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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q
|X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of principal executive offices, including zip code)
(609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 2005
---------------------------- ----------------------------------
Class A Common Stock 3,651,590
Class B Common Stock 4,608,945
CONGOLEUM CORPORATION
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004..................................3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2005 and 2004 (unaudited).........4
Condensed Consolidated Statements of Cash Flows for
the Three Months ended March 31, 2005 and 2004 (unaudited).........5
Notes to Unaudited Condensed Consolidated Financial
Statements (unaudited).............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........35
Item 4. Controls and Procedures..............................................35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........36
Item 3. Defaults Upon Senior Securities......................................36
Item 4. Submission of Matters to a Vote of Security Holders..................36
Item 5. Other Information....................................................36
Item 6. Exhibits.............................................................36
Signatures....................................................................38
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
March 31,
2005 December 31,
(unaudited) 2004
- -----------------------------------------------------------------------------------------------------------
ASSETS
------
Current assets:
Cash and cash equivalents ..................................................... $ 21,562 $ 29,710
Restricted cash ............................................................... 16,559 15,682
Accounts receivable, less allowances of $1,674 and $1,174
as of March 31, 2005 and December 31, 2004, respectively .................... 26,255 17,621
Inventories ................................................................... 40,366 39,623
Prepaid expenses and other current assets ..................................... 6,241 5,124
Deferred income taxes ......................................................... 10,678 10,678
- -----------------------------------------------------------------------------------------------------------
Total current assets ..................................................... 121,661 118,438
Property, plant, and equipment, net ............................................. 77,655 79,550
Other assets, net ............................................................... 14,810 14,894
- -----------------------------------------------------------------------------------------------------------
Total assets ............................................................. $ 214,126 $ 212,882
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................................. $ 13,951 $ 10,296
Accrued liabilities ........................................................... 21,745 26,395
Asbestos-related liabilities .................................................. 18,774 21,079
Revolving credit loan ......................................................... 12,410 9,500
Accrued taxes ................................................................. 1,456 1,670
Liabilities subject to compromise - current ..................................... 16,626 14,225
- -----------------------------------------------------------------------------------------------------------
Total current liabilities ................................................ 84,962 83,165
Long-term debt .................................................................. -- --
Asbestos-related liabilities .................................................... 2,738 2,738
Accrued pension liability ....................................................... -- --
Other liabilities ............................................................... -- --
Deferred income taxes ........................................................... 10,678 10,678
Accrued post-retirement benefit obligation ...................................... -- --
Liabilities subject to compromise - long term ................................... 137,089 137,290
- -----------------------------------------------------------------------------------------------------------
Total liabilities ........................................................ 235,467 233,871
- -----------------------------------------------------------------------------------------------------------
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 March 31, 2005 and
December 31, 2004, respectively ............................................... 47 47
Class B common stock, par value $0.01; 4,608,945 shares authorized, issued and
outstanding at March 31, 2005 and December 31, 2004, respectively ............ 46 46
Additional paid-in capital ...................................................... 49,106 49,106
Retained deficit ................................................................ (44,182) (43,830)
Accumulated other comprehensive loss ............................................ (18,545) (18,545)
-------- --------
(13,528) (13,176)
Less Class A common stock held in treasury, at cost; 1,085,760 shares at
March 31, 2005 and December 31, 2004, respectively ............................ 7,813 7,813
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ....................................... (21,341) (20,989)
------- -------
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) ....................... $ 214,126 $ 212,882
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of
the condensed consolidated financial statements.
3
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2005 2004
(In thousands, except per share amounts)
Net sales .......................................... $ 57,630 $ 52,000
Cost of sales ...................................... 43,969 38,449
Selling, general and administrative expenses ....... 11,733 11,985
-------- --------
Income from operations ......................... 1,928 1,566
Other income (expense):
Interest income ................................ 98 --
Interest expense ............................... (2,500) (2,245)
Other income ................................... 122 244
-------- --------
Net loss ........................................... (352) $ (435)
======== ========
Net loss per common share, basic ............... $ (0.04) $ (0.05)
======== ========
Net loss per common share, diluted ............. $ (0.04) $ (0.05)
======== ========
Weighted average number of common shares
outstanding, basic .......................... 8,261 8,260
======== ========
Weighted average number of common shares
outstanding, diluted ........................ 8,693 8,314
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------------
2005 2004
(In thousands)
Cash flows from operating activities:
Net loss .................................................................. $ (352) $ (435)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation .......................................................... 2,749 2,751
Amortization .......................................................... 96 140
Changes in certain assets and liabilities:
Accounts and notes receivable .................................... (8,634) (5,532)
Inventories ...................................................... (743) 325
Prepaid expenses and other assets ................................ 841 2,255
Accounts payable ................................................. 3,655 7,418
Accrued expenses ................................................. (2,261) 2,053
Asbestos-related expenses ........................................ (4,263) (1,141)
Other liabilities ................................................ (415) (28)
-------- --------
Net cash (used in) provided by operating activities ......... (9,327) 7,806
-------- --------
Cash flows from investing activities:
Capital expenditures .................................................. (854) (847)
Proceeds from asset retirement ........................................ -- 30
-------- --------
Net cash used in investing activities ....................... (854) (817)
-------- --------
Cash flows from financing activities:
Net short-term borrowings ............................................. 2,910 925
Net change in restricted cash ......................................... (877) 399
-------- --------
Net cash (used in) provided by financing activities ........ 2,033 1,324
-------- --------
Net (decrease) increase in cash and cash equivalents ........................... (8,148) 8,313
Cash and cash equivalents:
Beginning of period ....................................................... 29,710 2,169
-------- --------
End of period ............................................................. $ 21,562 $ 10,482
======== ========
The accompanying notes are an integral part
of the condensed consolidated financial statements.
5
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of Congoleum Corporation's (the "Company" or
"Congoleum") condensed consolidated financial position, results of operations
and cash flows have been included. Operating results for the three month period
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer
to the consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
Based upon the nature of the Company's operations, facilities and
management structure, the Company considers its business to constitute a single
segment for financial reporting purposes.
Certain amounts appearing in the prior period's condensed consolidated
financial statements have been reclassified to conform to the current period's
presentation.
The financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. As described more fully below
and in Note 6, there is substantial doubt about the Company's ability to
continue as a going concern unless it obtains relief from its substantial
asbestos liabilities through a successful reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code").
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve
claims asserted against it related to the use of asbestos in its products
decades ago. During 2003, Congoleum obtained the requisite votes of asbestos
personal injury claimants necessary to seek approval of a proposed, pre-packaged
Chapter 11 plan of reorganization. In January 2004, the Company filed its
proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. On November 8, 2004, Congoleum filed a modified plan of reorganization
and related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos 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 Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the modified
plan. On April 22, 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
6
Future Claimants' Representative to make certain modifications to its proposed
plan of reorganization and related documents governing the settlement and
payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreement would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan (the "Plan
Trust") to pay asbestos claims against Congoleum. As a result of these changes,
Congoleum advised the Bankruptcy Court that Congoleum would withdraw its
existing plan and prepare an amended plan and disclosure statement and solicit
acceptances from certain claimant creditors affected by these modifications.
Congoleum anticipates that it will submit its amended plan to the Bankruptcy
Court prior to a status conference scheduled for June 6, 2005, at which time it
anticipates a date will be set to consider approval of the amended plan,
disclosure statement and related voting procedures. There can be no assurance
that the Company will receive the acceptances necessary for confirmation of the
proposed amended plan of reorganization, that the proposed amended plan will not
be modified further, that the Bankruptcy Court will approve the amended plan,
disclosure statement and voting procedures or that such approval will be
received in a timely fashion, that the Bankruptcy Court will confirm the amended
plan, or that the amended plan, if confirmed, will become effective. 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
plans of reorganization and related matters. Although Congoleum expects to
consider the views of its insurance carriers when preparing its amended plan, it
is possible that a plan which will satisfy the requirements of Section 524(g) of
the Bankruptcy Code with respect to asbestos creditors will not resolve all
objections raised by some or all of the insurance carriers. Certain other
parties have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the proposed amended plan.
The proposed amended 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 amended plan of reorganization
would provide, among other things, for an assignment of certain rights in, and
proceeds of, Congoleum'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 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 end of 2005 at the earliest to obtain confirmation of its
proposed amended plan of reorganization.
Based on its proposed amended 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.
7
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 6 of the Notes to Unaudited
Condensed Consolidated Financial Statements. There can be no assurance that the
Company will be successful in realizing its goals in this regard or in obtaining
confirmation of its proposed amended plan of reorganization or that any
confirmed plan will become effective. 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 Quarterly Report on Form 10-Q
and the estimated costs and contributions to effect the contemplated amended
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 amended 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. Recent Accounting Principles:
Stock Based Compensation
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) was originally
effective for public companies at the beginning of the first interim or annual
period beginning after June 15, 2005. In April 2005, the Securities and Exchange
Commission (SEC) provided for a phased-in implementation process for public
companies. Based on the Company's year end of December 31, the Company must
adopt SFAS No. 123(R) on January 1, 2006.
8
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. For 2005, the Company will continue to disclose stock-based
compensation information in accordance with FASB Statement No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation--Transition and Disclosure--an
Amendment of FASB Statement No. 123," and Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation."
A reconciliation of consolidated net income (loss), as reported, to pro
forma consolidated net income (loss) including compensation expense for the
Company's stock-based plans as calculated based on the fair value at the grant
dates for awards made under these plans in accordance with the provisions of
SFAS 123 as amended by SFAS 148, as well as a comparison of as reported and pro
forma basic and diluted earnings per share follows (in thousands, except per
share data):
Three Months Ended
March 31,
2005 2004
------- -------
Net income (loss):
As reported $ (352) $ (435)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (60) (51)
------- -------
Pro forma $ (412) $ (486)
======= =======
Net income (loss) per share:
As reported basic and diluted $ (0.04) $ (0.05)
Pro forma compensation expense (0.01) (0.01)
------- -------
Pro forma basic and diluted $ (0.05) $ (0.06)
======= =======
3. Inventories
A summary of the major components of inventories is as follows (in
thousands):
March 31, December 31,
2005 2004
--------- ------------
Finished goods $30,930 $32,811
Work-in-process 2,315 1,415
Raw materials and supplies 7,121 5,397
- -----------------------------------------------------------------------------
Total inventories $40,366 $39,623
- -----------------------------------------------------------------------------
9
4. Income/(Loss) Per Share
Basic net income (loss) per share is calculated by dividing net loss by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share is calculated by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period, unless their effect is anti-dilutive.
5. Environmental and Other Liabilities
The Company records a liability for environmental remediation claims when
a cleanup program or claim payment becomes probable and the costs can be
reasonably estimated. 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 million at March 31, 2005 and at December 31, 2004,
are not reduced by the amount of insurance recoveries. Such estimated insurance
recoveries approximated $2.1 million at March 31, 2005 and at December 31, 2004,
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 established a remediation trust fund of $100 thousand as
10
financial assurance for certain remediation funding obligations. Estimated total
cleanup costs of $ 1.7 million, including capital outlays and future maintenance
costs for soil and groundwater remediation, are primarily based on engineering
studies. Of this amount, $0.3 million is included in current liabilities subject
to compromise and $1.4 million is included in non-current liabilities subject to
compromise.
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.
6. Asbestos Liabilities
Claims Settlement and Chapter 11 Reorganization
In early 2003, the Company announced that it was seeking to resolve its
asbestos liabilities through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code, and later in 2003,
consistent with this strategy, the Company entered into a settlement agreement
with various asbestos personal injury claimants (the "Claimant Agreement"). As
contemplated by the Claimant Agreement, the Company also entered into agreements
establishing a pre-petition trust (the "Collateral Trust") to distribute funds
in accordance with the terms of the Claimant Agreement and granting the
Collateral Trust a security interest in its rights under applicable insurance
coverage and payments from insurers for asbestos claims. As announced April 22,
2005, an agreement in principle has been reached among certain parties,
including representatives of participants in the Claimant Agreement, pursuant to
which those participants would forbear from exercising the security interest in
and priority rights to distributions from the Collateral Trust pursuant to an
amended plan of reorganization being prepared by Congoleum.
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 amended plan of
reorganization, after the establishment of the Plan Trust, the assets in the
Collateral Trust would be transferred to the Plan Trust and any claims subject
to the Claimant Agreement would be channeled to the Plan Trust and paid in
accordance with the terms of the proposed amended plan.
11
In October 2003, the Company began soliciting acceptances for its proposed
pre-packaged plan of reorganization and the Company received the votes necessary
for acceptance of the plan in late December 2003.
On November 8, 2004, Congoleum announced that it had filed a modified plan
of reorganization and related documents with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos 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 a hearing began on April 12, 2005 to
consider confirmation of the plan. The Company had solicited and received the
acceptances necessary for confirmation of its plan as then constituted at that
time.
On April 22, 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative to make certain modifications to its proposed
plan of reorganization and related documents governing the settlement and
payment of asbestos related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreement would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust. As a result of these changes, Congoleum advised the
Bankruptcy Court that Congoleum would withdraw its existing plan and prepare an
amended plan and disclosure statement and solicit acceptances from certain
claimant creditors affected by these modifications. Congoleum anticipates that
it will submit its amended plan to the Bankruptcy Court prior to a status
conference scheduled for June 6, 2005, at which time it anticipates a date will
be set to consider approval of the amended plan, disclosure statement and
related voting procedures.
There can be no assurance that the Company will receive the acceptances
necessary for confirmation of the proposed amended plan of reorganization, that
the proposed amended plan will not be modified further, that the Bankruptcy
Court will approve the amended plan, disclosure statement and voting procedures
or that such approval will be received in a timely fashion, that the Bankruptcy
Court will confirm the amended plan, or that the amended plan, if confirmed,
will become effective.
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 plans of reorganization and related matters.
Although Congoleum expects to consider the views of its insurance carriers when
preparing its amended plan, it is possible that a plan which will satisfy the
requirements of Section 524(g) of the Bankruptcy Code with respect to asbestos
creditors will not resolve all objections raised by some or all of the insurance
carriers. Certain other parties have also filed various objections to
Congoleum's previously proposed plans of reorganization and may file objections
to the proposed amended plan.
12
On May 12, 2005, the Company entered into a settlement agreement with one
of its excess insurance carriers over coverage for asbestos-related claims.
Under the terms of the settlement, certain AIG companies will pay $103 million
over ten years to the Plan Trust. The settlement resolves coverage obligations
of policies with a total of $114 million in liability limits for asbestos bodily
injury claims, and is subject to final Bankruptcy Court approval and
effectiveness of Congoleum's proposed amended plan of reorganization.
Under the proposed amended plan of reorganization and related documents,
Congoleum's assignment of insurance recoveries to the Plan Trust is net of costs
incurred in connection with insurance coverage litigation. Congoleum is entitled
to withhold from recoveries, or seek reimbursement from the Plan 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 Plan 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 Plan Trust, for the $1.3 million claims processing
fee once insurance recoveries exceed $375 million.
In connection with modifications to the fourth amended 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 amended plan of reorganization and related
documents provide for the channeling of asbestos property damage claims in
addition to asbestos personal injury claims to the Plan Trust established
pursuant to the provisions of Section 524(g) of the Bankruptcy Code. There were
no property damage claims asserted against the Company at the time of its
bankruptcy filing. The Bankruptcy Court approved an order establishing a bar
date of May 3, 2004 for the filing of asbestos property damage claims. The
claims agent appointed in the Company's bankruptcy proceeding has advised the
Company that, as of the bar date, it received 35 timely filed asbestos property
damage claims asserting liquidated damages in the amount of approximately $0.8
million plus additional unspecified amounts. The Company 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 amended 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
13
adjustment amount were calculated during the 90 consecutive day trading period
ended March 31, 2005, the resulting adjustment amount would be $21.2 million.
Under the terms of the proposed amended 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 amended 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 its
controlling shareholder, American Biltrite Inc. ("ABI"), of the breach and a
material breach of the pledge agreement (the "ABI Pledge Agreement") by ABI
(which agreement is discussed below) which remains uncured 30 days following
notice by the Plan Trust to ABI and the Company of the breach. The terms of the
Company Note would provide that, upon the occurrence of an event of default
under the Company Note, the Company and ABI would have 10 days from the date
they receive notice that an event of default has occurred to cure the event of
default. If the event of default remains uncured after the 10-day cure period,
the aggregate outstanding principal amount of the Company Note together with any
accrued but unpaid interest thereon would become immediately due and payable if
the event of default relates to an uncured event of default 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 amended 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 amended 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
14
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 amended plan of
reorganization, the Company Note and the ABI Pledge Agreement.
The Company Note, the ABI Pledge Agreement and the Company's proposed
amended 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 proposed amended plan of reorganization, the Company Note and the ABI
Pledge Agreement.
Under the proposed amended plan of reorganization ABI would be permitted
to prepay the principal amount of the Company Note, in whole but not in part,
without any penalty or premium at any time following the Principal Adjustment
Date and any interest that may have accrued but not yet paid at the time of any
principal repayment would be due and payable at the time of the principal
repayment. The Company would be obligated to repay ABI for any amounts paid by
ABI pursuant to the Company Note, which repayment obligation would by evidenced
by a promissory note or notes to be issued by the Company to ABI. Any such note
would have similar payment terms as those expected to be afforded to the Plan
Trust with regard to the Company Note, which rights of repayment are expected to
be subordinate and subject in right of payment to the prior payment in full of
all amounts owing and payable to the Plan Trust with regard to the Company Note
and with regard to amounts owing and payable pursuant to the Senior Notes and
credit facility, except that the right of full subordination with regard to the
Senior Notes and credit facility would contain an exception that would allow the
Company to make regularly scheduled interest payments to ABI pursuant to any
such note so long as no default or event of default has occurred or is
continuing under the indenture or the Company's credit facility.
The proposed amended 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 amended 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 amended 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
15
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 amended 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. Under the expected terms
of the Company's proposed amended 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
amended 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 amended 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 $6.9 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
16
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 of 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 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 the insurance carrier will pay Congoleum $15.4
million in full satisfaction of the applicable policy limits, of which $14.5
million has been paid to date. 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 previously proposed plans of reorganization
and are expected to raise objections to the proposed amended plan.
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
17
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 motions for
summary judgment by the excess carriers that the Claimant Agreement was not
binding on them because Congoleum had breached the consent and cooperation
clauses of their insurance policies by, among other things, entering into the
Claimant Agreement without their consent. Congoleum argues, among other things,
that it was entitled to enter into the Claimant Agreement and/or the Claimant
Agreement was binding on the excess insurance carriers because they were in
breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and/or the Claimant
Agreement was fair, reasonable and in good faith and/or there was and is no
prejudice to the excess insurance carriers from the Claimant Agreement and/or
the excess insurance carriers had breached their duties of good faith and fair
dealing.
On August 12, 2004, the Court entered a case management order that 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.
On February 22, 2005, the Court ruled on a series of summary judgment
motions filed by various insurers. The Court denied a motion for summary
judgment filed by certain insurers, holding that there were disputed issues of
fact regarding whether the Claimant Agreement and other settlement agreements
between Congoleum and the claimants had released Congoleum and the insurers from
any liability for the asbestos bodily injury claims of the claimants who signed
the Claimant Agreement and the other settlement agreements.
The Court also denied another motion for summary judgment filed by various
insurers who argued that they did not have to cover the liability arising from
the Claimant Agreement because they had not consented to it.
The Court granted summary judgment regarding Congoleum's bad faith claims
against excess insurers (other than first-layer excess insurers), holding that
the refusal of these excess insurers to cover the Claimant Agreement was at
least fairly debatable and therefore not in bad faith.
The first phase of the trial had been scheduled to begin on June 6, 2005,
but now has been adjourned to July 19, 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
18
Congoleum's decision to enter into the Claimant Agreement constitutes any
breach(es) on the part of Congoleum. The Company believes, however, that even if
the insurers were to succeed in the first phase of the Coverage Action, such
result would not deprive individual claimants of the right to seek payment from
the insurers who issued the affected insurance policies or negotiating
settlements with some or all of the signatories to the Claimant Agreement and
seeking payment from its insurers for such settlements, nor would such result
preclude the Company from amending the Claimant Agreement and seeking recovery
under the Claimant Agreement as amended; moreover, the Company does not believe
that it would be deprived of coverage-in-place insurance for future obligations
of or demands upon the insurers under the applicable insurance policies.
However, there can be no assurances of the outcome of these matters or their
potential effect on the Company's ability to obtain approval of its plan of
reorganization.
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 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 was held on April 12, 2005 and the motion was denied.
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.
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. As a result of tabulating ballots on its
fourth amended plan, the Company is also aware of claims by claimants whose
claims were not determined under the Claimant Agreement but who have submitted
claims with a value of $512 million based on the settlement values applicable in
the fourth amended plan.
The Company's gross liability of $491 million for these settlements and
contingent liability for the additional $512 million in unsettled claims 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 March 31,
19
2005, the Company estimates the minimum remaining amount of the contributions
and costs to be $6.9 million, of which it has recorded $4.2 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 Plan Trust.
During the fourth quarter of 2003, the Company recorded a charge of $3.7 million
to increase its recorded liability to the minimum estimated amount. 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, 2004 to March 31, 2005:
Spending Recoveries
Balance at Against From Balance at
(in thousands) 12/31/04 Reserve Insurance 3/31/05
--------------------------------------------------
Reserves
- --------
Current $ 6,550 (2,387) -- $ 4,163
Long-Term 2,738 -- -- 2,738
Receivables
- -----------
Current (1,509) (1,958) -- (3,467)
Long-Term (7,300) -- -- (7,300)
--------------------------------------------------
Net Asbestos Liability $ 479 $(4,345) $ -- $(3,866)
- ---------------------- ======= ======= ==== =======
20
7. Product Warranties
The Company provides product warranties for specific product lines and
accrues for estimated future warranty cost in the period in which the revenue is
recognized. The following table sets forth activity in the Company's warranty
reserves (in millions) for the:
Three Months Ended Three Months Ended
March 31, March 31,
2005 2004
---- ----
Beginning balance $ 2.7 $ 2.7
Accruals 1.0 1.4
Charges (1.0) (1.4)
------ ------
Ending balance $ 2.7 $ 2.7
====== ======
8. Liabilities Subject to Compromise
As a result of the Company's Chapter 11 filing (see Notes 1 and 6 to the
Unaudited Condensed Consolidated Financial Statements), pursuant to SOP 90-7,
the Company is required to segregate pre-petition liabilities that are subject
to compromise and report them separately on the consolidated balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of the Company's pre-petition debt is recorded at
face value and is classified within liabilities subject to compromise. In
addition, the Company's accrued interest expense on its Senior Notes is also
recorded in liabilities subject to compromise.
Liabilities subject to compromise at March 31, 2005 and December 31, 2004
are as follows:
(In thousands)
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Current
- --------
Pre-petition other payables and accrued interest $ 16,626 $ 14,225
Non-current
- -----------
Debt (at face value) 100,000 100,000
Pension liability 16,809 16,936
Other post-retirement benefit obligation 8,210 8,303
Pre-petition other liabilities 12,070 12,051
-------- --------
- --------------------------------------------------------------------------------
Non-current 137,089 137,290
- -----------
- --------------------------------------------------------------------------------
Total liabilities subject to compromise $153,715 $151,515
======== ========
- --------------------------------------------------------------------------------
21
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.
9. Accrued Liabilities
A summary of the significant components of accrued liabilities consists of
the following:
(In thousands)
March 31, December 31,
2005 2004
- --------------------------------------------------------------------------------
Accrued warranty, marketing and sales promotion $17,590 $18,487
Employee compensation and related benefits 3,930 4,735
Other 225 3,173
- --------------------------------------------------------------------------------
Total accrued liabilities $21,745 $26,395
- --------------------------------------------------------------------------------
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 March 31, 2005 (see Note 8).
10. Pension Plans
The Company sponsors several non-contributory defined benefit pension
plans covering most of the Company's employees. Benefits under the plan are
based on years of service and employee compensation. Amounts funded annually by
the Company are actuarially determined using the projected unit credit and unit
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").
22
The following summarizes the components of the net periodic benefit cost
for the Pension and Other Benefit Plans for the three months ended March 31,
2005 and 2004:
(In thousands)
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Components of Net Periodic Benefit Cost
Service cost ................................. $ 355 $ 46 $ 359 $ 50
Interest cost ................................ 1,094 130 1,108 140
Expected return on plan assets ............... (881) -- (853) --
Recognized net actuarial loss ................ 385 15 400 11
Amortization of transition obligation ........ (18) -- (18) --
Amortization of prior service cost ........... (72) (47) (71) (116)
------- ----- ------- ------
Net periodic benefit cost ........................ $ 863 $ 144 $ 925 $ 85
======= ===== ======= ======
The weighted average assumptions used to determine net periodic benefit
cost were as follows:
March 31, 2005 March 31, 2004
-------------- --------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Discount rate .................................. 6.25% 6.25% 6.25% 6.75%
Expected long-term return on plan assets ....... 7.00% -- 7.00% --
Rate of compensation increase .................. 4.00% -- 4.00% --
5.50% 5.50%
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto contained in Item
1 of this Quarterly Report on Form 10-Q.
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.
23
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 Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the modified
plan. On April 22, 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative to make certain modifications to its proposed
plan of reorganization and related documents governing the settlement and
payment of asbestos related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreement would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan (the "Plan
Trust") to pay asbestos claims against Congoleum. As a result of these changes,
Congoleum advised the Bankruptcy Court that Congoleum would withdraw its
existing plan and prepare an amended plan and disclosure statement and solicit
acceptances from certain claimant creditors affected by these modifications.
Congoleum anticipates that it will submit its amended plan to the Bankruptcy
Court prior to a status conference scheduled for June 6, 2005, at which time it
anticipates a date will be set to consider approval of the amended plan,
disclosure statement and related voting procedures. There can be no assurance
that the Company will receive the acceptances necessary for confirmation of the
proposed plan of reorganization, that the proposed amended plan will not be
modified further, that the Bankruptcy Court will approve the amended plan,
disclosure statement and voting procedures or that such approval will be
received in a timely fashion, that the Bankruptcy Court will confirm the amended
plan, or that the amended plan, if confirmed, will become effective. 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
plans of reorganization and related matters. Although Congoleum expects to
consider the views of its insurance carriers when preparing its amended plan, it
is possible that a plan which will satisfy the requirements of Section 524(g) of
the Bankruptcy Code with respect to asbestos creditors will not resolve all
objections raised by some or all of the insurance carriers. Certain other
parties have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the proposed amended plan.
24
The proposed amended 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 amended plan of reorganization
would provide, among other things, for an assignment of certain rights in, and
proceeds of, Congoleum'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 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 end of 2005 at the earliest to obtain
confirmation of its proposed amended plan of reorganization.
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 amended plan of reorganization,
after the establishment of the Plan Trust, the assets in the Collateral Trust
would be transferred to the Plan Trust and any claims subject to the Claimant
Agreement would be channeled to the Plan Trust and paid in accordance with the
terms of the proposed amended plan.
Based on its proposed amended 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 the Company's Annual
Report on Form 10-K for the year ended December 31, 2004. 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.
Three months ended March 31, 2005 as compared to three months ended March
31, 2004.
Net sales for the three months ended March 31, 2005 were $57.6 million as
compared to $52.0 million for the three months ended March 31, 2004, an increase
of $5.6 million or 10.8%. The increase resulted primarily from the impact of
selling price increases instituted in the second half of 2004 and during the
first quarter of 2005 (7%), higher sales of residential products (up 8.9%), and
higher sales in the manufactured housing category (up 8.0%), partially offset by
lower sales of do-it-yourself tile to mass merchandisers (down 48%).
25
Gross profit for the three months ended March 31, 2005 totaled $13.7
million, or 23.7% of net sales, compared to $13.6 million, or 26.1% of net
sales, for the same period last year. The major factor leading to the
deterioration in gross margin percent was the sharp rise in raw material costs
experienced during the fourth quarter of 2004 and ongoing into the first quarter
of 2005, which reduced margins by 9.1 percentage points of net sales. This was
partially mitigated by the 7.0 percentage point increase in selling prices, as
well as improved plant efficiencies and cost reduction programs which benefited
gross margins by an additional 0.3 percentage points.
Selling, general and administrative expenses were $11.7 million for the
three months ended March 31, 2005 as compared to $12.0 million for the three
months ended March 31, 2004, a decrease of $0.3 million. The reduction in
expenses reflects a reduction of $0.4 million in merchandising and sales support
related costs partially offset by an increase of $0.1 million in research and
development costs related to new product initiatives. As a percent of net sales,
selling, general and administrative costs were 20.4% for the three months ended
March 31, 2005 compared to 23.0% for the same period last year.
Income from operations was $1.9 million for the quarter ended March 31,
2005 compared to income of $1.6 million for the quarter ended March 31, 2004.
The improvement in operating income was a result of the higher sales and related
gross margin dollars coupled with lower selling, general and administrative
expenses.
Liquidity and Capital Resources
The consolidated financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, the
unaudited condensed consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern. As described more fully in the Notes to the Unaudited Condensed
Consolidated Financial Statements contained in Item 1 of this Quarterly Report
on Form 10-Q, there is substantial doubt about the Company's ability to continue
as a going concern unless it obtains relief from its substantial asbestos
liabilities through a successful reorganization under Chapter 11 of the
Bankruptcy Code.
The Company is a defendant in a large number of asbestos-related lawsuits
and on December 31, 2003 filed a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. See Notes 1 and 6 of the Notes to the Unaudited
Condensed Consolidated Financial Statements, which are contained in Item 1 of
this Quarterly Report on Form 10-Q. These matters will have a material adverse
impact on liquidity and capital resources. During the first quarter of 2005, the
Company paid $4.3 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
26
processing costs and expenses in connection with pursuit of insurance coverage.
At March 31, 2005, Congoleum had $10.8 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 $6.9 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
$7.3 million at a minimum during 2005 in connection with pursuit of insurance
coverage, for which it expects to be reimbursed as discussed above. Required
expenditures could be materially higher than these estimates.
As part of the Company's proposed amended plan of reorganization,
Congoleum expects that it will also issue a promissory note to the Plan Trust.
Under the terms of the proposed amended plan, the original principal amount of
the Company Note will be approximately $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 approximately 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 March 31, 2005, the resulting adjustment
amount would be $21.2 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 amended plan and Plan Trust agreement, 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 March 31, 2005, were $21.6 million, a decrease of $8.1 million from December
31, 2004. 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 $2.0 million and $1.2 million at March
31, 2005 and December 31, 2004, respectively, are recorded as restricted cash.
Additionally, a $14.6 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 March 31, 2005. The Company expects to contribute
these funds, less any amounts withheld pursuant to reimbursement arrangements,
to the Plan Trust formed upon confirmation of its proposed amended plan of
reorganization. Working capital was $36.7 million at March 31, 2005, up from
$35.3 million at December 31, 2004. The ratio of current assets to current
27
liabilities at March 31, 2005 was 1.4 to 1.0, which is unchanged from December
31, 2004. The ratio of debt to total capital at March 31, 2005 was 0.47 to 1.0
which is also unchanged since December 31, 2004. Net cash used by operations
during the first three months of 2005 was $9.3 million, as compared to net cash
provided by operations of $7.8 million in 2004. The decrease in cash provided by
operations in the first three months of 2005 versus the first three months of
2004 was primarily due to higher working capital requirements and increased
reorganization expenditures in 2005.
Capital expenditures for the three months ended March 31, 2005 totaled
$0.9 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 March 31, 2005. Borrowings under this facility are
collateralized by inventory and receivables. At March 31, 2005, based on the
level of receivables and inventory, $30.0 million was available under the
facility, of which $6.0 million was utilized for outstanding letters of credit
and $12.4 million was utilized by the revolving loan. A motion to extend this
financing agreement through December 31, 2005 has been filed with the Bankruptcy
Court and the extension will be effective upon Bankruptcy Court approval. A fee
of $125 thousand will be paid in connection with this extension. 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 proposed amended 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 (as extended) will be renewed prior to that
facility's expiration.
In addition to the provision for asbestos litigation discussed previously,
the Company has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. The Company is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against the Company.
Among these claims, the Company is a named party in several actions associated
with waste disposal sites (more fully discussed in Note 5 to the Unaudited
Condensed Consolidated Financial Statements). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of the
Company's owned and previously owned facilities. The contingencies also include
claims for personal injury and/or property damage. The exact amount of such
28
future cost and timing of payments are indeterminable due to such unknown
factors as the magnitude of cleanup costs, the timing and extent of the remedial
actions that may be required, the determination of the Company's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. The Company has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company believes its
estimate of the future amount of these liabilities is reasonable, and that they
will be paid over a period of five to ten years, the timing and amount of such
payments may differ significantly from the Company's assumptions. Although the
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation which would
reasonably have such an effect. There can be no assurances that the costs of any
future government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant
expenses incurred by or judgments assessed against the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. Although the
Company did not generate cash from the operations in the first quarter of 2005,
the Company anticipates that it will generate cash from operations in 2005. The
Company believes that net cash provided by operating activities and borrowings
under its financing agreement will be adequate to fund working capital
requirements, debt service payments, and planned capital expenditures for the
foreseeable future, plus its current estimates for costs to settle and resolve
its asbestos liabilities through its proposed amended plan of reorganization.
The Company's inability to obtain confirmation of its proposed amended plan in a
timely manner would have a material adverse effect on the Company's ability to
fund its operating, investing and financing requirements. The Company also
anticipates it will be able to obtain exit financing upon confirmation of its
proposed amended plan although there can be no assurance that such financing
will be obtained. Such financing will be required to replace its
debtor-in-possession credit facility and permit the Company to pay accrued
interest on its Senior Notes and other obligations needed to be satisfied in
connection with the confirmation of the proposed amended plan of reorganization.
Risk 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 the Company's
expectations, as of the date of this report, of future events, and the Company
undertakes no obligation to update any of these forward-looking statements.
Although the Company believes that these expectations are based on reasonable
assumptions, within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
29
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 below and in the Company's other filings with
the Securities and Exchange Commission.
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 6 of the Notes to Unaudited
Condensed Consolidated Financial Statements, which are included in this
Quarterly Report on Form 10-Q, 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 and is aware of additional
unsettled claims with a proposed settlement value of $512 million. Satisfaction
of this obligation pursuant to the terms of the proposed 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 proposed 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 Quarterly Report on Form 10-Q. Furthermore, the estimated
costs and contributions to effect the contemplated proposed plan of
reorganization or an alternative plan could be significantly greater than
currently estimated. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court approvals, and there can be no assurance that such conditions,
approvals and other requirements will be satisfied or obtained.
Some additional factors that could cause actual results to differ from the
Company's goals for resolving its asbestos liability through the 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 ABI'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
30
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 the plan of reorganization it has proposed or any
plan that may be proposed in the future. 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 6 of Notes to Unaudited Condensed Consolidated Financial Statements,
which are included in this Quarterly Report on Form 10-Q.
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
31
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
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, although quantities of
certain materials available from alternative suppliers may be in limited supply.
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,
32
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.
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.
33
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.
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; the Company's 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 the Company's common stock, representing a 68.3% voting
interest. As a result, ABI can elect all of the Company's 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 the
Company's assets, any matters submitted to a vote of the Company's 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 the Company's 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 the
Company's common stock. In addition, certain officers of Congoleum are officers
of ABI and members of the family group that owns a controlling interest in ABI.
Possible future sales of shares by ABI could adversely affect the market for our
stock.
ABI may sell shares of the Company's common stock in compliance with the
federal securities laws. By virtue of ABI's current control of Congoleum, ABI
could sell large amounts of shares of the Company's common stock by causing the
34
Company to file a registration statement that would allow them to sell shares
more easily. In addition, ABI could sell shares of the Company's common stock
without registration. Although the Company can make no prediction as to the
effect, if any, that such sales would have on the market price of the Company's
common stock, sales of substantial amounts of the Company's common stock, or the
perception that such sales could occur, could adversely affect the market price
of the Company's common stock. If ABI sells or transfers shares of the Company's
common stock as a block, another person or entity could become the Company's
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 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.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act")) as of the end of the period covered by this
quarterly report (the "Evaluation Date"). Based on this evaluation,
such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to
the Company required to be included in the Company's reports filed
or submitted under the Exchange Act.
35
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal controls over financial
reporting during the last quarter covered by this Quarterly Report
that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: The information contained in
Note 5 "Environmental and Other Liabilities" and Note
6 "Asbestos Liabilities" of the Notes to Unaudited
Condensed Consolidated Financial Statements is
incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds: None
Item 3. Defaults Upon Senior Securities: The commencement
of the Chapter 11 proceedings constituted an event of
default under the indenture governing the Company's
8-5/8% Senior Notes. In addition, due to the Chapter
11 proceedings, the Company was precluded from making
the interest payments due February 1, 2004, August 1,
2004 and February 1, 2005 on the Senior Notes. The
amount of accrued interest that was not paid on the
Senior Notes on those dates is approximately $13.0
million. As of March 31, 2005, the principal amount
of the Senior Notes is approximately $100 million.
These amounts, plus $743,000 of accrued interest on
the interest due but not paid on February 1, 2004,
August 1, 2004 and February 1, 2005 are included in
"Liabilities Subject to Compromise."
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information: None
Item 6. Exhibits:
36
(a) Exhibits
Exhibit
Number Exhibits
------ --------
3.1 Amended Certificate of Incorporation of the Company
3.2 Amended and Restated Bylaws of the Company
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
37
CONGOLEUM CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: May 16, 2005 By: /s/ Howard N. Feist III
---------------------------------------
(Signature)
Howard N. Feist III
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial & Accounting Officer)
38
Exhibit Index
Exhibit
Number Exhibits
------ --------
3.1 Amended Certificate of Incorporation of the Company (1)
3.2 Amended and Restated Bylaws of the Company (1)
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(1) Incorporated by reference to the exhibit bearing the same description
filed with the Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1996.
39