 options under the 1995 Plan at
an exercise price of $1.94 per share. The new options granted under the 1995
Plan will generally vest annually in equal installments over a five-year period
beginning on the first anniversary of the date of the grant.
On July 1, 2004, the Company issued 2,500 options under the 1999 Plan at
an exercise price of $2.60 per share. The new options granted under the 1999
Plan will generally vest fully six months from the date of grant.
68
A summary of the Company's 1995 Plan activity, and related information, is as
follows:
December 31, 2004:
- --------------------------------------------------------------------------------
Weighted average
Shares exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year 652,500 $1.99
Options granted 38,500 1.94
Options exercised (400) 2.05
Options forfeited (4,100) 2.05
-------- -----
Options outstanding end of year 686,500 $1.99
- --------------------------------------------------------------------------------
Exercisable at end of year 255,600 $2.04
Weighted average remaining
contractual life 7.63 years
Stock options available
for future issuance 111,100
- --------------------------------------------------------------------------------
December 31, 2003:
- --------------------------------------------------------------------------------
Weighted average
Shares exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year 678,500 $2.09
Options granted 28,000 0.36
Options exercised -- --
Options forfeited (54,000) 2.05
-------- -----
Options outstanding
end of year 652,500 $1.99
- --------------------------------------------------------------------------------
Exercisable at end of year 127,300 $2.09
Weighted average remaining
contractual life 8.53 years
Stock options available
for future issuance 145,500
- --------------------------------------------------------------------------------
69
December 31, 2002:
- --------------------------------------------------------------------------------
Weighted average
Shares exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year 676,000 $ 9.98
Options granted 670,000 2.05
Options canceled (667,500) 10.04
Options forfeited -- --
-------- ---------
Options outstanding end of year 678,500 $ 2.09
- --------------------------------------------------------------------------------
Exercisable at end of year 4,400 $ 6.06
Weighted average remaining
Contractual life 9.5 years
Stock options available
For future issuance 119,500
- --------------------------------------------------------------------------------
The weighted average grant date fair value of options granted under the
1995 Plan in 2004, 2003, and 2002 was $1.94, $0.36 and $2.05, respectively.
The exercise price of options granted under the 1999 Plan and outstanding
at December 31, 2004 range from $0.75 to $2.60 per share.
A summary of the 1999 Plan activity, and related information, is as
follows:
December 31, 2004:
- --------------------------------------------------------------------------------
Weighted average
Shares Exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year 15,500 $ 2.17
Options granted 2,500 2.60
Options exercised -- --
Options forfeited (1,000) 7.19
------- --------
Options outstanding
end of year 17,000 $ 1.94
- --------------------------------------------------------------------------------
Exercisable at end of year 14,500 $ 1.83
Weighted average remaining
contractual life 7.96 years
Stock options available for
future issuance 33,000
- --------------------------------------------------------------------------------
70
- --------------------------------------------------------------------------------
December 31, 2003: Weighted average
Shares Exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year 13,000 $2.44
Options granted 2,500 0.75
Options exercised -- --
Options forfeited -- --
Options outstanding
end of year 15,500 $2.17
- --------------------------------------------------------------------------------
Exercisable at end of year 13,000 $2.44
Weighted average remaining
contractual life 8.49 years
Stock options available
for future issuance 34,500
- --------------------------------------------------------------------------------
December 31, 2002: Weighted average
Shares Exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year 10,500 $5.30
Options granted 12,000 2.05
Options canceled (9,500) 5.11
Options forfeited -- --
Options outstanding end of year 13,000 $2.44
- --------------------------------------------------------------------------------
Exercisable at end of year 10,500 $2.54
Weighted average remaining
contractual life 9.24 years
Stock options available
for future issuance 37,000
The weighted average grant date fair value of options granted under the
1999 Plan in 2004, 2003, and 2002 was $2.60, $0.75 and $2.05, respectively.
19. Stockholders' Equity:
Holders of shares of the Company's Class B common stock are entitled to
two votes per share on all matters submitted to a vote of stockholders other
than certain extraordinary matters. The holders of shares of the Company's Class
A common stock are entitled to one vote per share on all matters submitted to a
vote of stockholders.
71
In November 1998, the Board of Directors authorized the Company to
repurchase an additional $5.0 million of the Company's common stock (Class A and
Class B shares) through the open market or through privately negotiated
transactions, bringing the total authorized common share repurchases to $15.0
million. Under the total plan, Congoleum has repurchased shares of its common
stock at an aggregate cost of $14.0 million through December 31, 2004. No shares
were repurchased during 2004 or 2003. Shares of Class B stock repurchased
(totaling 741,055 shares) have been retired. As of December 31, 2004, American
Biltrite Inc. owned 151,100 Class A shares and 4,395,605 Class B shares that
represented an aggregate 68.3% of the voting interest of the Company.
20. Fair Value of Financial Instruments:
The Company's cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt are financial instruments. With
the exception of the Company's long-term debt, the carrying value of these
financial instruments approximates their fair value at December 31, 2004 and
2003. The Company's long-term debt had a book value of $99.8 million and a fair
market value of $64.0 million at December 31, 2004. The Company's long-term debt
had a book value of $99.7 million and a fair market value of $65.0 million at
December 31, 2003.
The fair value of the Company's long-term debt is determined based on
quoted market values. The fair value of the Company's other financial
instruments is determined based on discounted cash flows. Due to the short
period over which the cash flows are expected to be realized, the carrying value
of the financial instruments approximates the net present value of cash flows
and changes in interest rate assumptions would not have a material effect on the
calculation.
72
21. Quarterly Financial Data (Unaudited):
The following table summarizes unaudited quarterly financial information
(in thousands):
Year ended December 31, 2004
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
Net sales $ 52,000 $ 62,951 $58,871 $ 55,671
Gross profit 13,551 16,886 17,059 14,153
Net income (loss) (435) 1,360 1,153 870(1)
Net income (loss) per common share:
Basic $ (0.05) $ 0.16 $ 0.14 $ 0.11
Diluted (0.05) 0.16 0.13 0.10
- ------------------------------------------------------------------------------------------------
Year ended December 31, 2003
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
Net sales $ 53,581 $ 54,995 $61,139 $ 50,991
Gross profit 12,667 12,256 15,013 13,906
Net income (loss) (2,588) (1,991) 1,280 (3,463)(2)
Net income (loss) per common
share - basic and diluted $ (0.31) $ (0.24) $ 0.15 $ (0.42)
- ------------------------------------------------------------------------------------------------
(1) The fourth quarter of 2004 includes $5.0 million or $0.61 per share for
the effect of the asbestos-related charges described in Notes 1 and 17.
(2) The loss in the fourth quarter of 2003 includes $3.7 million or $0.45 per
share for the effect of the asbestos-related charges described in Notes 1
and 17.
73
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Congoleum Corporation
We have audited the accompanying consolidated balance sheets of Congoleum
Corporation (the Company) as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Congoleum
Corporation at December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principals. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
The accompanying financial statements have been prepared assuming that Congoleum
Corporation will continue as a going concern. As more fully described in Note 1,
"Basis of Presentation," to the consolidated financial statements, the Company
has been and continues to be named in a significant number of lawsuits stemming
primarily from the Company's manufacture of asbestos-containing products. The
Company has recorded significant charges to earnings to reflect its estimate of
costs associated with this litigation. On December 31, 2003, Congoleum filed a
voluntary petition with the United States Bankruptcy Court for the District of
New Jersey (Case No. 03-51524) seeking relief under Chapter 11 of the United
74
States Bankruptcy Code, as a means to resolve claims asserted against it related
to the use of asbestos in its products decades ago. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1,
"Basis of Presentation," to the consolidated financial statements. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 5, 2005
75
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this annual report
(the "Evaluation Date"). Based on this evaluation, such officers
have concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting them on
a timely basis to material information relating to the Company
required to be included in the Company's reports filed or submitted
under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any significant changes in the Company's internal controls over
financial reporting during the last quarter covered by this annual
report that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial
reporting.
Item 9B. OTHER INFORMATION
Not Applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2005.
Item 11. EXECUTIVE COMPENSATION
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2005.
76
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by this Item (except the Equity Compensation
Plan Information called for by Item 201(d) of Regulation S-K which is included
in Part II hereof) is hereby incorporated by reference to the Registrant's
definitive Proxy Statement for its Annual Meeting of Shareholders to be held on
May 10, 2005.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2005.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this Item is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held on May 10, 2005.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) (1) The following financial statements of the Company are included in
this report on Form 10-K:
Page Number
Consolidated Balance Sheets at December 31, 2004 and 2003 33
Consolidated Statements of Operations for each of the
three years ended December 31, 2004, 2003 and 2002 34
Consolidated Statements of Changes in Stockholders' Equity
for each of the three years ended December 31, 2004,
2003 and 2002 35
Consolidated Statements of Cash Flows for each of the
three years ended December 31, 2004, 2003 and 2002 36
Notes to Consolidated Financial Statements 37
Supplementary Data Quarterly Financial Data (Unaudited) 73
(2) The following financial statement schedule is included in this
report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts 81
All other schedules are omitted because they are not
required, are inapplicable, or the information is
otherwise shown in the financial statements or
notes thereto.
77
(3) Exhibits
These exhibits, required to be filed by Item 601 of Regulation S-K,
are listed in the Exhibit Index included in this report at pages 83
through 85.
Exhibit
Number Exhibits
------ --------
2.1 Fourth Modified Joint Plan of Reorganization Under Chapter
11 of the Bankruptcy Code of Congoleum Corporation, et al.
3.1 Amended Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Registration Rights Agreement, dated as of February 8, 1995,
by and between the Company and Hillside.
4.2 Indenture, dated as of August 3, 1998, by and between the
Company and First Union National Bank, as trustee.
4.2.1 First Supplemental Indenture, dated as of March 28, 2003,
between the Company and Wachovia Bank, National Association
(as successor to First Union National Bank), as trustee.
4.2.2 Second Supplemental Indenture, dated as of August 7, 2003,
between the Company and Wachovia Bank, National Association
(as successor to First Union National Bank), as trustee.
10.1 Joint Venture Agreement, dated as of December 16, 1992, by
and among Resilient Holdings, Hillside, the Company
(collectively, the "Congoleum Group"), Hillside Capital
Incorporated ("Hillside Capital") and American Biltrite.
10.2 Closing Agreement, dated as of March 11, 1993, by and among
the Congoleum Group, Hillside Capital and American Biltrite.
10.3 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American
Biltrite and the Company.
10.3.1 First Amendment, dated February 8, 1995, to Personal
Services Agreement, by and between American Biltrite and the
Company.
10.3.2 Second Amendment, dated November 15, 1996, to Personal
Services Agreement, by and between American Biltrite and the
Company.
10.3.3 Third Amendment, dated as of March 10, 1998, to Personal
Services Agreement, by and between American Biltrite and the
Company.
10.3.4 Fourth Amendment, dated as of November 7, 2002, to Personal
Services Agreement, by and between American Biltrite and the
Company.
10.4 Business Relations Agreement, dated as of March 11, 1993, by
and between American Biltrite and the Company.
10.4.1 First Amendment, dated August 19, 1997, to Business
Relations Agreement, by and between American Biltrite and
the Company.
10.5 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company.
78
10.6 Trademark Purchase Agreement, dated November 29, 1993, by
and between the Company and The Amtico Company LTD ("Amtico
Company").
10.7 First Right of Refusal, dated November 29, 1993, by and
between American Biltrite (Canada) Limited and Amtico
Company.
10.8 Undertaking Concerning Amtico Trademark, dated November 29,
1993, by and between American Biltrite and Amtico Company.
10.9 Form of 1995 Stock Option Plan.
10.9.1 Form of Amendment to 1995 Stock Option Plan.
10.10 Congoleum Corporation 1999 Stock Option Plan for
Non-Employee Directors.
10.10.1 Form of Amendment to Non-Qualified, Non-Employee Directors
Stock Option Plan.
10.11 Loan and Security Agreement, dated December 10, 2001 (the
"Congress Financial Loan Agreement") by and between Congress
Financial Corp. (the "Lender") and the Company.
10.11.1 Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial
Corporation and Congoleum Corporation.
10.11.2 Amendment No. 2 to Loan and Security Agreement, dated as of
February 27, 2003, by and between Congress Financial
Corporation and Congoleum Corporation. (14)
10.11.3 Ratification and Amendment Agreement dated January 7, 2004,
by and between the Company and Congress Financial
Corporation.
10.11.4 Ratification and Amendment Agreement dated December 14,
2004, by and between the Company and Congress Financial
Corporation.
10.12 Settlement Agreement Between the Company and Various
Asbestos Claimants dated April 10, 2003.
10.12.1 First Amendment to Settlement Agreement Between the Company
and Various Asbestos Claimants dated June 6, 2003.
10.13 Collateral Trust Agreement, dated April 16, 2003, by and
between the Company, Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust,
and Wilmington Trust Company, solely in its capacity as
Delaware Trustee of the Collateral Trust.
10.13.1 First Amendment to Collateral Trust Agreement, dated June 6,
2003, by and between the Company, Arthur J. Pergament,
solely in his capacity as the Collateral Trustee of the
Collateral Trust, and Wilmington Trust Company, solely in
its capacity as Delaware Trustee of the Collateral Trust.
10.14 Security Agreement, dated April 16, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as
the Collateral Trustee of the Collateral Trust.
10.14.1 Second Security Agreement, dated April 17, 2003, by and
between the Company and Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust.
79
10.14.2 Termination Agreement, dated June 6, 2003, by and between
the Company and Arthur J. Pergament, solely in his capacity
as the Collateral Trustee of the Collateral Trust.
10.14.3 Superceding Security Agreement, dated June 11, 2003, by and
between the Company and Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust.
12.1 Statement Regarding Computation of Ratio of Earnings to
Fixed Charges.
14.1 Code of Ethics.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Registered Public Accounting Firm,
Ernst & Young LLP.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1 Disclosure Statement of Congoleum Corporation, Congoleum
Sales, Inc. and Congoleum Fiscal, Inc.
80
SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Reversed to Balance
Beginning Income Other At end
of Period Statement Changes Deductions (a) of Period
--------- --------- ------- -------------- ---------
Year ended December 31, 2004:
Allowance for doubtful
accounts and cash discounts $(1,049) $ -- $ (142)(b) $ 17 $(1,174)
Year ended December 31, 2003:
Allowance for doubtful
accounts and cash Discounts $(1,204) $ 34 $ 121(b) $ -- $(1,049)
Year ended December 31, 2002:
Allowance for doubtful
accounts and cash Discounts $(1,859) $ -- $ 655(b) $ -- $(1,204)
(a) Balances written off, net of recoveries.
(b) Represents (provision) utilization of the allowance for doubtful accounts
and cash discounts.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
24th day of March, 2004.
CONGOLEUM CORPORATION
By: /s/ Roger S. Marcus
------------------------------
Roger S. Marcus
President, Chairman & Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Roger S. Marcus President, Chairman, Chief Executive Officer March 24, 2005
- ------------------------ and Director (Principal Executive Officer)
Roger S. Marcus
/s/ Howard N. Feist III Chief Financial Officer March 24, 2005
- ------------------------ (Principal Financial and Accounting Officer)
Howard N. Feist III
/s/ Richard G. Marcus Vice Chairman and Director March 24, 2005
- ------------------------
Richard G. Marcus
/s/ William M. Marcus Director March 24, 2005
- ------------------------
William M. Marcus
/s/ John N. Irwin III Director March 24, 2005
- ------------------------
John N. Irwin III
/s/ Cyril C. Baldwin Jr. Director March 24, 2005
- ------------------------
Cyril C. Baldwin, Jr.
/s/ Mark S. Newman Director March 24, 2005
- ------------------------
Mark S. Newman
/s/ Mark N. Kaplan Director March 24, 2005
- ------------------------
Mark N. Kaplan
/s/ C. Barnwell Straut Director March 24, 2005
- ------------------------
C. Barnwell Straut
82
INDEX TO EXHIBITS
Exhibit
Number Exhibits
- ------ --------
2.1 Fourth Modified Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code of Congoleum Corporation, et al. (15)
3.1 Amended Certificate of Incorporation of the Company. (3)
3.2 Amended and Restated Bylaws of the Company. (3)
4.1 Registration Rights Agreement, dated as of February 8, 1995, by
and between the Company and Hillside. (2)
4.2 Indenture, dated as of August 3, 1998, by and between the
Company and First Union National Bank, as trustee. (4)
4.2.1 First Supplemental Indenture, dated as of March 28, 2003,
between the Company and Wachovia Bank, National Association (as
successor to First Union National Bank), as trustee. (11)
4.2.2 Second Supplemental Indenture, dated as of August 7, 2003,
between the Company and Wachovia Bank, National Association (as
successor to First Union National Bank), as trustee. (12)
10.1 Joint Venture Agreement, dated as of December 16, 1992, by and
among Resilient Holdings, Hillside, the Company (collectively,
the "Congoleum Group"), Hillside Capital Incorporated ("Hillside
Capital") and American Biltrite. (1)
10.2 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite. (1)
10.3 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American Biltrite
and the Company. (1)
10.3.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company. (2)
10.3.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company. (5)
10.3.3 Third Amendment, dated as of March 10, 1998, to Personal
Services Agreement, by and between American Biltrite and the
Company. (5)
10.3.4 Fourth Amendment, dated as of November 7, 2002, to Personal
Services Agreement, by and between American Biltrite and the
Company. (11)
10.4 Business Relations Agreement, dated as of March 11, 1993, by and
between American Biltrite and the Company. (1)
10.4.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company. (5)
10.5 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company. (5)
10.6 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico
Company"). (2)
83
Exhibit
Number Exhibits
- ------ --------
10.7 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company. (2)
10.8 Undertaking Concerning Amtico Trademark, dated November 29,
1993, by and between American Biltrite and Amtico Company. (2)
10.9 Form of 1995 Stock Option Plan. (2)
10.9.1 Form of Amendment to 1995 Stock Option Plan. (6)
10.10 Congoleum Corporation 1999 Stock Option Plan for Non-Employee
Directors. (8)
10.10.1 Form of Amendment to Non-qualified, Non-employee Directors Stock
Option Plan. (9)
10.11 Loan and Security Agreement, dated December 10, 2001 (the
"Congress Financial Loan Agreement") by and between Congress
Financial Corp. (the "Lender") and the Company. (9)
10.11.1 Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial
Corporation and Congoleum Corporation. (10)
10.11.2 Amendment No. 2 to Loan and Security Agreement, dated as of
February 27, 2003, by and between Congress Financial Corporation
and Congoleum Corporation. (11)
10.11.3 Ratification and Amendment Agreement dated January 7, 2004, by
and between the Company and Congress Financial Corporation.(14)
10.11.4 Ratification and Amendment Agreement dated December 14, 2004, by
and between the Company and Congress Financial Corporation.
10.12 Settlement Agreement Between the Company and Various Asbestos
Claimants dated April 10, 2003. (12)
10.12.1 First Amendment to Settlement Agreement Between the Company and
Various Asbestos Claimants dated June 6, 2003. (12)
10.13 Collateral Trust Agreement, dated April 16, 2003, by and between
the Company, Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust, and Wilmington Trust
Company, solely in its capacity as Delaware Trustee of the
Collateral Trust. (12)
10.13.1 First Amendment to Collateral Trust Agreement, dated June 6,
2003, by and between the Company, Arthur J. Pergament, solely in
his capacity as the Collateral Trustee of the Collateral Trust,
and Wilmington Trust Company, solely in its capacity as Delaware
Trustee of the Collateral Trust. (12)
10.14 Security Agreement, dated April 16, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust. (12)
10.14.1 Second Security Agreement, dated April 17, 2003, by and between
the Company and Arthur J. Pergament, solely in his capacity as
the Collateral Trustee of the Collateral Trust. (12)
10.14.2 Termination Agreement, dated June 6, 2003, by and between the
Company and Arthur J. Pergament, solely in his capacity as the
Collateral Trustee of the Collateral Trust. (12)
84
Exhibit
Number Exhibits
- ------ --------
10.14.3 Superceding Security Agreement, dated June 11, 2003, by and
between the Company and Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust. (12)
12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
14.1 Code of Ethics
21.1 Subsidiaries of the Company. (7)
23.1 Consent of Registered Public Accounting Firm, Ernst & Young LLP.
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Disclosure Statement of Congoleum Corporation, Congoleum Sales,
Inc. and Congoleum Fiscal, Inc. (13)
(1) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Registration Statement on Form S-1 (File No.
33-71836) declared effective by the Securities and Exchange Commission on
January 25, 1994.
(2) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Registration Statement on Form S-1 (File No.
33-87282) declared effective by the Securities and Exchange Commission on
February 1, 1995.
(3) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q (File No.
001-13612) for the period ended June 30, 1996.
(4) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q (File No.
001-13612) for the period ended June 30, 1998.
(5) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
for the period ended December 31, 1997.
(6) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
for the period ended December 31, 1996.
(7) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
for the period ended December 31, 1998.
(8) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Registration Statement on Form S-8 (File No.
333-84387) declared effective by the Securities and Exchange Commission on
August 3, 1999.
85
(9) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
for the period ended December 31, 2001.
(10) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q (File No.
001-13612) for the period ended September 30, 2002.
(11) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
for the period ended December 31, 2002.
(12) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q (File No.
001-13612) for the period ended June 30, 2003.
(13) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Current Report on Form 8-K (File No. 001-13612)
dated October 27, 2003.
(14) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Annual Report on Form 10-K (File No. 001-13612)
for the period ended December 31, 2003.
(15) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Current Report on Form 8-K (File No. 001-13612)
dated November 9, 2004.
86