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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2005 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at May 9, 2005
- ------------------- --------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets--Assets as of
March 31, 2005 (unaudited) and December 31, 2004..............3
Consolidating Condensed Balance Sheets--Liabilities and
Stockholders' Equity as of March 31, 2005 (unaudited)
and December 31, 2004.........................................4
Consolidating Condensed Statements of Operations for the
three months ended March 31, 2005 and 2004 (unaudited)........5
Consolidating Condensed Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 (unaudited)........6
Notes to Unaudited Consolidating Condensed Financial
Statements....................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk...49
Item 4. Controls and Procedures......................................50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................50
Item 3. Defaults Upon Senior Securities..............................50
Item 5. Other Information............................................51
Item 6. Exhibits.....................................................51
Signature ...........................................................54
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
2005 2004 2005 2004 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 28,033 $ 34,691 $ 21,562 $ 29,710 $ 6,471 $ 4,981
Restricted cash 16,559 15,682 16,559 15,682
Accounts receivable, net 51,945 43,591 $ (97) $(1,036) 26,255 17,621 25,787 27,006
Inventories 79,231 76,036 (224) (268) 40,366 39,623 39,089 36,681
Assets of discontinued
operation 2,932 2,952 2,932 2,952
Deferred income taxes 12,636 12,636 10,678 10,678 1,958 1,958
Prepaid expense & other
current assets 8,617 6,826 6,241 5,124 2,376 1,702
------------------------------------------------------------------------------------------------------
Total current assets 199,953 192,414 (321) (1,304) 121,661 118,438 78,613 75,280
Property, plant &
equipment, net 120,813 124,070 77,655 79,550 43,158 44,520
Other assets:
Insurance for
asbestos-related
liabilities 7,500 7,500 7,500 7,500
Goodwill, net 11,300 11,300 11,300 11,300
Other assets 19,909 20,001 (186) (186) 14,810 14,894 5,285 5,293
------------------------------------------------------------------------------------------------------
38,709 38,801 (186) (186) 14,810 14,894 24,085 24,093
------------------------------------------------------------------------------------------------------
Total assets $359,475 $355,285 $(507) $(1,490) $214,126 $212,882 $145,856 $143,893
======================================================================================================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
2005 2004 2005 2004 2005 2004 2005 2004
-------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 24,966 $ 18,700 $ (97) $ (57) $ 13,951 $ 10,295 $ 11,112 $ 8,462
Accrued expenses 42,125 48,605 -- (979) 23,201 28,066 18,924 21,518
Asbestos-related
liabilities 18,774 21,079 18,774 21,079
Liabilities of
discontinued
operation 151 165 151 165
Notes payable 20,839 17,036 12,410 9,500 8,429 7,536
Current portion of
long-term debt 21,397 21,411 21,397 21,411
Liabilities subject to
compromise 16,626 14,225 16,626 14,225
-------------------------------------------------------------------------------------------------------
Total current
liabilities 144,878 141,221 (97) (1,036) 84,962 83,165 60,013 59,092
Long-term debt, less
current portion 2,416 2,790 2,416 2,790
Asbestos-related liabilities 10,238 10,238 2,738 2,738 7,500 7,500
Other liabilities 25,262 25,237 10,678 10,678 14,584 14,559
Noncontrolling interests 1,274 623 1,274 623
Liabilities subject to
compromise 136,903 137,104 (186) (186) 137,089 137,290
-------------------------------------------------------------------------------------------------------
320,971 317,213 (283) (1,222) 235,467 233,871 85,787 84,564
Stockholders' equity
Common stock 46 46 (93) (93) 93 93 46 46
Additional paid-in capital 19,548 19,548 (49,106) (49,106) 49,106 49,106 19,548 19,548
Retained earnings 50,150 49,526 35,051 35,007 (44,182) (43,830) 59,281 58,349
Accumulated other
comprehensive loss (16,108) (15,916) 6,111 6,111 (18,545) (18,545) (3,674) (3,482)
Less treasury shares (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
-------------------------------------------------------------------------------------------------------
Total stockholders' equity 38,504 38,072 (224) (268) (21,341) (20,989) 60,069 59,329
-------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $359,475 $355,285 $ (507) $ (1,490) $214,126 $212,882 $145,856 $143,893
=======================================================================================================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended March 31, 2005 and 2004
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------------
Net sales $107,424 $99,415 $ 52 $(43) $57,630 $52,000 $49,742 $47,458
Cost of products sold 78,856 72,894 (44) (51) 43,969 38,449 34,931 34,496
Selling, general & administrative
expenses 25,524 26,349 11,733 11,985 13,791 14,364
---------------------------------------------------------------------------------------------
Income (loss) from operations 3,044 172 96 8 1,928 1,566 1,020 (1,402)
Other (income) expense
Interest income (143) (6) (98) (45) (6)
Interest expense 3,264 2,967 2,500 2,245 764 722
Other (income) expense (2,202) (93) 52 8 (122) (244) (2,132) 143
---------------------------------------------------------------------------------------------
919 2,868 52 8 2,280 2,001 (1,413) 859
---------------------------------------------------------------------------------------------
Income (loss) before taxes and
other items 2,125 (2,696) 44 -- (352) (435) 2,433 (2,261)
Provision (credit) for income taxes 971 (797) 971 (797)
Noncontrolling interests (474) 36 (474) 36
---------------------------------------------------------------------------------------------
Income from continuing operations 680 (1,863) 44 -- (352) (435) 988 (1,428)
Discontinued operation (56) (162) (56) (162)
---------------------------------------------------------------------------------------------
Net income (loss) $ 624 $(2,025) $ 44 $ -- $ (352) $ (435) $ 932 $(1,590)
=============================================================================================
Basic Diluted
2005 2004 2005 2004
----------------------- -----------------------
Income (loss) per common share from
continuing operations $ 0.20 $(0.54) $ 0.19 $(0.54)
Discontinued operation (0.02) (0.05) (0.02) (0.05)
----------------------- -----------------------
Net income (loss) per common share $ 0.18 $(0.59) $ 0.17 $(0.59)
======================= =======================
Weighted average number of common
and equivalent shares outstanding 3,442 3,442 3,493 3,442
======================= =======================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended March 31, 2005 and 2004
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Operating activities
Net income (loss) $ 624 $(2,025) $ 44 $ -- $ (352) $ (435) $ 932 $(1,590)
Net loss from discontinued operation 56 162 56 162
-----------------------------------------------------------------------------------------
Income (loss) from continuing
operations 680 (1,863) 44 -- (352) (435) 988 (1,428)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 4,376 4,466 2,845 2,891 1,531 1,575
Gain on sale of property (2,327) -- (2,327) -
Change in operating assets and
liabilities:
Accounts and notes receivable (8,560) (8,393) (939) -- (8,634) (5,532) 1,013 (2,861)
Inventories (3,492) (553) (44) -- (743) 325 (2,705) (878)
Prepaid expenses and other assets 128 3,770 841 2,255 (713) 1,515
Accounts payable and accrued
expenses 2,493 8,659 939 -- 1,394 9,471 160 (812)
Asbestos-related expenses (4,263) (1,141) (4,263) (1,141)
Noncontrolling interests 651 (36) 651 (36)
Other (373) (911) (415) (28) 42 (883)
-----------------------------------------------------------------------------------------
Net cash (used) provided by
operating activities (10,687) 3,998 -- -- (9,327) 7,806 (1,360) (3,808)
Investing activities
Investments in property, plant and
equipment (1,200) (1,435) (854) (847) (346) (588)
Proceeds from sale of property 2,327 30 -- 30 2,327 -
-----------------------------------------------------------------------------------------
Net cash provided (used) by
investing activities 1,127 (1,405) -- -- (854) (817) 1,981 (588)
Financing activities
Net short-term borrowings 3,878 5,066 2,910 925 968 4,141
Payments on long-term debt (388) (339) (388) (339)
Net change in restricted cash (877) 399 (877) 399
-----------------------------------------------------------------------------------------
Net cash (used) provided by
financing activities 2,613 5,126 -- -- 2,033 1,324 580 3,802
Effect of foreign exchange rate
changes on cash 339 159 339 159
-----------------------------------------------------------------------------------------
Net cash (used) provided by
continuing operations (6,608) 7,878 (8,148) 8,313 1,540 (435)
Net cash used by discontinued
operations (50) (226) (50) (226)
Cash and cash equivalents at beginning
of period 34,691 3,959 29,710 2,169 4,981 1,790
-----------------------------------------------------------------------------------------
Cash and cash equivalents at end
of period $ 28,033 $11,611 $ -- $ -- $ 21,562 $10,482 $ 6,471 $ 1,129
=========================================================================================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and provisions for
discontinued operations) considered necessary for a fair presentation have been
included. Operating results for the three months 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 footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
The consolidated balance sheet at December 31, 2004 has been derived from the
audited financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidating condensed
financial statements have been reclassified to conform to the current period's
presentations.
During 2003, the Company decided to discontinue the operations of Janus Flooring
Corporation ("Janus"), a manufacturer of pre-finished hardwood flooring, and
sell the related assets. Historical financial results have been restated to
reflect the classification of Janus as a discontinued operation in accordance
with the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets. Results of Janus, including charges resulting from the
shutdown, are being reported as a discontinued operation.
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") and two of its
subsidiaries filed voluntary petitions commencing cases for reorganization
relief under Chapter 11 of the Bankruptcy Code on December 31, 2003. The
accompanying consolidating condensed financial statements include the results
for Congoleum for all periods presented. ABI continues to own a majority of the
voting stock of Congoleum. As a result, the Company expects to continue to
control Congoleum while it is in reorganization proceedings. In January 2004,
Congoleum filed a pre-packaged plan
7
Note A - Basis of Presentation (continued)
of reorganization and disclosure statement with the Bankruptcy Court. On
November 8, 2004, Congoleum filed a modified plan of reorganization, disclosure
statement and related documents with the Bankruptcy Court reflecting the result
of further negotiations with representatives of the Asbestos 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 forebear 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 July 19, 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 Congoleum will receive the acceptances necessary for confirmation of the
proposed amended plan of reorganization, that the date the Bankruptcy Court will
consider approval of the amended plan disclosure statement and voting procedures
will not be delayed or that such approval will be received in a timely fashion,
that the proposed amended plan will not be modified further, that the Bankruptcy
Court will confirm and approve 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.
8
Note A - Basis of Presentation (continued)
On May 12, 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), 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.
Unless the context otherwise provides, references in these Notes to Unaudited
Consolidating Condensed Financial Statements to the proposed plan, amended plan
or similar language refers to the version of the Congoleum plan of
reorganization that Congoleum has indicated it anticipates filing with the
Bankruptcy Court prior to the status conference scheduled for July 19, 2005.
The proposed amended plan of reorganization, if confirmed, would leave
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against Congoleum. 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 a Plan Trust that would fund
the settlement of all pending and future asbestos claims and protect Congoleum
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 Congoleum to pay
trade creditors in the ordinary course of business. Congoleum 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, Congoleum has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through the Plan Trust established under Section 524(g) of the
Bankruptcy Code. Congoleum recorded a charge of $17.3 million in the fourth
quarter of 2002, an additional $3.7 million in the fourth quarter of 2003 and a
further $5.0 million in the fourth quarter of 2004 to provide for the estimated
minimum costs of completing its reorganization. Actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing the plan
of reorganization could be materially higher.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J of the Notes to Unaudited
Consolidating Condensed Financial Statements. There can be no assurance that
Congoleum 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 Congoleum 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 Congoleum will be subject to numerous
conditions, approvals and other requirements, including Bankruptcy Court
approvals, and there
9
Note A - Basis of Presentation (continued)
can be no assurance that such conditions, approvals and other requirements will
be satisfied or obtained. Delays in getting Congoleum's amended plan of
reorganization approved by the Bankruptcy Court could result in a proceeding
that takes longer and is more costly to Congoleum and the Company than Congoleum
and the Company have estimated.
Although there can be no assurances that the plan will not be modified again or
that Congoleum will obtain the necessary acceptances and approvals required for
confirmation of the plan, the terms of the plan anticipate no changes in equity
ownership of Congoleum upon emergence from reorganization. Accordingly, the
Company has elected to continue to consolidate the financial statements of
Congoleum in its consolidated results because it believes that is the
appropriate presentation given its anticipated continuing control of Congoleum.
However, the accompanying financial statements also present the details of
consolidation to separately show the financial condition, operating results and
cash flows of ABI (excluding Congoleum and its wholly owned subsidiaries) and
Congoleum and its wholly owned subsidiaries, which may be more meaningful for
certain analyses.
The financial statements of Congoleum have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code").
The American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
31, 2003. Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy
Code are required to segregate pre-petition liabilities that are subject to
compromise and report them separately on the balance sheet. Liabilities that may
be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Liabilities for asbestos claims are recorded based upon the minimum amount
Congoleum expects to spend for its contribution to, and costs to settle asbestos
liabilities through, a plan trust established under Section 524(g) of the
Bankruptcy Code. Obligations arising post-petition, and pre-petition obligations
that are secured or that the Bankruptcy Court has authorized Congoleum to pay,
are not classified as liabilities subject to compromise. Other pre-petition
claims (which would be classified as liabilities subject to compromise) may
arise due to the rejection by Congoleum of executory contracts or unexpired
leases pursuant to the Bankruptcy Code, or as a result of the allowance by the
Bankruptcy Court of contingent or disputed claims.
10
Note B - 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 ("SFAS No. 123"), 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.
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 SFAS No. 123.
A reconciliation of consolidated net income (loss), as reported, to pro forma
consolidated net income (loss) including compensation expense for the Company's
and Congoleum's stock-based plans as calculated based on the fair value at the
grant dates for awards made under these plans in accordance with the provisions
of SFAS 123 as amended by SFAS 148, as well as a comparison of as reported and
pro forma basic and diluted EPS follows (in thousands, except per share data):
Three Months Ended
March 31,
2005 2004
---------- ----------
Net income (loss):
As reported $ 624 $ (2,025)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (97) (54)
---------- ----------
Pro forma $ 527 $ (2,079)
========== ==========
Net income (loss) per share:
As reported $ 0.18 $ (0.59)
Pro forma compensation expense (0.03) (0.01)
---------- ----------
Pro forma $ 0.15 $ (0.60)
========== ==========
11
Note C - Inventories
Inventories at March 31, 2005 and December 31, 2004 consisted of the following
(in thousands):
March 31, December 31,
2005 2004
--------- ------------
Finished goods $54,259 $54,597
Work-in-process 10,637 9,207
Raw materials and supplies 14,335 12,232
--------- ---------
$79,231 $76,036
========= =========
Note D - Sale of Property
In January 2005, the Company completed the sale of a warehouse building and land
located in Tullahoma, Tennessee. The building and land were owned by Tullahoma
Properties, L.L.C. ("Tullahoma Properties"), a subsidiary in which ABI owns a
62.5% interest. The building was previously leased to a third party, and upon
termination of the lease in 2003, Tullahoma Properties listed the property for
sale. The building and land were sold for $2.5 million in cash and a gain of
approximately $2.3 million was recognized and included in other income in the
first quarter. After taxes and non-controlling interest, the increase in first
quarter net income as a result of the sale was $887,000 or $0.26 per share.
Note E - Accrued Expenses
Accrued Expenses at March 31, 2005 and December 31, 2004 consisted of the
following (in thousands):
March 31, December 31,
2005 2004
---------- ------------
Accrued advertising and sales
promotions $22,729 $24,260
Employee compensation and
related benefits 8,830 9,138
Interest 182 191
Environmental matters 1,000 1,000
Royalties 860 1,118
Taxes payable 3,096 3,709
Other 5,428 9,189
--------- ---------
$42,125 $48,605
========= =========
See Note G for Liabilities Subject to Compromise.
12
Note F - Other Liabilities
Other Liabilities at March 31, 2005 and December 31, 2004 consisted of the
following (in thousands):
March 31, December 31,
2005 2004
---------- ------------
Pension benefits $ 2,644 $ 2,615
Environmental remediation and
product related liabilities 4,680 4,680
Deferred income taxes 16,531 16,531
Other 1,407 1,411
--------- ---------
$25,262 $25,237
========= =========
See Note G for Liabilities Subject to Compromise.
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J to the Unaudited
Consolidating Condensed Financial Statements), pursuant to SOP 90-7, Congoleum
is required to segregate pre-petition liabilities that are subject to compromise
and report them separately on the consolidated balance sheet. Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of Congoleum's pre-petition debt is recorded at face value and
is classified within liabilities subject to compromise. In addition, Congoleum's
accrued but unpaid interest expense on its 8 5/8% Senior Notes Due 2008 is also
recorded in liabilities subject to compromise. See Notes A and J to the
Unaudited Consolidating Condensed Financial Statements for further discussion of
Congoleum's asbestos liability.
Liabilities subject to compromise were 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
--------- ---------
137,089 137,290
Elimination - Payable to American Biltrite (186) (186)
--------- ---------
136,903 137,104
--------- ---------
Total liabilities subject to compromise $ 153,529 $ 151,329
========= =========
13
Note G - Liabilities Subject to Compromise (continued)
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims.
Note H - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three
months ended March 31, 2005 and 2004 (in thousands):
2005 2004
-------------------- -------------------
Other Other
Pension Benefits Pension Benefits
-------- -------- -------- --------
Components of Net Periodic
Benefit Cost:
Service cost $ 586 $ 46 $ 554 $ 50
Interest cost 1,445 130 1,433 140
Expected return on plan assets (1,270) -- (1,221) --
Recognized net actuarial loss 361 15 400 11
Amortization of transition
obligation (18) -- (35) --
Amortization of prior
service cost (60) (47) (62) (116)
-------- -------- -------- --------
Net periodic benefit cost $ 1,044 $ 144 $ 1,069 $ 85
======== ======== ======== ========
14
Note H - Pension Plans (continued)
The weighted average assumptions used to determine net periodic benefit cost for
the three months ended March 31, 2005 and 2004 were as follows:
2005 2004
------------------------------ -------------------------------
Other Other
Pension Benefits Pension Benefits
----------------- --------- ------------------ ----------
Discount rate 6.10% - 6.25% 6.25% 6.25% - 6.75% 6.75%
Expected long-term return on
plan assets 7.00% - 7.50% -- 7.00% - 7.50% --
Rate of compensation increase 4.00% - 5.50% -- 4.00% - 5.50% --
Note I - Commitments and Contingencies
The Company and Congoleum are 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 and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of Congoleum's owned and previously owned
facilities. The contingencies also include claims for personal injury and/or
property damage. The exact amount of such future cost and timing of payments are
indeterminable due to such unknown factors as the magnitude of cleanup costs,
the timing and extent of the remedial actions that may be required, the
determination of the Company's and Congoleum's liability in proportion to other
potentially responsible parties, and the extent to which costs may be
recoverable from insurance. The Company and Congoleum have recorded provisions
in the financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company and Congoleum
believe their 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 and
Congoleum's assumptions. Although the effect of future government regulation
could have a significant effect on the Company's and Congoleum's costs, the
Company and Congoleum are 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 their customers.
Estimated insurance recoveries related to these liabilities are reflected in
other non-current assets.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted to
reflect such revisions and progress.
15
Note I - Commitments and Contingencies (continued)
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's consolidated balance sheet. Due
to the relative magnitude and wide range of estimates of these liabilities and
the fact that recourse related to these liabilities is generally limited to
Congoleum, these matters are discussed separately following matters for which
ABI has actual or potential liability. However, since ABI includes Congoleum in
ABI's consolidating financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidating financial
statements.
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,772 pending claims involving
approximately 2,881 individuals as of March 31, 2005. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Three Months
Ended Year Ended
March 31, December 31,
2005 2004
------------ -----------
Beginning claims 1,838 1,954
New claims 210 678
Settlements (5) (20)
Dismissals (271) (774)
---------- ----------
Ending claims 1,772 1,838
========== ==========
The total indemnity costs incurred to settle claims during the three months
ended March 31, 2005 and twelve months ended December 31, 2004 were $188,000 and
$1,320,000, respectively, all of which were paid by ABI's insurance carriers
pursuant to ABI's relevant insurance policies, as were the related defense
costs. The average indemnity cost per resolved claim was approximately $700 for
the three months ended March 31, 2005 and $2,000 for the year ended December 31,
2004.
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.
16
Note I - Commitments and Contingencies (continued)
The Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum), based upon a strategy to actively defend or seek settlement
for those claims in the normal course of business. Factors such as recent and
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. In 2004, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability for
resolving present and possible future asbestos claims. At March 31, 2005 and
December 31, 2004, the estimated range of liability for settlement of current
claims pending and claims anticipated to be filed through 2010 was $7.5 million
to $19.4 million. The Company believes no amount within this range is more
likely than any other, and accordingly has recorded the minimum liability
estimate of $7.5 million in its consolidated financial statements. The Company
also believes that, based on this minimum liability estimate, the corresponding
amount of insurance probable of recovery is $7.5 million at March 31, 2005 and
December 31, 2004, which has been included in other assets. Receivables for
expected insurance recoveries are recorded if the related carriers are solvent
and paying claims under a reservation of rights or under an obligation pursuant
to coverage in place or a settlement agreement. Two insurance carriers account
for 70% and 25% of the $7.5 million deemed probable of recovery. The estimated
liabilities and insurance recovery amounts were based on currently known facts
and a number of assumptions. However, projecting future events, such as the
number of new claims to be filed each year, the average cost of disposing of
each such claim, and the continuing solvency of various insurance companies, as
well as numerous uncertainties surrounding asbestos legislation in the United
States, could cause the actual liability and insurance recoveries for the
Company to be significantly higher or lower than those projected or recorded.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and proposed plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a five year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that resolution of its asbestos related liabilities
resulting from Congoleum's anticipated plan will be limited to liabilities
derivative of claims asserted against Congoleum as may be afforded under Section
524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2004 Annual Report on Form 10-K that it has
been named as a Potentially Responsible Party ("PRP") within the meaning of the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended ("CERCLA"), with respect to four sites located in three separate states.
ABI also reported that it is potentially responsible for response and
remediation costs with respect to three state-supervised sites. There have been
no material developments relating to these sites during the three month period
ended March 31, 2005.
17
Note I - Commitments and Contingencies (continued)
In 1993, a lawsuit was brought by Olin Corporation ("Olin"), the present owner
of a former chemical plant site in Wilmington, Massachusetts (the "Olin Site"),
which alleged that ABI and three other named defendants were liable for a
portion of the site's soil and groundwater response and remediation costs at the
site. A wholly-owned subsidiary of ABI owned and operated the Wilmington plant
from 1959 to 1964, and for approximately one month during 1964, American
Biltrite Inc. held title to the property directly.
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus pay an annual reimbursement of $100,000 for Olin's
internal costs as long as Olin is actively working on remediating the site.
Under an agreement between ABI and TBC, TBC is liable for 37.5% of the amounts
due under the settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2005 will be approximately $6.4 million. For costs
beyond 2005, ABI has estimated the range to be between $20.0 million and $59.0
million. As of March 31, 2005, ABI has estimated its potential liability to Olin
to be in the range of $4.4 million to $13.8 million after allocation for Olin's
internal costs but before any recoveries from insurance and TBC.
The State of Maine Department of Environmental Protection ("MEDEP") has put the
present owner of a former ABI plant on notice to clean up a dumpsite (the "Maine
Site") where there is exposed asbestos from sheet vinyl waste along with other
hazardous substances. ABI is reviewing the condition of the site and its
potential liability for its share of any clean-up costs. ABI believes, at this
time, that the cost of site investigation, remediation, maintenance and
monitoring at the site will be approximately $1 million. ABI has not yet entered
a final cost sharing agreement with the current owner. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of the costs incurred by ABI at
this site.
The Environmental Protection Agency ("EPA") has put the same former owner of the
Maine Site on notice to clean up a parcel of land (the "Maine Parcel") in the
same town of the Maine Site. The parcel of land is alleged to contain PCB's in
the soil. In May 2005, after discussions with the MEDEP, the EPA concluded that
the site should be returned to the MEDEP for oversight of the remediation work.
ABI is reviewing the condition of the site and its potential liability for its
share of any clean-up costs, as well as the potential availability of insurance
coverage for such costs. ABI cannot determine at this time the cost of site
investigation, remediation, maintenance and monitoring at the site. ABI has not
yet entered a cost sharing agreement with the former owner. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of costs incurred by ABI at this
site.
18
Note I - Commitments and Contingencies (continued)
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the three state supervised
sites, the Olin Site, the Maine Site and the Maine Parcel. An agreement was
executed by ABI and its carriers regarding the payment of the defense costs for
the Olin Site. ABI has reached agreements with three of its insurance carriers
whereby the carriers have reimbursed the Company $1.9 million for past and
current environmental claims. One carrier has also agreed to reimburse the
Company for 2.5% of the Company's liabilities regarding future environmental
expenses related to the Olin Site, $50,000 of which was reimbursed through March
31, 2005 and which reimbursement was shared 37.5% with TBC pursuant to the
Company's agreement with TBC. ABI and its insurance carriers continue to discuss
ABI's remaining demands for insurance coverage for these sites. As of March 31,
2005, the Company has accrued $5.7 million for ABI's estimable and probable
amounts for environmental-related contingencies described above. The Company has
also recorded a receivable of $2.1 million for ABI's estimable and probable
recoveries for the contingencies described above.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order from the New Jersey
Department of Environmental Protection for any environmental remediation the
state may require at that location. Pursuant to the contribution in 1993 of the
Company's former tile division to Congoleum, Congoleum assumed liability for the
cost of cleaning up the site. Congoleum has established a remediation trust fund
of $100,000 as financial assurance for certain remediation funding obligations.
The Company remains contingently liable in the event that Congoleum fails to
perform or fund any required remediation relating to this site.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations and cash flows of the
Company.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary case under Chapter 11
of the Bankruptcy Code. See Note J - "Congoleum Asbestos Liabilities and
Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability in connection with those other sites depends on
many factors, including the volume of material contributed to the site by
Congoleum, the number of
19
Note I - Commitments and Contingencies (continued)
other PRP's and their financial viability, the remediation methods and
technology to be used and the extent to which costs may be recoverable by
Congoleum from relevant insurance policies. However, under CERCLA, and certain
other laws, as a PRP, Congoleum can be held jointly and severally liable for all
environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 81 companies, substantially all of which are large, financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater treatment system was installed thereafter.
The 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 estimated that future costs of
the remedy recently selected by the 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 Congoleum.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100,000 as financial
assurance for certain remediation funding obligations. Estimated total clean-up
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, $300,000 was included in current liabilities subject to
compromise and $1.4 million was included in non-current liabilities subject to
compromise as of March 31, 2005 and December 31, 2004.
At March 31, 2005 and December 31, 2004, Congoleum had recorded a total of $4.6
million for estimated environmental liabilities and $2.1 million for related
insurance recoveries. Receivables for expected insurance recoveries are recorded
if the related carriers are solvent and paying claims under a reservation of
rights or under an obligation pursuant to coverage in place or a settlement
agreement. Substantially all of Congoleum's recorded insurance asset for
environmental matters is collectible from a single carrier.
Congoleum 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 Congoleum'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 Congoleum.
20
Note I - Commitments and Contingencies (continued)
Other
In addition to the matters referenced above and in Note J, in the ordinary
course of their businesses, the Company and Congoleum become involved in
lawsuits, administrative proceedings, product liability 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.
Note J - Congoleum Asbestos Liabilities and Reorganization
On December 31, 2003, Congoleum and two of its subsidiaries each filed their
respective voluntary petitions commencing cases for reorganization relief under
Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for
the District of New Jersey. These Chapter 11 cases are being jointly
administered as Case No. 03-51524 (KCF), styled In re Congoleum Corporation, et
al., and were commenced in order to resolve Congoleum's asbestos-related
liabilities and any future asbestos-related liability that might be asserted
against Congoleum. During 2003, Congoleum obtained the asbestos personal injury
claimant votes necessary for approval of a proposed pre-packaged Chapter 11 plan
of reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court.
In November 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. Congoleum had solicited and received the acceptances necessary
for confirmation of its plan as constituted at that time.
In April 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. Congoleum anticipates that it will
submit its amended plan to the Bankruptcy Court prior to a status conference
scheduled for July 19, 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 Congoleum will receive the
acceptances necessary for confirmation of the proposed amended plan of
reorganization, that the date the Bankruptcy Court will consider approval of the
amended plan disclosure statement and voting procedures will not be delayed or
that such approval will be received in a timely fashion, that the proposed
amended plan will not be modified further, that the Bankruptcy Court will
confirm and approve the amended plan, or that the amended plan, if confirmed,
will become effective.
21
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
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.
On May 12, 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), 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.
The proposed amended plan, if confirmed, would leave most of Congoleum's
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against Congoleum. The proposed amended plan of reorganization
would provide for, among other things, an assignment of, or grant a security
interest in, certain rights in, and proceeds of, Congoleum's applicable
insurance to a plan trust established under Section 524(g) of the Bankruptcy
Code that would fund distributions to pending and future asbestos claimants and
provide for the issuance of an injunction that would protect Congoleum from all
future asbestos-related litigation and liabilities by channeling all current and
future asbestos claims to the plan trust. Congoleum's general unsecured
creditors would be unimpaired under the plan.
ABI and Congoleum expect to contribute, among other things, to a plan trust that
would be established upon confirmation of Congoleum's Chapter 11 reorganization
(the "Plan Trust") $250 thousand in cash from ABI and a note from Congoleum (the
"Congoleum Note") in an initial aggregate principal amount of approximately $2.7
million with payment of such note secured by a pledge by ABI of both the common
stock of Congoleum that it owns as well as certain of its rights to receive
certain indemnity payments from Congoleum. The Congoleum Note is expected to be
subject to future increase in an amount equal to the amount by which 51% of the
equity value of Congoleum as of the last trading day of the 90 consecutive
trading day period commencing on the first anniversary of the effective date of
Congoleum's confirmed Chapter 11 plan of reorganization exceeds approximately
$2.7 million. This adjustment amount could result in the principal amount of the
note increasing materially. The adjusted principal amount of the note would be
effective as of the measurement date of the adjustment. ABI does not expect that
the Congoleum Note would have a material adverse effect on ABI's liquidity or
capital resources.
22
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
The proposed plan also provides for a possible additional contribution by ABI to
the Plan Trust in the event ABI sells its interest in Congoleum before the
fourth anniversary of the effective date of Congoleum's confirmed Chapter 11
plan of reorganization. The expected amount of any additional contribution by
ABI would be equal to 50% of any amount by which 51% of the equity value of
Congoleum implied by ABI's sale of its interest in Congoleum exceeds the
aggregate principal amount of the Congoleum Note outstanding as of the first
anniversary of the effective date of Congoleum's confirmed Chapter 11 plan of
reorganization, after taking into account any increase in the principal amount
of the Congoleum Note as a result of the remeasurement of the principal amount
on such first anniversary.
As part of Congoleum'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
Congoleum, 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. Under the proposed amended plan of reorganization, any rights of
indemnity ABI may have (under the Joint Venture Agreement, entered into in 1992,
as to which both Congoleum and ABI are parties) against Congoleum are prohibited
until after any amounts due and payable to the Plan Trust under the Congoleum
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
Congoleum's obligations under the Congoleum Note until released from such escrow
and paid to ABI.
While Congoleum believes its proposed amended plan is feasible and should be
confirmed by the Bankruptcy Court and is in the best interest of all Congoleum's
constituents, there are sufficient risks and uncertainties such that no
assurances of the outcome of Congoleum's Chapter 11 case can be given. Congoleum
expects that its remaining costs to confirm and effect its proposed plan,
consisting principally of legal and advisory fees and contributions to the plan
trust to be established upon confirmation of the plan will be approximately $6.9
million at a minimum and could be materially higher.
23
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three
months ended March 31, 2005 and 2004 (in thousands):
Three Months Ended
March 31,
2005 2004
-------- --------
Net income (loss) $ 624 $(2,025)
Foreign currency translation adjustments (192) (254)
-------- --------
Total comprehensive income (loss) $ 432 $(2,279)
======== ========
Note L - Earnings (Loss) Per Share
Basic and diluted earnings per share are computed in accordance with FASB
Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 requires both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common equivalent shares outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings, which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape products
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of the Company's majority-owned subsidiary K&M
Associates L.P., a national costume jewelry supplier to mass merchandisers and
department stores. The Company's Canadian division produces flooring, rubber and
other industrial products.
24
Note M - Industry Segments (continued)
Net sales by segment for the three months ended March 31, 2005 and 2004 were as
follows (in thousands):
2005 2004
--------- --------
Net sales to external customers:
Flooring products $ 57,682 $ 51,957
Tape products 22,599 21,018
Jewelry 15,888 15,754
Canadian division 11,255 10,686
--------- --------
Total net sales to external customers 107,424 99,415
Intersegment net sales:
Flooring products -- 51
Tape products 20 17
Jewelry -- --
Canadian division 1,184 1,187
--------- --------
Total intersegment net sales 1,204 1,255
Reconciling items
Intersegment net sales (1,204) (1,255)
--------- --------
Total consolidated net sales $ 107,424 $ 99,415
========= ========
Segment profit or loss is before income tax expense or benefit. Profit (loss) by
segment for the three months ended March 31, 2005 and 2004 was as follows (in
thousands):
2005 2004
------- -------
Segment profit (loss)
Flooring products $ (352) $ (435)
Tape products 31 (198)
Jewelry 625 (714)
Canadian division (249) (451)
------- -------
Total segment profit (loss) 55 (1,798)
------- -------
Reconciling items
Corporate items 2,026 (1,004)
Intercompany profit (loss) 44 106
------- -------
Total consolidated income (loss) before
income taxes and other items $ 2,125 $(2,696)
======= =======
Corporate items of $2.0 million for the three months ended March 31, 2005
include a gain of $2.3 million from the sale of the Tullahoma property (see Note
D).
25
Note M - Industry Segments (continued)
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
March 31, December 31,
2005 2004
----------- -----------
Segment assets
Flooring products $ 214,126 $ 212,882
Tape products 60,876 51,788
Jewelry 33,544 37,158
Canadian division 40,645 39,953
----------- -----------
Total segment assets 349,191 341,781
Reconciling items
Assets of discontinued operation 2,932 2,952
Corporate items 27,312 22,577
Intersegment accounts receivable (19,537) (11,558)
Intersegment profit in inventory (237) (281)
Intersegment other asset (186) (186)
----------- -----------
Total consolidated assets $ 359,475 $ 355,285
=========== ===========
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's (and
its majority-owned subsidiary Congoleum's) expectations, as of the date of this
report, of future events and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are cautioned
not to place undue reliance on any forward-looking statements. Factors that
could cause or contribute to the Company's actual results differing from its
expectations include those factors discussed elsewhere in this report, including
in the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 and in the Company's other filings with the Securities and
Exchange Commission.
On December 31, 2003, the Company's subsidiary Congoleum and two of Congoleum's
subsidiaries each filed their respective voluntary petitions commencing cases
for reorganization relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of New Jersey. These Chapter 11 cases
are being jointly administered as Case No. 03-51524 (KCF), styled In re
Congoleum Corporation, et al., to resolve claims that have been or might in the
future be asserted against Congoleum related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization, and in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court.
On November 8, 2004, Congoleum filed a modified plan of reorganization,
disclosure statement 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 forebear 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 Congoleum's plan of
27
reorganization (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 July 19,
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 Congoleum will receive the acceptances necessary for
confirmation of the proposed amended plan of reorganization, that the date the
Bankruptcy Court will consider approval of the amended plan disclosure statement
and voting procedures will not be delayed or that such approval will be received
in a timely fashion, that the proposed amended plan will not be modified
further, that the Bankruptcy Court will confirm and approve 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.
On May 12, 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), 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.
Unless the context otherwise provides, references in this report to the proposed
plan, amended plan or similar language refers to the version of the Congoleum
plan of reorganization that Congoleum has indicated it anticipates filing with
the Bankruptcy Court prior to the status conference scheduled for July 19, 2005.
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. As discussed above, pursuant to the agreement in principle
reached by Congoleum with representatives of the Asbestos Claimants' Committee
and the Future Claimants' Representative in April 2005, under Congoleum's
proposed amended plan of reorganization, asbestos claimants with claims settled
28
under the Claimant Agreement would agree to forego the security interest they
were granted pursuant to the Claimant Agreement 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. 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. The Company expects
that any claims subject to the Claimant Agreement that are unsatisfied as of the
confirmation of the plan of reorganization by the Bankruptcy Court would be
channeled to the Plan Trust.
The proposed amended plan and Collateral Trust Agreement, as modified, will
obligate Congoleum, together with the Plan Trust, to indemnify certain asbestos
claimant representatives for all costs and liabilities (including attorneys'
fees) relating to the negotiation of the modification of the plan and the
Collateral Trust. Congoleum's indemnification obligations in this regard are
capped under the modified plan and plan trust agreement at $3 million. In
addition, the plan modifications further obligate Congoleum to fund any actual
costs in excess of $2 million incurred by such asbestos claimant representatives
in connection with the confirmation of the plan, subject to Bankruptcy Court
approval of those costs.
Based on its reorganization strategy, which included Congoleum settling certain
asbestos claims prior to commencing its Chapter 11 case, Congoleum has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. Congoleum recorded charges of $17.3 million in the fourth
quarter of 2002, an additional charge of $3.7 million in the fourth quarter of
2003, and a further charge of $5.0 million in the fourth quarter of 2004 to
increase its recorded liability to the estimated minimum cost to complete its
plan of reorganization. Congoleum expects that its remaining costs to confirm
and effect its proposed plan, consisting principally of legal and advisory fees
and contributions to the plan trust to be established upon confirmation of the
plan will be approximately $7.2 million at a minimum. Actual amounts that will
be contributed to the plan trust and costs for obtaining confirmation of and
implementing the plan of reorganization could be materially higher, which could
have a material adverse effect on ABI's and Congoleum's consolidated results of
operations as well as Congoleum's financial position.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Results of Janus, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidating financial statements,
which have been prepared in accordance with accounting principles generally
29
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the date of the Company's financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that its most critical accounting policies, upon which its financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, filed with the Securities and Exchange
Commission. There have been no material changes of what the Company considers to
be its critical accounting policies or the disclosure the Company provided
regarding those policies in that Form 10-K.
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended March 31
2005 2004
-------- -------
(In thousands of dollars)
Net sales $ 49,742 $47,458
Cost of sales 34,931 34,496
-------- -------
Gross profit 14,811 29.8% 12,962 27.3%
Selling, general & administrative expenses 13,791 27.7% 14,364 30.3%
-------- -------
Operating income (loss) 1,020 (1,402)
Interest expense, net (719) (716)
Other income (expense), net 2,132 (143)
-------- -------
Income (loss) before taxes and other items 2,433 (2,261)
Provision for (benefit from) income taxes 971 (797)
Noncontrolling interests (474) 36
-------- -------
Income (loss) from continuing operations $ 988 $(1,428)
======== =======
Net sales in the first quarter of 2005 were $49.7 million compared to $47.5
million in the first quarter of 2004, an increase of $2.2 million or 4.8%. This
increase was due to higher net sales at all divisions. Tape and the Canadian
divisions had increases in net sales of $1.6 million (7.5%) and $0.6 million
(5.3%), respectively, while K&M had a modest increase of approximately $100
thousand. The increase in net sales at the Tape division was driven by higher
sales in Europe and Asia with new customers and higher sales to existing
customers, including $0.6 million from price increases. The increase in Canadian
division net sales was due to the foreign exchange impact of a stronger Canadian
dollar.
30
Gross profit increased from 27.3% for the first quarter of 2004 to 29.8% for the
first quarter of 2005. Gross profit at the Tape division improved by 0.8 points
as a result of additional volume, better manufacturing performance, and price
increases, which helped offset increases in raw material costs. Gross profit at
the Canadian division also improved by 0.8 points because of improved product
mix and price increases, offset by increases in raw material costs. Gross profit
at K&M increased by 6.9 points as a result of lower fixture costs and a more
profitable sales mix, partly offset by price increases by suppliers in China.
The Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative expenses. Some companies also record such
costs in operating expenses while others record them in cost of goods sold.
Consequently, the Company's gross profit margins may not be comparable to other
companies. Had the Company recorded these expenses in cost of sales, the gross
profit margins for the quarter ended March 31, 2005 and 2004 would have been
29.3% and 26.8%, respectively.
Selling, general and administrative ("SG&A") expenses in the first quarter of
2005 decreased by $573 thousand compared to the first quarter of 2004. As a
percentage of net sales, SG&A decreased from 30.3% to 27.7%. The decrease in
expense was due to lower SG&A costs at the Corporate level ($650 thousand) as a
result of lower compensation costs, professional fees and interest expense.
Interest income and expense for the first quarter of 2005 were comparable to the
same period last year. Higher borrowings under the Canadian line of credit were
offset by lower borrowings at the Corporate level.
Other income includes a gain of $2.3 million recognized on the sale of a
warehouse. The impact of this sale on the Company's net income after taxes and
non-controlling interest was $887 thousand, or $0.26 per share.
The effective tax rate was 40% in the first quarter of 2005 compared to 35% in
the first quarter of 2004. During the first quarter of 2004, the Canadian
division recorded a higher loss and a higher tax benefit (effective rate of
36%). For the first quarter of 2005, the Canadian division lowered its effective
rate to 30% because its overall effective rate for all of 2004 was 30%.
The income from continuing operations in the first quarter of 2005 was $1.0
million compared to a loss from continuing operations of $1.4 million in the
corresponding prior year period. Excluding the net impact of the sale of the
warehouse, the income from continuing operations for the first quarter of 2005
was approximately $100 thousand. The change from the same period in the prior
year is due to the increase in gross profit coupled with the decrease in SG&A
expenses.
31
Congoleum
Three Months Ended March 31
2005 2004
-------- -------
(In thousands of dollars)
Net sales $ 57,630 $52,000
Cost of sales 43,969 38,449
-------- -------
Gross profit 13,661 23.7% 13,551 26.1%
Selling, general & administrative
expenses 11,733 20.4% 11,985 23.0%
-------- -------
Operating income 1,928 1,566
Interest expense, net (2,500) (2,245)
Other income, net 220 244
-------- -------
Loss before taxes (352) (435)
Provision for income taxes -- --
-------- -------
Net loss $ (352) $(435)
======== =======
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 (7.0%), 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 48.0%).
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.
32
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, increased $1.5
million in the first three months of 2005 to $6.5 million. Cash used by
operating activities, principally for seasonal working capital increases, were
financed by income earned during the quarter and with short term borrowings.
Working capital at March 31, 2005 was $18.6 million, up from $16.2 million at
December 31, 2004. The ratio of current assets to current liabilities at March
31, 2005 was 1.31 compared to 1.27 at December 31, 2004.
Capital expenditures in the first three months of 2005 were $0.3 million
compared to $0.6 million for the first three months of 2004. It is anticipated
that capital spending for the full year 2005 will be between $3 million and $4
million.
During the quarter, the Company sold a warehouse for $2.5 million, resulting in
net cash proceeds of $2.3 million. The warehouse was owned by Tullahoma
Properties L.L.C., a subsidiary in which the Company owns a 62.5% interest.
The Company has recorded provisions which it believes are adequate for
environmental remediation and non-asbestos product-related liabilities,
including provisions for testing and potential remediation of conditions at its
own facilities. While the Company believes its estimate of the future amount of
these liabilities is reasonable, that most of such amounts will be paid over a
period of three to ten years and that the Company expects to have sufficient
resources to fund such amounts, the actual timing and amount of such payments
may differ significantly from the Company's assumptions. Although the effect of
future government regulation could have a significant effect on the Company's
costs, the Company is not aware of any pending legislation or regulation
relating to these matters that would have a material adverse effect on its
consolidated results of operations or financial position. There can be no
assurances that such costs could be passed along to its customers.
American Biltrite Inc. has two principal debt agreements that it is party to as
borrower. The first of those agreements is a credit agreement (the "Credit
Facility") with Bank of America (as successor to Fleet National Bank, "BofA").
The Credit Facility provides the Company with a revolving credit facility of up
to $20 million, including up to $5 million for the issuance of letters of
credit. Amounts that the Company can borrow under the Credit Facility are
subject to reduction from time to time if the borrowing base is less than $20
million. The formula used for determining the borrowing base is based upon
inventory, receivables and fixed assets of the Company and certain of its
subsidiaries, reduced by amounts outstanding under the Note Agreement (as
defined below). Interest is payable on amounts borrowed under the Credit
Facility at rates which generally vary between a LIBOR based rate plus 1.0% to a
LIBOR based rate plus 2.75% depending on the Company's leverage ratio, as
determined under the Credit Facility. Certain domestic subsidiaries of the
Company have agreed to guarantee the Company's obligations under the Credit
Facility. The Credit Facility expires on January 1, 2006.
33
The second principal debt agreement that American Biltrite Inc. is a party to
(the "Note Agreement") is with The Prudential Insurance Company of America
("Prudential"). Under the Note Agreement, the Company previously issued notes in
an aggregate principal amount of $20 million (the "Series A Notes"). The Series
A Notes generally bear interest at a rate of 7.91% per annum, and the Company is
obligated to pay Prudential an additional fee on each interest payment date if
the Company's and certain of its subsidiaries' ratio of debt to EBITDA, as
defined under the Note Agreement, exceeds certain levels. The amount of those
fees that may be payable by the Company varies depending on the extent the
Company's and certain of its subsidiaries' debt exceeds EBITDA, as determined
under the Note Agreement, and is capped at 2% of the outstanding principal
amount of the Series A Notes. During 2004 and for the quarter ended March 31,
2005, the Company was obligated to pay the full 2% of that fee. Principal on the
Senior A Notes is repayable in five annual installments of $4.0 million
beginning on August 28, 2006.
Both the Credit Facility and the Note Agreement contain certain covenants that
the Company must satisfy. The covenants included in the Credit Facility and the
Note Agreement include certain financial tests, restrictions on the ability of
the Company to incur additional indebtedness or to grant liens on its assets and
restrictions on the ability of the Company to pay dividends on its capital
stock. The financial tests are required to be calculated based on the Company
accounting for its majority-owned subsidiary Congoleum Corporation on the equity
method and include a maximum ratio of total liabilities to tangible net worth, a
minimum ratio of earnings before interest, taxes, depreciation and amortization
("EBITDA") less certain cash payments for taxes, debt service, and dividends to
interest expense, a minimum level of tangible net worth, a minimum ratio of
current assets to current liabilities, a requirement that there be no
consecutive quarterly losses from continuing operations, and a maximum level of
capital spending.
Pursuant to the Credit Facility and the Note Agreement, the Company and certain
of its domestic subsidiaries granted BofA and Prudential a security interest in
most of the Company's and its domestic subsidiaries' assets. The security
interest granted does not include the shares of capital stock of the Company's
majority-owned subsidiary Congoleum Corporation or the assets of Congoleum
Corporation.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. In January 2004, the Credit
Facility and the Note Agreement were amended to eliminate a participant on the
Credit Facility, reduce the credit line to $20 million, and to modify the
tangible net worth, adjusted EBITDA to interest expense and consecutive
quarterly loss covenants. Fees of $83 thousand were paid to the lenders in
connection with these amendments. In April 2004, the Credit Facility and the
Note Agreement were amended to permit American Biltrite (Canada) Ltd. (the
"Canadian Subsidiary") the ability to grant a security interest in certain
assets under a credit agreement that the Canadian Subsidiary is a party to. In
November 2004, the Credit Facility was amended to extend the term of the Credit
Facility to January 1, 2006, to modify the treatment of tax refunds in covenant
calculations, and to modify the measurement levels for the adjusted EBITDA to
interest expense and current assets to current liabilities covenants for the
remainder of the extended loan term. A fee of $50 thousand was paid in
connection with this amendment. In December 2004, a temporary waiver of the
adjusted EBITDA to interest expense covenant in the Note Agreement was obtained,
34
which waived compliance with that covenant until February 15, 2005. The
expiration date of that temporary waiver was subsequently amended and currently
is scheduled to expire on May 30, 2005. The Company is currently negotiating
modifications to financial covenants for 2005 under the Note Agreement to make
them comparable to the 2005 financial covenants in the amended Credit Facility.
While the Company has been successful in such negotiations previously and
believes it will be so again, failure to obtain such modifications or to obtain
waivers of certain existing financial covenants would likely result in the
Company failing to satisfy the financial covenants as currently comprised during
the measurement periods in 2005. Such a failure would constitute a default under
the Note Agreement.
There can be no assurance that the Company will not need to obtain additional
amendments or waivers of covenants under its debt agreements in 2005 or
subsequent years. If it fails to satisfy those covenants it will be in default
under the respective debt agreements.
Certain defaults under the Note Agreement, such as defaults resulting from
certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum), automatically cause all
amounts owing with respect to the Senior Notes then outstanding under the Note
Agreement to become immediately due and payable. A default in the payment of
principal or interest under the Senior Notes would allow each individual
noteholder to cause all amounts owed with respect to the Senior Notes held by
such holder to become immediately due and payable. In addition, with respect to
all other defaults under the Note Agreement, holders of at least 51% of the
aggregate principal amount of the Senior Notes then outstanding could cause all
amounts then owing with respect to the Senior Notes to become immediately due
and payable. The Company understands that Prudential is the only holder of the
Senior Notes and, as such, any decision to cause the acceleration of amounts
owed with respect to the Senior Notes would be made at Prudential's discretion.
Certain events of default under the Credit Facility, such as defaults resulting
from certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum) automatically terminates
BofA's obligation to make borrowings available under the Credit Facility and
causes all amounts outstanding under the Credit Facility to become immediately
due and payable. With respect to all other events of default under the Credit
Facility, BofA may terminate its obligation to make borrowings available under
the Credit Facility and cause all amounts outstanding under the Credit Facility
to become immediately due and payable.
Pursuant to the terms of the Credit Facility and the Note Agreement, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If a default occurs, BofA and Prudential could respectively
require the Company to repay all amounts outstanding under the respective debt
agreements. If a default occurs and the Company is unable to obtain a waiver
from BofA and Prudential and the Company is required to repay all amounts
outstanding under those agreements, the Company would need to obtain funding
from another source. Otherwise, the Company would likely be unable to repay
those outstanding amounts, in which case, BofA as administrative agent over the
collateral securing the amounts outstanding under the Credit Facility and the
Note Agreement, might exercise BofA's and Prudential's rights over that
35
collateral. Any default by the Company under the Credit Facility or the Note
Agreement that results in the Company being required to immediately repay
outstanding amounts under its debt agreements, and for which suitable
replacement financing is not timely obtained, would have a material adverse
effect on the Company's business, results of operations and financial condition.
As noted above, the Credit Facility and the Note Agreement restrict the
Company's ability to obtain additional financing. Moreover, since the Company
and most of its subsidiaries have already granted security interests in most of
their assets, the Company's ability to obtain any additional debt financing may
be limited. The Company currently believes that its cash flow from operations,
expected proceeds from the sale of the Janus Flooring assets and borrowings
available under its existing credit facilities will be adequate for its expected
capital expenditure, working capital and debt service needs, subject to
compliance with the covenants contained in its debt agreements and the ability
of the Company to replace or refinance its existing credit facility that is
scheduled to expire on January 1, 2006 on satisfactory terms. However, if
circumstances change, the inability of the Company to obtain any necessary
additional debt financing would likely have a material adverse effect on its
business, operations and financial condition.
Under Congoleum's proposed amended plan of reorganization, it is expected that
certain rights that the Company may have to receive indemnification for claims
under the plan of reorganization or the joint venture agreement relating to the
contribution by ABI to Congoleum in 1993 of the Company's tile division, subject
to certain exceptions, will not be paid to the Company for so long as any
obligations owed to the Plan Trust under the promissory note expected to be
contributed by Congoleum to the Plan Trust remain outstanding. Instead, those
amounts will be held in escrow by the Plan Trust and be pledged by the Company
as collateral securing Congoleum's obligations under that promissory note until
released from such escrow and paid to the Company pursuant to the terms of
Congoleum's plan of reorganization, the promissory note and the pledge agreement
expected to be entered into by the Company with regard to the collateral
expected to be pledged by the Company to secure Congoleum's obligations under
the promissory note. To the extent the amounts that are subject to that escrow
are material, that could have a material adverse effect on the Company's
liquidity and capital resources since those escrowed amounts represent amounts
that would have already been paid by the Company but not yet reimbursed to the
Company to the extent they remain in escrow.
Pursuant to the terms of Congoleum's proposed amended plan of reorganization,
ABI will also pledge the shares of Congoleum stock it owns as collateral
securing Congoleum's obligations under that promissory note expected to be
contributed by Congoleum to the Plan Trust. The original principal amount of
that note is expected to 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 Congoleum's plan of
reorganization in an amount equal to the excess, if any, of the amount by which
51% of Congoleum's market capitalization as of that date exceeds approximately
$2.7 million. This adjustment amount could result in the principal amount of the
note increasing materially. For example, if the adjustment amount were
calculated based on the excess of 51% of the equity value of Congoleum over $2.7
million during the 90 consecutive day trading period ended March 31, 2005, the
resulting adjustment amount would be approximately $21.2 million. Although the
scheduled repayment date for this note does not occur until its tenth
36
anniversary of issuance, it is expected that the terms of the note will require
Congoleum to make interest payments prior to the note's maturity date. Any
default by Congoleum under that note could have a material adverse effect on the
Company's liquidity and capital resources.
The proposed Congoleum plan of reorganization also provides for a possible
additional contribution by ABI to the Plan Trust in the event ABI sells its
interest in Congoleum during the three-year period beginning on the first
anniversary of confirmation of Congoleum's plan of reorganization. The expected
amount of any additional contribution by ABI would be equal to 50% of any amount
by which 51% of the equity value of Congoleum implied by ABI's sale of its
interest in Congoleum exceeds the aggregate principal amount of the note
contributed by Congoleum to the Plan Trust outstanding as of the measurement
date for determining whether the principal amount of that note would be
increased and after taking into account any such increase in the principal
amount.
In addition, the terms of Congoleum's plan of reorganization are expected to
provide that the Company will no longer have certain other rights to receive
indemnification under the joint venture agreement or Congoleum's plan of
reorganization for asbestos-related property damage claims. To the extent that
the Company pays material amounts for asbestos-related property damage claims
that the Company would have been entitled to be reimbursed for by Congoleum
absent the provisions of Congoleum's plan of reorganization, that could have a
material adverse effect on the Company's liquidity and capital resources.
Furthermore, to the extent that the amount of any of the Company's indemnity
claims against the Plan Trust are reduced pursuant to the distribution
procedures under Congoleum's plan of reorganization to an amount less than the
corresponding amount paid by the Company, that could have a material adverse
effect on the Company's liquidity and capital resources.
In addition, under the terms of Congoleum's plan of reorganization, ABI expects
to contribute $250 thousand in cash to the Plan Trust.
Cash requirements for capital expenditures, working capital, and debt service
are expected to be financed from operating activities and borrowings under
existing bank lines of credit. As of March 31, 2005, approximately $28.2 million
in the aggregate was available for borrowing by the Company under its bank lines
of credit, subject to the value from time to time of the collateral securing
outstanding borrowings under those lines of credit. At March 31, 2005, $8.4
million was outstanding under revolving credit lines and $0.8 million was
outstanding under letters of credit. An additional $15.2 million was available
for borrowing as of that date under the Company's revolving credit lines. The
Company believes that its cash flow from operations, expected proceeds from the
sale of the Janus assets and borrowings available under its existing bank lines
of credit will be adequate for its expected capital expenditure, working
capital, and debt service needs, subject to compliance with the covenants
contained in its debt agreements referred to above and the ability of the
Company to replace or refinance its existing credit facility that is scheduled
to expire on January 1, 2006 on satisfactory terms.
37
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's board of directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the Credit Facility, aggregate dividend
payments (since September 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Facility, earned after September 30,
2003. Under the Note Agreement, aggregate dividend payments (since December 31,
2000) generally may not exceed the sum of $6 million plus 50% of cumulative
consolidated net income (accounting for Congoleum under the equity method of
accounting), as determined under the Note Agreement, earned after December 31,
2000.
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the unaudited
condensed consolidated financial statements do not include any adjustments that
might be necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to Unaudited Consolidating Condensed Financial
Statements contained in Item 1 of this Quarterly Report on Form 10-Q, there is
substantial doubt about Congoleum's ability to continue as a going concern
unless it obtains relief from its substantial asbestos liabilities through a
successful reorganization under Chapter 11 of the Bankruptcy Code.
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003 Congoleum and two of its subsidiaries filed voluntary
petitions commencing cases for reorganization under Chapter 11 of the United
States Bankruptcy Code as part of its strategy to resolve this liability. See
Notes A and J of the Notes to Unaudited Consolidating Condensed Financial
Statements, which are contained in Item 1 of 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, Congoleum 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 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.
38
As part of Congoleum'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
Congoleum 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 Congoleum's plan of
reorganization in an amount approximately equal to the excess, if any, of the
amount by which 51% of Congoleum'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
Congoleum 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. The decrease includes accrued but unpaid interest during 2004 and 2005 of
$13.7 million. Under the terms of its revolving credit agreement, payments on
Congoleum's accounts receivable are deposited in an account assigned by
Congoleum to its lender and the funds in that account are used by the lender to
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $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. Congoleum 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
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.
39
Capital expenditures for the three months ended March 31, 2005 totaled $0.9
million. Congoleum 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. An amendment to further extend
this financing agreement through December 31, 2005 has been executed and will be
effective upon Bankruptcy Court approval. A fee of $125 thousand will be paid in
connection with this extension. 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 Congoleum to
borrow from the facility. Congoleum 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. Congoleum anticipates that its debtor-in-possession
financing facility will be replaced with a revolving credit facility on
substantially similar terms upon confirmation of its proposed amended plan of
reorganization. While Congoleum expects the facilities discussed above will
provide it with sufficient liquidity, there can be no assurances that it will
continue to be in compliance with the required covenants, that Congoleum will be
able to obtain a similar or sufficient facility upon exit from bankruptcy, or
that the debtor-in-possession facility (as extended) will be renewed prior to
that facility's expiration on December 31, 2005.
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note I of the Notes to
Unaudited Consolidating Condensed Financial Statements). These actions include
possible obligations to remove or mitigate the effects on the environment of
wastes deposited at various sites, including Superfund sites and certain of
Congoleum's owned and previously owned facilities. The contingencies also
include claims for personal injury and/or property damage. The exact amount of
such future cost and timing of payments are indeterminable due to such unknown
factors as the magnitude of cleanup costs, the timing and extent of the remedial
actions that may be required, the determination of Congoleum's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. Congoleum has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While Congoleum believes its
40
estimate of the future amount of these liabilities is reasonable, and that they
will be paid over a period of five to ten years, the timing and amount of such
payments may differ significantly from Congoleum's assumptions. Although the
effect of future government regulation could have a significant effect on
Congoleum's costs, Congoleum is not aware of any pending legislation which would
reasonably have such an effect. There can be no assurances that the costs of any
future government regulations could be passed along to 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 Congoleum.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Although Congoleum did
not generate cash from operations in the first quarter of 2005, Congoleum
anticipates that it will generate cash from operations in 2005. Congoleum
believes that net cash provided by operating activities and borrowing 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. Congoleum's
inability to obtain confirmation of the proposed amended plan in a timely manner
would have a material adverse effect on Congoleum's ability to fund its
operating, investing and financing requirements. Congoleum also anticipates it
will be able to obtain exit financing upon confirmation of its proposed 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 Congoleum to pay accrued interest on its Senior Notes (which
amounted to $16.6 million at March 31, 2005) 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
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, I and J of the Notes to Unaudited
Consolidating Condensed Financial Statements, which is included in this report,
the Company and its majority-owned subsidiary Congoleum have significant
liability and funding exposure for asbestos personal injury claims. In
connection with Congoleum's strategy for resolving its asbestos liability, in
2003, Congoleum entered into settlement agreements with various asbestos
claimants, which provides for an aggregate settlement value of at least $491
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.
Settlement of these obligations pursuant to the terms of Congoleum's proposed
amended plan is dependent on Bankruptcy Court confirmation of the plan of
reorganization, including determinations by the Bankruptcy Court that the plan
has satisfied certain criteria under the Bankruptcy Code, among other things.
41
There can be no assurance that Congoleum will be successful in obtaining
confirmation of Congoleum's proposed amended plan in a timely manner or at all.
Any alternative plan of reorganization pursued by Congoleum or confirmed by the
Bankruptcy Court could vary significantly from the description in this report.
Furthermore, the estimated costs and contributions required to confirm and to
effect the proposed amended plan of reorganization or an alternative plan could
be significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained.
As part of Congoleum's plan of reorganization, Congoleum would contribute to the
Plan Trust certain of Congoleum's rights to receive insurance proceeds for
asbestos liabilities under its applicable insurance policies. Congoleum is
currently involved in litigation with certain of its insurance carriers related
to disputed insurance coverage for asbestos-related liabilities, and certain
insurance carriers have filed various objections to Congoleum's previously filed
plan of reorganization and related matters. It is expected that these insurers
will continue to vigorously contest their obligations to provide Congoleum with
insurance coverage for Congoleum's asbestos liabilities and seek to prevent any
contribution by Congoleum of its rights to receive insurance for asbestos
matters to the Plan Trust. The first phase of the insurance coverage trial is
scheduled to begin on 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 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 constituted a breach of their duties of good faith and fair dealing
such that they are precluded from asserting that Congoleum's decision to enter
into the Claimant Agreement constitutes any breach on the part of Congoleum. The
second phase of the trial will address all coverage issues, including but not
limited to trigger and allocation. The final phase of the trial will address bad
faith punitive damages, if appropriate. Congoleum 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 affected insurance policies nor would such result preclude Congoleum from
amending the Claimant Agreement and seeking recovery under the Claimant
Agreement, as amended; moreover, Congoleum 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
Congoleum's ability to obtain approval of its plan of reorganization.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
42
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses that would likely have a material adverse effect on the
Company's financial position.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's objectives for resolving asbestos liability
include: (i) the future cost and timing of estimated asbestos liabilities and
payments and availability of insurance coverage and reimbursement from insurance
companies, which underwrote the applicable insurance policies for Congoleum and
the Company, for asbestos-related claims, (ii) costs relating to the execution
and implementation of any plan of reorganization pursued by Congoleum, (iii)
timely reaching an agreement with other creditors, or classes of creditors, that
exist or may emerge, (iv) the Company's and Congoleum's satisfaction of the
conditions and obligations under their respective outstanding debt instruments,
and amendment of those outstanding debt instruments, as necessary, to permit
Congoleum and the Company to satisfy their obligations under Congoleum's
proposed plan of reorganization, (v) the response from time-to-time of the
Company's and Congoleum's lenders, customers, suppliers and other constituencies
to the Chapter 11 process and related developments arising from the strategy to
settle asbestos liability, (vi) Congoleum'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,
(vii) timely obtaining sufficient creditor and court approval of any
reorganization plan, (viii) developments in and the outcome of insurance
coverage litigation pending in New Jersey State Court involving Congoleum and
certain insurers, and (ix) compliance with the Bankruptcy Code, including
section 524(g). In addition, in view of American Biltrite's relationships with
Congoleum, American Biltrite could be affected by Congoleum's negotiations, and
there can be no assurance as to what that impact, positive or negative, might
be. In any event, the failure of Congoleum to obtain confirmation and
consummation of its anticipated Chapter 11 plan of reorganization would have a
material adverse effect on Congoleum's business, results of operations or
financial condition and could have a material adverse effect on American
Biltrite's business, results of operations or financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan of reorganization Congoleum
may decide to pursue. To date, Congoleum has expended significant amounts
pursuant to resolving its asbestos liability relating to its proposed Chapter 11
plan of reorganization. To the extent any federal legislation is enacted which
does not credit Congoleum for amounts paid by Congoleum pursuant to its plan of
reorganization or requires the Company or Congoleum to pay significant amounts
to any national trust or otherwise, such legislation could have a material
adverse effect on the Company or Congoleum's businesses, results of operations
and financial conditions.
43
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A, I and J of the Notes to Unaudited Consolidating Condensed
Financial Statements, which are included in this report.
A substantial portion of the Company's debt must be amended or refinanced,
existing defaults under the Company's debt agreements must be permanently
effectively waived and the Company's ability to obtain additional financing may
be limited.
As of December 31, 2004, the Company did not satisfy a financial covenant under
the Note Agreement. Prudential has granted the Company a temporary waiver of any
event of default that would result from that failure to satisfy that financial
covenant as of December 31, 2004. That temporary waiver has been extended and
expires May 30, 2005. The Company is currently negotiating with Prudential for a
permanent waiver of that covenant default or an amendment to the Note Agreement
that would result in the Company not violating that financial covenant as of
December 31, 2004. While the Company believes it will be able to successfully
negotiate such a waiver or amendment, failure to do so would result in the
Company being in default of the Note Agreement.
The Company is also negotiating with Prudential for modifications to the
financial covenants for 2005 under the Note Agreement to make them comparable to
the financial covenants for 2005 in the amended Credit Facility. While the
Company has been successful in such negotiations previously and believes it will
be so again, failure to obtain such modifications or to obtain waivers of
certain existing financial covenants would result in the Company failing to
satisfy the financial covenants as currently comprised during the measurement
periods in 2005. Such a failure would constitute a default under the Note
Agreement.
Pursuant to the terms of the Note Agreement and the Credit Facility, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If such a default occurs, BofA and Prudential could
respectively require the Company to repay all amounts outstanding under the
respective debt agreements. If a default occurs and the Company is unable to
obtain a waiver from BofA and Prudential and the Company is required to repay
all amounts outstanding under those agreements, the Company would need to obtain
funding from another source. Otherwise, the Company would likely be unable to
repay those outstanding amounts, in which case, BofA as administrative agent
over the collateral securing the amounts outstanding under the Credit Facility
and the Note Agreement, might exercise BofA's and Prudential's rights over that
44
collateral. Any default by the Company under the Credit Facility or the Note
Agreement that results in the Company being required to immediately repay
outstanding amounts under its debt agreements, and for which suitable
replacement financing is not timely obtained, would have a material adverse
effect on the Company's business, results of operations and financial condition.
The Credit Facility expires on January 1, 2006. Although the Company expects
that the Credit Facility will be extended or replaced by that date, there can be
no assurances in this regard. If the Company has outstanding borrowings under
the Credit Facility at that date and the Credit Facility's term has not been
extended beyond that date, such failure would result in a breach of the Note
Agreement, which, for the reasons discussed in the preceding paragraph, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Under the terms of the Company's debt agreements, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at those facilities, in order to comply
with existing environmental laws, and those amounts may be substantial. Although
the Company and Congoleum believe that those amounts should not have a material
adverse effect on their respective financial positions, there can be no
assurance that these amounts will not have such an effect because, as a result
of environmental requirements becoming increasingly strict, neither the Company
nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies. Moreover, in addition to
potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company or Congoleum
to modify or curtail their operations, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
45
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of their raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, in part due to a fire
at a large resin plant in 2004. Although the Company and Congoleum have not
experienced any significant difficulties obtaining specialty resin, there can be
no assurances that they may not have difficulty in the future, particularly if
global supply conditions deteriorate. Raw material prices in 2004 increased
significantly and are expected to remain high in 2005 and until additional
capacity becomes available.
46
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the United States Bankruptcy Code and emerge from
bankruptcy as continuing operating companies that have shed much of their
pre-filing liabilities, those competitors could have a cost competitive
advantage over Congoleum. In addition, in order to maintain their competitive
positions, the Company and Congoleum may need to make substantial investments in
their businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
47
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 21% of the
Company's tape division's net sales for the year ended December 31, 2004. The
loss of the largest unaffiliated customer and/or two or more of the other
unaffiliated customers could have a material adverse effect on the Company's
business, results of operations or financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations, or financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors accounted for approximately 70% of
Congoleum's net sales for the year ended December 31, 2004.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 59% of its net sales for the year ended
December 31, 2004. The loss of K&M Associates L.P.'s largest customer would
likely have a material adverse effect on the Company's business, results of
operations or financial condition.
48
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to adequately perform in his current position,
could have a material adverse effect on the Company's business, results of
operations or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on their investments. The Company and Congoleum
invest primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. If market interest rates were to
increase by 10% from levels at December 31, 2004 and March 31, 2005, the fair
value of our investments as of each such respective date would decline by an
immaterial amount. The carrying amount of these investments approximates fair
value due to the short-term maturities. The substantial majority of the
Company's outstanding consolidated long-term debt as of December 31, 2004 and
March 31, 2005 consisted of indebtedness with a fixed rate of interest, which is
not subject to change based upon changes in prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe, Asia and
Central America, giving rise to exposure to market risks from changes in foreign
exchange rates. To a certain extent, foreign currency exchange rate movements
also affect the Company's competitive position, as exchange rate changes may
affect business practices and/or pricing strategies of non-U.S. based
competitors. For foreign currency exposures existing at December 31, 2004 and
March 31, 2005, a 10% unfavorable movement in currency exchange rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as of each respective date.
Under their current policies, neither the Company nor Congoleum currently use
derivative financial instruments, derivative commodity instruments or other
financial instruments to manage their exposure to changes in interest rates,
foreign currency exchange rates, commodity prices or equity prices and do not
hold any instruments for trading purposes.
49
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements is incorporated herein by
reference.
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due February 1, 2004, August 1, 2004 and
February 1, 2005 on the Senior Notes. The aggregate amount of the interest
payments that was not paid on the Senior Notes with respect to those interest
payment due dates is approximately $13.0 million. As of March 31, 2005, the
aggregate outstanding principal amount of the Senior Notes is approximately $100
million. These amounts, plus $743,000 of aggregate accrued interest on the
unpaid interest that was due on February 1, 2004, August 1, 2004 and February 1,
2005 with respect to the Senior Notes, are included in the line item
"Liabilities Subject to Compromise" in the Company's consolidated balance sheet
included in this report.
50
Item 5. Other Information
On May 12, 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), 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.
Item 6. Exhibits
Exhibit No. Description
- --------------------------------------------------------------------------
3 (1) I Restated Certificate of Incorporation
3 (2) IV By-Laws, amended and restated as of September 11, 2004
4 (1) Any instrument defining the rights of holders of
unregistered long-term debt of American Biltrite
Inc. that does not authorize the issuance of debt
securities in excess of 10 percent of the total
assets of American Biltrite Inc. and its
subsidiaries on a consolidated basis is not filed
as an exhibit to this Report. American Biltrite
Inc. agrees to furnish a copy of each such
instrument to the Securities and Exchange
Commission upon request.
4 (2) III Note Purchase and Private Shelf Agreement and
Facility Guarantee, dated as of August 28, 2001,
among American Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance Company of America
4 (3) III Amendment No. 1 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
December 31, 2002, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (4) III Amendment No. 2 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
March 31, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America
51
Exhibit No. Description
- --------------------------------------------------------------------------
4 (5) III Amendment No. 3 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of June
30, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America
4 (6) III Amendment No. 4 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
October 14, 2003, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (7) III Amendment No. 5 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
January 29, 2004, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (8) II Security Agreement, dated as of October 14, 2003,
among American Biltrite Inc., K&M Associates L.P.,
Fleet National Bank and the subsidiaries of
American Biltrite Inc. from time to time party
thereto
4 (9) II Intercreditor and Collateral Agency Agreement,
dated as of October 14, 2003, by and among Fleet
National Bank, Citizens Bank of Massachusetts, The
Prudential Insurance Company of America and the
other banks from time to time party thereto and
the Acknowledgment of and Consent and Agreement to
Intercreditor and Collateral Agency Agreement by
American Biltrite Inc., K&M Associates L.P. and
the other American Biltrite Inc. guarantor
subsidiaries
4 (10) II Guarantor Joinder Agreement, dated as of October
14, 2003, made by ABTRE, Inc., AIMPAR, Inc.,
American Biltrite Intellectual Properties, Inc.,
Ideal Tape Co., Inc., Majestic Jewelry, Inc.,
Ocean State Jewelry, Inc. and 425 Dexter
Associates, L.P. in favor of The Prudential
Insurance Company
4 (11) IV Indenture, dated as of August 3, 1998, by and
between Congoleum Corporation and First Union
National Bank, as trustee
52
Exhibit No. Description
- --------------------------------------------------------------------------
4 (12) IV First Supplemental Indenture, dated as of March
28, 2003, between Congoleum Corporation and
Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee
4 (13) IV Second Supplemental Indenture, dated as of August
7, 2003, between Congoleum Corporation and
Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Principal Financial Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
32 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
---------------------------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. (1-4773)
II Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on August 14, 2003.
III Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on October 17, 2003.
IV Incorporated by reference to the exhibits of the Company's Annual
Report on Form 10-K filed for the year ended December 31, 2004.
53
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: May 16, 2005 BY: /s/ Howard N. Feist III
-------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
54
INDEX OF EXHIBITS
Exhibit No. Description
- --------------------------------------------------------------------------------
3 (1) I Restated Certificate of Incorporation
3 (2) IV By-Laws, amended and restated as of September 11,
2004
4 (1) Any instrument defining the rights of holders of
unregistered long-term debt of American Biltrite
Inc. that does not authorize the issuance of debt
securities in excess of 10 percent of the total
assets of American Biltrite Inc. and its
subsidiaries on a consolidated basis is not filed
as an exhibit to this Report. American Biltrite
Inc. agrees to furnish a copy of each such
instrument to the Securities and Exchange
Commission upon request.
4 (2) III Note Purchase and Private Shelf Agreement and
Facility Guarantee, dated as of August 28, 2001,
among American Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance Company of America
4 (3) III Amendment No. 1 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
December 31, 2002, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (4) III Amendment No. 2 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
March 31, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America
4 (5) III Amendment No. 3 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of June
30, 2003, among American Biltrite Inc., K&M
Associates L.P. and The Prudential Insurance
Company of America
4 (6) III Amendment No. 4 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
October 14, 2003, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
55
Exhibit No. Description
- --------------------------------------------------------------------------------
4 (7) III Amendment No. 5 to Note Purchase and Private Shelf
Agreement and Facility Guarantee, dated as of
January 29, 2004, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (8) II Security Agreement, dated as of October 14, 2003,
among American Biltrite Inc., K&M Associates L.P.,
Fleet National Bank and the subsidiaries of
American Biltrite Inc. from time to time party
thereto
4 (9) II Intercreditor and Collateral Agency Agreement,
dated as of October 14, 2003, by and among Fleet
National Bank, Citizens Bank of Massachusetts, The
Prudential Insurance Company of America and the
other banks from time to time party thereto and
the Acknowledgment of and Consent and Agreement to
Intercreditor and Collateral Agency Agreement by
American Biltrite Inc., K&M Associates L.P. and
the other American Biltrite Inc. guarantor
subsidiaries
4 (10) II Guarantor Joinder Agreement, dated as of October
14, 2003, made by ABTRE, Inc., AIMPAR, Inc.,
American Biltrite Intellectual Properties, Inc.,
Ideal Tape Co., Inc., Majestic Jewelry, Inc.,
Ocean State Jewelry, Inc. and 425 Dexter
Associates, L.P. in favor of The Prudential
Insurance Company
4 (11) IV Indenture, dated as of August 3, 1998, by and
between Congoleum Corporation and First Union
National Bank, as trustee
4 (12) IV First Supplemental Indenture, dated as of March
28, 2003, between Congoleum Corporation and
Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee
4 (13) IV Second Supplemental Indenture, dated as of August
7, 2003, between Congoleum Corporation and
Wachovia Bank, National Association (as successor
to First Union National Bank), as trustee
56
Exhibit No. Description
- --------------------------------------------------------------------------------
31.1 Certification of the Principal Executive Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certification of the Principal Financial Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
32 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
-----------------------------
I Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996. (1-4773)
II Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q filed on August 14, 2003.
III Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q filed on October 17, 2003.
IV Incorporated by reference to the exhibits of the Company's
Annual Report on Form 10-K filed for the year ended December
31, 2004.
57